Turquoise Hill's Mongolia row worsens as U.S. fund gets feisty

Turquoise Hill Resources Ltd., a Montreal-based miner, is facing a new front in an escalating dispute over how to finance its biggest project after a U.S. hedge fund threatened the miner with legal action.

Pent water Capital Management, which has a large minority stake in Rio Tinto-controlled Turquoise Hill Resources, said it was prepared to file an “oppression” order unless the company allowed Turquoise to take on more debt to fund the US$6.8-billion underground expansion of the Oyu Tolgoi mine in Mongolia's Gobi Desert.

“We do not undertake this lightly, but enough is enough,” Pentwater chief executive Matthew Halbower said in an open letter sent on Monday to Rio's board of directors.

“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.”

Pentwater's warning came days after Odey Asset Management, a London-based hedge fund, also called on Rio to change the way it was funding the project. Odey, which has made a bearish bet against Turquoise Hill, said Rio should seek to refinance the entire project but through a massive rights issue. It has asked the company whether it will try to do so.

Rio could not be immediately reached for comment. TRQ, which saw its stock price decline 3 per cent to $12.64 on the Toronto Stock Exchange Monday, declined to comment.

The underground expansion of Oyu Tolgoi is Rio's most important project. When finished, the mine will be capable of producing more than 500,000 tonnes of copper a year.

However, it has been dogged by problems and is running more than a year behind schedule and more than US$1 billion over budget. Its first sustainable production is now expected around October 2022.

While Rio operates Oyu Tolgoi it does not have a direct stake. Instead it owns 50.8 per cent of TRQ, which in turn owns 66 per cent of the project, with the rest owned by the Mongolian government.

The row over funding of the cost blowout started to heat up in early November when TRQ launched arbitration proceedings against Rio in an effort to get clarity on funding.

Rio has said it will not allow TRQ to take on more than US$500 million in additional debt, telling the company to plug a funding gap of up to US$3 billion by reprofiling loans and raising equity.

That move has alarmed minority TRQ shareholders including Pentwater, which owns almost 10 per cent of the company. They fear being diluted if the company is not allowed to issue more debt or raise cash by selling the rights to future gold production from Oyu Tolgoi.

Pentwater said TRQ's current financing agreements with Rio were written to allow for US$1.6 billion of supplemental debt financing.

“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,” said Halbower.