Major shareholder Pentwater opposes Rio Tinto-Turquoise Hill deal, weighing legal options

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A crane hovers above the site of a shaft under construction at the Oyu Tolgoi mine site in Mongolia November 7, 2009.Ganbat Namjilsangarav/Associated Press

Pentwater Capital Management LP, TRQ-T’s second largest shareholder of Turquoise Hill Resources Ltd., said it opposed RIO-N’s planned takeover of Rio Tinto PLC of the Canadian copper mine, adding further uncertainty about to the success of the agreement.

Florida-based Pentwater, an investment firm that owns an 11.7% stake in Turquoise Hill, said in a statement Friday that Rio’s offer “significantly undervalues” the company.

“The proposed premium is unacceptable for a mine that Pentwater says will be the third largest copper and gold mine in the world, with a lifespan of more than 90 years.”

Turquoise Hill owns a 66% stake in the massive Oyu Tolgoi mine in Mongolia, with the rest held by the Mongolian government.

Pentwater said it was considering possible legal action to prevent the Rio deal from going ahead.

Rio already owns 51% of Turquoise Hill, a Montreal company. The miner backed Rio’s revised offer of $43 per share in cash for the 49% it does not already own, valued at $4.2 billion. Rio’s latest proposal is 67% higher than its initial proposal of $34 per share in March.

For the deal to succeed, it must gain the support of 50% of Turquoise Hill’s minority shareholders.

Canadian copper miner Turquoise Hill Resources signs definitive agreement with Rio Tinto

Rio Tinto closes in on acquisition of Canadian copper mining company Turquoise Hill, but uncertainty hangs over minority shareholder approval

Pentwater is the main minority shareholder. Last week, Turquoise Hill’s second minority shareholder, SailingStone Capital Partners, said it opposed the deal. The Houston-based company holds a 2.2% stake. The combined 13.9% stake held by Pentwater and SailingStone is not enough to stop the transaction, but the views of other major minority shareholders are not yet known, so the fate of the transaction hangs in the balance.

Despite vocal opposition from Pentwater and SailingStone, the chances of Rio improving its offer further seem non-existent. Last week, Rio Tinto Copper chief executive Bold Baatar told The Globe and Mail it was Rio’s “best and last” offer. If shareholders vote against the deal, he said, the British-Australian mining giant is ready to walk away.

Selling to Rio would eliminate short-term funding risk for Turquoise Hill shareholders. The Canadian miner previously said it needed to raise $650 million in equity before the end of the year for the Oyu Tolgoi expansion. The mine is located in the Gobi Desert, 550 kilometers south of the Mongolian capital, Ulaanbaatar.

But Turquoise Hill said last week Rio would provide additional short-term debt, allowing it to push back the capital raise until next year, when Rio could own the company. However, if Rio fails in its bid to buy the company, existing Turquoise Hill investors will once again face the prospect of dilution.

Shares of Turquoise Hill fell 3% on the Toronto Stock Exchange on Friday to close at $40.73 apiece, just over $2 below Rio’s offer, raising fears the deal will succeed .

Oyu Tolgoi was discovered and developed by veteran mining financier Robert Friedland. The mine went into production in 2011, but it has been plagued by capital cost overruns, production delays and disagreements between Rio and Turquoise over financing. Many of these problems have since been overcome.

Many of the world’s largest mining companies, including Rio, BHP Group Ltd. and the Canadian company Teck Resources Ltd., reduce their exposure to polluting raw materials, such as coal, while doubling their consumption of minerals with a less problematic environmental footprint, such as copper. .

While the mining, refining and transportation of copper is detrimental to the environment, its growing end use in alternative energy gives it a cleaner shine than workhorse metals such as iron ore. The acquisition of Turquoise would also strengthen Rio’s position in a metal that, alongside lithium, cobalt and graphite, is increasingly used in the growing electric automotive industry.

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