Dispute over funding for over-budget and late-running Oyu Tolgoi project in Mongolia
Rio Tinto is at loggerheads with a subsidiary over how to fund a multibillion-dollar cost overrun at its huge underground copper and gold project in Mongolia’s Gobi desert.
Turquoise Hill Resources, which is 50.80 per cent owned by Rio, revealed on Thursday it had started arbitration proceedings against its parent in British Columbia to seek “clarity” on financing the Oyu Tolgoi mine.
The underground expansion of Oyu Tolgoi is one of Rio’s most important projects and will increase its copper output at a time when the shift to renewable energy drives demand for the metal for use in electric vehicles and wind turbines.
But the expansion has been a near constant source of problems for Rio and its outgoing chief executive Jean-Sébastien Jacques. The project, which the Anglo-Australian miner runs on behalf of TRQ, is running between $1.3bn and $1.8bn over budget and 16 to 30 months behind schedule.
First production is now scheduled for autumn 2022. Once at full capacity the mine will be able to churn out more than 500,000 tonnes of a copper a year, worth about $3.4bn at current prices.
In September Rio said it did not want Toronto-listed TRQ to take on more than $500m in additional debt, saying equity should be used to plug any funding gaps.
TRQ, which owns 66 per cent of Oyu Tolgoi, wants to pursue a plan that involves “reprofiling” its debt burden by pushing out payments and selling the rights to gold production from the mine.
It said on Thursday that the arbitration process would provide “needed clarity from an independent third party” of Rio’s obligations under their co-operation pacts.
“Rio Tinto’s approach to the financing of the Oyu Tolgoi project is incompatible with the company’s announced strategy to maximise debt and or hybrid financing for the Oyu Tolgoi project so as to minimise the size, and defer the timing, of an equity rights offering, if any,” TRQ said. The arbitration process, which is confidential, is expected to take between three and five months with its decision will be binding on both parties, according to TRQ.
Minority shareholders in TRQ have complained for years that Rio has too much control of the company and would look to dilute them through equity issues. TRQ has a market value of just $1.6bn.
Rio fears TRQ’s financing plan will saddle the company with expensive debt that would alarm the Mongolian government, according to people familiar with its thinking. Ulaanbaatar owns 34 per cent of the mine.
“We cannot comment on the arbitration announcement issued by Turquoise Hill Resources as we have not yet received an arbitration notice or background on their claims,” Rio said on Thursday.
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Edward Sterck, analyst at BMO Capital Markets, said TRQ’s hybrid financing package was not in Rio’s best interests. “In our view these options would likely have a cost of capital similar to, or more likely in excess of, Rio Tinto’s own, but still leaving Rio Tinto to bear all the risk,” he said.
Henry Steel, fund manager at Odey Asset Management who has made large profits betting against TRQ, said the arbitration was simply a “PR exercise” to avoid a governance backlash from investors.
“There is a clear legal route and incentive for Rio . . . to run a rights issue here. The arbitration will simply confirm this,” he said.
Last month a US legal firm launched a class-action lawsuit against Rio, accusing the miner of making “materially false and misleading statements” about the progress of OT.