Turquoise Hill: Power Plant Is Expected One Year Later Than Originally Planned
Turquoise Hill submits feasibility study for the Tavan Tolgoi power plant in Mongolia.
Mongolian government wanted the power solution to be ready by June 30,
2023. The study proposes start-up in June 2024, a year later.
The stock is under pressure as the delay signals more headaches for the company.
Turquoise Hill (TRQ) has just announced
the submission of a feasibility study for the Tavan Tolgoi power plant
in Mongolia. As a reminder, the company has to find a domestic power
solution for the Oyu Tolgoi mine by June 30, 2023. Mongolia wants to
find a use for the coal from the big Tavan Tolgoi deposit. Putting this
coal at work as a source of power for Oyu Tolgoi mine is an obvious
Here’s what Turquoise Hill proposes. The
company plans to build a 300MW coal-fired power plant with a total
project cost estimate of up to $924 million. The back-up power will be
sourced from China (which currently supplies energy to the mine). The
proposed schedule targets two units of the Tavan Tolgoi power plant to
be operational by June 2024. In short, the plant is currently set to be
one year late. The company commented: “The existing PSFA (Power Source
Framework Agreement – author) specifies target dates for milestones to
be achieved through mutual cooperation between Oyu Tolgoi LLC and the
Government of Mongolia, several of which have now passed […] Oyu Tolgoi
LLC has given notice and is currently seeking a mutually acceptable
alternative basis on which to proceed with securing long term domestic
power supply for Oyu Tolgoi."
surprisingly, Turquoise Hill's shares are losing ground after the
release of the news. Mongolia is not the easiest place to do business,
and the difference between the target date set in the PSFA and the date
shown in the feasibility study is a problem. Turquoise Hill's statement
that it is “seeking a mutually acceptable alternative basis on which to
proceed with securing long term domestic power supply” signals another
major headache for the project.
Turquoise Hill's shares
fared well at the time of the coronavirus panic despite copper’s move
from the whereabouts of the $2.90 level to $2.50. However, the new
challenge in Mongolia is simply too much for the stock to tolerate. The
company does not need another distraction at a time when it has not
solved its current problems with mine design and future financing.
key catalyst for Turquoise Hill this year is the release of a new mine
plan. When the plan is released, the company will also provide its view
on how it will finance the mine whose development materially lags the
original schedule. At this point, it looks like the 2020 capex budget
will not grow too much since Turquoise Hill will have to spend time
negotiating with Mongolia as its projected start-up of the power plant
is one year late compared to the original plan.
the same time, the news about the power plant pushed the stock back
below $0.60, almost erasing its chances to get back above $1.00 in the
near term. This means that a reverse stock split may be around the
corner as the company's shares have stayed below $1.00 for many months.
For companies that have problems but still carry material
capitalization, a reverse stock split often leads to more downside as
more investors get the chance to short the shares (some funds/personal
accounts do not have access to penny stock short-selling or face
restrictive margin requirements).
The company’s Q4 2019 production numbers looked positive,
but the momentum was hurt by coronavirus problems, while the news on
the power plant provided additional pressure. Now, the stock will need
some positive commentary in the Q4 2019 financial report to get back on
track. Without such a catalyst, it’s hard to expect any near-term upside
in Turquoise Hill's shares. The longer-term trajectory of the stock
depends on the content of the new mine plan, which is set to be
delivered in the second half of 2020. Stay tuned!
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