Rio Tinto PLC RTPPF has reached an agreement with a pair of activist shareholders who had opposed the Anglo-Australian mining giant’s plans to acquire the minority share in Canadian copper miner Turquoise Hill Resources Ltd. TRQ-T it doesn’t already own, paving the way for the deal to succeed.
London-based Rio said late Tuesday that Pentwater Capital Management LP and SailingStone Capital Partners LLC have agreed to withhold their votes at the upcoming Turquoise Hill shareholder meeting. With the two most vocal dissidents not carrying any voting influence, Turquoise Hill is now far more likely to win approval from its shareholders for the deal. The bar for deal success is at least 50 per cent of minority shareholders voting in favour of the transaction at the meeting.
In return for sitting out the meeting, the two shareholders will be paid out an undetermined amount by Rio Tinto in recognition of fair value for their shares. The pair will receive $34.40 a share after the deal closes, with additional funds coming once an arbitrator makes a ruling.
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The development is the latest turn in what was a dramatic day for Turquoise Hill investors. Shareholders were scheduled to meet Tuesday morning, but the Montreal-based miner announced with barely 30 minutes to spare that it would be pushed back by a week until Nov. 8. The only reason given for the delay was that Rio requested it, and it fuelled more uncertainty about whether the contentious deal would succeed.
Rio Tinto’s takeover offer for the 49 per cent of Turquoise Hill it didn’t already own is a 67-per-cent premium to the miner’s market price before the deal was first proposed in March. While the $4.2-billion deal was eventually welcomed by Turquoise Hill’s board of directors – after its terms were sweetened twice – it had generated significant opposition by the two minority shareholders.
Pentwater Capital, which is Turquoise Hill’s second-biggest shareholder with a 14.5-per-cent stake, voiced its opposition to the buyout early on. The Florida-based firm said the acquisition significantly undervalued the miner. Houston-based SailingStone Capital, which holds a 2.2-per-cent stake, also opposed the transaction, saying recently that it’s “not interested in selling its stake at a massive discount to intrinsic value.”
Proxy advisory firm Institutional Shareholder Services, in the meantime, recommended Turquoise Hill shareholders vote against the deal. ISS said that while shares in the company will almost certainly crash in the short term if the buyout fails, over the long term Turquoise Hill is poised to trade dramatically higher owing to its exposure to a massively growing copper mine whose best days are in front of it.
“Securing an offer that appropriately compensates investors for TRQ’s long-term profile is paramount,” ISS said in its report, referring to Turquoise Hill by its stock symbol.
To that end, Scotia Capital Inc. said in September that $50 a share would be closer to fair value, given the potential of Oyu Tolgoi, Turquoise Hill’s only mine.
Oyu Tolgoi is a massive copper project in Mongolia in which the company owns a 66-per-cent stake. The remainder is owned by the Mongolian state. The site is located in the Gobi Desert, 550 kilometres south of the country’s capital, Ulan Bator.
Rio Tinto has been adamant that it will not budge from its most recent offer. In September, Bold Baatar, chief executive of copper at Rio, told The Globe and Mail this was its “best and final” offer. If shareholders vote down the deal, Rio Tinto is prepared to walk away, he said.
Rio Tinto’s initial offer of $34 a share was rejected by Turquoise Hill’s board as too low, but after the Anglo-Australian mining giant increased the offer to $43 a share, the board came around. If the deal with Rio doesn’t close, Turquoise Hill will eventually need to raise almost $5-billion in additional funding to complete the underground expansion of the Oyu Tolgoi mine. A portion of that funding is slated to come from issuing additional equity, which would be dilutive and potentially weigh on the share price.
Oyu Tolgoi was discovered and developed by famed mining financier Robert Friedland. Rio Tinto initially invested in Turquoise Hill in 2006. The mine, which went into production in 2011, was plagued by multibillion-dollar capital cost overruns, lengthy production delays, disagreements between Rio and Turquoise about funding and tax disputes with the government of Mongolia. Those problems have since been largely overcome.
Acquiring Turquoise Hill would strengthen Rio Tinto’s position in copper, one of several critical minerals – alongside lithium, cobalt and graphite – that are increasingly used in the fast-growing electric car industry.
Rio Tinto and other large global miners such as BHP Group Ltd. and Teck Resources Ltd. are on a mission to reduce their exposure to environmentally damaging commodities such as coal, and double down on those that carry a less problematic environmental, social and governance footprint, such as copper. While the mining, refining and transportation of copper is detrimental to the environment, its growing end use in alternative energy gives it a cleaner sheen than workhorse metals such as iron ore and coal, whose use in blast furnaces to make steel is a major contributor to carbon emissions.