With Rio's bid, Turquoise Hill Stockholders Might Make Lots of Profits

Rio Tinto owns and operates the Oyu Tolgoi mine, which is located 550 kilometres (342 miles) south of Mongolia's capital Ulaanbaatar, thanks to Turquoise Hill's 66 percent share. Mongolia's government controls 34% of the company.

Turquoise Hill's investors, according to market experts, may get a better offer. Analysts at Scotiabank expect that the company's shareholders will demand a significantly bigger offer from Rio Tinto than the current offer price of C$34/ share, possibly exceeding C$50/share. The second-largest miner in the world has the financial means to pay a larger premium. Rio has $1.6 billion in net cash as of December, and rising iron ore prices are adding to that. According to Macquarie, acquiring the Vancouver-based miner would increase Rio Tinto's copper output by 10% over the next five years, 17% on average over ten years, and more than 30% by 2032.

a 12 percent premium to the bank's target price for the stock, according to the bank.

THE DIAMOND IN THE CROWN

Oyu Tolgoi, according to Jefferies analysts, will become a "crown gem" in Rio Tinto's portfolio. They also see the purchase as an opportunity to clean up the project's jumbled financing structure, which is one of the reasons for the underground copper mine's delays.

Rio's attributable copper output would be increased as a result of this deal, which involves an asset that the company has built, is presently operating, and well understands.While the Mongolian mine has a high-quality deposit, it is located in a difficult jurisdiction, according to UBS analysts, making it a "overall poor investment." has climbed 254 percent since January 2021, to C$34.04 from C$9.6, and it concerns that cash returns could be harmed this year, with Rio Tinto having already invested $3.5 billion in mergers and acquisitions.

BMO Capital Markets' Alexander Pearce and David Gagliano said the company's plan for its ownership in Turquoise Hill has been debated for years, but that the acquisition might "make sense."

"In the past, Rio Tinto was happy to share the risk of its assets with minority shareholders," they wrote in a note to clients. "However, given the scarcity of copper opportunities elsewhere, perhaps increasing its exposure to Oyu Tolgoi now makes sense and could simplify the remaining funding hurdles for the underground project," they added. Rio Tinto and the world's largest new copper mine, Oyu Tolgoi, have had a tumultuous relationship, particularly over how to pay the project's growth. Some of Turquoise Hill's smaller owners have criticised the top miner for exerting too much influence over the company.

Given the scarcity of copper opportunities elsewhere and its recently reduced risk profile, it may be time to increase its Oyu Tolgoi exposure.

The underground section of Oyu Tolgoi, once completed, will increase production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes at peak output, which is currently expected in 2025 at the earliest. This would make it the largest new copper mine in several years to come online.

Rio's offer may be a 32 percent premium to Turquoise's closing price, but it is just a 12 percent premium to the bank's target price for the stock, according to the bank.