Turquoise is a semi-precious stone that gets its bluish colour from a mixture of copper and aluminium. In Mongolia what miners want is the former. At the country’s huge Oyu Tolgoi project, Anglo-Australian miner Rio Tinto has plans to produce as much as 560,000 tonnes of copper concentrate by 2025, roughly four times that of 2018. That is a big jump and it will cost a lot. One hedge fund, backed by Crispin Odey, thinks far too much.
Already Rio has begun to discuss delays to the next big stage for the mine, which involves digging deeper underground at an estimated $5.3bn cost. That could well rise. Given that over 70 per cent of Rio’s operating profits stem from iron ore, not all of Rio Tinto’s shareholders will mind greatly about a delay. Add to that, it has generated $7bn of free cash flow on average since 2015. So one might just be willing to give Rio the benefit of the doubt on some extra spending.
Then again Rio’s partner in this project is Toronto-listed Turquoise Hill Resources. Rio controls Turquoise with a holding of just over 50 per cent. The remnant of the original exploration company, Turquoise Hill is a one-asset company with the greatest returns yet to come. Though it does make profits, its net debt is not less than 8 times its ebitda. It depends on Rio support to complete the project.
That company is where the risk lies, thinks Odey portfolio manager Henry Steel. He spent a few years at Rio Tinto London headquarters working with key executives. Presumably he knows a bit about the big projects. He will not be the first betting against Turquoise. Short positions, at a two-year high, have climbed for a while.
Whether or not Rio shareholders get a case of the blues about Oyu Tolgoi, expect the group to support the project no matter what. Chief executive Jean-Sébastien Jacques was previously in charge of this project, and clearly Rio needs to diversify its income stream away from iron ore. Oyu Tolgoi is too precious to give up on just yet.
Is Odey right to short Turquoise Hill? Please tell us what you think below.
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