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Mongolian partners revolt, force Rio into Oyu Tolgoi review www.afr.com
Rio Tinto will be forced to endure an independent review of its failure to meet cost and schedule guidance on Mongolia's Oyu Tolgoi copper project, after the mining giant's less powerful partners in the project united in an extraordinary show of defiance.
The Government of Mongolia and representatives of Canadian company Turquoise Hill Resources worked together on Monday evening to ensure an independent review would be conducted into the blow outs, which will see Rio's most important growth project delivered almost two years late and close to $US1.5 billion over budget.
Multiple sources have suggested that Rio was opposed to the creation of the committee and the independent review, although at the time of publication Rio had not responded to enquiries.
Rio blamed an uncontrollable factor - weaker than expected geology in the underground section of the Oyu Tolgoi project - when it disclosed the blow outs to investors in 2019.
But Rio has been less forthcoming about the degree to which controllable factors played a role in the blow outs; something the Mongolian Government is particularly keen to investigate.
The commissioning of the review is a victory for the Mongolian Government and minority investors in Turquoise Hill, both of which have struggled over the past decade to contend with the powerful hand that Rio has held in the complicated ownership structure of Oyu Tolgoi.
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The unlikely alliance between the Mongolian Government and Turquoise Hill also highlights the risks inherent in Rio's 2012 strategy to acquire majority, but not complete, control of Turquoise Hill.
The theatre for Monday's extraordinary show of defiance was a board meeting of the Mongolian company that directly owns 100 per cent of the mine; Oyu Tolgoi LLC.
That Mongolian company is 66 per cent owned by Turquoise Hill and 34 per cent owned by a Mongolian Government company called EOT.
Rio Tinto chief executive Jean-Sebastien Jacques struck the 2015 Oyu Tolgoi expansion agreement with the previous Mongolian government.
Rio's exposure to the mine comes through its 50.79 per cent stake in Turquoise Hill; a stake that has given Rio firm control of the mine over the past eight years despite having no direct ownership of Oyu Tolgoi LLC.
Rio's power has been enhanced by the fact it is the main financier and technical manager of the mine expansion project, which is set to cost close to $US6.8 billion and is partly funded by a loan from the Australian Government's export credit agency.
The traditional factional alliance within the project - where Rio and Turquoise Hill appointees to the board of Oyu Tolgoi LLC vote together on motions - was broken on Monday night, when directors representing Turquoise Hill and the Mongolian government voted together on a motion to create a ''special committee'' that would oversee an independent review of the blow outs.
Rio has been further disempowered by the fact it will not have majority control of the four person special committee; two committee members will be nominated by the Mongolian government while two will be provided by Turquoise Hill.
The Mongolian government issued a statement saying independent experts would probe Rio's handling of the mine expansion.
''The special committee has been charged with selecting and engaging an independent and reputable firm of experts in the field of project management, mine planning, cost management and other related fields,'' said the Mongolian government in a statement.
''The expert(s) will be tasked with conducting an independent investigation aimed at identifying the causes of the cost overruns and schedule delays and producing a detailed report to be shared with the special committee as soon as possible, and in any event, within 6 months of commencing its investigation.''
'Fully supportive'
A spokesman for Turquoise Hill (TRQ) confirmed to The Australian Financial Review that its representatives on the board of Oyu Tolgoi LLC had voted in favour of the review.
“TRQ fully supports our government partner, EOT, in securing an independent and objective review of the cost overruns and delays announced last year. TRQ’s nominees will serve on the special committee and TRQ is fully supportive of the review process,'' said the spokesman.
Rio Tinto has built the Oyu Tolgoi operation in the vast expanse of Mongolia's South Gobi Desert.
''We believe the independent special committee established in EOT's resolution is consistent with corporate governance best practices, ensures accountability and transparency and will ultimately serve the best interests of Oyu Tolgoi’s owners – EOT and TRQ – as well as our respective stakeholders.”
Turquoise Hill's willingness to demand an independent review of Rio's failings shows the growing distance between the Canadian company and its biggest shareholder.
Turquoise Hill and Rio have clashed over the past month over the best way to source funds to cover the blow outs, with Turquoise Hill keen to use debt.
But Rio has sought to block the use of extra debt, telling Turquoise Hill it must instead conduct a multi-billion dollar equity raising.
Minority shareholders in Turquoise Hill fear that Rio is seeking to cheaply grow its stake in Turquoise Hill through such an equity raising, based on the expectation that Rio would underwrite any shortfall created by minority Turquoise Hill shareholders who do not participate in the raising.
Legal threats
Those fears were articulated on Tuesday by the second biggest shareholder in Turquoise Hill, Pentwater Capital Management, which threatened Rio with legal action if it forced Turquoise Hill into a dilutive equity raising.
Departing Rio chief executive Jean-Sebastien Jacques is often held accountable for the myriad challenges at Oyu Tolgoi, given he was in charge of Rio's copper division when the project was revived in 2015.
But while Mr Jacques was intimately involved in the project and the $US4.4 billion finance facility that has funded the expansion, many of Rio's problems lie in the complicated ownership structure created when Rio's former chief executive Tom Albanese and former chairman Jan du Plessis moved to acquire 50.79 per cent of Turquoise Hill in 2012 rather than 100 per cent.
While that 50.70 per cent stake gave Rio control at the lowest immediate cost, it also consigned Rio to dealing with a group of noisy minority shareholders in Turquoise Hill, who have frequently drawn attention to what they believe are corporate governance failures created by Rio's grip on the company.
The decision to not acquire 100 per cent of Turquoise Hill also left Rio vulnerable to the sort of cross-bench coalition that occurred at Monday's meeting of the Oyu Tolgoi LLC board.
The Mongolian government's insistence on owning an equity stake in the mine is also unusual by international standards, and has created headaches for Rio.
Unable to fund its share of construction costs, the Mongolian government has relied upon Rio to cover its share of costs, under an arrangement that is effectively creating a debt that will be repaid by the government through dividends from the mine once it is built and operating.
Rio might find it more expensive to raise debt for its Mongolian copper mine after the Asian nation was "grey listed" by developed economies.
Responsibility for a portion of the construction costs has made the Mongolian government extremely sensitive and suspicious about any cost blowout on the project, hence this week's request for an independent review.
Mr Jacques openly noted during his time as Rio chief executive that the ownership structure of Oyu Tolgoi was not ideal, and the Mongolian government flagged in 2019 that it would consider swapping its 34 per cent equity stake in the mine for a special royalty.
Such a scenario would give Rio direct and enhanced control over the mine and ensure the developing nation gets a share of the mine's wealth sooner, but one year after the idea was publicly floated, a deal has proved elusive.
Published Date:2020-12-01
