Analyst Actions: Credit Suisse On Turquoise Hill Resources-Call for an Oyu Tolgoi Sit-Down Rejected
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 ( PPA ) 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.
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