Mongolia woes gives Rio unit a $1.16bn whipping
INVESTORS have savaged Rio Tinto's Mongolian-focused subsidiary Turquoise Hill, wiping $1.16 billion from its market value over the mothballing of the Oyu Tolgoi underground expansion.
The Canadian-listed Turquoise Hill slumped 20 per cent to a 4 1/2-year low on Monday night after Rio said it was halting development work on an expansion of the $US11bn ($12.1bn) Oyu Tolgoi copper and gold mine, which the Canadian company operates.
Analysts at Credit Suisse and BMO, who had been expecting Turquoise Hill shares to bounce back to higher levels, acknowledged this was unlikely, wiping up to $C4bn ($4.28bn) off their valuations on the company, which is 51 per cent owned by Rio.
Government uncertainty has been a feature of the big Oyu Tolgoi project, with calls from members of parliament for a greater stake for the nation in the cashflows it will provide.
But the latest move by the government, to require parliament to pass project financing, threatens to unravel $US2bn worth of funding commitments from banks and poses a serious hurdle to investment in underground expansion, which according to BMO provides all the value in the mine.
This comes after reports the government has a host of further issues that need ironing out, including some it has said could breach Mongolian laws.
Turquoise Hill shares slumped $C1.07 to $C4.38 in their biggest one-day fall in 20 months on the Toronto Stock Exchange, leaving the miner with a market value of $C4.4bn.
Credit Suisse downgraded the stock to neutral from buy and slashed its target price for Turquoise Hill from $C10 to $C6 to "reflect uncertainty on timing of project financing and lower project valuation".
BMO made the same rating downgrade and cut its target price from $C10 to $C5.50.
"Mongolia's reputation for mining investment has been destroyed," BMO analyst Tony Robson said.
BMO pushed back its forecast for first production from the expanded mine to 2018 from company estimates of 2016.
Mr Robson said Turquoise Hill's net present value with just the $US6bn open pit that has just started production was virtually zero because its value was roughly equal to debt levels.
Morgan Stanley said a two-year delay on Oyu Tolgoi, which makes up 2 per cent of Rio's value, would remove only $US280 million, or US22c per share, from the big miner's value.
Rio's shares bucked the pessimism yesterday, closing up 60c at $57.71.
Turquoise Hill has mobilised $US4bn of project financing commitments, half from a group of international banks and the rest from export credit agencies.
The financing now needs to be signed off by Mongolia's parliament, where there is opposition to the terms of the project, rather than by just the cabinet.
The banks had an August 12 deadline for approval from Rio and Mongolia but had granted approval until October, based on there being no stopping of development and quick Mongolian approval.
But development has now stopped and BMO does not expect real progress in talks between Mongolia and Rio for the rest of the year, leaving more uncertainty over funding.
The Canadian-listed Turquoise Hill slumped 20 per cent to a 4 1/2-year low on Monday night after Rio said it was halting development work on an expansion of the $US11bn ($12.1bn) Oyu Tolgoi copper and gold mine, which the Canadian company operates.
Analysts at Credit Suisse and BMO, who had been expecting Turquoise Hill shares to bounce back to higher levels, acknowledged this was unlikely, wiping up to $C4bn ($4.28bn) off their valuations on the company, which is 51 per cent owned by Rio.
Government uncertainty has been a feature of the big Oyu Tolgoi project, with calls from members of parliament for a greater stake for the nation in the cashflows it will provide.
But the latest move by the government, to require parliament to pass project financing, threatens to unravel $US2bn worth of funding commitments from banks and poses a serious hurdle to investment in underground expansion, which according to BMO provides all the value in the mine.
This comes after reports the government has a host of further issues that need ironing out, including some it has said could breach Mongolian laws.
Turquoise Hill shares slumped $C1.07 to $C4.38 in their biggest one-day fall in 20 months on the Toronto Stock Exchange, leaving the miner with a market value of $C4.4bn.
Credit Suisse downgraded the stock to neutral from buy and slashed its target price for Turquoise Hill from $C10 to $C6 to "reflect uncertainty on timing of project financing and lower project valuation".
BMO made the same rating downgrade and cut its target price from $C10 to $C5.50.
"Mongolia's reputation for mining investment has been destroyed," BMO analyst Tony Robson said.
BMO pushed back its forecast for first production from the expanded mine to 2018 from company estimates of 2016.
Mr Robson said Turquoise Hill's net present value with just the $US6bn open pit that has just started production was virtually zero because its value was roughly equal to debt levels.
Morgan Stanley said a two-year delay on Oyu Tolgoi, which makes up 2 per cent of Rio's value, would remove only $US280 million, or US22c per share, from the big miner's value.
Rio's shares bucked the pessimism yesterday, closing up 60c at $57.71.
Turquoise Hill has mobilised $US4bn of project financing commitments, half from a group of international banks and the rest from export credit agencies.
The financing now needs to be signed off by Mongolia's parliament, where there is opposition to the terms of the project, rather than by just the cabinet.
The banks had an August 12 deadline for approval from Rio and Mongolia but had granted approval until October, based on there being no stopping of development and quick Mongolian approval.
But development has now stopped and BMO does not expect real progress in talks between Mongolia and Rio for the rest of the year, leaving more uncertainty over funding.
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