Leading investor Odey Asset Management has attacked Rio Tinto’s management over a troubled copper mine in Mongolia and warned a rights issue of $8.9bn (£6.6bn) might be needed to get the project back on track.
Fund manager Henry Steel said he was worried about the fairness of the financing package for Oyu Tolgoi and the sustainability of agreements with the Mongolian government.
One of the largest copper deposits in the world, Oyu Tolgoi is FTSE 100 Rio’s biggest copper growth project and vital to the Mongolian economy, but work to expand the mine underground has been beset by overruns and delays, with costs estimated of up to $7.2bn in 2019.
Rio Tinto does not own the project directly but has a 50.8pc holding in Toronto-listed Turquoise Hill Resources, which owns a 66pc stake in the project. The rest of the project is owned by the Mongolian government.
Odey Asset Management is a shareholder in Rio Tinto and also holds a short position in Turquoise Hill Resources.
In a letter to Rio’s finance chief Jakob Stausholm, Mr Steel claimed the current $4.4bn project financing agreements were “wholly inappropriate” for Rio Tinto shareholders, as lenders took too little risk.
He argued Rio had the right to force Turquoise Hill to refinance the package through a rights issue, and urged the company to confirm whether it would try to do so. He believes an extra $4.5bn of equity financing might also be needed, subject to further analysis.
“Odey appreciates that this may sound like a large number but the structure of such a refinancing is not uncommon,” he says.
Mr Steel argued that the current situation was “allowing the creation of, in Odey’s opinion, a false market to form in the trading of Turquoise Hill’s shares”, and demanded Rio publicly answers questions about the project. He added that Odey had been unable to get an answer to these questions in private.
The attack came after the Financial Times reported that the Mongolian government was seeking an independent review into cost overruns at the project, with the request due to be discussed by the board of Oyu Tolgoi.
Rio’s leadership is in limbo after the resignation in September of chief executive J S Jacques following an outcry when the mining giant blew up sacred Aboriginal rock shelters in Australia while searching for iron ore. He remains in post until March or when a successor is found.
Mr Jacques was key to getting the Mongolian expansion project going, but Mr Steel said his departure was now a “new opportunity to act”.
Urging Rio to answer seven questions about the project, he added: “We feel it is appropriate and fair that these questions be addressed immediately, in a public manner in the interest of transparency, accountability and integrity.”
Demand for copper is set to soar due to its use in electric vehicle batteries and wind turbines.
According to Rio’s figures, Oyu Tolgoi directly and indirectly employs 13,000 Mongolians and has already paid more than $2.7bn into state coffers in taxes and other payments.
Rio declined to comment.