Over the next seven years we face significant technical, financial, and macroeconomic risks while we complete the design, development and ramp-up of this major underground block caving project
Rio Tinto issues letter to Turquoise Hill shareholders. (Credit: Rio Tinto)
Rio Tinto has issued an open letter to the shareholders of Turquoise Hill Resources Ltd (TSX: TRQ) (NYSE: TRQ) (“Turquoise Hill”) outlining the future of TRQ and reiterating its long-term commitment to Oyu Tolgoi.
Dear Turquoise Hill Shareholders,
Since Rio Tinto’s approach in March to acquire Turquoise Hill Resources you may have heard many views about the merits of our proposal. Today, we want you to hear directly from Rio Tinto.
We are all shareholders in Turquoise Hill because we believe in the long term potential of the Oyu Tolgoi project in Mongolia. But we must also recognise that we have a long way to go before its full value is unlocked. Over the next seven years we face significant technical, financial, and macroeconomic risks while we complete the design, development and ramp-up of this major underground block caving project. Further, to achieve this, over the next two years Turquoise Hill needs an additional US$3.6 billion (C$4.9 billion) in funding. A proportion of the funding burden will fall on shareholders, and we will all need to contribute cash or face dilution.
Against that backdrop we have made our best and final offer of C$43 in cash for each of your shares. That is:
A premium of 67% to the share price immediately before our proposal; and
An implied premium of more than 150% to the price of your shares if they had performed in line with copper company peers since 11 March 2022.1
The independent and highly qualified Directors of your Board, with the help of leading Canadian financial advisors, reviewed our proposal and, after extensive negotiations and analysis over six months, unanimously recommended in favour of the transaction. That view was further endorsed by Glass Lewis, a prominent advisor to institutional investors.
We acknowledge that we do not have the support of some Turquoise Hill shareholders and ISS, another advisor to institutional investors. However, we believe that ISS’s final conclusion on Net Asset Value (NAV) is based on flawed logic. The average analyst NAV when the transaction was announced was C$39 per share, giving a resultant P/NAV of our offer of 1.10x, which is a strong premium to NAV and above precedent transactions for assets under development.
There are many important issues that may affect your voting decision, but we would like to highlight two:
We believe that Rio Tinto’s proposal fully values the long term potential of Oyu Tolgoi and Turquoise Hill and assumes that the near term challenges can be overcome.
Whilst in the past Rio Tinto has shouldered the majority of the funding burden on behalf of all shareholders, if our proposal does not proceed then in future all shareholders will need to contribute proportionately. To be clear, that means Turquoise Hill shareholders will need to contribute at least US$1.1 billion in the first half of 2023, in the form of new equity through placings or rights issues, or potentially face dilution.
If, after considering the realities outlined above, you decide not to accept the Rio Tinto proposal, then we welcome you as ongoing investors in Turquoise Hill. Together we will make the substantial commitments necessary to complete the Oyu Tolgoi project over the next seven years.
But, if you conclude that C$43 per share represents a strong return for your investment, taking into account the balance of risks and long term potential, then vote FOR our proposal. If the transaction proceeds, then we look forward to soon paying C$43 in cash for each of your shares in a market which has otherwise deteriorated significantly since our initial proposal.
Source: Company Press Release