Rio’s Mongolian generosity reflects strategic bind

LONDON, March 14 (Reuters Breakingviews) – Jakob Stausholm is flashing the money. Rio Tinto’s (RIO.AX), (RIO.L) chief govt on Monday provided to purchase out minority shareholders in Turquoise Hill Assets (TRQ.TO), which controls the commodities big’s $10 billion Oyu Tolgoi copper and gold mine in Mongolia. A beneficiant $2.7 billion money provide for the 49% of the corporate Rio doesn’t already personal is logical, but in addition displays its lack of strategic wiggle room.

Stausholm’s fundamental rationale is sound. Oyu Tolgoi’s messy capital construction is likely one of the explanation why the underground copper mine has suffered delays. Final December Stausholm wrote down a mortgage Turquoise Hill’s forerunner had superior to the cash-strapped Mongolian authorities to pay for its 34% stake within the mine learn extra . The most recent gambit additional reduces the scope for the form of squabbles about value overruns and administration missteps which have blighted the undertaking lately.

Rio shareholders have authentic trigger to scratch their heads, although. As not too long ago as November Turquoise Hill shares had been buying and selling under $10, partly reflecting fears that the corporate would possibly difficulty fairness to finance the subsequent stage of the undertaking. Minority buyers who didn’t take part would face dilution. JPMorgan analysts reckon their share of Oyu Tolgoi’s internet current worth is $2.2 billion. Stausholm is providing them $26.7 in money, a 32% premium over the past closing share value, to take full possession of an organization he already controls.

Rio has the monetary assets to do the deal. As of December it had $1.6 billion of internet money, whereas excessive iron ore costs are including to that pile. Utilizing this stash means Stausholm can doubtlessly eliminate litigious Turquoise Hill shareholders like Pentwater Capital Administration.

Nonetheless, Rio’s willingness to pay over the percentages displays that it’s additionally in one thing of a strategic bind. Almost two-thirds of its income final 12 months got here from iron ore, whose value has gyrated amid uncertainty about demand. Against this, the world financial system wants heaps extra copper to impress industries like carmaking and burn much less fossil gas. Stausholm’s dedication to make sure that one of many world’s greatest copper mines avoids future mishaps comprises a component of desperation.

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CONTEXT NEWS

– Rio Tinto stated on March 14 that it had made a non-binding proposal to the board of Turquoise Hill Assets to amass the 49% of the Canadian-listed firm it doesn’t already personal.

– Turquoise Hill minority shareholders would obtain C$34 ($26) in money per share, representing a premium of 32% to Turquoise Hill’s final closing share value on the Toronto Inventory Change, and valuing their shares at $2.7 billion. Turquoise Hill owns 66% of the Oyu Tolgoi mine, one of many world’s largest recognized copper and gold deposits, with the rest owned by the Mongolian authorities.

– Rio stated the transaction would simplify the Oyu Tolgoi possession construction, strengthen Rio Tinto’s copper portfolio, and reinforce its long-term dedication to Mongolia. It additionally stated the deal offered Turquoise Hill minorities with certainty “at a time when uncertainties inherent within the improvement of the underground operations and funding of such improvement stay”.

– The transaction requires the approval of holders of 66.7% or extra of Turquoise Hill who vote at a shareholders assembly, in addition to a majority of minority shareholders.

– As of 0920 GMT on March 14 Rio Tinto shares had been buying and selling at 53.70 kilos, down 3.5%.

Enhancing by Peter Thal Larsen and Oliver Taslic

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