Calls for Rio Tinto to Immediately Cease
Brazen Attempt to Enrich Itself at the Expense of Turquoise Hill
Minority Shareholders
Pentwater Capital Management LP ("Pentwater"), the
largest minority shareholder of Turquoise Hill Resources Ltd.
("Turquoise Hill" or the "Company") (TSX:TRQ)
(NYSE:TRQ), has written the attached letter to the Rio Tinto plc
(“Rio Tinto” or “Rio”) (LSE:RIO) Board of
Directors:
Dear Members of the Board of Directors of Rio Tinto plc:
Pentwater Capital Management is the largest minority shareholder
of Turquoise Hill. We are writing to you because it is our sincere
hope that the Board of Rio Tinto is unaware of the oppressive and
illegal actions which Rio’s current management team has taken
against Turquoise Hill’s minority stockholders. It is our sincere
hope that Pentwater can work with Rio’s Board to correct these
actions and thereby avoid the otherwise necessary filing of an
action for oppression by Pentwater against Rio Tinto.
As you are undoubtedly aware, Rio controls Turquoise Hill
through its 51% ownership stake, has hand picked every director at
Turquoise Hill, has chosen every management employee at Turquoise
Hill, and is the manager of the mine which is Turquoise Hill’s sole
asset. I assume that you are also aware that since Rio took control
of Turquoise Hill in 2012, Rio has eliminated every previous
Turquoise Hill employee and brought in a parade of six CEOs and
CFOs who have all been existing or former Rio employees. I assume
that you also know that Rio’s hand-picked directors and management
team have signed contracts with Rio that have resulted in Turquoise
Hill paying Rio over $1.4 billion since Rio took control.
As manager of the mine, Rio has been responsible for the
construction of the underground mine at Oyu Tolgoi. Rio originally
promised Turquoise Hill that the underground mine would reach first
sustainable production in Q1 of 2021 with a $5.3 billion budget.
Then in July of 2019, Rio shocked Turquoise Hill’s minority
shareholders by communicating for the first time that there would
be a massive cost overrun and enormous schedule delay. According to
a former Rio employee who turned whistleblower named Richard
Bowley, the budget overrun and schedule delay were largely caused
by Rio’s negligent construction of Shaft 2. The whistleblower
further confirmed that Rio was fully aware of the budget overruns
and schedule delay a year in advance of the disclosure to the
market and intentionally hid those facts from the market and the
government of Mongolia. The Financial Times has reported:
“Mr. Bowley, who worked for Rio’s copper
business between 2017 and 2019 as head of strategic projects in
Mongolia, claims he first alerted senior executives to problems
with the project in February 2018. According to Mr. Bowley, he
continued to express his concerns to senior executives until he was
dismissed in March 2019 after making whistleblowing disclosures. ‘I
indicated [delay] to the schedule in the early part of 2018, which
would lead to serious risk related to capital required to complete
the project. This risk only grew throughout 2018, but was not
disclosed to investors,’ he said in the statement. ‘Clear evidence
exists through the project reporting, email correspondence and
other documents [that] Rio Tinto were fully aware of the delays to
the project and the effects these would cause.’” Financial Times,
March 23, 2020.
Rio Tinto chose to hide the cost and schedule overruns in the
underground project beginning in 2018.
“Mr. Bowley claims he first alerted senior
executives to problems at the mine in February 2018. That was
followed by a second warning – to an HR executive – in July 2018
that the mine was $300m over budget and a year behind schedule.
Yet, in a presentation to US investors on October 2, 2018, the head
of Rio’s copper business Arnaud Soirat said the project was ‘on
budget and on schedule’”. Financial Times, February 16, 2020.
“In one email, sent just weeks after Mr. Soirat’s October 2018
presentation, Mr. Bowley told his local manager there would be a
‘12-18 month delay in the underground project, with substantial
cost implications.’ He also outlined his concerns to board members
at Rio.” Financial Times, February 16, 2020.
You may or may not be aware that Mr. Bowley was scheduled to
provide live testimony in open Court last month that would have
been very embarrassing to Rio, but the day before that Court
hearing was scheduled to take place, Rio agreed to an undisclosed
settlement with Mr. Bowley presumably to buy his silence. Pentwater
certainly hopes that it was Rio’s current management team rather
than Rio’s Board making these decisions. Obviously, it was Rio’s
management team that decided to destroy sacred aboriginal sites in
Australia as well take actions which have resulted in numerous
foreign corrupt practices investigations, bribery investigations,
as well as financial disclosure investigations around the world by
agencies such as the US Securities Exchange Commission and the
Serious Fraud Office in the UK. It is Pentwater’s understanding
that Rio’s Board finally took the correct action to eliminate Rio’s
CEO after these numerous improprieties.
Unfortunately, the elimination of Mr. Jacques occurred one day
too late. Literally the day the Board asked for his resignation,
Mr. Jacques attempted to force Turquoise Hill to pay for the cost
overruns caused by Rio’s own mismanagement of the construction of
the underground mine through an equity rights offering instead of
accessing cheaper, readily available financing. It is unacceptable
that Rio, through a recently announced Memorandum of Understanding
(MOU), is preventing TRQ from seeking the financing solutions that
are most optimal for TRQ shareholders. Rio is attempting to force
Turquoise Hill to conduct an equity raise despite the fact that the
current equity price severely undervalues the Company and despite
the fact that there are much cheaper and more advantageous
financing options available to the Company, such as streaming and
bond financing. The fact that Rio has already notified Turquoise
Hill that it will oppose any additional debt or hybrid financing
options beyond the amount in the MOU, exposes Rio’s oppressive
tactic to enrich itself and expand its holdings in Turquoise Hill
at bargain basement prices through the backstop.
The complete and utter lack of financial logic in Rio’s current
position is so blatantly corrupt that it has forced Rio Tinto’s own
hand-picked Board at Turquoise Hill to initiate arbitration against
Rio. Turquoise Hill’s Board is convinced that the cost overruns
caused by Rio can all be funded by supplemental financing or a
stream. Both options would be at reasonable costs and interest
rates. Why would you as the Board of Rio not want a company that
Rio owns 51% of to finance the construction of the underground mine
in the most capital efficient manner?
Pentwater hopes that the answer to this question is that you
want efficient financing for Turquoise Hill. Pentwater hopes that
it was your lame duck CEO Mr. Jacques who duped Rio into proceeding
down this value destructive path. Pentwater hopes that once you
understand the facts, you will agree that the only rational path
forward is to allow supplemental financing to move forward.
Hopefully you understand that all Turquoise Hill’s current
financing agreements are written to allow for $1.6 billion of
supplemental financing.
Pentwater hopes that you understand that there is near universal
belief that Rio has not engaged in appropriate corporate governance
with respect to Turquoise Hill. Rio has not allowed any minority
representation on Turquoise Hill’s Board. Earlier this year, I ran
for a seat on the Turquoise Hill Board. 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. I can only assume that it was Mr.
Jacques who didn’t want minority shareholders to be able to
investigate Rio’s reported misfeasance and malfeasance committed in
construction of the underground mine. I assume it was Mr. Jacques
who didn’t want minority shareholders to have any oversight into
the $1.4 billion that Turquoise Hill has already paid Rio. I assume
it was Mr. Jacques who didn’t want minority shareholders to be able
to push Turquoise Hill to investigate Rio’s reported lack of candor
and disclosure in reporting delays and cost overruns.
The leading corporate governance firm in the United States,
Institutional Shareholder Services (ISS) supported minority
shareholder representation on the Turquoise Hill Board. On July 15,
2020, the Australian Financial Review, taking notice of ISS’s
endorsement of minority shareholder representation, 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.’
The same article goes on to say:
Under the capricious Jean-Sébastien
Jacques, Rio Tinto’s bad faith conduct is overarching. Its
pariah status transcends the company’s individual crises and its
organizational silos. It treats its business partners and minority
shareholders with the same contempt it shows its host communities –
like the grieving PKKP people. It is excoriated by Canberra’s
Takeovers Panel, American proxy houses, British fund managers and
by Reconciliation Australia alike. These are not inconsequential
malcontents. They are a growing chorus, and these are glaring
warning signs for Simon Thompson’s board, if it cares to notice.
Australian Financial Review, July 15, 2020.
But, of course, it is not “breaking news” that Rio Tinto, under
Mr. Jacques and his predecessors have not been models of good
corporate governance. Among the many scandals swirling around
Jacques was one reported by The Australian Financial Review on July
27, 2020 regarding unethical conduct by Rio’s most senior
executives. The paper states:
In December 2017…. British executive coaching
firm GFI Blackswan abruptly quit its 12-year role providing
leadership development services to Rio Tinto’s senior leadership
team ‘because of serious misgivings about unethical behaviour.’
Blackswan’s principal, Dr. Maurice Duffy, laid this out in an
eye-popping letter to current chairman Simon Thompson and the
entire Rio Tinto board, Jacques and his entire executive committee
… on November 26, 2019. In it, Duffy complains that before
terminating his consultancy agreement in 2017, he 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’.
Mr. Jacques was CEO in 2017. The same article reported that
Duffy’s concerns addressed Rio issues in both Mongolia and
Mozambique.
Duffy had reported ‘the potential
overstatements that [Blackswan] were informed of in Mongolia and
Mozambique, which we first informed [Rio Tinto] of in 2017.’ In
October 2017, Albanese and former CFO Guy Elliott were charged by
the US Securities and Exchange Commission with fraud ‘for inflating
the value of coal assets’ in Mozambique. Duffy even called out ‘the
2019 independent investigations by Baker McKenzie that excluded
information known by [Blackswan] about Mongolia since 2017’.
According to the same article, Duffy apparently had reported
inappropriate relationships at Rio. To quote, “Duffy had reported
‘the inappropriate relationships.’ One such relationship remains an
open secret in Rio Tinto circles.” Pentwater believes that one of
these inappropriate relationships created conflicts of interests
with Turquoise Hill at the time large contracts were being
negotiated between Turquoise Hill and Rio.
Rio’s corporate culture problems extend around the world, from
its corporate inner sanctum to Mongolia, to Mozambique and even to
Guinea. As the Financial Times on July 28, 2020 reported:
Rio Tinto is in talks with the UK’s Serious
Fraud Office about a possible deal under which the Anglo-Australian
miner would avoid prosecution on bribery allegations. The group is
seeking a deferred prosecution agreement over a payment it made to
a consultant working on a contentious iron ore deposit in Guinea,
according to people with knowledge of the situation, who said there
was no certainty a deal would be reached. Under a DPA, the SFO
charges a company with a criminal offence but proceedings are
automatically suspended as long as the deal is approved by a judge.
For negotiations to begin, the company has to agree a number of
terms, including paying a fine and co-operating with future
prosecutions of individuals.
How could Mr. Jacques have allowed such a culture of misfeasance
and malfeasance infest Rio Tinto? To be fair, the rot began before
his reign. The Mozambique scandal and the Guinea bribery scandal
involved underlying actions that occurred before his ascendance.
However, he has continued the degradation of any semblance of good
corporate character, leading to the pièce de resistance of his
reign … the blowing up of cultural heritage sites in Australia. The
destruction of Western Australia's Juukan Gorge cultural heritage
sites is emblematic of Rio’s actions under Mr. Jacques – a
“Rio-first-and-only, whatever the cost” corporate mentality; a
high-handed disregard of business and ethical obligations; and a
total disrespect of governments and non-governmental partners and
co-investors.
You know that your corporation has gone astray when you have to
“clean house” yet again. Mr. Jacques’ tenure started with great
hopes that Rio Tinto could put past scandals behind it. But we have
now come full circle, and Mr. Jacques is leaving under a dark
cloud. This is the time for the Board of Directors to put right the
things that are indeed wrong. It is illegal and oppressive for Rio
to order Turquoise Hill to undergo an equity raise despite the lack
of any economic sense. We hope that it was not the Board itself who
thought sua sponte that this was a good idea. Unfortunately, the
press from last week makes Pentwater question whether it is in fact
Rio’s own Board who is responsible for all of these numerous acts
of impropriety.
A Financial Times article published Wednesday, November 25,
2020, states that the Government of Mongolia is calling for Oyu
Tolgoi LLC to seek “an independent review into delays and huge
costs blowouts in the underground expansion” of the Oyu Tolgoi
mine. As you know, Rio Tinto does not own the Oyu Tolgoi mine. Rio
is simply the operator in charge of underground mine construction.
The mine is co-owned by Turquoise Hill and the government of
Mongolia. The article suggests that both owners of the mine want an
independent investigation but that Rio is opposing this. If
accurate, that is truly SHOCKING. Rio is nothing more than the
contractor hired to build the mine. Do you really have the audacity
to attempt to block the owners of the mine from conducting an
independent investigation into you, their hired contractor? If so,
it serves as nothing but confirmation that Rio’s management team
AND BOARD have a great deal to hide. And your actions would be
further confirmation that Rio truly does not understand the concept
of corporate governance, if it insists on blocking an independent
investigation into itself. How can you possibly explain to the
people of Mongolia and TRQ minority shareholders that you want to
block an investigation into yourself if you truly have nothing to
hide?
We can only hope that Rio’s Board takes this moment to course
correct, to provide transparency to the Government of Mongolia and
Turquoise Hill, and to enter into a financially appropriate
non-equity financing agreements to fund the cost overruns at Oyu
Tolgoi necessitated by your own management. However, if Rio’s Board
continues with this oppressive behavior toward Turquoise Hill,
Pentwater is prepared to go forward with legal action against the
proper parties, including, you, the Board of Directors of Rio
Tinto. We do not undertake this lightly, but enough is enough. This
mine is a jewel. It will be the third largest gold and copper mine
in the world. It will produce tens of billions of dollars of free
cash flow for decades. Its owners should be treated as business
partners, not as puppets or pawns. I sincerely hope to hear from
you shortly and am free to discuss these matters at any time
convenient for you.
Kindest Regards,
Matthew C. Halbower CEO Pentwater Capital Management
cc: Turquoise Hill Resources
View source
version on businesswire.com: https://www.businesswire.com/news/home/20201130005269/en/
David Zirin- Chief Operating Officer Pentwater Capital
Management 312-589-6401
Turquoise Hill Resources (NYSE:TRQ)
Historical Stock Chart
From Feb 2024 to Mar 2024
Turquoise Hill Resources (NYSE:TRQ)
Historical Stock Chart
From Mar 2023 to Mar 2024