Turquoise Hill: Once Again, More Questions Than Answers

About: Turquoise Hill Resources Ltd. (TRQ)
by: Vladimir Zernov

Turquoise Hill reports Q1 results.

The results are good, but key answers to important questions are not provided, again.

Without internal catalysts, the main hope for near-term upside is the successful resolution of U.S. - China standoff.

Back in April, Turquoise Hill (TRQ) announced that the completion of Shaft 2 at Oyu Tolgoi was delayed to the end of October 2019. The news, in combination with U.S. – China trade war fears, put pressure on the stock, which has recently tested new lows. The company’s first quarter report and the subsequent earnings call presented a chance to break the downside trend with better news. As it turned out, the report was good, but the conference call was (again) a disappointing performance.

Turquoise Hill reported revenue of $353 million and income of $105 million, beating analysts’ estimates on both earnings and revenue. Strong cost performance (cost of sales was $1.99 per pound of copper compared to $2.12 in Q4 2018 and $2.23 in Q1 2018) helped the company’s results. Turquoise Hill ended the quarter with $1.55 billion of cash on the balance sheet and available credit of $1.6 billion. While Q1 results could have served as a favorable catalyst, investors were apparently more interested to get answers on several important questions – and received no answers.

  1. Power plant remains a project without a price. As those who follow Turquoise Hill know well, Mongolia forced Turquoise Hill to agree to build a power plant close to Tavan Tolgoi coalfields. At this point, we know that construction is expected to start in 2020 and that the plant should be constructed by mid-2023. No other information is disclosed, including the budget or the source of funding. The company and Mongolia signed the framework agreement at the end of last year, so the company had some time to provide at least some additional information to the market.
  2. Something is going on with Mongolian parliamentary working group. This group was established back in March 2018. Its task was to review the implementation of the investment agreement (such things rarely bring good news in the resource space). The report was scheduled to be published back in June 2018, but nothing came out. The market started forgetting about the issue, but it looks like the process is entering an active phase. On May 3, Oyu Tolgoi received a summary of the report, and on May 6, it provided a written answer. During the earnings call, the management was pressed to share some details but refused to do so. Here’s a typical exchange between analysts and management: “[Analyst] But would it be fair to say that they’re proposing changing the current investment agreement? [CEO] As I said, Orest, we can’t really comment on the content in the report”. While the management’s hands may indeed be tied on this topic, the whole situation is certainly not helping a stock which is already falling.
  3. Investors should expect some update on the mine with midyear results, but what kind of information will be provided remains a mystery. As the latest delay pushed sustainable first production from the underground mine beyond the end of Q3 2021, the company will present a new plan by the end of the year, with some information shared when mid-year results will be published. However, the CEO stated that he did not “want to raise expectations more than we can deliver” so the market will be left guessing what kind of an update it gets later in summer.

Fundamentally, Turquoise Hill remains a bet that Rio Tinto (NYSE:RIO), the mine’s manager, will make it work by 2022, and that the company won’t have major challenges with the Mongolian government. Current market fears like the trade war between U.S. and China will most likely be resolved long before 2022. In this light, I see two strategies – buying at lows in order to sit through thick and thin up to 2022 to see how the thesis played out, or simply trading the volatility that this stock offers from time to time. As once again, the market’s main questions were not answered, it’s hard to expect sustainable upside in the near term unless U.S. – China standoff rapidly comes to an end.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.