Ground Breakers: Analysts question value of Rio's US$2.7bn Oyu Tolgoi bid

Goldman Sachs says Rio’s Oyu Tolgoi bid a 43% discount to valuation
Sanction threat tightens around Russian resources oligarchs with Aussie interests
Materials index gains 1.41% in morning session on Friday

Rio Tinto (ASX:RIO) could be forced to lift its offer to take a larger stake in its Oyu Tolgoi copper-gold mine in Mongolia, after it lobbed a US$2.7 billion bid to take out the minority shareholders in subsidiary Turquoise Hill Resources this week.

Turquoise Hill, of which Rio controls 51%, owns 66% of Oyu Tolgoi alongside the Mongolian Government.

After years of painstaking negotiations with Mongolia which ended when Rio offered to wipe a US$2.4b debt from the host nation, a US$6.93 billion underground mine that would make Oyu Tolgoi one of the world’s largest copper and gold assets has been given the thumbs up.

The C$34 a share offer for the rest of Turquoise Hill was a 32% premium to Turquoise Hill’s Friday closing price.

But some analysts say it falls below their valuation of the 40+ year, lowest cost quartile copper mine.

Goldman Sachs analysts Paul Young, Hugo Nicolaci and Jack O’Brien this week said in a research note the offer is at a 43% discount to the valuation contained in their price target.

Goldman, which has a buy on Rio and is bullish on the big iron ore miners, says the whole of Oyu Tolgoi is valued at US$20.5bn on a long-run real copper price of US$3.6/lb.

Some minority shareholders have already raised their concerns the bid is too cheap.

It marks the first major acquisition attempt by Rio since Jakob Stausholm became CEO and since announcing a record profit last month of over US$20 billion.

Rio Tinto share price today:

Aussie Government sanctions mining oligarchs

Speaking of Rio, last week it stated that it wouldn’t be doing business with Russian companies but it’s unknown exactly what that will mean at the moment.

Its most glaring connection is the Queensland Alumina Refinery in Gladstone, 20% owned by Rusal which uses its feedstock to feed aluminium smelters in its homeland.

Rusal’s president Oleg Deripaska and Viktor Vekselberg, who has an indirect stake in a minority partner of Origin Energy (ASX:ORG) at its Beetaloo Basin gas exploration assets, have just been placed on Canberra’s Russian sanction s**t list, long after activists began pointing the finger at the Putin-linked oligarchs.

This is all terribly awkward for the Federal Government, which is hitched to the whole ‘gas fired recovery’ deal in the Beetaloo and is about to engage in its favourite election year sport – sucking up to Queenslanders.

“Queensland alumina is very important to the Gladstone economy, it’s a very large employer in that town,” Home Affairs Minister Karen Andrews said on Sky News this well.

“We will be mindful of that but there is the bigger picture that we need to mindful of as well.”

Rio told the ABC this week it believed it had the appropriate structures in place to keep Gladstone operating, reiterating its intentions to terminate commercial relationships with Russian businesses.

The Australasian Centre for Corporate Responsibility, which has led a campaign against Deripaska and Vekselberg in recent weeks, called on Origin and Rio to immediately quarantine their interests in the JVs.

“The government must consider imposing sanctions on Rusal, in addition to the Russian financial institutions listed today,” ACCR director Dan Gocher said.

“Both Origin Energy and Rio Tinto must take every possible step to ensure that neither Deripaska nor Vekselberg financially benefits in any way from the respective joint ventures.

“Alumina exports from Queensland to Russia must be stopped immediately, to prevent the possibility of Australian alumina being used in munitions manufacturing.

“With sanctions now in force, we expect Rio Tinto to take complete control of the Queensland Alumina joint venture. We look forward to further disclosure on the implications of this process.”

It’s been an interesting few days for Deripaska after squatters in London occupied a multi-million pound mansion they believed to be owned by the billionaire.

The spokesman later came out to say family members owned the mansion, not him personally.

Miners start Friday on a high

The ASX’s large cap miners have started the last day of the week on a high, with the major iron ore companies steering the materials index to a 1.41% gain this morning.

Energy was also solid, up 2.28%. Lithium and coal stocks were the big movers in the mid-tier with Stanmore (ASX:SMR), Coronado (ASX:CRN), Lake Resources (ASX:LKE) and Sayona (ASX:SYA) all on the winner’s list.

Uranium explorer Paladin (ASX:PDN) was the biggest mover, up 9.24% as uranium remained around long term highs of ~US$55/lb.