Thesis
In a previous article, I discussed how declining copper prices could pose a threat to the near-term outlook of Turquoise Hill Resources (TRQ). The prevailing uncertainty amid the pandemic-triggered lock downs also elevated the troubles. However, with easing lockdowns and recovering oil prices, copper's price outlook has witnessed a turnaround particularly due to the gradual reopening of the Chinese economy. This is good news for TRQ, whose share prices have been depressed for long and whose copper and gold concentrates are shipped to Chinese smelters.
More importantly, the GoM (read: Government of Mongolia) has recently revealed its plan to construct and self-fund the 450 Megawatt TTPP (read: Tavan Tolgoi Power Plant) instead of RIO Tinto (RIO). This reduces the total underground project development CAPEX by $924 BB, and brightens Oyu Tolgoi's outlook. In this article, we will discuss the implications of these two positive catalysts on TRQ.
Figure-1 (Source: Energy Central)
Spotlight on copper prices
Copper prices are staging a slow but steady recovery (Figure-2) after having tanked from over $2.8/lb (toward the beginning of FY 2020). At the time of writing, the industrial metal's prices have already climbed by more than 25% from their mid-March lows; and post-lockdown, step-by-step resumption of economic activity in China (the biggest consumer of copper) is helping stabilize copper prices.
Figure-2 (Source: Finviz)
China's GDP dropped by 6.8% during Q1 2020 but the country has managed to emerge from the economic ramifications of the pandemic. This is quite relevant for TRQ since all concentrate produced at its OT mine is shipped to Chinese smelters. TRQ's Q1 2020 revenues of $130.7 MM saw a whopping 63% YoY decline owing to significantly lower copper and gold production (~23% and 78%, respectively), YoY. However, since FY 2020 copper production is expected to ramp up from last year, improving copper prices would reflect positively on the company's revenues. Gold
