By James Chessell.
Rio Tinto has sounded out potential partners for a $US6 billion-plus tilt at privatising its mammoth copper project in southern Mongolia.
According to a report in the Sunday Times in London, investment bankers at Goldman Sachs working for Rio Tinto have had discussions with potential co-investors in the New York-listed Turquoise Hill Resources.
Turquoise Hill owns 66 per cent of Oyu Tolgoi, which is a large copper, silver and gold mine in Mongolia that Deutsche analyst Paul Young has described as, “the best undeveloped copper project globally and probably the best undeveloped asset in the industry”.
Oyu Tolgoi represents a genuine growth opportunity for Rio which has emerged from the worst commodities downturn in decades in relatively strong shape.
The Anglo-Australian miner’s new chief executive Jean-Sébastien Jacques is open to copper acquisitions while commodity prices remain low. Copper is regarded as a sensible growth option for the big miners given there are few mines of genuine quality being developed around the world and demand for the metal goes beyond construction.
In March, Fairfax revealed speculation that Rio had engaged Goldman “on a process to increase its stake in Turquoise Hill”. The London report said the investment bank has “sounded out potential buyers, including Chinese state-owned companies, trading houses and pensions funds” about taking a minority stake in the company.
Rio already owns 51 per cent of Turquoise Hill and is believed to be interested in privatising the business with the assistance of a partner.
Any transaction will not be cheap. The stock hit a seven-year low of $US1.72 in mid-January but has since climbed to $US2.88. Rio and any partner would need to spend more than $US3 billion ($4.07 billion) to buy out the minority shareholders.
The ownership structure of Oyu Tolgoi means Rio owns about a third of the mine. Rio may consider a privatisation of Turquoise Hill more attractive and lower risk than a takeover of another mine because it is already familiar with the Mongolian asset.
Rio struck two important Oyu Tolgoi agreements last year that have given the London-based resources giant confidence it can ramp up production at the mine: the development agreement for a second mine expansion stage struck with the Mongolian Government in May, and the $US4.4 billion debt package that was secured for the expansion in December.
Last week Rio Tinto launched its second debt buyback in the space of two months as it works to shore up its balance sheet.
Rio offered to buy back $US2.9 billion ($A3.9 billion) worth of notes that are due in 2018 and will then consider offers from holders of about $US5.2 billion of bonds maturing in 2020 to 2022. It repurchased $US1.5 billion of notes in an April tender.
Rio shares are down around 18 per cent over the last 12 months.
SOURCE: Financial Review