Thursday, December 27, 2012

Ivanhoe Mines Is Now Turquoise Hill Resources

Name changes happen all the time in the junior resource sector.  Turquoise Hill Resources (TRQ / TRQ.TO) was known as Ivanhoe Mines until August 2 of this year.  This capped off a series of corporate changes set in motion when Rio Tinto backed a $1.8B credit facility to support their Mongolian projects.

The entire management team is now a slate of Rio Tinto top shelf talent.  I can easily forgive the lack of specificity of their mining backgrounds because they are obviously setting a much larger plan into motion.

The technical report for the development of their Oyu Tolgoi copper-gold project in Mongolia is thorough.  If Rio Tinto is confident enough in its potential to operate the project as a strategic partner then there's probably something big there.  Their production plan assumes a long-term average price of $850/oz for gold, which is about $200 higher than gold's real average price for the past 40 years.  The projected mine life of 27 years (potentially 59 years) is huge, but their estimated grades of Au are shockingly low.  It's even more shocking in light of the plan's estimate that mining can recover 79% of the Au, below the typical industry expectation of 85%.  This is a bet on the size of a deposit rather than grade.

One look at TRQ's option chain tells me that someone is very optimistic about the company's long run valuation, with hundreds of open positions in January 2014 calls at strike prices of $10 and up.  That is a very welcome development in light of the Rio Tinto backing.

I'm not sure about going long TRQ given the riskiness of doing business in Mongolia.  The Mongolian government owns 34% of the Oyu Tolgoi project.  Counting on credits from gold production to subsidize the cash cost of producing copper is also a risk, as those two metal prices don't necessarily move in tandem.  They also have other exploration projects that may or may not pan out.  Still, the momentum behind the Mongolian project is undeniably large and may very well sustain the entire company's valuation.  I may decide at some point to sell cash-covered puts under TRQ now that the Oyu Tolgoi project is ready to contribute earnings.

Full disclosure:  No position in Turquoise Hill Resources at this time, although that may change in the near term.