Turquoise Hill CEO quits on Rio Tinto meddling

Turquoise Hill Resources (TSX: TRQ; NYSE: TRQ) announced on March 4 that its CEO Ulf Quellmann is leaving the company after majority-owner Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO) told the Canadian miner that it planned to vote against his re-election at the annual shareholders’ meeting in May.

The board has appointed Steeve Thibeault as interim CEO. Thibeault previously served as the company’s chief financial officer between June 2014 and April 2017.

Tensions between the companies have grabbed headlines in recent months. They are at odds over roles and obligations in securing the remaining funding for the underground expansion of the vast Oyu Tolgoi copper-gold mine in Mongolia.

Turquoise Hill had expected the underground expansion to cost US$5.3 billion when it was approved in 2015. Last year, however, the world’s second-largest miner flagged stability risks associated with the original project design, adding that amendments to it could increase costs by as much as an additional US$1.9 billion.

The Vancouver-based miner warned at the time of further delays of up to two and a half years, with first sustainable production from Oyu Tolgoi’s underground expansion expected between May 2022 and June 2023.

Rio Tinto had said in September it planned to raise up to US$500 million through additional lending to develop the giant copper mine. The move, Rio Tinto said, would reduce the remaining funding requirement of the expansion to up to US$1.4 billion.

By reprofiling, the parties sought more time to repay their debt, knowing that the principal of the extended debt, or in some cases even the interest rate on it, are not reduced.

Any remaining funding for the underground mine, Rio Tinto vowed, was to be met through a Turquoise Hill equity offering.

Turquoise Hill is simultaneously advancing its evaluation of financing options for Oyu Tolgoi. The alternatives include additional debt from banks or international financial institutions, an offering of global medium-term notes and a gold streaming transaction, it said.

The company had previously disclosed it was facing a funding shortfall for Oyu Tolgoi’s expansion of up to US$4 billion, including balance sheet servicing costs.

Once completed, the underground section of Oyu Tolgoi will lift production from 125,000–150,000 tonnes in 2019 to 560,000 tonnes at peak output, which is now expected by 2025 at the earliest. This would make it the biggest new copper mine to come on stream in several years.

Rio Tinto owns the mine, located in the South Gobi desert near the border with China, through its majority stake in Turquoise Hill, which has a 66% interest in Oyu Tolgoi. The Mongolian state has the remaining 34% of the operation.

News of Quellmann’s resignation comes on the heels of a yet to be confirmed new deal between Rio Tinto and the government of Mongolia, governing the US$6.75 billion mine expansion.

The agreement would end a three-month spat between the world’s second-largest miner and the landlocked East Asian country, as it would give better economic benefits to the state than the current deal.

Activist investor Pentwater Capital Management, Turquoise Hill’s largest minority shareholder, condemned Quellmann’s rushed resignation.

“In over 20 years of investing in companies around the globe, I have never seen poorer corporate governance than has been exhibited by Rio Tinto and Turquoise Hill,” Pentwater’s CEO Matthew Halbower said in a statement.

“Mr. Quellmann’s brazen termination serves as just more proof of what was already clear to all: Rio Tinto has no respect or regard for good corporate governance or the minority shareholders of Turquoise Hill,” Halbower added.

Canaccord Genuity’s Dalton Baretto downgraded his rating on Turquoise Hill from a hold to a sell.

“Goodbye, good governance — we hardly knew ye!” he wrote in a research note to clients. “Mr. Quellmann was the first CEO in our long history with TRQ that we believed actually pushed back on RIO and stood up for decisions that were in the best interests of all shareholders,” the mining analyst wrote. “Mr. Quellmann departs at a  critical time for TRQ, with major project financing and project economic disbursement discussions underway amidst conflicting agendas between the major stakeholders. We believe these discussions could all be concluded by the time TRQ appoints a new permanent CEO. We are unsure how much Mr. Thibeault will weigh in on behalf of the minority shareholders, given his “interim” designation, his history with RIO, and the fate of Mr. Quellmann.”

BMO analyst Jackie Przybylowski downgraded her rating on Turquoise Hill from outperform (S) to market perform (S) and cut her target price from $23 per share to $18 per share.

“In our view, Mr. Quellmann had prioritized the defence of minority shareholder interests; with his departure, it’s increasingly likely that project funding will be dilutive to Turquoise Hill minority equity holders,” she commented in a research note.

“Our revised assumption for financing the completion of the Oyu Tolgoi underground project includes a smaller stream (or gold forward sale), now with a value of US$500M for 7.5% of gold produced (from US$1B for 15% of gold produced previously.) We now assume US$1B in debt (from US$1.75B previously), including the US$500M to which Rio has previously agreed, and we assume less attractive terms on debt reprofiling. We assume TRQ issues 80M shares to bridge the financing gap, from 35M shares.”

“In addition,” she wrote, “the Rio Tinto action erodes the good work that Ulf Quellmann had achieved in establishing credibility for the company, which will be difficult for Steeve Thibeault to overcome.” 

Turquoise Hill’s shares closed down $1.88 or 9.5% on the news to finish at $17.96. Over the last year the company’s shares have traded in a range of $4.30 and $21.09 per share.