Nothing for punters when Rio buys out Turquoise Hill

Shares in Turquoise Hill Resources (TSE,NYSE:TRQ) showed little reaction on Wednesday after media reports that the company's parent Rio Tinto is likely to buy out its majority-owned copper and gold miner.

According to a report in the Financial Post quoting CIBC analyst Tom Meyer, the world's number two miner likely will buy out the shares it does not already own in the next 12 to 18 months.

Meyer believes Rio is likely to pay a premium for the little less than half the shares it owns, but judging by the market reaction not many investors in the Vancouver-based company agree.

In midday trade Turquoise Hill was down 0.5% to $3.80 in much higher than usual volumes affording the company a $7.6 billion market value on the Toronto Stock Exchange despite a firmer copper price on Wednesday lifting other counters in the sector. The stock – long a favourite of resource stock investors – has been on a wild ride since hitting an all time high above $28 in January 2011.

Turquoise Hill's main asset is 66% of the massive Oyu Tolgoi copper and gold mine in Mongolia's Southern Gobi Desert near the border with China. The Oyu Tolgoi open pit shipped its first copper concentrate in 2013 and this year is likely to hit production of 600,000oz – 700,000oz of gold and 175,000t to 195,000t of copper.

But what makes Oyu Tolgoi really a prized asset is the proposed $5.6 billion underground expansion where 80% of the resource is located. After nearly two years of wrangling Rio and he Mongolian government (which owns the remainder of the mine) finally signed a deal in May this year.

Rio is now in the final stages of finalising the project finance, the feasibility study and securing all necessary permits so that the underground mine development can proceed and as Meyer points out in the note: "It is worth remembering that Rio Tinto is driving the bus":

"He noted that Rio has every incentive to maximize operating performance, but no incentive to “promote” the true value of the asset. The lower the stock price for Turquoise Hill, the less Rio has to pay to buy it out.

"Minority (Turquoise Hill) shareholders can ride the coattails and benefit too, but maybe not as much had there been no other competing investment agendas.”

"Meyer visited Oyu Tolgoi last week and came away very impressed with the project. Given the importance of the mine to Mongolia, he said he no longer views the political risk, one of his longstanding concerns, as above average."

In a country with a population of around 3 million the mine running at full tilt, could contribute as much as a third of the economy when in full production.

Oyo Tolgoi phase II is a truly giant project – an updated feasibility study including the underground expansion released a year ago shows recoverable copper of 24.9 billion pounds, 11.9 million ounces of gold and 78 million ounces of silver over a mine life of 41 years.

A separate economic assessment to develop Oyu Tolgoi further and include other deposits at the property shows just what a rich find Oyu Tolgoi really was. This scenario provides a 94 year mine life and recoverable copper of 56.5 billion pounds, 27.9 million ounces of gold and 195.2 million ounces of silver.

Rio Tinto bought a majority stake of Oyu Tolgoi in April 2012 which led to the ouster of the then owners Ivanhoe Mines under chairman Robert Friedland. The legendary mining financier had been advancing Oyu Tolgoi for the previous eight years.