‘Highly improbable’: Why Rio Tinto (ASX:RIO) shares are in focus again

The Rio Tinto Limited (ASX: RIO) share price is in focus again as the miner faces some pushback from one of the larger shareholders of the Mongolian Oyu Tolgoi mine.

Right now, Rio shares are trading for $110.10 each, down 0.22% on the day.

The ASX mining share is trying to increase its exposure to copper by taking complete control of Turquoise Hill Resources. It has owned just over half of Turquoise Hill Resources for the last decade.

What is Oyu Tolgoi?

According to Turquoise Hill Resources, Oyu Tolgoi is one of the world’s largest new copper-gold mines, located in the South Gobi region of Mongolia. It reportedly has the potential to operate for approximately 100 years from five known mineralised deposits.

A second deposit, Hugo North (lift 1), is under development as an underground operation and is scheduled to begin sustainable production in 2022. The other three deposits — Hugo North (lift 2), Hugo South, and Heruga — are not yet scheduled for development.

Acquisition hits a hurdle

According to the Australian Financial Review, the American investment fund Pentwater Capital owns 9.36% of Turquoise Hill Resources. It’s reported the fund’s boss Matt Halbower was not impressed by Rio Tinto’s offer for the business, saying it was “a fraction” of what the business was worth.

Halbower said:

In Pentwater’s opinion it is highly improbable that Rio will be successful at its current bid price and equally improbable that Turquoise Hill shares will ever fall back to the levels they traded at prior to Rio’s offer now that Rio’s true intentions are known.

Pentwater would be pleased to purchase part of Rio Tinto’s stake in Turquoise Hill for that price.

Another shareholder of Turquoise Hill Resources has also indicated that the offer was not enough.

Pentwater believes the cost overruns of the expansion of the Oyu Tolgoi mine, and Rio’s push for a capital raising to fund the extra costs, has led to the Turquoise Hill Resources share price trading for less than it’s actually worth.

It was only a couple of months ago that Rio Tinto Turquoise Hill agreed to forgive debts relating to the Mongolian government. The government owns around a third of the mine but couldn’t afford its share of the construction costs, according to the AFR.

Is the Rio Tinto share price a buy?

The broker Morgan Stanley thinks Rio is a buy with a price target of $126.50. That implies a potential upside of more than 10% over the next 12 months.

It likes the potential deal for Rio Tinto to buy 100% of Turquoise Hill. The broker thinks that the Mongolian government’s approval makes the deal worthwhile, even though copper is priced very highly right now.

The Rio Tinto share price is up 1.27% for the year, gaining more than 10% year to date.

The post ‘Highly improbable’: Why Rio Tinto (ASX:RIO) shares are in focus again appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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