Canadian copper miner Turquoise Hill Resources Ltd. TRQ-T has reached a tentative agreement to sell itself to mega-miner Rio Tinto International Holdings Ltd. RIO-N, but a prominent minority shareholder is saying it is opposed to the transaction, putting the deal’s success in doubt.
Montreal-based Turquoise said on Thursday that a special board committee had accepted Rio’s latest offer, of $43 a share in cash, after rejecting several lower bids over the past few months. Rio, which is based in London, already owns 51 per cent of the company’s shares, and would pay $4.2-billion for the remaining 49 per cent if the deal succeeds.
Rio’s revised takeover price is 19 per cent higher than Turquoise’s closing price on Wednesday, and 67 per cent above Rio’s initial $34-a-share proposal in March. After being rebuffed, Rio bumped its bid to $40 a share last week before raising it again.
The deal requires a shareholder vote at Turquoise. If a majority of votes cast by minority shareholders are in favour, the acquisition will succeed.
New York-based Pentwater Capital Management LP, Turquoise’s biggest minority shareholder, with a 9.7-per-cent stake, rejected Rio’s original bid but hasn’t yet revealed what it thinks of the latest offer. The company declined to comment on Thursday.
SailingStone Capital Partners, Turquoise’s fifth-largest shareholder, with a 2.2-per-cent stake, doesn’t support the revised offer from Rio. The Houston-based investment firm said in a news release on Thursday that the deal wouldn’t adequately compensate minority shareholders.
“As large, long-term holders of Turquoise Hill, we are not interested in selling our stake at a massive discount to intrinsic value as we sit on the precipice of a wall of free cash flow,” the release said.
Turquoise’s only mine is Oyu Tolgoi, a massive copper project in Mongolia in which the company owns a 66-per-cent stake. The remainder is owned by the government of Mongolia. The site is located in the Gobi Desert, 550 kilometres south of the country’s capital, Ulaanbaatar.
Rio Tinto Copper’s chief executive, Bold Baatar, dismissed that idea that his company would improve its bid yet again. In an interview, he said this was Rio’s “best and final” offer.
“The special committee has done a pretty bloody good job of stretching us already,” he said. “We don’t have anything else to give.”
Analysts were spilt on the merits of the deal and whether the latest offer was likely to succeed.
Scotia Capital Inc.’s Orest Wowkodaw said in a note to clients that Rio’s revised offer isn’t high enough, considering the long-term potential of the mine.
“Oyu Tolgoi is a very large, high-grade, long-life, expandable, world-class Tier 1 copper mine, representing an extremely valuable asset in today’s market,” he wrote. He added that $50 a share would be closer to fair value.
Canaccord Genuity Group Inc. analyst Dalton Baretto said in a note that the deal was nearing its “inevitable conclusion.”
“The offer price is in line with both our target price as well as precedent transaction multiples, and given current market conditions and the makeup of [Turquoise Hill’s] current minority share register, we believe this offer price will earn the 25 per cent supporting vote required to complete the deal,” he said.
Oyu Tolgoi was originally discovered and developed by mining financier Robert Friedland. Rio Tinto took its initial stake in 2006. The mine, which went into production in 2011, was plagued by multibillion-dollar capital cost overruns, lengthy production delays, disagreements between Rio and Turquoise about funding, and tax disputes with the government of Mongolia. Many of those problems have since been overcome.
Rio’s recent advances on Turquoise are in keeping with a global trend. Some of the world’s biggest mining companies, including Rio, BHP Group Ltd. and Canada’s Teck Resources Ltd., are reducing their exposure to environmentally damaging commodities, such as coal, and doubling down on resources with less problematic environmental, social and governance footprints.
Acquiring Turquoise would strengthen Rio’s position in copper, one of several materials – alongside lithium, cobalt and graphite – that are increasingly being used in the fast-growing electric car industry. While the mining, refining and transportation of copper is detrimental to the environment, its growing end use in alternative energy gives it a cleaner sheen than workhorse metals like iron ore.
For Turquoise, selling to Rio would remove some near-term funding risk. The company previously said it needed to raise US$650-million in equity before the end of the year. Under a revised plan unveiled by Rio on Thursday, that equity raise would be pushed out until next year, and Rio would provide additional debt in the interim.
Shares in Turquoise closed up 14 per cent on the Toronto Stock Exchange on Thursday, to $41.16 a share, a little less than $2 below the offer price.
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