Prices have recovered over the past month to be fetching $US3.60 a pound on Monday.
The chairman of the independent committee that analysed the offer on behalf of Turquoise Hill minority shareholders, Maryse Saint-Laurent, said the copper price slump had been taken into account.
But Rio’s $C34 per share offer remained “well below” the valuation conducted by an external provider for Turquoise Hill and attempts to convince Rio to raise its offer had proved fruitless.
“Market conditions in the equity and copper markets have changed significantly since the receipt of Rio Tinto’s privatisation proposal in March,” she said. “At the same time, the company has continued to make positive progress on the underground project.
“We concluded that a transaction at the price proposed by Rio Tinto would not fairly compensate minority shareholders for the fundamental, long-term value of the company’s interest in Oyu Tolgoi.”
Turquoise Hill owns 66 per cent of a Mongolian company called Oyu Tolgoi LLC, which owns the mine in the South Gobi Desert.
Rio considers Oyu Tolgoi to be among its most important growth projects, even though it has no direct ownership of the asset; its exposure comes indirectly via its majority shareholding in Turquoise Hill.
To complicate matters further, Turquoise Hill and the Mongolian government effectively hire Rio to be the manager of the Oyu Tolgoi project.
A medium-sized open pit mine exists at Oyu Tolgoi today, but the big focus has always been an underground expansion that would unlock the bulk of the value.
That expansion was expected to cost $US5.3 billion when it was launched in 2015, but it has since suffered numerous cost and schedule blowouts and is expected to cost closer to $US7 billion by the time first sustainable production is achieved in June 2023 at the latest.
The cost and schedule blowouts have forced Turquoise Hill to search for additional funds to complete construction, and Rio’s original preference was for the company to conduct a share issuance.
Many minority investors have been sceptical that Rio’s management of the project created cost and schedule blowouts that have depressed the Turquoise Hill share price and could create a situation where Rio was able to grow its exposure to Oyu Tolgoi cheaply through a dilutive share issuance or takeover at a low valuation.
“The special committee will now concentrate on the other major elements of its mandate and support company management in raising at least $US650 million in new equity by year-end as required under our funding agreement with Rio Tinto,” said Ms Saint-Laurent.
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