Extra Funding Looms On Turquoise Hill Over Delays In Oyu Tolgoi

Turquoise Hill Resources Ltd TRQ had a stellar Q2 this year. Profit smashed expectations thanks to copper and gold prices, and the output of the Oyu Tolgoi mine in Mongolia. However, it doesn’t look that nifty for the Canadian company, as it faces extra funding due to agreement delays with said government. 

Agreeing on royalties

According to an RBC Capital Markets report, Turquoise Hill remains in a “holding pattern” as non-technical aspects need to be sorted out before the company starts the block cave in the flagship mine. 

This means that the Mongolian government is yet to approve the new mine plan and agree over royalties, as it owns 34% of Oyu Tolgoi. The longstanding complaint, says the report, is that “the structure of the deal limits equity payments for decades.” 

With talks on hold as of June due to political elections, Turquoise Hill is looking at quickly rekindling negotiations with the government in August. 

However, for as long as the two parties don’t sit down and reach a turning point to start the block cave, the company could face significant CAPEX to the point of requiring additional funding. 

Potential CAPEX impact 

RBC asserts: “We continue to see the long-term value potential at Oyu Tolgoi with the shares trading at 0.77x NAVPS but we reiterate our Sector Perform rating and reduce our target to $27 from $30.”

At present, how hard the impact on CAPEX will be hinges on how soon an agreement is reached, as “the longer this stretches the more challenging it becomes as contracts are delayed, and de-mobilization/re-mobilization costs escalate.” 

In this outlook, Turquoise Hill has not provided guidance on the possible CAPEX impact, while the timing of an agreement with the Mongolian government remains to be determined.

Under current schedule, the company expects sustainable production to start in October 2022, but RBC Capital has factored a three-month delay that would change the date to early 2023. 

Working on estimates

Further, RBC has done the math and added $250 million to its CAPEX estimate on the Canadian company.  

“These changes took our NAVPS down by 11% to $26.87. Every additional $250 million of CAPEX results in a negative hit to NAV of roughly $1.00.”

During the first quarter, Turquoise Hill updated its funding shortfall to $2.4 billion from $2.3 billion with $100 million relating to Covid and the delays with the Mongolian government. 

Despite the offset of higher prices of gold and copper, RBC Capitals has its take: “We believe this could be funded by refinancing $1.4 billion of debt, $0.5 billion of new debt, and $500 million of equity.” 

The firm has increased the company’s funding requirement from $2.3 billion to $2.5 billion while estimating $1.9 billion of debt and $600 million of equity. Still, RBC says, “these are moving targets until we get clarity around timing.”

Long term value “is there”

RBC firmly asserts that Turquoise Hill’s long-term value is there, since its copper production from Oyu Tolgoi reached 36,735 t in the quarter, compared with 36,495 oz last year. “Its gold output more than tripled to 113,054 oz,” as informed by Mining Weekly.

“We continue to see potential for long-term value creation if agreements can be reached with the Mongolian government, and as the underground ramps up becoming one of the largest, lowest copper mines in the world.”

Turquoise Hill is also relying on its board committees and independent directors for the Oyu Tolgoi delay. 

Regarding any extra financing, “the Special Committee on Financing investigates and considers how all options would impact minority shareholders.”