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Rio copper chief says $3.76b copper bid ‘quite friendly’ www.afr.com
Rio Tinto copper boss Bold Baatar sought to play down the company’s fractious relationship with its Canadian buyout target Turquoise Hill Resources, as the Toronto-listed company’s shares leapt to match the $US2.7 billion ($3.76 billion) offer.
Investors and analysts said the move to buy out the 49 per cent of the Canadian company that it did not already own – which would streamline its ownership of Mongolia’s Oyu Tolgoi copper and gold mine – made sense.
However, they said there was no certainty that the deal would go ahead at this price, and the target’s shares jumped 32.5 per cent to $C34.02 ($36.98) on Monday Canadian time to just pip Rio’s $C34 bid price.
Argo Investments chief executive Jason Beddow, whose fund is one of the 20 largest investors in Rio Tinto, noted that the first bid was not always the last. He said simplifying the ownership structure of the troubled Mongolian mine was a good move, particularly as miners sought more exposure to copper.
Turquoise Hill owns 66 per cent of Oyu Tolgoi and the Mongolian government owns the rest.
“A joint venture is always a messy structure at the best of times,” he said. “Buying something you own half of already, you know it pretty well.”
Oyu Tolgoi, one of the largest copper projects in the world, has been a challenging project for Rio Tinto.
The project has spent $US13.4 billion in Mongolia since 2010, including operating costs and other items not directly associated with development. Rio itself has spent a little more than $US6 billion the project.
Government deal
However, in late January, Rio struck a deal with the Mongolian government that included writing off the government debt. The deal allowed the miner to develop plans to turn the open cut mine into an underground one more quickly, as the government softened its requirement to use a Mongolian energy generator.
The push to develop the project comes amid moves from miners to increase exposure to the raw materials that will be needed in the shift to a low-carbon economy. Copper is used in electric vehicles and wind turbines.
Macquarie analysts noted that if Rio Tinto acquired the remaining 49 per cent of Turquoise Hill, the company would boost its copper production by 10 per cent over the next five years and 17 per cent on average for the next 10 years.
Mr Baatar on Monday night dismissed views that Turquoise Hill shareholders were being held over a barrel by the prospect of a large equity raising if they did not accept the offer.
He refuted that the timing of the bid was “hostile” and said: “I don’t think it’s a massive threat with the rights offering.”
Mr Baatar said the group had the option of rescheduling loan payments, raising new loans, as well as issuing new equity. He also acknowledged that credit markets were not facing ideal conditions at the moment.
“Obviously, they’re subject to the credit market conditions and considering what’s happening in Russia, Ukraine, not an easy one,” he said.
One of Turquoise Hill’s largest shareholders, Pentwater Capital Management, has already accused Rio Tinto of “oppressive” behaviour towards its smaller shareholders. The fund manager threatened legal action if Rio Tinto forced a dilutive, multibillion-dollar equity raising.
Turquoise Hill needs to raise between $US1.7 billion ($2.3 billion) and $US3.6 billion to cover massive cost and schedule blowouts on Oyu Tolgoi.
‘Friendly approach’
In relation to equity financing as an option, Mr Baatar said that Rio had committed its own to help with bridging funding for the mine.
“So it’s actually a pretty reasonable and quite friendly approach on this,” he said.
In its note following Rio Tinto’s offer, Morgan Stanley analysts listed four reasons that it made sense for the mining giant to try and acquire Turquoise Hill now.
This included de-risking of the project after Rio’s agreement with the Mongolian government; a better operating and management structure as the mine transitions to underground; and a scarcity of copper asset to build or acquire. The broker also noted “a clean structure could enable Rio Tinto to carry through its culture/governance/sustainability objectives at Oyu Tolgoi”.
Merrill Lynch analysts noted that an alternative to the bid – for which it said Rio was paying a premium without a change of control, as it already owns 51 per cent of Turquoise Hill – would probably have been an equity raise and more project financing, leading to a “complicated” situation.
On Monday’s call, Mr Baatar said Rio would be disciplined about acquiring Turquoise Hill.
“I think it’s a fair offer. Obviously, it’s for shareholders to decide. We’re going to be disciplined,” he said.
“And obviously, if investors choose to stay in the project and, you know, over time, reject the offer, then at least ... we’re on the same page in terms of our long-term commitment to development of the project.”
BY: Jemima Whyte writes on business, specialising in companies, capital markets and innovation. Jemima has reported on business for The Australian Financial Review for more than 13 years. Email Jemima at jemima.whyte@afr.com
Published Date:2022-03-16
