Pentwater Capital Management LP ("Pentwater"), the
largest minority shareholder of Turquoise Hill Resources Ltd.
("Turquoise Hill") (TSX:TRQ) (NYSE:TRQ), wrote the following
letter to Rio Tinto plc (“Rio Tinto” or “Rio”)
(LSE:RIO) Director Ms. Ngaire Woods, CBE and the rest of the Rio
Tinto Board. Unfortunately, the failure of Ms. Woods (or any other
member of the Rio Tinto Board) to respond to Pentwater’s letter is
evidence that Rio Tinto continues to inflict serious corporate
governance breaches upon Turquoise Hill minority shareholders.
Dear Ms. Woods,
I write on behalf of Pentwater Capital Management, LLP
(“Pentwater”), the largest minority shareholder of Turquoise Hill
Resources Ltd. (“TRQ”). I write to ensure that you personally are
aware of how flagrantly the members of the Rio Tinto board have
breached and continue to breach all reasonable standards of
appropriate corporate governance with regard to Rio’s controlled
subsidiary, TRQ.
As you know, TRQ owns 66% of the entity that owns the Oyu Tolgoi
mine in Mongolia. The Government of Mongolia owns the other 34%.
Rio Tinto’s interest in the mine is exclusively through TRQ. As
TRQ’s majority shareholder, however, Rio Tinto has controlled the
election of TRQ’s board of directors, has selected TRQ’s management
team and generally exerts absolute control over all of TRQ’s
actions. Rio Tinto’s interests in the mine, however, are
conflicted, as Rio also served, at various times, as the mine’s
contractor, its financier, and TRQ’s primary negotiator with the
Government of Mongolia. Remarkably, even in purported negotiations
between Rio Tinto and TRQ regarding the mine, the TRQ
representatives “negotiating” with Rio are often merely Rio Tinto
employees temporarily seconded to TRQ.
The consequences of Rio Tinto’s abuse of power have been
disastrous. Turquoise Hill minority shareholders and the Government
of Mongolia and its people have suffered for many years. Then
again, Rio Tinto’s lack of business ethics has caused grave harm
far beyond Mongolia, extending to numerous countries throughout the
world.
You bring to the Rio Tinto Board an impressive resume as an
innovator, as founding dean of the Blavatnik School of Government,
founder of the Global Economic Governance Programme at Oxford
University, and co-founder of the Oxford-Princeton Global Leaders
Fellowship program. Your various current or past affiliations bear
the most recognizable and prestigious of names, such as: Harvard
University, Nelson Mandela, The American Academy of Arts and
Sciences, Tsinghua University, the World Economic Forum, the
African Development Bank, the Government of Oman, the UNDP, and the
IMF. You are even a Commander of the Most Excellent Order of the
British Empire (CBE).
Although we were confused by your decision to accept appointment
to the Rio Tinto Board last year (given its history of unethical
practices), we were hopeful that you could bring about some
much-needed change. We wondered whether you viewed service on the
Rio Tinto Board as a career capstone achievement, where you would
turn one of the world’s most corrupt corporations into one that is
law abiding, or whether you were so busy for the past dozen years
that you did not get the chance to learn of the corporate briar
patch that is Rio Tinto.
To be sure you cannot remain unaware of the situation before
you, we provide a recap of some of Rio Tinto’s lowlights over the
years that you might have missed:
2010 Rio Tinto China Bribery Scandal: In 2010, four Rio
Tinto employees, including Stern Hu, the former head of Rio Tinto’s
China iron ore business, were found guilty in China for accepting
bribes and stealing business secrets. According to the March 15,
2015 edition of the Sydney Morning Herald, “American statesman
Henry Kissinger pocketed close to US $5 million… for guiding mining
giant Rio Tinto to wash its hands of its jailed China chief,
Australian citizen Stern Hu, and build relations with Beijing.”
2011 Rio Tinto Simandou Scandal: Rio Tinto emails written
in 2011 were “discovered” in 2016 regarding Rio Tinto payments of
more than $10,000,000 related to the Simandou mine in Guinea,
leading to an internal investigation. Subsequently, in November
2016, Rio’s Legal and Regulatory Affairs Executive resigned, and
Rio’s Energy and Mineral’s head was fired. On July 28, 2020, the
Financial Times reported that Rio Tinto and the United Kingdom’s
Serious Fraud Office were in discussions regarding the possibility
of a deferred prosecution agreement on bribery allegations.
2013 Rio Tinto Mozambique Scandal: In January 2013, Tom
Albanese resigned as Rio Tinto CEO by “mutual agreement” with the
Rio Tinto Board. His departure came after the announcement of a $14
billion dollar write down, including on Rio’s Mozambique coal
mining assets. In October 2017, the British Financial Conduct
Authority (FCA) fined Rio Tinto £27,385,400 for “failing to carry
out an impairment test and to recognize an impairment loss on the
value of mining assets based in the Republic of Mozambique.” The
United States S.E.C.’s civil fraud complaint against Albanese and
Rio in the United States District Court remains pending (S.E.C. v.
Rio Tinto Plc., et al., U.S. District Court, Southern District of
New York, No. 17-07994).
2015 Massive Rio Tinto Tax Impropriety: In September
2021, Rio Tinto was fined $257,000,000 USD by the Australian Tax
Office for tax irregularities regarding 2015 interest deductions in
a “borrowing used to pay intragroup dividends in 2015.”
2016 Panguna Mine Divestiture: In 2016, Rio Tinto
divested the Panguna mine in Bougainville, Papua, New Guinea. On
March 1, 2020, the Human Rights Law Centre in Melbourne, Australia
released a blistering report, entitled “After the mine: Living with
Rio Tinto’s deadly legacy.” The report was a damning indictment of
Rio Tinto’s having left devastated communities “in a deteriorating,
increasingly dangerous situation.”
2017 Resignation of Rio Tinto’s C-Suite Leadership
Consultant: On July 27, 2020, the Australian Financial Review
reported that Dr. Maurice Duffy, who had been a leadership
consultant for Rio Tinto’s senior leadership team for twelve years,
quit this role in December 2017 because of “serious misgivings
about unethical behaviour” and on November 26, 2019 wrote a letter
to the Rio Board stating that in 2017 he had “reported ‘multiple,
unprofessional [and] unethical behaviors’ by Rio’s most senior
executives to the then chairman and members of the board, ‘who took
no action’.” The same article states that “Duffy had reported ‘the
inappropriate relationships.’ One such relationship remains an open
secret in Rio Tinto circles.”
2019 Rio Tinto Announcement of Cost Overruns and Timing
Delays in Mongolia: In a series of belated disclosures in 2019,
Rio and TRQ shocked Turquoise Hill’s minority shareholders by
communicating for the first time that there would be a massive cost
overrun and enormous schedule delay at Oyu Tolgoi. According to
Richard Bowley, a former Rio employee who turned whistleblower,
senior management was fully aware of the budget overruns and
schedule delay well over a year in advance of the disclosure to the
market and intentionally hid those facts from the market and the
government of Mongolia. Rio Tinto then settled a civil termination
suit against Mr. Bowley, presumably to buy his silence.
In 2021, an independent report commissioned by TRQ and the
Government of Mongolia through their Oyu Tolgoi vehicle found that
Rio’s and TRQ’s explanations for the delay and cost overruns were
unfounded but instead reflected knowing or reckless concealment by
Rio. Then, on July 27, 2021, the Financial Times stated that the
British Financial Conduct Authority “is conducting a probe into Rio
Tinto and its late running $6.75bn underground copper project in
Mongolia’s Gobi Desert. The Financial Conduct Authority is
investigating whether the Anglo-Australian company breached listing
rules in disclosures about the value of Oyu Tolgoi in 2018 and
2019, according to people familiar with the situation.”
2020 Australian Takeovers Panel Ruling Regarding Rio Tinto
Pressure on ERA: As reported by January 24, 2020’s Weekend
Australian:
Rio Tinto plotted a strategy of “increasing
pressure, aggression and risk” to win quick control of uranium
miner ERA, partly because it would get tax breaks from the
transaction, according to the Takeovers Panel. The Takeovers Panel
ruled [in 2019] that ERA’s $476m equity raising, to fund its
rehabilitation liabilities at the Ranger uranium mine, was made in
“unacceptable circumstances” — but allowed the Rio-backed raising
to go ahead for fear the uranium miner would go bust if it was
blocked. The panel published its decision reasons…. revealing
dissident shareholder Richard Magides was blocked from making an
alternative offer to fund the rehabilitation because Rio, in part,
wanted full control of ERA so it could use the company’s tax losses
to offset profits across its other Australian operations.
2020 Destruction of the Juukan Gorge Rock Shelters: On
May 24, 2020, Rio Tinto triggered worldwide shock and
disapprobation after it intentionally destroyed a 46,000-year-old
incredibly important historical and sacred site in Australia.
Reconciliation Australia ended its partnership with Rio as a
result. In October 2021, the Australian Parliament released its
final investigative report on the destruction, finding that “Rio
Tinto’s actions were inexcusable and an afront, not only to the
[Puutu Kunti Kurrama and Pinikura peoples] but to all Australians.
The company’s actions demonstrated the profound lack of care for
Aboriginal and Torres Strait Islander heritage in this
country.”
2020 Pentwater TRQ Proxy Contest Blocked by Rio Tinto: On
July 24, 2020, I ran for a seat on the Turquoise Hill Board. On
July 15, 2020, the Australian Financial Review, taking notice of
the endorsement of minority shareholder representation by
Institutional Shareholder Services (ISS), the leading corporate
governance firm in the United States, stated as follows: “In its
advice to [Turquoise Hill] shareholders, ISS confirmed ‘legitimate
concerns around governance, delays, cost overruns and the company’s
disclosure regarding the gravity of funding shortfalls.’ It said,
‘the board’s history of communication with minority shareholders is
of particular concern’ and noted that it ‘has not gone far enough’
in ensuring ‘mitigation of conflicts of interest.’” I received 88%
of the votes from minority shareholders who voted at the meeting.
Of course, Rio Tinto saw to it that minority shareholder voices
were silenced by casting its votes against me.
2020-2021 Rio Tinto Departures: In September 2020, Rio
Tinto’s CEO, J.S. Jacques, the Group Executive of Corporate
Relations, Simone Niven, and the Chief Executive of Iron Ore, Chris
Salisbury, resign under a cloud of scandal. Then, in March 2021,
Chair Simon Thompson, also operating under a cloud of scandal,
announced that he would not run for the board of directors in
2022.
2021 Removal of TRQ CEO: In March 2021, Ulf Quellmann,
the CEO of Turquoise Hill, was replaced after Rio Tinto pressured
Turquoise Hill’s board. Mr. Quellmann had attracted the ire of Rio
Tinto after (belatedly) supporting an investigation into the cost
overruns and schedule delays at the Oyu Tolgoi mine in Mongolia
that Rio operated. A former Rio Tinto employee was appointed his
interim replacement, now totaling five TRQ CEOs or acting or
interim CEOs in the past seven years who had at some point worked
for Rio Tinto.
Suffice it to say that Rio's habit of illegal and immoral
conduct cannot be denied.
Against that backdrop, you find yourself at a crossroads. At
this very moment, Rio is in negotiations with the Government of
Mongolia to compensate the government (which owns 34% of the Oyu
Tolgoi mine) for the cost overruns and schedule delays that Rio
itself caused. That compensation package is in excess of $2
billion.
And of course, an independent group of experts has already found
that Rio Tinto itself hid the cost overruns and schedule delays for
years from the government and then fabricated the reason for the
cost overruns and schedule delays. Rio must be honest and take
responsibility for its actions and admit its faults. But Rio
Tinto’s refusal to accept responsibility and admit its wrongdoing
has made the negotiations with the Mongolian government all the
more difficult.
Obviously since Turquoise Hill (owner of 66% of the mine) has
been harmed by Rio’s actions just like the Mongolian government, it
is natural that Turquoise Hill should be compensated as well.
However, instead of compensating Turquoise Hill, numerous press
reports (which have been confirmed by TRQ) have stated that Rio
Tinto is coercing TRQ to compensate the government of Mongolia by
forcing TRQ to forgive $1.6 billion of debt owed by Mongolia to
TRQ.
This is outrageous. If Rio’s concealed mismanagement harmed the
owners of the Oyu Tolgoi mine, then all the owners of the mine should be compensated.
Rio should not be permitted to use its influence and control over
TRQ to get TRQ to pay for the damages Rio’s actions caused.
Instead of acting properly, Rio has insured that minority
shareholders, representing 49% of the shares outstanding, literally
have no voice on the board. TRQ minority shareholders are victims
because of both the billions of dollars lost due to Rio’s concealed
mismanagement of the underground construction and the billions of
dollars that Rio is forcing TRQ to pay to the government of
Mongolia to compensate them for Rio’s mismanagement.
With these facts, could you ever face the students at any of the
prestigious universities that you are affiliated with and honestly
tell them that your role on Rio Tinto’s Board is anything but a
blight on your otherwise honorable record? Of course, you could not
honestly tell anyone that what Rio is doing to TRQ is appropriate
corporate governance.
This is why Pentwater is hoping that you can be one of the few
people at Rio who actually starts to clean up the current culture
of corruption and put in its place a genuine goal of operating
Rio’s business honestly. Pentwater hopes that you begin by taking
the following actions to stop the inappropriate (and in some cases
illegal) actions which are currently taking place:
- Rio must not be allowed to force TRQ’s minority shareholders
to pay for Rio’s mismanagement and dishonesty. TRQ’s minority
shareholders are just as much victims as the government of
Mongolia. It is reprehensible that Rio would force TRQ to pay over
$1.6 billion to the government of Mongolia as compensation for
Rio’s lies and project mismanagement.
- Rio must allow minority shareholder representation on the
TRQ board. The fact that Rio both works for TRQ (as the contractor
on the underground mine) and controls TRQ through its 51% ownership
interest is an inherent conflict. The only way to solve this
enormous conflict of interest is to allow minority shareholders to
elect board members to the TRQ board and then have those
minority-elected directors sit on a special committee that approves
all agreements with Rio Tinto.
In my decades of investing, I have never experienced a more
corrupt company than Rio Tinto. I have no doubt that when you
joined Rio Tinto’s Board, you had no intention of simply becoming
another pawn and footnote in Rio’s history of bad conduct, but
rather joined to enact change. The situation embroiling Oyu Tolgoi,
a world class asset holding so much promise for the people of
Mongolia, presents you with an opportunity to show to the world
what your intentions truly were when you joined the Rio Tinto
Board. What you decide will surely have both global and personal
consequences.
I would be very pleased to speak with you anytime regarding
these matters to provide you with all of the information that I
have learned over the past decade that we have invested in TRQ and
Rio Tinto. In the meantime, we watch and wait.
Kindest Regards,
Matthew Halbower Chief Executive Officer Pentwater Capital
Management
Cc: Members of the Board of Directors of Rio Tinto plc
View source
version on businesswire.com: https://www.businesswire.com/news/home/20211111005722/en/
David Zirin- Chief Operating Officer Pentwater Capital
Management 312-589-6401
Turquoise Hill Resources (NYSE:TRQ)
Historical Stock Chart
From Apr 2024 to May 2024
Turquoise Hill Resources (NYSE:TRQ)
Historical Stock Chart
From May 2023 to May 2024