Turquoise Hill's Friday vote on Rio Tinto takeover bid is hard to call

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MELBOURNE (Reuters) - Shareholders in Canada's Turquoise Hill will on Friday vote on a Rio Tinto (NYSE:RIO) $3.3 billion takeover offer that aims to give the Anglo-Australian miner more control over a giant Mongolian copper mine. The deal is far from a slam dunk.

Rio, which owns 51% of Turquoise Hill, has been keen to buy out minority shareholders and its twice-sweetened cash offer of C$43.00 per share represents a 67% premium to the Canadian firm's stock price before its initial bid in March.

If successful, Rio will be able to simplify the management structure of the Oyu Tolgoi mine - one of the world's largest-known copper and gold deposits - which is 66% owned by Turquoise Hill, 34% owned by the Mongolian government and operated by Rio.

The offer has been recommended by Turquoise Hill but has been opposed by activist shareholders Pentwater Capital and SailingStone Capital which own stakes of about 15% and 2% respectively. They argue Rio is lowballing, given the amount of cash the project could generate.

After Rio scrapped talks with Pentwater and SailingStone last month, it's unclear how they will vote and if they remain opposed, how many other shareholders will join them.

To win the vote, Rio needs two-thirds of Turquoise Hill shareholders to back its bid - a level it is expected to achieve given its 51% holding. But it also needs a simple majority of minority shareholders to vote in favour which is less certain.

Rio declined immediate comment. Pentwater did not respond to a request for comment and SailingStone declined to comment.

Analysts and investors in Rio say there are many good reasons for Turquoise Hill shareholders to vote in favour.

The Canadian company is facing a hefty $3.7-$4 billion funding gap as it ramps up the mine's underground development that is already long delayed and over budget. If the takeover attempt fails, it would soon have to raise capital.

Shares in Turquoise Hill were also last trading just under Rio's offer price, indicating expectations of a successful deal.

If Rio is unsuccessful, Turquoise Hill's shares are likely to plummet and Turquoise Hill could proceed with a share issue which would dilute minority shareholders' stakes.

That said, some investors could be willing to hold out for Rio to come back, in time, with a better offer given the starring role that copper plays in many types of green energy technologies.

"The more that gets written about why copper is the commodity you should be in...the investor is going to say why should I sell today?," said Peter O'Connor, an analyst at broker Shaw & Partners in Sydney.

The project assumes it can be economically viable with copper prices of $3.50 a pound or $7,716 a tonne.

Goldman Sachs (NYSE:GS) this week lifted its 2024 forecast for copper by 11.6% to $12,000 a tonne due to declines in mine supply and increasing demand from China's green energy sector.