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By Sohrab Darabshaw
At the start of this year, Rio Tinto plc (RIO) and the Mongolian Government announced they had reached an historic agreement with copper and metal manufacturing. The announcement came after a long tussle over the $6.93 billion expansion project for the Oyu Tolgoi copper-gold mining project.
Last week, Rio Tinto agreed to buy out Turquoise Hill Resources Ltd. (TRQ), a shareholder with an estimated 66% of the Oyu Tolgoi copper mine. The deal, valued at about $3.3 billion gives Rio Tinto significantly more control of the facility.
Experts say the Oyu Tolgoi mine will become the world’s fourth-largest copper mine once the underground component completes. In fact, the site’s expected production capabilities are over 500,000 metric tons of copper a year.
Investors Know Copper Integral to Metal Manufacturing
Just when copper sector experts thought the parties had ironed out all the wrinkles, a fresh problem arose. To properly understand this hurdle one needs to first grasp the mine’s shareholding situation.
Turquoise Hill owns 66% of the Oyu Tolgoi copper mine. Rio owns just over 50% of Turquoise Hill. But another investor in Turquoise Hill, Pentwater Capital opposed the takeover by Rio Tinto. Records show that Rio presented three separate offers to minority shareholders. The last one got the nod of the company’s board.
Unfortunately, Pentwater announced the purchase of 1.73% more of Turquoise Hill stock over the weekend which took its stake to 11.67%. This throws a rather significant curve ball into Rio’s plans. Pentwater also labeled the offer an “undervalued deal” for good measure.
Pentwater, a longstanding critic of Rio’s management of the asset plays a major role in this turnout. In a statement last Friday, the company said that the purchase price ascribes an equity value of (C$8.65 billion) US $6.66 billion to the Montreal-based miner. It argues this is a fraction of the free cash flow it expects the company to generate over the next decade.
Other investors besides Pentwater voiced their opposition. Sailingstone Capital Partners, which holds a 2.2% stake said earlier this month it also opposed the deal.
Experts Predict Future Supply Use Gap for Copper
Sailingstone Capital Partners, which holds a 2.2% stake said earlier this month it also opposed the deal.
Why are investors like Pentwater so bullish on copper even though its price has eroded by about 25% this year to about $US3.60 per pound due to global economic slowdown?
Because global experts and firms like S&P Global have predicted a massive explosion in copper demand over the next 15 years or so, which has now made all the players sit up and take note.
Most see a supply shortfall by 2025 and beyond, even if recycling of scrap copper picks up. Which means the supply use gap most likely will push prices up for the long term.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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