Turquoise Hill Resources: Reason And Reality, Buy And Monitor Closely (from Seeking Alpha website)
Dec 31, 2012 | by Emmet Kodesh | about:TRQ
includes:FCX, MNGGF.PK, MNGLU, MOGLF.PK, RIO
The adventures in Mongolia of mining giant Rio Tinto (RIO) and its subsidiary Turquoise Hill Resources (TRQ) would make a great novel, a postmodern novel whose middle sections and ending, if any, are being written by a host of characters rarely on the same page. This fascinating saga exemplifies the limits of reason and calculation in human relationships, not least as they relate to markets, resources, other cultures, money and, last but not least, power.
Money is a nexus of control; it has more to do with power over other people than the exchange value of yellow, white, black or red commodities or colorful fiat paper. Buy some TRQ and monitor it carefully: here's why.
Turquoise Hill shares recently hit a multi-year bottom at $7.10 after a long, long goodbye from its post-crash high of $30/share late in 2010, a seemingly inexorable decline punctuated by moments of euphoria. There also is the puzzling disjunction between the richness of its Mongolian properties and the inability, despite massive investment, to get them operational by securing the consistent support of a frontier nation's rulers.
But a recent event may unlock the narrative. As detailed in Jon Springer's 12-27 Seeking Alpha column top Mongolian leaders have pledged publicly to abide by the royalty plan it signed with Rio Tinto in 2009. These comments and those quoted in the following day's Oyu Tolgoi press release, hardly could have been more explicit and reassuring in their praise of and support for RIO:
Mongolian President Tsakhia Elbegdorj says his country should respect the Oyu Tolgoi copper-gold deposit… and create a better investment environment.
In the President's own words: "The Oyu Tolgoi agreement is a legal document signed by the government and foreign investors after years of negotiations and Mongolia should respect the agreement."
Stressing that Mongolia was a nation that respects the rule of law and will maintain a welcoming and supportive investment climate, President Elbegdorj repudiated action to re-open Rio's contract on royalties. The President noted, correctly, that these pressures had "worsened Mongolia's financial climate." Emphasizing the new situation, Mongolia's Mining Minister, who had pushed for re-negotiation of the lease agreement, effectively recanted and joined his President in praising RIO and formally commissioning its new ore concentrator. His fulsome words linked the entire nation and history of Mongolia to the work of RIO-TRQ:
"I am pleased to be participating in the ceremony to commission the concentrator at Oyu Tolgoi's world-class mine. On behalf of the Mongolian Government, I congratulate all who contributed to the project, which is being constructed on schedule. Oyu Tolgoi's progress as the guarantee of our mineral wealth left for us by our ancestors is the result of Rio Tinto's effective project management and financial capabilities."
Mongolian officials now not only have a large financial stake but prestige and face invested in the work that has been done and now is accelerating:
Batsukh Galsan, Oyu Tolgoi LLC Chairman added, "Equipped with world-class knowledge, the next generation of Mongolians now possesses the ability to operate the most advanced mining machinery in the world. We are pleased that the technical skills we impart will bring economic prosperity to the people of Mongolia."
So finally it's all good for RIO, TRQ, the government and people of Mongolia, their ancestors, investors and customers (not least China). Extraction, processing and transport of product to markets can ramp up. Share prices of TRQ could soar. Folks who got wind of the news 12-26 (East Asia is 12 hours ahead of NY) quickly bid up shares from $7.10 to a spike at $7.60 before two days of crawl-down that continued after hours on Friday December 28. The same retreat happened to RIO which till then had stood out by bucking the sell down that began after America's election. Then December 31 saw a strong rise in price/share.
That's how things stand: stay tuned for breaking developments. TRQ has seemed to find its bottom before this. It seems like a good time to initiate or add to a position.
There are no doubts about the value of RIO - TRQ holdings in the land of the Great Khan: the huge, high quality gold, silver, copper and rare earth mine at Oyut Tolgoi and the immense coal deposits at Ovoot Tolgoi fifty-five miles from China. At great expense the mines, RR lines and roads have been built and massive trucks imported; after delays and "negotiations" electricity is coming from the coal's main customer, China, for whom coal supplies 70% of energy. RIO has made and continues to make generous donations to Mongolian education and health care. Government, people and ancestors are aboard. As the officials noted, it is in their best interest, and that of all Mongolians (as well as the Chinese) to proceed vigorously. Shareholders will share in what their investments have bought. A win-win-win situation is in place.
But as students of Melville's "Billy Budd" and of many other literary works and periods of history know, reason often does not rule the affairs of men, women and governments. Mongolian cavalry once conquered most of the known world (c. 1200-60) but that was then and Mongolia still is barely emerging from a colorful but primitive existence. The cult of the great Khan, central to what otherwise has been a grouping of diverse tribes, is about all Mongolia has aside from a hatred of Russia acquired during Soviet times, and vast mineral deposits. Rapid development has drawn large numbers of natives to Ulan Bator where, as in many other "third world" capitals, the infrastructure is inadequate and all-but begging for investment capital and development.
Those who have lived and worked in East Asia know that some stereotypes are true. In making arrangements for anything beyond tailoring a suit, first one encounters the "smiling mask," then come assurances, then promises and signed contracts. Then at the eleventh or even the 12th hour difficulties are discovered; new personnel are in charge: ad hoc changes are announced or demanded. It is like tracking the nomads in Waiting for the Barbarians: suddenly one is out on the steppe having expended enormous energy and wealth and the way back is uncertain. The other side, once thought to be a partner or employer, is implacable. But now things have moved beyond that stage, - probably.
To this writer the shares at around $7/ are a buy but it's not time to go all in as the action immediately following the formal commissioning suggests. Ideally one waits for a "rounded bottom" recovery chart; ideally… but charts often offer the appearance of objectivity which like many "lies, damned lies and statistics" can deceive. Reality is more than reason, technical analysis and mutual interest. In most times and for most people mutual interest in abundant resources might be enough. But this is the era when we have learned to "stop making sense." In an era of disintegrating moral and economic values, of financial manipulation and global shakedowns, power increasingly stakes claim to "the bottom line."
Why did it take so long to get this good resolution? Rio Tinto's market cap is ten times the size of Mongolia's GNP. The provable and probable holdings of TRQ in copper, gold, silver and coal could exceed $2 trillion. On its own Mongolia cannot access this wealth. Freeport McMoran's (FCX) recent acquisitions in the oil and gas industries and ensuing outcry by some analysts and shareholders may have been driven in part by the wish to reduce geo-political risks. FCX, like other companies, has found that official and unofficial groups can disrupt productive properties like its Grasberg mine in Indonesia. Would members of the government of a very fragile developing nation like Mongolia be willing to kill a goose that's paying big bucks to lay golden eggs for it? Until last week it seemed they might. The prospectus of another company, Blue Wolf Holdings (MNGLU), capital investment hints at the point: BWH "seeks to acquire businesses that have demonstrated an ability to develop a successful business model in Mongolia…" But, they add, "Mongolia is a developing economy." Ay, that's the rub. In such cases problems arise where it was thought that all potential snags had been precluded.
Gooses that lay golden eggs, people and companies that add value are wasted every day as part of nature and human nature: it is the lavish complexity of life and passion as well as the mark of a declining civilization, and there is no shortage of potentially interested parties in the world who might wish to complicate the project, especially when there are resources and, thus, power on the magnitude of those at Oyut Tolgoi. The looser the governing structures and the "rule of law" are, the greater the ability for egos or personal issues to be indulged at the expense of business that seems set in everyone's best interest. After all, even in nations where the rule of law receives much mouth honor ways are found to make it pliable.
TRQ, originally Ivanhoe Mining, is a great story with incredibly rich properties and an established infrastructure already in production. Sales growth in 2013 should be great. Mongolia is a nation emerging from a primitive perhaps happier time and those who lead it say they want to progress. It appears that this story is beginning its productive chapters which should last a long time. Given the demographics and the commitment of Western power centers to foster growth in East Asia, the Mongolia Growth Group (MNGGF.PK) formed to develop real estate in Ulan Bator, the Mongolian Mining Corporation (MOGLF.PK) and Blue Wolf Holdings should thrive.
The ride likely will not be as smooth as it could be for companies and investors but it will be good, especially compared to the turbulence on tap for the West. Perhaps while Mongolians learn to drive trucks and enjoy city living we should learn the finer points of dwelling in a yurt, herding goats and buying into TRQ; and into RIO as well, for essential strength, this story's good turn and the rebound in iron ore prices. So buy TRQ but watch events closely.
Of the equities mentioned above, the writer is invested in TRQ and FCX.
Disclosure: I am long TRQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.