Friday, March 7, 2014

Rio readies for Mongolia pounce

Rio Tinto is edging closer to snaffling the stake in Canada's Turquoise Hill Resources it does not already own in a move to shore up its exposure to key copper asset Oyu Tolgoi as it tries to counter a predicted drop in the iron ore price.

According to a report in the Daily Mail, Rio will make a cash offer of about $8 per share for the group, which would value the stake at $16.09 billion. The remaining 49.2 per cent stake in Toronto Exchange-listed Turquoise is currently valued at $4.495 billion, based on its last close of $4.54, putting a $9.12 billion tag on the whole company.

Turquoise owns 66 per cent of the most valuable copper resource in the world, the Oyu Tolgoi mine in Mongolia. Rio is the project operator of the copper and gold mine and has effective majority control through its 50.8 per cent holding in Turquoise.

Oyu Tolgoi has been plagued by delays over Rio’s failure to strike an investment deal with the Mongolian government but Rio is now suggested to be close to reaching a deal with the Mongolian government for the $6 billion second stage development of the mine. That speculation was sparked by an online job ad seeking "an integrated project team for the next phase of a major EPCM (Engineering, Procurement, Construction Management) mining project in Mongolia." The ad was posted by engineering and project management firm AMEC, which worked on the first phase of Oyu Tolgoi.

Shares in Turquoise have gained 12 per cent to C$4.54 in the past three days.

When production comes online it will diversify Rio’s earnings, currently dominated by iron ore. Iron ore supply is tipped to enter surplus in the second half of this year and some analysts have predicted the price will fall to US$80 a tonne in 2016. It yesterday hit an eight-month low of US$116.80. Copper has better near-term price prospects that iron ore, according to analysts. It is one of the few commodities tipped to enjoy a price increase and supply shortfall.

Rio Tinto’s last acquisition in Canada was disastrous. It purchase Alcan for $US38 billion at the height of the mining boom in 2007, ultimately claiming the scalp of then boss Tom Albanese.

(Reporting by Amanda.Saunders@businessspectator.com.au)

Editing by Miranda.Maxwell@businessspectator.com.au )

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