14th Mar 2022 12:35
(Alliance News) - Rio Tinto's tilt for the Oyu Tolgoi copper mine in Mongolia could slap a thick slice of the global copper market on its plate, but analysts pointed out that the miner's eyes may be bigger than its stomach with a price tag that could lean towards the heavier side.
"Rio Tinto's move on Turquoise makes strategic sense as it tidies up ownership and gives it a stronger position in the copper sector," said AJ Bell investment director Russ Mould.
The Anglo-Australian miner has made a USD2.7 billion non-binding all-cash proposal for the remaining 49% of Toronto- and New York-listed Turquoise Hill, which owns 66% of the Oyu Tolgoi copper mine in Mongolia.
Rio Tinto currently holds a majority stake in the company, with 50.8% of its issued capital, and manages operations at the mine. The remainder of the copper mine is owned by the Mongolian government.
Under the proposal, minority shareholders of Turquoise Hill would receive CAD34 cash per share, which is a premium of 32% to its last closing price on the Toronto Stock Exchange, said Rio.
"The proposed transaction would enable Rio Tinto to work directly with the government of Mongolia to move the Oyu Tolgoi project forward with a simpler and more efficient ownership and governance structure," said Rio Chief Executive Jakob Stausholm.
Rio shares were down 3.7% to 5,359.00 pence each in London, although were outperforming rivals Anglo American and Glencore, which were down 4.2% and 3.9%, respectively. Mining stocks were down on Monday as investors fretted over a recent spike in Covid cases in China.
Interactive Investor head of investment Victoria Scholar said: "Following the recent surge in commodity prices, the deal will help Rio Tinto expand its copper and gold mining activities."
"Despite being Rio's most important growth project, the Mongolian mine has also been a serious source of chaos, hit by a series of delays, ballooning costs and disputes with the Mongolian government. Today's proposed deal could help pave the way for Rio to ramp up activity at the copper-gold mining project and reduce further problems," Scholar added.
In late January, Rio Tinto struck an agreement with the government of Mongolia to ramp up production Oyu Tolgoi. Rio said the January agreement will allow the start of underground mining operations at the project, which is expected to be the fourth largest copper mine in the world by 2030.
At that time, Rio had said it would "consider" buying all the shares of Turquoise Hill, if market conditions, tax rules and "other factors" were aligned.
Oyu Tolgoi is expected to produce about 500,000 tonnes of copper per year on average from 2028 to 2036 from the open pit and underground combined, with 350,000 tonnes per year for a further five years. In 2021, Oyu Tolgoi produced 163,000 tonnes of copper from the open pit, which has been in operation for almost 10 years.
Turning back to Rio's Turquoise tilt, the miner stressed that no agreement has been reached yet and that there is no guarantee the acquisition will go through.
AJ Bell's Mould said: "Like the project itself, this transaction is not expected to go smoothly. Rio may have to dig a lot deeper to win over Turquoise Hill's shareholders."
Mould suggested that this was the reason that Rio was trading at the bottom of the FTSE 100 earlier Monday morning when the proposed acquisition was first announced.
"The fact its share price is down on the Turquoise Hill news would suggest the market is starting to worry once again that it will overpay to get what it wants," Mould said.
If one looks at the history of commodity booms, Mould noted, miners hit acquisition frenzies which are fuelled by high metal prices, but just end up either writing down the value of these assets or offloading them in the next price lull.
"Most of the big miners overpaid for growth in the last commodities boom which peaked about 10 years ago, and then spent a long time writing down the value of assets, getting rid on non-core operations and streamlining wherever possible. We've not seen a return of M&A in the current commodities rally, but history suggests it is only a matter of time," Mould explained.
With the miner flush with cash after a record 2021 performance, where pretax profit doubled year-on-year to USD30.83 billion and free cash flow surged 88% to USD17.7 billion, heavy price tags may not look so heavy any more.
By Elizabeth Winter, [email protected]; and Greg Roxburgh, [email protected]
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