Rio faces investor rebellion over Oyu Tolgoi

Oyu Tolgoi copper-gold-silver mine. (Image courtesy of Rio Tinto.)

Rio Tinto (ASX, LON, NYSE: RIO) is facing a new setback at its giant copper project in Mongolia with a large investor demanding a shakeup at the Oyu Tolgoi operation 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 mine. 

Naples, Florida-based Pentwater 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 said in the statement.

US hedge fund Pentwater Capital said it had become increasingly worried at the mismanagement of Oyu Tolgoi’s underground expansion and the timing of market disclosures

The fund, which has a 9% interest in Vancouver-based Turquoise Hill, said it had become increasingly worried at the mismanagement of an underground expansion of 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. 

Mongolian muddles

Investor activism is just the latest in a series of recent headaches for Rio as it builds what would rank as one of the three largest copper mines in the world when operating at full tilt – now expected to be by 2025 at the earliest.

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 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 building local relationships.

The issue resurfaced later, when a group of Mongolian legislators recommended a review of the 2009 deal that launched construction of the mine. It also advised revoking 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.

Behind schedule and over budget

Rio warned last year that the project located in the South Gobi desert near the border with China 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 Hill poured more cold water on the plan, saying that it would need at least another $4.5 billion to finish the project.

Once completed, the expansion is expected to lift Oyu Tolgoi’s production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes at peak output, targeted for 2025.

The giant deposit, discovered in 2001, is one-third owned by Mongolia’s government and two-thirds held by Turquoise Hill. Rio has a 51% stake in the Canadian miner.