Shares of Turquoise Hill Resources (NYSE:TRQ) were down about 19% by 10:45 a.m. EDT on Thursday. Weighing on the mining stock was an agreement it reached with its controlling shareholder Rio Tinto (NYSE:RIO) on a long-term funding plan for the Oyu Tolgoi copper mine in Mongolia.
Turquoise Hill signed a memorandum of understanding with Rio Tinto, which currently holds 50.8% of its outstanding shares. The plan, according to the announcement, "provides a clear pathway to progress the financing for completion of the Oyu Tolgoi Underground Project in Mongolia and addresses TRQ's funding position." Under the terms of the agreement, the companies will:
- Pursue reprofiling of principal debt repayments with lenders to better time them with the revised mine plan and expected cash flows. These agreements could reduce the company's funding needs by $1.4 billion.
- Look to issue $500 million in additional debt under existing project financing agreements.
- Explore other options for additional debt financing to support the remaining project spend.
But while Rio will allow Turquoise Hill to seek additional debt funding, it does not support this option. Instead, it believes that the company will need to complete an equity offering to help finance the project, which would dilute outside shareholders. It wouldn't dilute Rio's position since it has anti-dilution rights that permit it to buy additional shares of Turquoise Hill to maintain its controlling interest.
While Turquoise Hill and Rio Tinto have worked out an understanding of how they'll fund the Oyu Tolgoi project, it will likely come at a high cost to outside shareholders. Turquoise Hill estimates that it would need to raise at least $3.6 billion of equity to satisfy its funding needs if it can't complete the reprofiling agreements and issue additional debt.
Meanwhile, even if it does accomplish those goals, it would likely still need to sell equity, which would dilute outside shareholders, not Rio Tinto. Because of that, they'll likely own a smaller piece of the company in the future, which is weighing on the share price today.