Rio Tinto looks to lift stake in Mongolia’s Oyu Tolgoi mine

Speculation just won’t go away that Rio Tinto will move to better match its equity position in Mongolia’s expanding Oyu Tolgoi copper/gold mine to its deep involvement and leadership of the nation-changing project.

The latest chatter, courtesy of London’s Sunday Times, is that Rio has hired Goldman Sachs as an adviser to look at a two-step wrap-up of the Vancouver-listed Turquoise Hill, owned 51 per cent by Rio.

Turquoise Hill owns 66 per cent of Oyu Tolgoi (meaning Rio has a 33.66 per cent Oyu Tolgoi stake), with the Mongolian government owning the remaining 34 per cent.

The Sunday Times is suggesting that Rio is looking to increase its stake in Turquoise Hill and have the rest of the company acquired by single strategic buyer or consortium. Both Rio and Goldmans declined to comment, as was the case the last time it was reported Goldmans had been hired to solve the Oyu Tolgoi conundrum.

The time and effort spent by Rio on getting Oyu Tolgoi to the point where the operation’s $US5.3 billion expansion underground can take place, along with its financial support along the way, makes it a no brainier that its indirect 33.66 per cent indirect exposure needs to become direct, and much larger.

And despite Oyu Tolgoi’s expansion underground making it the next best thing in the global mining space, the cost to Rio would not be particularly big. On Friday, Turquoise Hill was valued at all of $US5.8bn, valuing the outstanding 49 per cent at $US2.8bn, or $US3.6bn if a 30 per cent premium was to be added.

Take the premium price and assume Rio would like to see a 30 per cent stake go off to The Sunday Times’ strategic buyer, and the cost to Rio is a more than manageable $US1.4bn to take it up to a more meaningful 70 per cent of the 66 per cent mine stake, or 46.2 per cent of the action.

The timing is good if Rio’s previous call that first production in 2020 from the underground operation — it is where 80 per cent of the value is — will coincide with a structural deficit in global copper supplies can be relied on.

Turquoise Hill benefited from the mid-January rally in prices and sentiment on commodity prices. Its market value has improved by 67 per cent since, so an earlier move by Rio would have been ideal. Then again, Turquoise Hill is still down by 30 per cent on its level of a year ago.