Rio Tinto is facing a new front in an escalating dispute over how to finance its biggest project after a US hedge fund threatened the miner with legal action.

Pentwater Capital Management, which has a large minority stake in Rio-controlled Turquoise Hill Resources, said it was prepared to file an “oppression” order unless the company allowed the subsidiary to take on more debt to fund the $6.8bn 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 TRQ, 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 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 $1bn over budget. Its first sustainable production is now expected around October 2022.

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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 $500m in additional debt, telling the company to plug a funding gap of up to $3bn 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 $1.6bn 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 Mr Halbower.

Separately, one of the frontrunners to replace Rio’s outgoing chief executive Jean-Sébastien Jacques ruled himself out of the running for the job on Monday.

Newcrest Mining chief executive Sandeep Biswas said in an email to staff that he was not “interested in any other CEO role outside Newcrest”.

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After four years at the helm of Rio, Mr Jacques stepped down in September following an investor backlash over the destruction of a sacred Aboriginal site to make way for the expansion of the mine. Rio has appointed MWM Consulting to help find its next chief executive.

Via Financial Times