Fund warns Turquoise Hill over troubled Oyu Tolgoi

Oyu Tolgoi is Rio’s biggest copper growth project but has faced geological challenges. (Image from Rio Tinto)

London investment firm Odey Asset Management has accused Turquoise Hill of destroying value through lack of action over problems at Oyu Tolgoi.

In an open letter, Odey AM accused the miner of holding the “people of Mongolia… accountable for Turquoise Hill’s failings” after it called the Mongolian government’s $7bn equity stake in the copper-gold mine “worthless”.

Turquoise Hill, a subsidiary of Rio Tinto, owns two-thirds of the Oyu Tolgoi giant copper mine with the rest owned by the Mongolian government. The mine is Rio’s biggest copper growth project, but it has faced geological challenges and legal setbacks.

In April, the US hedge fund Pentwater Capital demanded a shakeup at the Oyu Tolgoi operation over what it claimed was “a massive devaluation” of the asset

Odey said Rio Tinto was allowing a false market for Turquoise Hill’s shares with a rights issue from the Canadian company on the horizon. The hedge fund owns shares in Rio Tinto and has a short position in Turquoise Hill.

In a letter to Rio Tinto’s finance chief Jakob Stausholm the fund said Turquoise Hill would require an $8.9bn rights issue after delays and budget overruns at Oyu Tolgoi. 

“Indeed, Odey has sought to ask questions on both Rio Tinto’s and Turquoise Hill’s public earnings calls, but Odey has not been given the opportunity on these calls to propose any such questions, limiting the opportunity for greater public scrutiny of the Oyu Tolgoi investment case,” the investment firm said.

In July, Rio Tinto said it cut estimated reserves at its underground copper mine extension of Oyu Tolgoi and confirmed it would face delays and higher costs after ground instability forced it to redesign the mine plan.

The U.S. Securities and Exchange Commission is examining claims from a whistleblower that Rio Tinto was aware of problems months before the company confirmed the project would face delays.

“Odey does not believe that the $4.4bn project finance package associated with Oyu Tolgoi is accurately described as ‘project’ finance,” the hedge fund said.

“While it is referred to as ‘project’ finance by the lending parties, the reality is that Rio Tinto has given corporate guarantees to the lenders for most of the duration of these loans. True project finance, as you know, is ring-fenced, non-recourse lending to an asset.”

Odey’s scrutiny of Oyu Tolgoi is led by Henry Steel, a former executive assistant to Rio Tinto’s chief financial officer in 2011.

The fund said the Mongolian government has $8.3bn of loans outstanding to Turquoise Hill, which is in the form of $7bn of shareholder loans to Oyu Tolgoi and $1.3bn to state-owned oil and gas exploration company Erdenes.

“Given the size of the existing loans that outstand between Turquoise Hill and the Mongolian Government, it is Odey’s belief that dividends will never flow from Oyu Tolgoi to its shareholders, effectively rendering the Mongolian Government’s equity stake in Oyu Tolgoi worthless,” Odey said.

“As such, Odey believes Rio Tinto should remove its project finance package at Oyu Tolgoi altogether, and that Turquoise Hill’s failure to deliver the Oyu Tolgoi project on time should be “met with accountability”.

In April, the US hedge fund Pentwater Capital also demanded a shakeup at the Oyu Tolgoi operation over what it claimed was “a massive devaluation” of the asset.

Rio Tinto declined to comment.

Midday Wednesday, Turquoise Hill’s stock was down 8% on the NYSE. The company has a $1.98 billion market capitalization.

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