Turquoise Hill agrees to beefed up US$3.3B offer from Rio Tinto

Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO) has reached an in-principle deal with Turquoise Hill (TSX: TQR) to buy the 49% of the Canadian miner it doesn’t already own for US$3.3 billion.

The move would grant the global miner direct ownership of the giant Oyu Tolgoi copper-gold mine in Mongolia, located 550 km south of the capital Ulaanbaatar. 

It also brings the six-month takeover battle to an end, boosting Rio Tinto’s exposure to copper, which is expected to benefit from the world’s shift to renewables and electric vehicles for which the metal is key.

Rio has agreed to pay $43 per share in cash for the rest of Turquoise Hill, a more than 19% premium to the stock’s last close and higher than a sweetened offer of $40 per share proposed last month.

Turquoise Hill, a single-asset company holding 66% of Oyu Tolgoi, had appointed an independent committee to evaluate the offer. After rejecting the US$2.7 billion original bid, or $34 per share as too low, the team indicated the fair market value for the company was “in the range of C$42 to C$58 per common share.”

The deal, subject to shareholder approval, would give Rio Tinto a majority stake in Oyu Tolgoi, one of the world’s largest known copper and gold deposits.

“This agreement … will simplify governance, improve efficiency and create greater certainty of funding for the long-term success of the Oyu Tolgoi project,” Rio Tinto chief executive officer Jakob Stausholm said in a statement.

Rio Tinto copper boss Bold Baatar noted the deal simplifies the ownership structure of Oyu Tolgoi, enabling the company to work in partnership directly with Erdenes Oyu Tolgoi and the government of Mongolia, which owns the remaining 34%.

The two companies also agreed to amend financing arrangements to help the Turquoise Hill address near-term liquidity, including increasing a May advance facility to US$650 million from US$400 million and extending the deadline for a US$650 million equity raising and debt repayment to at least March 2023. 

The amended terms also include a commitment by Rio to participate pro rata in an initial equity offering.

The deal requires two thirds of shareholders, including Rio Tinto’s, to vote in favour. Additionally, more than 50% of minority shareholders must approve it.

A special meeting of Turquoise Hill shareholders to approve the deal is expected in the fourth quarter and the deal, if approved, will close shortly thereafter, Rio said.

Biggest new copper mine

Rio Tinto has had a rocky relationship with the Quebec-based miner, particularly over how to fund Oyu Tolgoi’s expansion. The top miner has also drawn criticism from some of Turquoise Hill’s minority shareholders about the control it exerts over the company.

The global miner and the Mongolian government ended earlier this year a long-running dispute over the US$7-billion expansion of the mine.

“Rio Tinto’s strategy over its stake in Turquoise Hill has been subject to discussion for many years, but we didn’t think it would end up offering to buy out the minorities based on previous form,” BMO Metals and Mining analysts said in a note to investors.

“Given the dearth of copper opportunities elsewhere, combined with its recently lowered risk profile, perhaps increasing its Oyu Tolgoi exposure now makes sense,” BMO’s Alexander Pearce and David Gagliano wrote.

“It’s a little bit higher than our base-case valuation,” Saul Kavonic, an analyst at Credit Suisse, said of the deal. He added that buying the stake “was probably necessary in order to move the project forward.”

Once completed, the underground section of Oyu Tolgoi will lift production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes at peak output, which is now expected by 2025 at the earliest. This would make it the biggest new copper mine to come on stream in several years.