SailingStone Capital Partners Writes Open Letter to Turquoise Hill Board Commending Them on Initial Steps to Improve Corporat...
December 04 2020 - 9:15AM
Business Wire
SailingStone Capital Partners (“SailingStone”), a large,
long-time owner of Turquoise Hill Resources Ltd. (“Turquoise Hill,”
“TRQ” or the “Company”) (TSX:TRQ) (NYSE:TRQ), has written the
attached letter to the Turquoise Hill Board of Directors:
Dear Members of the Board of Turquoise Hill Resources Ltd.,
As a large, long-time shareholder of Turquoise Hill,
SailingStone Capital Partners would like to commend Turquoise Hill
and the Government of Mongolia (the “Government”) for the recent
collective efforts to increase transparency, improve alignment, and
reduce uncertainty related to the development and financing of Oyu
Tolgoi’s (“OT”) immense underground copper and gold reserves. It is
in the interest of all stakeholders to bring this world-class mine
into production as safely and expeditiously as possible.
Trust, proper corporate governance, and a clear understanding of
roles and responsibilities sit at the core of any partnership.
Since there appears to be some confusion about the relationship
between TRQ, the Government of Mongolia and Rio Tinto (“Rio”),
please indulge our effort to set the record straight. Turquoise
Hill owns 66% of Oyu Tolgoi, with the remaining 34% held by the
Government of Mongolia. Turquoise Hill has agreed to fund the
Government’s equity stake and pro-rata share of development capital
which is to be repaid from future cash flows once the underground
mine is commissioned. Rio Tinto has been hired to operate and
develop the mine. In addition, Rio has provided completion
guarantees as a means to facilitate a project finance facility
which efficiently allocates risk based on capabilities. Sovereign
risk is absorbed by the international lending syndicate while Rio
Tinto, a self-proclaimed “leading global mining group,” accepts the
risk of mine development. To be clear, Rio is compensated for their
completion guarantee in the form of incremental support fees above
and beyond the $850 million in cost recoveries and management
services payments received since 2011. Rio Tinto is also the
majority shareholder of Turquoise Hill, having paid approximately
$6.3 billion for its 51% ownership stake.
Over the last decade, Rio has received more than $1.5 billion in
compensation for its work at Oyu Tolgoi and related financings.
While that sum may seem de minimis for a global mining
conglomerate, it is important to note that ex-iron ore and Oyu
Tolgoi, Rio has generated approximately $15 billion in negative
free cash flow over the same time frame. 1 Turquoise Hill,
meanwhile, has invested just over $10 billion into the project2,
while OT paid the Government approximately $2.6 billion in taxes
and royalties between 2010 and 2019, directly employs almost 8,200
Mongolian nationals and worked with more than 560 Mongolian
businesses in 2019.3 By some estimates, Oyu Tolgoi will represent
more than 30% of Mongolian GDP when the underground is at full
capacity and clearly is the most important proxy for foreign direct
investment into Mongolia.
While the roles and responsibilities of the OT partnership are
relatively straightforward, proper corporate governance and trust
have been in short supply. Thus, we are encouraged by two recent
events which we believe are important first steps in creating the
alignment and governance standards necessary to complete a project
as complex and important as Oyu Tolgoi.
First, we applaud the decision of the OT board to move forward
with a fully independent review of the cost overrun and delays
associated with Shaft 2, which we have been requesting since the
initial announcement last July. Since Rio Tinto is responsible for
the project, is being paid for its efforts, and apparently has
shareholders who are concerned about the associated risks, an
independent post mortem “in a public manner in the interest of
transparency, accountability and integrity” would indeed be
“appropriate and fair” for all stakeholders. Of course, any effort
to impede these efforts could only be cause for serious concern on
behalf of Oyu Tolgoi’s owners and inevitably would lead to a
further degradation of trust. Building a multibillion-dollar block
cave is no mean feat, and all participants understand that there
are risks involved. However, having the party responsible for mine
construction be the sole beneficiary of a capital overrun and
multi-year delay runs counter to the concept of “partnership.” The
mere commencement of this review process, supported by all
stakeholders, is a seminal step in the history of Oyu Tolgoi. We
surely are not alone in our eager anticipation of the Special
Committee’s findings.
Second, we believe that the decision to commence arbitration
proceedings to clarify Rio’s role and obligations in supporting
Turquoise Hill’s attempt to obtain the lowest cost sources of
financing to meet the incremental funding requirements, caused in
no small part by Rio’s own mismanagement, is not only appropriate
but the only available option. Basic principles of corporate
governance require that board members and management teams put the
interest of their shareholders, in this case the shareholders of
TRQ, ahead of their own. Rio Tinto’s cost of capital is totally
irrelevant in any decision regarding Turquoise Hill. To suggest
otherwise is to explicitly acknowledge an abrogation of the
collective Board’s fiduciary obligations. There is no alternative
interpretation. Fortunately, in this situation there are attractive
financing options available – the rare occasion when doing the
right thing is actually possible.
In theory, Rio Tinto should be aligned with Turquoise Hill
minority shareholders and the Government of Mongolia to maximize
the value of Turquoise Hill’s share price. After all, Rio paid more
than $6 billion for their equity stake in the Company and Oyu
Tolgoi’s success has significant positive implications for the
Government and people of Mongolia. Over the past several years,
however, Rio has left itself open to accusations of intentionally
depressing the share price, a conclusion made all the more pointed
when comparing Rio Tinto’s stock returns to TRQ’s. Supporting
Turquoise Hill’s efforts to identify the lowest cost source of
financing as a means to either eliminate or mitigate the amount of
equity raised is consistent with first principles of corporate
finance and proper corporate governance.
Similar to the independent review discussed above, the refusal
to seek out the most efficient means of financing OT results in a
prim facie conclusion that Rio is intentionally suppressing the
stock price. This conclusion only makes sense if Rio is attempting
to harm the minorities ahead of a planned take-out or to undercut
the Government of Mongolia in any negotiations related to a debt
for equity swap in conjunction with a tax and royalty agreement.
Since yet another corporate governance failure cannot be high on
Rio’s list of priorities at the moment, securing non-equity
financing seems like a unique opportunity to level-set the
partnership and advance the development of what everyone
acknowledges is one of the most important mining assets in the
world. We expect that recent events have helped Rio’s board and
interim management suite better understand the significance of
these decisions as well.
In summary, we are encouraged by recent events and believe that
your actions will serve to further de-risk the project by enhancing
governance at OT and TRQ, and by increasing the level of trust
across the partnership. We thank you for your efforts on behalf of
Turquoise Hill shareholders, and for working with the Government of
Mongolia and other stakeholders to usher in a new era of
cooperation at Oyu Tolgoi.
Best regards,
SailingStone Capital Partners LLC
About SailingStone Capital Partners LLC
SailingStone Capital Partners LLC is an employee-owned
investment advisory firm focused exclusively on providing
investment solutions in the global natural resource space with a
specific focus on the commodities and services which are key
enablers of the energy transition. Based in the San Francisco Bay
Area, SailingStone manages concentrated, long-only equity
portfolios for institutional investors.
1 Sellside model from a firm which has requested anonymity
2 Turquoise Hill financial statements
3 Turquoise Hill OTTR 2020 presentation, updated for current
employment levels
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SailingStone Contact: Henry Tran, Chief Compliance Officer (415)
429-5194 ir@sailingstonecapital.com
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