Rio’s Takeover Plan of Turquoise Hill Opposed by Top Investor

Rio Tinto’s takeover plan of Turquoise Hill Resources Ltd is in jeopardy as the latter’s second largest investor has opposed the acquisition.

Pentwater Capital Management LP, one of Turquoise Hill Resources’ top shareholders, threatened to thwart the deal arguing that the purchase price undervalued the company. Pentwater has also recently upped its stake in the Canadian mining company.

Pentwater holds almost 12% stake in Turquoise Hill Resources Ltd. as compared to Rio Tinto, which has a 51% share. Despite a larger stake, more than half of Turquoise Hill’s remaining stakeholders will have to support Rio Tinto’s takeover plan for the acquisition to push through. Pentwater said that it would look into the possibility of “exercising their dissent rights or taking other legal action” to block Rio Tinto’s deal.

Rio Tinto earlier announced that they had a binding agreement to take over Turquoise Hill Resources Ltd. Rio Tinto’s takeover plan between the Anglo-Australian mining company and Turquoise Hill was reportedly agreed upon by principle. Rio Tinto’s takeover plan amounted to about $3.3 billion and would give Rio Tinto more control of the Oyu Tolgoi mine in Mongolia. Rio Tinto has been developing this copper mine in the Gobi desert.

Turquoise Hill Resources Ltd Top Investor Blasts Rio Tinto’s takeover Plan

The Naples (Florida) based investment firm Pentwater and Rio Tinto do not seem to see eye to eye, especially concerning Rio’s management of the asset. The shareholder recently blasted Rio Tinto by stating that the purchase price ascribes an equity value of C$8.65 billion (US$ 6.66 billion) to Turquoise Hill Resources Ltd. Pentwater was of the opinion that this represented just a fraction of the expected free cash flow that the Montreal-based miner will gain over the next decade.

The fund manager said that they are checking all possible legal remedies and examining all their legal and shareholder rights with regard to the possible takeover. They believed that as the world shifts towards green and renewable energy, the price of copper will surely pick up to $4 per pound over the next decades. Pentwater said that Turquoise Hill Resources Ltd is set to generate C$14.2 billion in free cash flow through 2030 should the prices of copper be more than $4 per pound.

In a statement, Pentwater Capital Management LP said, “Pentwater expects Turquoise Hill to generate over C$10.5 billion of free cash flow through 2030 assuming US$3.50 copper and almost C$14.2 billion of free cash flow assuming US$ 4.00 copper.

Pentwater believes that as the world transitions to a green economy, the demand for copper will continue to increase and that there is a high probability that the price of copper will be in excess of US$ 4.00 over the next decade. Pentwater further believes that the proposed premium is unacceptable for a mine that Pentwater expects to be the third-largest copper and gold mine in the world, with a mine life in excess of 90 years. Pentwater does not support the proposed plan of the arrangement.”

The shares of Turquoise Hill Resources Ltd plunged 2.7% to C$40.87 in Toronto while Rio’s shares picked up by 3.5% in London.

Aside from Pentwater, another Turquoise Hill investor is also opposing the takeover plan. SailingStone Capital Partners holds a 2.2% stake in Turquoise Hill Resources Ltd and had announced earlier that it would also oppose the acquisition plan set by Rio. SailingStone, however, has already sold much of its stake in the company. It previously held a stake of about 14% before it sold a significant portion of its shares. SailingStone Capital Partners has yet to give its official statement about the latest acquisition plan.

Rio Tinto’s takeover plan to take full ownership of Turquoise Hill was to gain total control of Oyu Tolgoi mine of which the latter has a 66% share. The government of Mongolia owns the remaining 34%. Earlier, Rio Tinto and the Mongolian government had hit a stumbling block but this was eventually ironed out.

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The Oyu Tolgoi mine is expected to be the fourth largest copper mine in the world once the underground expansion is done. About 500,000 metric tons of copper are expected to be produced out of the mine annually once it is completed. The massive mine is believed to have the world’s largest gold and copper deposits.

Copper is expected to be in high demand as more electric vehicles are developed and more charging stations are built. Even other green energy infrastructure needs are expected to add to the demand for the metal as the world attempts to decarbonize.

In recent times, the prices of copper have plunged from an all-time high. This was attributed to demand from China hitting a snag apart from other global inflationary pressures. However, the prices of the metal are expected to rise again in line with the projected increase in demand.

Rio Tinto’s takeover plan of Turquoise Hill has been underway for almost half a year now. Turquoise Hill Resources Ltd. had previously turned down the initial offer of C$34 from the Anglo-Australian company stating that the proposed amount was too low.

Last week, the Chief Executive Officer of Rio Tinto, Mr. Jakob Stausholm said, “This agreement … will simplify governance, improve efficiency and create greater certainty of funding for the long-term success of the Oyu Tolgoi project.”

It remains to be seen whether Rio Tinto will be able to overcome the recent roadblock to finally take over Turquoise Hill.