Turquoise Hill: Q3 Production Report Looks Good But Dilution Fears Prevail (NYSE:TRQ)

Turquoise Hill (TRQ) has recently provided its third-quarter production report, which is the first report that was published after the company shocked the market with the details of its funding discussions with Rio Tinto (RIO) back in September. Without further ado, let’s look at the latest developments:

  • In the third quarter, Turquoise Hill produced 36,300 tons of copper and 37,000 ounces of gold. The company maintained its full-year production guidance of 140,000 – 170,000 tons of copper and 155,000 – 180,000 ounces of gold. It is already clear that the pandemic had no material impact on the company’s current operations.
  • Turquoise Hill managed to bring 40 specialists to the mine in July but will still need to remobilize international shaft-sinking specialists. The company expects that it will be able to bring them to the underground mine by the end of the fourth quarter and does not expect that the current delay will affect the first sustainable production for Panel 0.
  • Turquoise Hill will announce an updated liquidity forecast when it reports its third-quarter results on November 13. Initial indications show that the company will have sufficient liquidity to fund its operations and underground development into the second quarter of 2022. Unfortunately for investors, Rio Tinto has already set a dilution bomb under the common equity so the optimistic liquidity forecast is unlikely to provide material support to the company’s shares.
  • The company expects to publish its definitive estimate cost and schedule for Panel 0 in the fourth quarter. However, it stated that current data suggests that the mine will reach its first sustainable production closer to earlier months of the previous guidance range between October 2022 and June 2023.

Fundamentally, things are going well for Turquoise Hill as a business. Copper prices are on the rise and may soon get to new highs as Lundin (OTCPK:LUNMF) is set to halt production at Candelaria mine in Chile as it failed to reach a deal with a union. The company’s current operations are performing well and production levels are stable. While the pandemic has slowed down the development of the underground mine due to restrictions on movements of foreign specialists, the development of Panel 0 has not suffered delays and Turquoise Hill’s press release suggests that it may have a chance to get to its first sustainable production by the end of 2022.

A combination of solid production levels and favorable copper and gold price environment improved the company’s liquidity profile. Theoretically, Turquoise Hill should be in no rush to search for financing but the pressure from Rio Tinto to raise equity financing will likely continue to put pressure on the company’s shares. The fear of dilution is so strong that Turquoise Hill shares have completely missed the recent copper price upside.

While I think that the third-quarter earnings report will look good thanks to solid production and good pricing environment, the company’s shares may still lack upside momentum as investors prepare for the upcoming dilution.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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