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Rio in $3.7b bid to take control of Oyu Tolgoi www.afr.com
Rio Tinto has moved to take control of the Oyu Tolgoi project in Mongolia, making a $US2.7 billion ($3.7 billion) bid for the company behind the troubled copper mine, as chief Jakob Stausholm continues his push to tidy up problem issues of the past.
Signalling the mining majors are turning their minds to acquisitions amid the boom in commodity prices, Rio on Monday revealed plans to buy the about 49 per cent of Toronto-listed Turquoise Hill it does not already own.
Under the terms of the deal, Turquoise Hill minority shareholders would receive $C34 a share, representing a premium of 32 per cent to its last closing price.
Rio Tinto CEO Jakob Stausholm: “We believe the terms of proposal are compelling for Turquoise Hill shareholders.” Trevor Collens
If successful, the deal would see Rio hold a 66 per cent interest in Oyu Tolgoi, with the remaining 34 per cent owned by the Mongolian government.
It comes after Rio in January struck a deal with the Mongolian government to resolve the major disputes that have hampered progress on a $US6.9 billion expansion of Oyu Tolgoi, agreeing to waive a $US2.4 billion debt the government owed. In exchange, Mongolia softened its stance on several matters, most notably its desire for the mine to get all of its power from a Mongolian generator by July 2023.
Rio said the bid would simplify the Oyu Tolgoi ownership structure after the recent “reset” of the relationship between the project’s partners and strengthen its copper portfolio. It would also give Turquoise Hill’s minority shareholders an attractive exit “at a time when uncertainties inherent in the development of the underground operations and funding of such development remain”, Rio added.
“Rio Tinto strongly believes in the long-term success of Oyu Tolgoi and Mongolia, and delivering for all stakeholders over the long term,” Mr Stausholm said. “That is why we want to increase our interest in Oyu Tolgoi, simplify the ownership structure, and further strengthen Rio Tinto’s copper portfolio.
Relationship reset
“We believe the terms of proposal are compelling for Turquoise Hill shareholders.
“[It] 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. With our relationship reset and the underground operations commenced, this transaction demonstrates our clear and unequivocal long-term commitment to Mongolia.”
Rio is being advised by Credit Suisse, RBC Capital Markets and Rothschild.
Turquoise Hill is yet to comment on the bid.
The move comes after Mr Stausholm last month held a roundtable with sell-side analysts where he flagged he was “happy with its mix, but is looking for modest growth, not big M&A”, according to Barrenjoey’s Glyn Lawcock.
“Rio is now looking for modest growth through value-accretive developments that Rio can grow and not through conducting large-scale M&A,” he said. “Within copper, Rio has growth options with the underground expansion at Oyu Tolgoi, while Winu is not for sale at the moment, as the resource is still being defined.”
Juukan Gorge scandal
Since replacing Jean-Sebastien Jacques in January 2021 following the Juukan Gorge scandal, where the mining giant destroyed prized cultural heritage in the Pilbara, Mr Stausholm has been addressing several lingering challenges, including releasing a bombshell report into its culture revealing systemic bullying, with common instances of sexual harassment and racism.
Rio has also battled sizeable cost blowouts for Oyu Tolgoi’s underground expansion, contributing to the miner’s enduring fractious relationship with the Mongolian government.
Turquoise Hill requires a further $US3.4 billion to complete the underground expansion, which would supercharge the project that Rio has mined from a small open pit mine since 2011.
Macquarie’s analysts on Friday lifted their copper price forecasts 7-16 per cent over 2022 and 2023, saying they “continue to see value in Rio, which is benefiting from iron ore, aluminium and copper prices”.
In 2021, Rio’s copper earnings before interest, taxes, depreciation, and amortisation soared 90 per cent to $US4 billion on the back of a 50 per cent jump in prices, supported by strong demand amid the global economic recovery and decarbonisation trends.
It expects Oyu Tolgoi’s underground operations to begin production in the first half of 2023.
Michael Bennet is WA reporter for The Australian Financial Review based in Perth. He has worked as a journalist for more than a decade, including at The Australian where he was senior banking reporter and also covered economics, markets and deals. Connect with Michael on Twitter. Email Michael at michael.bennet@afr.com
Published Date:2022-03-14
