Turquoise Hill Resources Ltd.: Investors Upbeat Before Takeover

Stella Mwende profile picture
Stella Mwende


  • The agreement between Turquoise Hill Resources and the Mongolian Government will stabilize gold and copper production by H1 2023.
  • Minority shareholders may force Rio Tinto to increase its cash offer from C$34 for the remaining 49% stake in Turquoise Hill Resources.
  • The company had planned out 25 km of drilling in 2022 and 2023 in mining areas located in Hugo Lift 1 horizon.

Aerial view industrial of opencast mining quarry with lots of machinery at work - extracting fluxes for the metal industry. Oval mining industrial crater, acid mine drainage in rock

panophotograph/iStock via Getty Images

Investors of Turquoise Hill Resources Ltd. (NYSE:TRQ) have followed the company keenly ever since it entered into a binding Heads of Agreement (HoA) with Rio Tinto (RIO) on April 9, 2021. The $2.3 billion funding agreement, which was later amended on January 24, 2022 has made TRQ increase more than 66% in the past year while RIO has lost about 24%. The value of the two companies has been affected by the price of copper, silver and gold. TRQ has remained solid despite RIO's proposal to take the company private. While considering the shortage of metals, Tesla (TSLA) is on a quest to acquire a mining company to help its transition to clean energy.


Turquoise Hill Resources is currently undervalued and is a potential hold despite the 20% revenue drop in Q1 2022. The company updated its capital expenditure estimate for Phase 2 to $7.06 billion with the management hopeful to continue the open-pit optimizations by the end of the year. Already, production in the underground mine is going as planned with the mill throughput above nameplate capacity despite maintenance downtime. Overall, investors are hopeful that the renewed partnership with the Mongolian government and the amended funding agreement with Rio Tinto will work to steer sustainable commodity production through 2023.

In its Q1 2022 earnings review, TRQ announced that it had reached a mutual agreement to renew its partnership with the Government of Mongolia over the Oyu Tolgoi mine. This understanding will enable the underground mine to achieve sustainable production in the first half of 2023. In Q1 2022, the mine produced 30,300 tons of copper concentrates (down 33.26% from 45,400 tons in Q1 2021) and 59,000 ounces of gold (-59.6% YoY).

It was necessary for Turquoise to reach an agreement with Mongolia to save the dwindling supply. There has been a tax dispute between the Mongolian authorities and Oyu Tolgoi totaling to $155 million from 2013 to 2015 (a matter adjudicated since 2018). Out of this amount, Oyu Tolgoi paid $5 million and disputed the rest - $150 million. The agreement between the two parties in February 2022 to a 6-month suspension of the tax dispute to resolve the outstanding issues came as a sigh of relief.

As we know, Turquoise Resources owns 66% of Oyu Tolgoi while the Mongolian government owns the rest - 34%. Rio Tinto is set to expand its 50.8% of TRQ and gain the remaining 49% and with that gain control of the Oyu Tolgoi mine. After RIO decided to write off a $2.4 billion debt (in loans and interest) owed by the Mongolian government, it became imperative for the company to proceed with the TRQ bid. At the moment, RIO does not have control of the Oyu Tolgoi mine despite its 50% stake in TRQ. Whether TRQ will consider the non-solicitation or the non-compete clause in this bid is still left to question.

What Has RIO offered?

RIO offered $2.7 billion for the 49% minority shares it does not own in the Canadian miner with indications that it was serious about full ownership of Oyu Tolgoi. This offer translates to C$34 per outstanding share of TRQ. With the current exchange rate, the amount translates to $26.50, which is 5.11% below the market value and 40.95% below the book value/share. In my view, Rio's offer will reduce TRQ's valuation, keeping in mind the company's market capitalization stands at $5.46 billion.

The final word over this deal will rest with the minority shareholders such as Pentwater Capital Management with at least 10% stake in TRQ and SailingStone Capital. As we know it a majority of the independent shareholders will have to vote for RIO's proposal to sail through based on Canadian law.

Back in 2020, Pentwater filed a class action lawsuit action against RIO with the claim that the latter concealed massive cost overruns and delays. In essence, executives of both RIO and TRQ assured investors that the underground development of Oyu Tolgoi was going according to plan and budget but, it was way behind schedule. TRQ's operating expenses have surged 37% since December 2020 to $329.1 million while RIO's have increased 6.9% over the same period. However, the latter's enormous revenue at $63.495 billion (+42.33% YoY) has provided a buffer and shielded investors against net losses from delayed projects.

In my view, TRQ's minority stakeholders will force RIO to increase its offer, say C$50 since the share price has appreciated from the commencement of the underground development. As of 2019, the cost overrun announced by RIO stood at $1.9 billion with the total capital expenditure to range from $6.5 billion to $7.2 billion. Additional lending raised the expenditure by $500 million.

Still lower head grades for copper and gold have been blamed for decreased commodity production in the Oyu Tolgoi mine. Mill throughput also declined 9% in Q1 2022 (QoQ) to 9.58 million tons and 2% lower as compared to Q1 2021. However, the company stated that the decline was in line with its expectations due to the planned maintenance.

Expected Production Surge

Turquoise Resources announced that it reached a milestone at the Oyu Tolgoi copper-gold mine after the second shaft reached its planned depth of 1,284 meters at the Hugo North Lift. In the Q1 2022 earnings call, Interim CEO Steve Thibeault stated,

All mass excavation was completed in conveyer surface. We have seen the recommencement of sinking activities in shafts 3 and 4, which are critical for the ventilation for continued development of the Hugo North Lift 1 footprint into Panels 1 and 2."

The company had planned out 25 km of drilling in 2022 and 2023 in mining areas located in Hugo Lift 1 horizon. The company is expected to reach peak production between 2024 and 2028 where it will produce at least 600,000 tons of copper annually. This production estimate is impressive since the 2022 copper production guidance was revised to range at 110,000 to 150,000 tons. Gold production estimate was also changed from the range of 115,000-165,000 ounces to 135,000 to 165,000 ounces.

Falling Copper and Gold prices


Over the past year, Gold has gained 0.21% to $1818.47 while copper is down 1.90% at $4.159 per ton. Copper futures had just recovered from an 8-month low at $4.06 near mid-May 2022. Investors were hopeful that China would ease the Covid19 restrictions but the price of the red metal is yet to hit the record high of $5 attained in early March 2022.

TRQ Supply Bottlenecks

TRQ is facing mineral supply disruption as a result of Mongolian government interference and the force majeure that was declared on some Chinese contracts. To curb this effect, TRQ assured investors that it is working with both the Chinese and Mongolian governments to resolve the legal impasse. The quarter saw increased concentrate shipments to China with the inventory level falling by 30%. Still target levels are yet to be reached and the company is maintaining the force majeure until it reaches sufficient volume convoys. Of special note is that the Commission of Materials handling System 1 as well as the first on-footprint chute were completed in the quarter.

As stated earlier, the cost surge of the underground mine to $7.2 billion from an earlier estimate of $5.3 billion may delay production. This higher capex may drive sustainable production to as late as June 2023. The removal of various underground infrastructure especially those involving the ore handling system and conducting data modeling changes from the original mine plan will augment the costs.

Risks To Consider

TRQ's accumulated shareholder losses rose 37.14% from $2.890 billion in 2021 to $3.964 billion by Q1 2022. The company maintained its debt level at $4.18 billion, a 0.4% decline from the level reached in 2020. This debt was against a cash balance of $585 million, indicating a relatively weak financial position. A company such as Barrick Gold (GOLD) with a debt of $5.14 billion boasts of a robust cash position at $5.89 billion. The company will remain with more than $750 million after paying its entire debt.

Bottom Line

Turquoise Resources has increased its gold and copper production guidance for the fiscal year 2022-2023. The company also plans to augment cross-border shipments to China with the hope that China will ease Covid-19 restrictions. Already concentrate inventory has declined by 30%. The amended HoA with Rio Tinto is expected to offer a financial pathway to expand the Oyu Tolgoi mine in Mongolia. Still, the company is faced with an increase in developmental costs that may hamper quick sustainable production. Due to the expected complete acquisition of TRQ, we have raised our rating from sell to hold.

This article was written by

Stella Mwende profile picture
I have more than five years experience in the financial industry. I focus mostly in the commodities, foreign exchange and cryptocurrencies. I also write on general issues like equity research, economics and geopolitics.Fellow contributor Crispus Nyaga is my colleague.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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