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Is Mongolia the right move for Rio Tinto?
The Rio Tinto Limited (ASX: RIO) share price has dipped 4.6% today despite announcing the proposed acquisition of Turquoise Hill.
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The iron price fell 6.2% overnight, leading to losses across the iron ore miners including Fortescue Metals Group Limited (ASX: FMG) and BHP Group Ltd (ASX: BHP).
What is the offer?
Turquoise Hill shareholders will receive C$34.00 (AU$36.84) per share, which is a 32% premium to the company’s last closing share price on the Toronto Stock Exchange.
The bid offers Turquoise Hill at approximately US$2.70 billion (AU$3.75 billion).
Rio Tinto already has an existing 51% ownership of Turquoise Hill. It proposes to acquire the remaining 49% of outstanding shares.
Why is Rio interested in Turquoise Hill?
Turquoise Hill owns a stake in the Oyu Tolgoi copper project located in Mongolia.
Rio Tinto and the Mongolian government are also shareholders in the project.
By purchasing Turquoise Hill, Rio Tinto increases its holding in the project to 66%. The remainder is owned by the Mongolian government.
It will create a more simple ownership structure and provides a chance for Turquoise Hill shareholders to realise immediate value:
“…[the transaction] provides Turquoise Hill minority shareholders with the ability to realise compelling, immediate and certain value for their shares at a time when uncertainties inherent in the development of the underground operations and funding of such development remain”
Will Turquoise Hill accept the offer?
The Oyu Tolgoi project has been plagued by past disputes over the expansion of the mine.
But fortunately, Rio Tinto and the Mongolian government recently ‘reset’ the relationship.
Rio waived the right to US$2.4 billion in debt owed in exchange for the government agreeing to several matters such as where the mine would source its power.
“Rio Tinto strongly believes in the long-term success of Oyu Tolgoi and Mongolia, and delivering for all stakeholders over the long-term”
There is a possibility Turquoise Hill reject the proposal. In that case, the existing ownership structure would remain:
“Should Turquoise Hill investors not accept the Proposed Transaction, Rio Tinto welcomes their continued investment and equal share of future risks and funding obligations”
What next for the Rio share price?
If the proposed acquisition is accepted by Turquoise Hill, the Rio share price will likely rise on the news.
Analysts have been largely bullish on the deal, believing it will be accretive to Rio Tinto’s bottom line.
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