The tribulations of globe-spanning mining giant Rio Tinto (RIO) in Mongolia are well known to all who follow the mining and commodity sectors. The headaches involve RIO's majority-owned company, Turquoise Hill Resources (TRQ) that in 66%-34% partnership with the GOM (Government of Mongolia) owns the fabulous site at Oyu Tolgoi in the South Gobi, fifty miles from the border with China. Ever since RIO bought out billionaire mining legend Robert Friedland's Ivanhoe Mining in the early months of 2012, the GOM has jerked RIO around regarding the October 2009 basic agreement and a seemingly endless series of demands for more control and money from the site. This bizarre and irritating process has been enmeshed in the murky intricacies of geopolitics, Mongolian politics and Mongolian fears of being cheated. However, the situation may finally have come to a win-win resolution due to strong and savvy moves by RIO. There are several articles on RIO - TRQ and their Mongolian adventures in my archive.
Here is a brief review for newcomers or those who have lost clarity in the mazes of the adventure. After extensive review of the basic agreement by international lawyers, it took effect March 31, 2010 but deficit-spending politicians have played the resource nationalism card to make the project a roller coaster ride that has dismayed countless investors who have sold holdings and walked away.
OT (Oyu Tolgoi) contains 46 billion lbs of copper and 25 million oz. measured and indicated oz. gold. There is more to be found: 55 billion lbs copper and 37 million oz gold inferred resources. Potentially, it is the largest gold mine in the world, greater than Freeport McMoRan's (FCX) Grasberg minerals district in West Papua on the island of New Guinea, Indonesia. RIO by 2021 will be 40-60% partner with FCX in all the produce from that fabulous copper, molybdenum and gold complex. As for TRQ, the first ore concentrate was produced at OT January 31 this year and it achieved 80% capacity open pit operations last week. The first ore concentrate was exported to China July 9.
Mongolia's tumultuous 3-way election campaign May 17-June 26 resulted in the razor thin re-election of incumbent Tsakhia Elbegdorj. Elbegdorj is now perceived as a friend of RIO's development of OT.
In the past six weeks, RIO has taken steps to insure that its project at OT ($6.2 billion invested so far, within 1% of budget), move forward at a brisk and steady pace henceforth. On June 28, RIO extended a non-revolving bridge facility for $225 million to TRQ that matures today, August 12. Had TRQ not repaid on time in full, any portion left unsatisfied would be converted by RIO into more shares in TRQ. That is, the arrangement would increase RIO's ownership position and control.
TRQ intended to use the sale of its 50% share of the Kyzyl gold site at Altynalmas, Kazakhstan, to fulfill its obligation to RIO. In fact, this process has played out in the past 8 days. On August 2 TRQ announced that it had agreed with purchaser, Sumeru Gold BV to re-price Kyzyl from $300 million to $235 million given lower gold prices in USD. Then, August 7, TRQ received these funds (the "Republic" of Kazakhstan and its President, N. Nazarbayev had to approve the sale) from Sumeru Gold and repaid RIO for the short-term bridge-funding facility. This was very positive news for TRQ and its shares rose 10% late in the week of August 5-9, closing August 9 at $5.10, nearly 32% above the 52-week low, $3.82, it set in July when the Mongolian head of OT LLC announced that it had "22 points of dispute" with RIO about development of the site. These seem now to have subsided.
The completion of the sale of the Kyzyl site and subsequent settlement of the short-term facility was a major event. The new bridge facility gives TRQ $600 million to complete Phase 1 operations by December 31 when the funds are to be repaid. To secure the funds, TRQ has paid RIO $6 million as a front-end fee for securing the credit and will service it at the LIBOR rate + 5%/year till re-payment. If there is a shortfall, TRQ would need to roll out a rights offering to satisfy its obligation to RIO. GOM is into this 34% so their interest in speeding development is enhanced. For now GOM no longer is considering an IPO for OT to give Mongolians a direct personal share of the proceeds and quicken their personal interest in accelerating site development.
Through TRQ, RIO owns 58% of the major coal mining operation of South Gobi Resources (OTC:SGQRF) at Ovoot Tolgoi several hundred miles to the West. South Gobi has had tumultuous relations with Mongolia, even having two of its employees detained for months in country. That situation is half resolved and the company is exporting to China. South Gobi has 302 million measured and indicated tons of coal at Ovoot Tolgoi and its 3 development sites within 25 miles of China, the world's largest user of coal (70% of its energy use). The proven and probable coal reserves of the main site alone are 176 million tons and China has rail lines to the border to load product.
Despite its intrinsic merits, RIO's satellite holding SGQRF has sold down 55% in the political jousting of the last 5 months, from $2.25/share to close August 9 at $1.01. A year ago it was at $3.90. At the peak of the commodity bull in 2Q 2011 it was at $17. Buyers have become wary both of the local situation and a slowdown in world and China's economies. But South Gobi is a strong value and growth buy now.
Through TRQ, RIO also owns 57% of Inova Resources, formerly Ivanhoe Australia (IVAN), a significant copper, gold, silver, uranium, molybdenum and rhenium site at Mt. Isa in Queensland, northeastern Australia. It is producing and selling copper and gold for its current cash flow and expanding exploration on its 5700 km properties. This rich area of mineralization is bordered by holdings of BHP Billiton (BHP) and Xstrata (OTC:XSRAF).
The result of a tumultuous twenty months is that RIO has increased its control over TRQ and is actively pushing initiatives to hasten development at OT. It already has received pledges of $4.5-5 billion for Phase 2 (underground) operations there from the EBRD (European Bank for Reconstruction and Development), many European, Japanese and Australian Banks and the US Export-Import Bank.
Those who follow TRQ know that surprises are the norm but there appears to be a qualitative change occurring in which RIO can manage and rationalize development. This is constructive and makes TRQ a buy on the next dip. RIO itself, a major producer of iron ore, aluminum, copper, coking and thermal coal and diamonds (the famed Argyle mines in Australia) has risen 25% to $49.81 since I began 3 months ago recommending its merits as a value, growth and income play. Its consensus target estimate of $67 gives 35% upside and major firms list it as a strong buy. Its outlook will improve notably if progress at OT continues as now appears possible, perhaps likely.