Rio Tinto offers US$2.7-billion for remaining 49-per-cent stake in ‘crown jewel’ Canadian copper miner Turquoise Hill

Rio Tinto Group is proposing to buy the 49 per cent of Canadian miner Turquoise Hill Resources Ltd. it doesn’t already own for US$2.7-billion, potentially putting an end to years of strife with Turquoise Hill’s management and shareholders.

London-based Rio, one of the world’s biggest diversified mining companies, said on Monday it is offering $34 in cash a share for Turquoise Hill, a 32-per-cent premium to its Friday close on the Toronto Stock Exchange.

Montreal-based Turquoise Hill holds a 66-per-cent ownership stake in the Oyu Tolgoi copper mine, with the Mongolian government owning the rest.

Oyu Tolgoi has been plagued by massive capital cost blowouts, multiyear production delays, tension between Rio and Turquoise Hill over funding, and tax disputes with Mongolia.

Rio is making its offer for Turquoise Hill after a January agreement with the Mongolian government that smoothed the path for the underground mine development to proceed.

Rio said its proposed acquisition of Turquoise Hill will simplify the convoluted ownership structure of the company and strengthen its position in top-performing copper.

In an interview, Bold Baatar, the chief executive officer of Rio’s copper division, called the offer “very generous,” considering Oyu Tolgoi has sizable execution risk. Among the challenges are its huge size, the complexities of underground mining and the difficulties of operating in an extremely arid environment. Oyu Tolgoi is located in the Gobi desert, 550 kilometres south of Ulaanbaatar, the capital of Mongolia.

“Any megaproject is complex,” Mr. Baatar said. “What this project is calling for is simplicity – in governance, how we manage it and having a single interface with the government.”

Turquoise Hill said in a statement that an independent committee of the board will review the Rio offer, and advised investors to sit tight.

Apart from Turquoise Hill’s board, Rio will be hoping that U.S. activist investor Pentwater Capital Management LP backs the offer. Pentwater has a 9.7-per-cent stake in Turquoise Hill, and in the past has clashed with Rio. Pentwater filed a class-action lawsuit against Rio last year, alleging it concealed cost overruns with the mine from investors.

“There is a risk that Turquoise Hill shareholders will not accept this offer, in which case Rio may seek to raise,” Christopher LaFemina, analyst with Jefferies, wrote in a note to clients.

Rio’s involvement in Oyu Tolgoi dates to 2006 when well-known mining financier Robert Friedland controlled the project. Open-pit mining began at Oyu Tolgoi in 2011. Turquoise Hill shocked investors in 2019 by jacking up cost projections for an underground expansion by US$3.6-billion. Subsequently, Rio and Turquoise Hill clashed over how to fund the shortfall, with minority shareholders wanting to limit how much dilutive equity would be issued.

In January, Rio and Turquoise Hill finally agreed to a financing package heavily skewed toward debt, with only US$650-million to be raised in an equity issuance. At the same time, Rio and Turquoise also patched up much of their differences with Mongolia. A US$2.3-billion loan extended to the Mongolian government was forgiven. Mongolia, in turn, said it would work to resolve outstanding tax claims against Turquoise Hill, and allow Oyu Tolgoi to tap into the national electricity grid.

Many of the world’s biggest mining companies, including Rio, BHP Group Ltd. and Canada’s Teck Resources Ltd., are doubling down on metals with a less problematic environmental, social and governance footprint, and ridding themselves of dirty commodities, such as coal. While the mining, refining and transportation of copper is detrimental to the environment, its growing end use in alternative energy, such as electric car batteries, means investors are embracing it as a relatively clean commodity. Over the past two years, copper has more than doubled in price to trade at roughly US$4.50 a pound.

Oyu Tolgoi’s underground mine is expected to be in steady production by the second half of next year, and eventually ramp up to around 500,000 tonnes a year.

Mr. LaFemina said that if all goes to plan, Oyu Tolgoi is set to become a “crown jewel” in Rio’s portfolio.

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