Summary
Finally, the Mongolian parliamentary working group shares the results of its work.

As per Reuters report, Mongolia wants to replace its interest in the project with a special royalty and receive dividends earlier than previously expected.

The final outcome of this story is still unknown. The market appears to be tired of problems at Oyu Tolgoi and is simply waiting for the final resolution.

In a number of my articles on Turquoise Hill (TRQ), including the most recent one, I noted the issue with the Mongolian parliamentary working group, which was supposed to review the implementation of the investment agreement between the company and the country. In the most recent earnings call, the company’s management did not provide any clarity on this issue. However, a week after the earnings call was held, Reuters published a report stating that Rio Tinto (RIO) (and, therefore, Turquoise Hill) was facing renegotiation of the investment agreement regarding the Oyu Tolgoi mine. While Turquoise Hill shareholders cannot call the project a success since the company’s stock has been under huge pressure for years and has lost about 70% of value year-to-date, the Mongolian side is unhappy with returns and is seeking more money. This is an unfortunate move since the project is facing additional spending and delays, but this negative catalyst cannot be avoided.

As per the Reuters report, the parliamentary working group’s recommendations included replacing the country’s 34% interest in the project with a special royalty and pushing the date when the country starts receiving dividends to the left. Both Rio Tinto and Turquoise Hill did not provide any update on this issue for investors. The latest press release on Rio Tinto’s website is dated November 4, 2019, and titled “Rio Tinto achieves significant milestone at Oyu Tolgoi.” Turquoise Hill noted the proceedings themselves but had nothing to say about their outcome. Meanwhile, the country’s mining minister stated that the project will not be stopped but the government will work on improving the investment agreement.

Of course, without any finalized resolution from the Mongolian side or the official commentary from Rio Tinto or Turquoise Hill, investors are in the dark. As I watched the stock price action in Turquoise Hill stock which failed to make a meaningful move in either side following the release of such an important catalyst, I kept thinking that it could be that the market is so tired of Oyu Tolgoi problems that it chose to ignore the issue with the potential new investment agreement until it is actually carved in stone.

That said, I think that the goals of the Mongolian politicians are crystal clear. By replacing the ownership with royalty, they will provide themselves with “money now.” To monetize a stake, you should receive dividends (none at this point) or sell it (hardly an option given what happened to Turquoise Hill shares and the valuation of the project). At the same time, a royalty is paid periodically (for example, each year), so the money will stop flowing into the budget right after a new investment agreement is done.

There’s one thing that I found truly strange in the Reuters report. Apparently, the Mongolian side wants to have a special royalty but also to receive dividends sometime in the future (sooner rather than later, I guess). At the same time, the report states that the royalty should replace the 34% stake in the project. Dividends are for shareholders – how can you get dividends if you stop being a shareholder, or how can you stay a shareholder if you replace your stake with a special royalty? There are clearly more questions than answers on this issue.

From a practical point of view, I believe that the market will be unable to make up its stance on this development in the near term. I’d also note that the year will soon end, and this means that those who have been unfortunate enough to hold Turquoise Hill shares for the whole year may consider selling them for tax purposes, putting additional pressure on the stock or at least preventing it from developing upside (unless major upside catalysts emerge – at this point, nothing points to their emergence before the end of this year). I believe that the most likely pattern for Turquoise Hill shares until the end of this year is a $0.40-0.50 trading range.

by Vladimir Zernov

Published Date:2019-11-29