London investment firm Odey Asset Management has accused聽Turquoise Hill of destroying value through lack of action over problems at Oyu Tolgoi.
In an open letter, Odey AM accused the miner of holding the 鈥減eople of Mongolia鈥� accountable for Turquoise Hill鈥檚 failings鈥� after it called the Mongolian government鈥檚 $7bn equity stake in the copper-gold mine 鈥渨orthless鈥�.
Turquoise Hill, a subsidiary of Rio Tinto, owns two-thirds of the Oyu Tolgoi giant copper mine with the rest owned by the Mongolian government.聽The mine is Rio鈥檚 biggest copper growth project, but it has faced geological challenges and legal setbacks.
In April, the US hedge fund Pentwater Capital demanded a shakeup at the Oyu Tolgoi operation over what it claimed was 鈥渁 massive devaluation鈥� of the asset
Odey said聽Rio Tinto聽was allowing a false market for Turquoise Hill鈥檚 shares with a rights issue from the Canadian company on the horizon. The hedge fund owns shares in聽Rio Tinto聽and has a short position in Turquoise Hill.
In a letter to Rio Tinto鈥檚 finance chief Jakob Stausholm the fund said Turquoise Hill would require an聽$8.9bn聽rights issue after delays and budget overruns at Oyu Tolgoi.聽
鈥淚ndeed, Odey has sought to ask questions on both Rio Tinto鈥檚 and Turquoise Hill鈥檚 public earnings calls, but Odey has not been given the opportunity on these calls to propose any such questions, limiting the opportunity for greater public scrutiny of the Oyu Tolgoi investment case,鈥� the investment firm said.
In July, Rio Tinto said it cut estimated reserves at its underground copper mine extension of Oyu Tolgoi and confirmed it would face delays and higher costs after ground instability forced it to redesign the mine plan.
The U.S. Securities and Exchange Commission is examining claims from a whistleblower that Rio Tinto was aware of problems months before the company confirmed the project would face delays.
鈥淥dey does not believe that the $4.4bn project finance package associated with Oyu Tolgoi is accurately described as 鈥榩roject鈥� finance,鈥� the hedge fund said.
鈥淲hile it is referred to as 鈥榩roject鈥� finance by the lending parties, the reality is that Rio Tinto has given corporate guarantees to the lenders for most of the duration of these loans. True project finance, as you know, is ring-fenced, non-recourse lending to an asset.鈥�
Odey鈥檚 scrutiny of Oyu Tolgoi is led by Henry Steel, a former executive assistant to Rio Tinto鈥檚 chief financial officer in 2011.
The fund said the Mongolian government has $8.3bn of loans outstanding to Turquoise Hill, which is in the form of $7bn of shareholder loans to Oyu Tolgoi and $1.3bn to state-owned oil and gas exploration company Erdenes.
鈥淕iven the size of the existing loans that outstand between Turquoise Hill and the Mongolian Government, it is Odey鈥檚 belief that dividends will never flow from Oyu Tolgoi to its shareholders, effectively rendering the Mongolian Government鈥檚 equity stake in Oyu Tolgoi worthless,鈥� Odey said.
鈥淎s such, Odey believes Rio Tinto should remove its project finance package at Oyu Tolgoi altogether, and that Turquoise Hill鈥檚 failure to deliver the Oyu Tolgoi project on time should be 鈥渕et with accountability鈥�.
In April, the US hedge fund Pentwater Capital also demanded a shakeup at the Oyu Tolgoi operation over what it claimed was 鈥渁 massive devaluation鈥� of the asset.
Rio Tinto declined to comment.
Midday Wednesday, Turquoise Hill鈥檚 stock was down 8% on the NYSE. The company has a $1.98 billion market capitalization.