Back in March, I wrote that Turquoise Hill (TRQ) was an interesting bet at the stock's low levels despite the company's numerous problems. Now that Turquoise Hill has published a Q1 production update, it's time to revisit the thesis.
In the first quarter of 2018, Turquoise Hill reported copper production of 45,800 tons and gold production of 120,000 ounces. The company stated that both copper and gold grades were expected to decline over the remainder of the year, but it remained on track to achieve its production guidance of 125,000-155,000 tons of copper and 180,000-220,000 ounces of gold.
However, the report once again comes with an announcement of the delay. This time, Rio Tinto (RIO) which manages Oyu Tolgoi has informed Turquoise Hill that Shaft 2 will be completed by the end of October 2019. At this point, it is not clear whether this additional delay impacts the timeline of the underground mine, which was supposed to deliver the first production beyond the end of Q3 2021 after the previous delay.
Surely, such news does not serve as a positive catalyst for the stock. While it's not unusual for a huge project to have problems, the regular flow of negative news and the sub-par business climate in Mongolia (as highlighted by the recent news that certain Mongolian lawmakers wanted to scrap Oyu Tolgoi deal, an idea that was later rejected by the country's mining minister) does not lead to increased investor confidence. At this point, the nature of the project - a giant bet on future copper demand - and the historically low valuation are the sole pillars supporting the bull thesis, while actual news is mostly disappointing.
This flow of negative news is keeping the stock near the lows while copper prices mostly show positive dynamics as the market assumes that U.S.-China negotiations will ultimately end with some kind of a deal. I share the same opinion and believe that copper will ultimately break through the $3.00 level and head closer to the previous highs:
Copper dynamics bode well for copper plays like Freeport-McMoRan (FCX) and Southern Copper (SCCO), but Turquoise Hill shares will need positive internal catalysts to participate in this upside. With continuous spending on the underground mine and the looming expenditure on the coal-fired power plant at Tavan Tolgoi, the timing of future cash flows from underground copper production becomes an increasingly important factor.
Conclusion: investors with multi-year timeframes will likely see no material difference from the news about another delay. The biggest upcoming catalyst for them is the definitive estimate review of the project which is expected to be completed towards the end of the year. In my opinion, current levels are cheap enough to make a long-term bet (with proper risk management tactics like setting a mental stop in case the stock goes south and/or proper position sizing).
Those of us interested in shorter-term movements will now have to wait until the company reports its Q1 results and, hopefully, sheds more light on what's going on. Without positive internal catalysts, Turquoise Hill will likely ignore positive copper price movements even if they happen in the upcoming weeks.
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Disclosure: I am/we are long FCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the above-mentioned stocks.