What happened
Shares of Turquoise Hill Resources (TRQ) fell over 45% today after the company reported production results from the second quarter of this year. While first-half 2019 copper, gold, and silver output were solid compared to the year-ago period, the production update included troubling news for the Oyu Tolgoi copper mine in Mongolia.
As previously discussed on the first-quarter 2019 earnings conference call, the company's most important asset is facing unexpected development challenges, primarily related to the underground expansion of the mine. Turquoise Hill Resources now expects steady-state production could be delayed 16 to 30 months from the original estimate, while capital investment could increase $1.2 billion to $1.9 billion over the most recent $5.3 billion estimate.
As of 11:30 a.m. EDT, the stock had settled to a 41.1% loss.
Image source: Getty Images.
So what
An aboveground portion of the Oyu Tolgoi copper mine is currently in production, but the majority of the asset's vast resources remain locked deep underground. While Turquoise Hill Resources has long planned to develop a world-class underground mine at the site, the relatively small company lacks the capital required to complete that ambitious task by itself. The latest cost estimates put that goal even further out of reach.
It helps that Rio Tinto (RIO 0.43%) owns a 50.8% stake in Turquoise Hill Resources, but even the $102 billion mining behemoth expects a challenging road ahead. According to Financial Times, Rio Tinto executives said a final mining plan with cost estimates and production timelines won't be ready until the second half of 2020.
Investors are worried about the newfound uncertainty. Will Rio Tinto scale back its plans for Oyu Tolgoi, or is the project too big to fail? The situation is complicated by the fact that the copper mine is expected to become the third-largest on the planet and to be an important source of revenue for the Mongolian government, which owns a 34% stake in the asset. Turquoise Hill Resources owns the remaining 66% equity of the mine.
Now what
Investors are clearly growing pessimistic over the chances Turquoise Hill Resources can pull off a miracle in Mongolia. The company has seen its market cap crater from over $6 billion to just $1.3 billion in the last three years. The stock now trades well below the $1 per share mark. Considering the high level of uncertainty, individual investors will need to keep a close eye on the business update from Rio Tinto next month, which will provide more details about the path forward.
