Rio Tinto (ASX, LON, NYSE: RIO), the
world’s second largest miner, is facing a fresh setback at its massive Oyu
Tolgoi underground copper project in Mongolia as one of its investors plans
a revolt over what it claims is “a massive devaluation” of the asset.
US hedge fund Pentwater Capital wants the designation of a new independent director to represent the interests of minority shareholders at Turquoise Hill Resources (TSX, NYSE:TRQ), the Rio-controlled company that operates the Mongolian mine.
The Naples, Florida-based firm also
wants other shareholders to be able to nominate three more directors.
“Turquoise Hill’s board and management have failed to effectively oversee Rio Tinto, and intervene in the abuse of control and refusal to make complete and truthful disclosure by Rio Tinto of the Oyu Tolgoi Project,” Pentwater, which has a 9% interest in Turquoise Hill, said in the statement.
The fund said it had become increasingly worried at the mismanagement of a critical underground ongoing expansion at the mine and the timing of market disclosures.
“The tangled web that has been woven between Rio Tinto and Turquoise Hill has resulted in a lack of corporate governance controls, systemic disregard for the interests of minority shareholders, a sustained period of false and misleading disclosures and irreparable harm to the interests of all Turquoise Hill stakeholders,” Pentwater said.
The brewing revolt is one of many
recent challenges Rio has faced in Mongolia in the past two years.
In January 2018, the country’s government served Oyu Tolgoi with a bill for $155 million in back taxes — the mine’s second tax dispute since 2014. The company said at the time the charge related to an audit on taxes imposed and paid by the mine operator between 2013 and 2015.
Shortly after, the southern Gobi
Desert-based mine had to declare force majeure after protests by Chinese
coal haulers disrupted deliveries near the border.
The situation prompted Rio’s chief
executive Jean-Sebastien Jacques to visit Prime Minister Ukhnaagiin Khurelsuk
to discuss how to build “win-win” partnerships. The trip was followed by the
company’s announcement that it was opening a new office in the country, focused on
exploration and local links.
The issue resurged later, when a
group of Mongolian legislators recommended a review of the 2009 deal that launched
construction of the mine. It also advised to revoke a 2015 agreement allowing
for an underground expansion.
In December, Mongolia’s parliament unanimously approved a resolution that reconfirms the validity of all the Oyu Tolgoi mine-related agreement, bringing the 18-month review to a close.
However, the company has had to deal with other issues, related to the under execution underground expansion of the mine.
Rio warned last year that the project would take 16-30 months longer than expected and would cost as much as an additional $1.9 billion to the initial $5.3 billion earmarked. Last week, Turquoise pour more cold water over the plan, saying that it would need at least another $4.5 billion to finish the project.
Once finished, the expansion is
expected to lift Oyu Tolgoi’s production from 125,000–150,000 tonnes in 2019 to
560,000 tonnes at full tilt from 2025, making it the biggest new copper mine to
come on stream in several years.
The giant deposit, discovered in
2001, is one-third owned by Mongolia’s government and two-thirds held by Turquoise
Hill. Rio does not have a direct stake in the mine, but its share through Turquoise
is equivalent to a 51% interest in the project, valued at around $6 billion.