Rio Tinto’s plan to take direct ownership of a giant copper mine in Mongolia has suffered a set back after its $2.7bn buyout proposal was rejected.
Turquoise Hill Resources said a special committee had “terminated” its review of Rio’s C$34 ($26) per share cash offer, saying it did not “fully and fairly reflect” the value of its holding in Oyu Tolgoi.
“A transaction at the price proposed by Rio Tinto would not fairly compensate minority shareholders for the fundamental, long-term value of the company’s interest in Oyu Tolgoi,” said Maryse Saint-Laurent, chair of the special committee.
Located in the Gobi desert, Oyu Tolgoi is one of the world’s biggest copper deposits. Once an underground expansion project is completed, it will be one of the world’s biggest copper mines, with production in its early years of about 500,000 tonnes per year, just as demand for the metal increases because of the energy transition.
It is one of several projects that Rio chief executive Jakob Stausholm is trying to sort out as he looks to position the group for the shift to a low-carbon economy. At the moment, the company derives most of its money producing steelmaking ingredient iron ore.
Although Rio operates Oyu Tolgoi and is overseeing the underground expansion project, it does not have a direct stake in Oyu Tolgoi. Instead, it holds a 51 per cent stake in Toronto-listed Turquoise Hill, which in turns owns 66 per cent of Oyu Tolgoi. The rest is owned by the government of Mongolia.
Turquoise Hill said on Monday that engagement between the parties had “not resulted in a consensus on value and price or in any improved proposal from Rio Tinto”.
The proposed Rio buyout has already been opposed by Pentwater Capital, the biggest independent shareholder in Turquoise Hill. It says the offer is too low.
Shares in Turquoise Hill fell nearly 9 per cent to C$30.53 on Monday.
Rio launched its offer for Turquoise Hill in March just as the copper price hit a record high of above $10,600 a tonne. Turquoise Hill responded by establishing a special committee of independent directors to review and consider the Rio proposal.
At the time Bold Baatar, head of Rio’s copper division, said the offer, which was pitched at a 32 per cent premium, would create a “simpler and efficient ownership” structure for Oyu Tolgoi.
The price of copper has since fallen back to about $8,000 a tonne, although many analysts remain bullish on its long-term prospects.
When Rio reported half-year results last month, Stausholm was asked about the buyout offer, which he described as a “full-priced proposal”. He also noted copper assets had fallen by more than a third since March.
Saint-Laurent said the committee would now support Turquoise Hill in its efforts to raise at least $650mn in new equity by the year-end to shore up its finances and complete development of the underground mine, where first production is expected in the first half of next year.
In a statement, Rio said it was “disappointed” by the decision of the special committee and it would remain “financially disciplined” as it considers its next move.
Should a deal not proceed, Rio said it would “welcome” continued investment by minority shareholders Turquoise Hill to meet their share of “future risks and funding obligations”.
The development costs for the underground mine at Oyu Tolgoi mine have risen to $7bn, up from an initial estimate of $5.3bn.
“While we are disappointed by this decision, we will continue to work constructively with the board of Turquoise Hill to advance the Oyu Tolgoi project,” said Baatar.
Dalton Baretto, an analyst at Canaccord Genuity, said he was not surprised that the special committee had taken such a hard line.
“Our view is that the current development reflects hardball negotiations on both sides and that there is a reasonable probability of a revised offer,” he added.