A top investor in Turquoise Hill Resources Ltd. is opposing a proposed takeover by Rio Tinto Plc, arguing the purchase price undervalues the company that’s behind one of the world’s largest copper mines.

Rio Tinto agreed last week to buy out the stake in Turquoise Hill it didn’t already own in a deal valued at about US$3.3 billion, giving it more control of the Oyu Tolgoi mine it’s developing in Mongolia.

Pentwater Capital Management, which has been a longstanding critic of Rio’s management of the asset, said in a statement Friday the purchase price ascribes an equity value of $8.65 billion (US$6.66 billion) to the Montreal-based miner, which it argues is a fraction of the free cash flow it expects the company to generate over the next decade.

Pentwater owns a nearly 12 per cent stake in Turquoise Hill. Rio already owns 51 per cent of Turquoise Hill, but more than half of the remaining shareholders must back the acquisition for the deal to proceed.

Shares of Montreal-based Turquoise Hill fell 2.7 per cent to $40.87 at 10:51 a.m. in Toronto. Rio Tinto shares rose 3.5 per cent in London.

The Naples, Florida-based investment firm said it was examining its legal and shareholder rights with respect to opposing the takeover. Pentwater Capital is the second-largest shareholder of Turquoise Hill, according to Bloomberg data.

Pentwater said it believed there is a high probability that copper prices will be in excess of US$4 a pound over the next decades as the world transitions to a green economy. The firm said at that price, it believes Turquoise Hill will generate almost $14.2 billion in free cash through 2030.

“Pentwater further believes that the proposed premium is unacceptable for a mine that Pentwater expects to be the third-largest copper and gold mine in the world with a mine life in excess of 90 years,” the firm said.



The price Rio has agreed to pay represents a 67 per cent premium on Turquoise Hill’s share price before the first offer in March, a time when copper was trading near a record high. Should shareholders reject the offer, Turquoise Hill is set to have to raise equity to fund its share of developing Oyu Tolgoi’s underground operations.

Rio Chief Executive Officer Jakob Stausholm said Monday in a statement that the deal will simplify governance, improve efficiency and that there will be no further price increases. 

Oyu Tolgoi is expected to be the world’s fourth-largest copper mine once the underground component is completed, with Turquoise Hill and its partners targeting an eventual production rate of more than 500,000 metric tons of copper a year. Suppliers of the industrial metal have been facing a dearth of new deposits and growing demand for the wiring metal that’s key to economies electrifying in a shift away from fossil fuels.

Pentwater isn’t the only investor to oppose the plan. Sailingstone Capital Partners, a top-five shareholder with a 2.2 per cent stake, said earlier this month it will also oppose the deal. 

Still, Sailingstone has sold most of its stake over the past three years for less than the current offer price, according to data compiled by Bloomberg. In 2018, the firm had built a stake of about 14 per cent in Turquoise Hill, only to sell much of its holdings as the stock traded in a range of $5 to $15 a share, the data show.