Event: TRQ (together with RIO) has rejected a request from the
Government of Mongolia (
) to renegotiate the Oyu Tolgoi Investment Agreement (IA).
View: Potential negative; a likely overhang until clarity
emerges. TRQ's announcement comes following receipt of a letter
from the Minister of Mining requesting the parties (GOM/TRQ/RIO)
renegotiate the IA that was signed October 2009 and became fully
effective March 2010. We note that as recently as October 2011, the
GOM had reaffirmed that the IA was signed in full compliance with
all laws and regulations of Mongolia.
Catalysts: Site power and project financing remains key. RIO
commented at its Investor Seminar last week that negotiations with
Chinese authorities on a power purchase agreement (
) for OT are "actively progressing". We expect final conclusion of
the PPA (power availability) could occur as late as mid-November
2012 to mid-January 2013 for OT to make commissioning on June 30,
2013. As a reminder, Oyu Tolgoi is 34% owned by the GOM (increasing
to 50% in 2027, our assumption) and is subject to a 25% corporate
tax rate and a 5% royalty. As this time, we do not forecast
significant changes to the IA, but have highlighted valuation
scenarios under GOM ownership levels.
Valuation: Our TP of C$14 is based on 1x our cash-adjusted NAVPS
of C$13.38/share. In our view, OT remains a strategically
significant source of new copper supply and provides investors with
exposure to a high quality asset with resource and production
growth potential beyond our base-case.