Turquoise Hill Resources Limited

Company Overview: Turquoise Hill Resources Limited (NYSE: TRQ) is a global mining company, particularly in the operations and development of the Oyu Tolgoi copper-gold mine, Southern Mongolia, which is TRQ’s only and principal mineral resource property.

­­­­­­TRQ Details

Material Business Updates

Rio Tinto Willing to Cut Rates on Loans: As announced on 30 August 2021, Rio Tinto has shown intentions to cut down the interest rates on loans to the Mongolian government, considering funding its stake on construction costs at the Oyu Tolgoi mine.

Oyu Tolgoi Review Raise Doubts: As announced on 9 August 2021, TRQ undertook an independent review of $1.4 billion cost overruns at Mongolia’s Oyu Tolgoi mine, signaled that the project’s disruptions were not caused by the geology conflicts that Rio Tinto blamed in 2019. Expenditure for Oyu Tolgoi mine’s expansion has ballooned to $6.75 billion, way above the original budget of $5.3 billion in 2016.

Historical Financial Trend:

TRQ illustrated sustainable operational performance while keeping the value proposition intact. The Operating revenues remain range-bound, primarily associated with exploration output. Operating gross profits grew at a 6.0% CAGR (FY16 – FY20).

Figure 1: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

First Quarter FY21 Performance:

Figure 2: Quarterly Performance Highlights:

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Figure 3: Annual Performance Highlights:

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~77.12% of the total shareholding. Rio Tinto PLC and Pentwater Capital Management LP hold a maximum stake in the company at ~­­­50.79% and ~9.48%, respectively.

Figure 4: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics:

Despite trimmed top-line due to unfavourable gold production, operating performance has hiked amidst improved cost-effective measures. As a result, the current ratio has moved close to the industry median, and stringent control over working capital has delivered a contracting cash conversion cycle since FY17.

Figure 5: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

Funding Plans: Under the Heads of Agreement (HoA), TRQ and Rio Tinto will restructure existing debt to align funding requirements with revised mining plans. TRQ seeks to raise US$500 million in senior supplemental debt.

Copper Demand: Electric Vehicles (EVs) industry holds substantial usage of copper. Battery vehicles use 3x more copper relative to vehicles in internal combustion engines. However, recent uplift in the EV industry, manifesting a substantial upward trend, is expected to cover demand gaps in copper metal.

Copper Being Key Material in Powering Renewable Energy: Solar and wind energy are 2x more copper-intensive relative to the traditional sources of power generation. Favourable momentum in EV & battery infrastructure, onshore and offshore wind projects, solar plants and other sources are expected to drive incremental copper demand by ~1.5 Mtpa.

Figure 6: FY21 Guidance

Source: Company Reports, Analysis by Kalkine Group

Key Risks:

Exploration Risk: Revenues have witnessed sequential fall in the past three years due to curtailed production levels. If the downward production trajectory continues, TRQ may have to engage in portfolio diversification.

Potential Liquidity Constraints: The expected funding requirements have increased to US$3.6 billion relative to US$2.4 billion in Q2FY21, primarily due to an estimated 6-month delay in ‘Panel 0’ sustainable production, which may cause a liquidity crunch.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

TRQ has delivered negative 3-month and 6-month returns of ~25.404% and ~47.008%, respectively. The stock is trading below the average of the 52-week high price of US$21.89 and the 52-week low price of US$8.06, indicating an accumulation opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering outperformance of gold production relative to guidance and soring copper production. For valuation, few peers like Hecla Mining Co (NYSE: HL), Coeur Mining Inc. (NYSE: CDE), Southern Copper Corp. (NYSE: SCCO), and others have been considered. Considering liquidity support from Rio Tinto, profitable stance relative to competitors, development in renewables and EV projects driving copper demand, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the closing price of US$11.07, up by ~5.33%, as of 08 November 2021.

TRQ Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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