mabus13
There’s Only One Important Factor Here
There’s really only one important factor in the Turquoise Hill (NYSE:TRQ)(TSX:TRQ:CA) share price here, that’s the bid from Rio Tinto (RIO) for the 49% of the company it doesn’t already own. The next stage in this story is the shareholder vote on the 9th December.
That this is the only important issue in this short and even medium term means we can ignore all of the issues like market background, profitability and so on. They’re just not going to be an issue here in this next month or so. They might inform how shareholders vote but that’s not something we can divine from outside as we are.
The current share price
The current stock price for TRQ is $31.69. The Rio bid is at C$43, which is some $32.09 US currently. That leaves a 1.3% uplift if the shareholders vote to take the offer and even that would leave us with some period of time before the cash is received. That’s almost certainly not worth it. Inflation is running at 8 and 10% a year (depends upon the inflation measure we use) and so the upside here is only equivalent to 6 weeks or so of inflationary losses in the value of money. And that’s before tax even.
Of course, it’s entirely possible that the CSD/USD exchange rate changes so changing the value of the bid in USD but if we wanted to play that then we’d go and do that over in the FX markets.
So, there’s no useful upside for us here as investors or even speculators.
No, there is no point in trying to assume that Rio is going to come back and sweeten the offer – they’ve already declared that this is their full and final offer.
The possible downside
It’s pretty obvious that the thing holding the TRQ stock price up where it is is the existence of this cash bid. Back in August when the shareholders rejected the earlier – and lower – bid from RIO the price dropped 24% immediately. So, we’d expect, upon such a rejection now, a similar or even larger drop in that market price.
We could, if we wish, think that the bid is going to fail again but that’s very much a minority opinion. Not just because the market price is so close to the bid, but because objectors have a get out currently.
The irrevocable commitment
At least two shareholders (SailingStone and Pentwater) did object, strongly, to this bid. Even at the raised level of C$43. So much so that Rio entered into an agreement with them.
This needs a little background. Rio is buying out the minority shareholders in a business it already owns the majority of. So, rather special rules come into play. It’s all too easy for a majority to unfairly squeeze a minority. The claim, essentially, from those two dissenters was that this is what Rio was doing. So, the authorities were to get involved and come to a determination of what was the “fair” price.
This will, of course, take forever. Bureaucracies rarely move at the speed of business or markets. It was possible that this would apply to the full 49% shareholding that Rio is trying to buy.
At first Rio said that for those two shareholders alone it would offer a special deal. C$34 now, in cash, plus interest, and then the remainder whenever and at whatever rate the authorities decided was that “fair” number. This ran afoul of other rules about minorities in share dealings. You can’t go around privileging some in a takeover bid, all the minority shareholders must be equally treated.
So, that offer has now been extended to all. Anyone who thinks that the C$43 isn’t enough, is in some manner “unfair” can now take the C$34 plus interest plus whatever extra is determined to be fair at that future date of the determination. Or, the C$43 now. Or, of course, vote against the idea in toto.
The effect of the irrevocable commitment
In my mind at least the effect here is that the bid is going to pass the shareholder vote. Those who think that the independent determination of “fair value” will give them a better deal get that opportunity even if at some carrying cost to themselves. Everyone else gets the C$43 now. I can’t see that, given this arrangement, anyone – or at least darn few – is going to vote against the takeover and risk that 24% and more likely decline in the TRQ price.
And again, note, Rio has already said this is the final offer. And given Rio’s 51% ownership already there’s no other bidder about to arrive.
The market, copper, Mongolia, etc.
Given that this is a look at the next month and no more the wider issues of the copper market, the mine itself, the Mongolian government attitude (they are the third stakeholder in the mine, after TRQ and Rio directly) and so on simply aren’t relevant. The decisions faced by the shareholders at that Dec 9th vote are as above. Take the cash now, gamble on fair value being determined higher, see a substantial fall in the TRQ price.
My view
So, I see the vote as going through. For us it doesn’t matter how many accept which offer, the $43 or the $34 plus, either counts as an acceptance of the bid. The winning line is 25% of the total shareholder base, or 50% of the 49% that Rio doesn’t already own. Arguments about appealing to the courts for a fair value determination have been put to bed.
There’s no grand value to be gained by trying to capture the takeover premium. There’s risk if the deal doesn’t go through. So, this is something we don’t want to bother with.
The investor view
It’s possible to think that the 1.5% or so is worth trying to capture. I don’t think that’s true, given inflation and taxes, but others can obviously differ. There is a – very minimal – risk that the deal will still fall apart. But the risk there is so small that trying to bet on it actually happening doesn’t seem worth it either.
Effectively, all the action in Turquoise Hill has now happened. There’s nothing left for us outsiders to do.
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