\nPentwater Capital Management LP (“Pentwater<\/b>“), the largest minority shareholder of Turquoise Hill Resources Ltd. (“Turquoise Hill<\/b>” or the “Company<\/b>“) (TSX:TRQ) (NYSE:TRQ), has written the attached letter to the Rio Tinto plc (\u201cRio Tinto<\/b>\u201d or \u201cRio<\/b>\u201d) (LSE:RIO) Board of Directors:\n<\/p>\n
\nDear Members of the Board of Directors of Rio Tinto plc:\n<\/p>\n
\nPentwater Capital Management is the largest minority shareholder of Turquoise Hill. We are writing to you because it is our sincere hope that the Board of Rio Tinto is unaware of the oppressive and illegal actions which Rio\u2019s current management team has taken against Turquoise Hill\u2019s minority stockholders. It is our sincere hope that Pentwater can work with Rio\u2019s Board to correct these actions and thereby avoid the otherwise necessary filing of an action for oppression by Pentwater against Rio Tinto.\n<\/p>\n
\nAs you are undoubtedly aware, Rio controls Turquoise Hill through its 51% ownership stake, has hand picked every director at Turquoise Hill, has chosen every management employee at Turquoise Hill, and is the manager of the mine which is Turquoise Hill\u2019s sole asset. I assume that you are also aware that since Rio took control of Turquoise Hill in 2012, Rio has eliminated every previous Turquoise Hill employee and brought in a parade of six CEOs and CFOs who have all been existing or former Rio employees. I assume that you also know that Rio\u2019s hand-picked directors and management team have signed contracts with Rio that have resulted in Turquoise Hill paying Rio over $1.4 billion since Rio took control.\n<\/p>\n
\nAs manager of the mine, Rio has been responsible for the construction of the underground mine at Oyu Tolgoi. Rio originally promised Turquoise Hill that the underground mine would reach first sustainable production in Q1 of 2021 with a $5.3 billion budget. Then in July of 2019, Rio shocked Turquoise Hill\u2019s minority shareholders by communicating for the first time that there would be a massive cost overrun and enormous schedule delay. According to a former Rio employee who turned whistleblower named Richard Bowley, the budget overrun and schedule delay were largely caused by Rio\u2019s negligent construction of Shaft 2. The whistleblower further confirmed that Rio was fully aware of the budget overruns and schedule delay a year in advance of the disclosure to the market and intentionally hid those facts from the market and the government of Mongolia. The Financial Times<\/i> has reported:\n<\/p>\n
\n\u201cMr. Bowley, who worked for Rio\u2019s copper business between 2017 and 2019 as head of strategic projects in Mongolia, claims he first alerted senior executives to problems with the project in February 2018. According to Mr. Bowley, he continued to express his concerns to senior executives until he was dismissed in March 2019 after making whistleblowing disclosures. \u2018I indicated [delay] to the schedule in the early part of 2018, which would lead to serious risk related to capital required to complete the project. This risk only grew throughout 2018, but was not disclosed to investors,\u2019 he said in the statement. \u2018Clear evidence exists through the project reporting, email correspondence and other documents [that] Rio Tinto were fully aware of the delays to the project and the effects these would cause.\u2019\u201d Financial Times<\/i>, March 23, 2020.\n<\/p>\n
\nRio Tinto chose to hide the cost and schedule overruns in the underground project beginning in 2018.\n<\/p>\n
\n\u201cMr. Bowley claims he first alerted senior executives to problems at the mine in February 2018. That was followed by a second warning \u2013 to an HR executive \u2013 in July 2018 that the mine was $300m over budget and a year behind schedule. Yet, in a presentation to US investors on October 2, 2018, the head of Rio\u2019s copper business Arnaud Soirat said the project was \u2018on budget and on schedule\u2019\u201d. Financial Times<\/i>, February 16, 2020.\n<\/p>\n
\n\u201cIn one email, sent just weeks after Mr. Soirat\u2019s October 2018 presentation, Mr. Bowley told his local manager there would be a \u201812-18 month delay in the underground project, with substantial cost implications.\u2019 He also outlined his concerns to board members at Rio.\u201d Financial Times<\/i>, February 16, 2020.\n<\/p>\n
\nYou may or may not be aware that Mr. Bowley was scheduled to provide live testimony in open Court last month that would have been very embarrassing to Rio, but the day before that Court hearing was scheduled to take place, Rio agreed to an undisclosed settlement with Mr. Bowley presumably to buy his silence. Pentwater certainly hopes that it was Rio\u2019s current management team rather than Rio\u2019s Board making these decisions. Obviously, it was Rio\u2019s management team that decided to destroy sacred aboriginal sites in Australia as well take actions which have resulted in numerous foreign corrupt practices investigations, bribery investigations, as well as financial disclosure investigations around the world by agencies such as the US Securities Exchange Commission and the Serious Fraud Office in the UK. It is Pentwater\u2019s understanding that Rio\u2019s Board finally took the correct action to eliminate Rio\u2019s CEO after these numerous improprieties.\n<\/p>\n
\nUnfortunately, the elimination of Mr. Jacques occurred one day too late. Literally the day the Board asked for his resignation, Mr. Jacques attempted to force Turquoise Hill to pay for the cost overruns caused by Rio\u2019s own mismanagement of the construction of the underground mine through an equity rights offering instead of accessing cheaper, readily available financing. It is unacceptable that Rio, through a recently announced Memorandum of Understanding (MOU), is preventing TRQ from seeking the financing solutions that are most optimal for TRQ shareholders. 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 to the Company, such as streaming and bond financing. The fact that Rio has already notified Turquoise Hill that it will oppose any additional debt or hybrid financing options beyond the amount in the MOU, exposes Rio\u2019s oppressive tactic to enrich itself and expand its holdings in Turquoise Hill at bargain basement prices through the backstop.\n<\/p>\n
\nThe complete and utter lack of financial logic in Rio\u2019s current position is so blatantly corrupt that it has forced Rio Tinto\u2019s own hand-picked Board at Turquoise Hill to initiate arbitration against Rio. Turquoise Hill\u2019s Board is convinced that the cost overruns caused by Rio can all be funded by supplemental financing or a stream. Both options would be at reasonable costs and interest rates. Why would you as the Board of Rio not want a company that Rio owns 51% of to finance the construction of the underground mine in the most capital efficient manner?\n<\/p>\n
\nPentwater hopes that the answer to this question is that you want efficient financing for Turquoise Hill. Pentwater hopes that it was your lame duck CEO Mr. Jacques who duped Rio into proceeding down this value destructive path. Pentwater hopes that once you understand the facts, you will agree that the only rational path forward is to allow supplemental financing to move forward. Hopefully you understand that all Turquoise Hill\u2019s current financing agreements are written to allow for $1.6 billion of supplemental financing.\n<\/p>\n
\nPentwater hopes that you understand that there is near universal belief that Rio has not engaged in appropriate corporate governance with respect to Turquoise Hill. Rio has not allowed any minority representation on Turquoise Hill\u2019s Board. Earlier this year, I ran for a seat on the Turquoise Hill Board. I received 88% of the votes from minority shareholders who voted at the meeting.Of course, Rio Tinto saw to it that minority shareholder voices were silenced by casting its votes against me. I can only assume that it was Mr. Jacques who didn\u2019t want minority shareholders to be able to investigate Rio\u2019s reported misfeasance and malfeasance committed in construction of the underground mine. I assume it was Mr. Jacques who didn\u2019t want minority shareholders to have any oversight into the $1.4 billion that Turquoise Hill has already paid Rio. I assume it was Mr. Jacques who didn\u2019t want minority shareholders to be able to push Turquoise Hill to investigate Rio\u2019s reported lack of candor and disclosure in reporting delays and cost overruns.\n<\/p>\n
\nThe leading corporate governance firm in the United States, Institutional Shareholder Services (ISS) supported minority shareholder representation on the Turquoise Hill Board. On July 15, 2020, the Australian Financial Review, taking notice of ISS\u2019s endorsement of minority shareholder representation, stated as follows:\n<\/p>\n
\nIn its advice to [Turquoise Hill] shareholders, ISS confirmed \u2018legitimate concerns around governance, delays, cost overruns and the company\u2019s disclosure regarding the gravity of funding shortfalls.\u2019 It said \u2018the board\u2019s history of communication with minority shareholders is of particular concern\u2019 and noted that it \u2018has not gone far enough\u2019 in ensuring \u2018mitigation of conflicts of interest.\u2019\n<\/p>\n
\nThe same article goes on to say:\n<\/p>\n
\nUnder the capricious Jean-S\u00e9bastien Jacques,<\/b> Rio Tinto\u2019s bad faith conduct is overarching. Its pariah status transcends the company\u2019s individual crises and its organizational silos. It treats its business partners and minority shareholders with the same contempt it shows its host communities \u2013 like the grieving PKKP people. It is excoriated by Canberra\u2019s Takeovers Panel, American proxy houses, British fund managers and by Reconciliation Australia alike. These are not inconsequential malcontents. They are a growing chorus, and these are glaring warning signs for Simon Thompson\u2019s board, if it cares to notice. Australian Financial Review<\/i>, July 15, 2020.\n<\/p>\n
\nBut, of course, it is not \u201cbreaking news\u201d that Rio Tinto, under Mr. Jacques and his predecessors have not been models of good corporate governance. Among the many scandals swirling around Jacques was one reported by The Australian Financial Review <\/i>on July 27, 2020 regarding unethical conduct by Rio\u2019s most senior executives. The paper states:\n<\/p>\n
\nIn December 2017\u2026. British executive coaching firm GFI Blackswan abruptly quit its 12-year role providing leadership development services to Rio Tinto\u2019s senior leadership team \u2018because of serious misgivings about unethical behaviour.\u2019 Blackswan\u2019s principal, Dr. Maurice Duffy,laid this out in an eye-popping letter to current chairman Simon Thompson and the entire Rio Tinto board, Jacques and his entire executive committee \u2026 on November 26, 2019. In it, Duffy complains that before terminating his consultancy agreement in 2017, he reported \u2018multiple, unprofessional [and] unethical behaviors\u2019 by Rio\u2019s most senior executives to the then chairman and members of the board, \u2018who took no action\u2019.\n<\/p>\n
\nMr. Jacques was CEO in 2017. The same article reported that Duffy\u2019s concerns addressed Rio issues in both Mongolia and Mozambique.\n<\/p>\n
\nDuffy had reported \u2018the potential overstatements that [Blackswan] were informed of in Mongolia and Mozambique, which we first informed [Rio Tinto] of in 2017.\u2019 In October 2017, Albanese and former CFOGuy Elliott were charged by the US Securities and Exchange Commission with fraud \u2018for inflating the value of coal assets\u2019 in Mozambique. Duffy even called out \u2018the 2019 independent investigations by Baker McKenzie that excluded information known by [Blackswan] about Mongolia since 2017\u2019.\n<\/p>\n
\nAccording to the same article, Duffy apparently had reported inappropriate relationships at Rio. To quote, \u201cDuffy had reported \u2018the inappropriate relationships.\u2019 One such relationship remains an open secret in Rio Tinto circles.\u201d Pentwater believes that one of these inappropriate relationships created conflicts of interests with Turquoise Hill at the time large contracts were being negotiated between Turquoise Hill and Rio.\n<\/p>\n
\nRio\u2019s corporate culture problems extend around the world, from its corporate inner sanctum to Mongolia, to Mozambique and even to Guinea. As the Financial Times on July 28, 2020 reported:\n<\/p>\n
\nRio Tinto is in talks with the UK\u2019s Serious Fraud Office about a possible deal under which the Anglo-Australian miner would avoid prosecution on bribery allegations. The group is seeking a deferred prosecution agreement over a payment it made to a consultant working on a contentious iron ore deposit in Guinea, according to people with knowledge of the situation, who said there was no certainty a deal would be reached. Under a DPA, the SFO charges a company with a criminal offence but proceedings are automatically suspended as long as the deal is approved by a judge. For negotiations to begin, the company has to agree a number of terms, including paying a fine and co-operating with future prosecutions of individuals.\n<\/p>\n
\nHow could Mr. Jacques have allowed such a culture of misfeasance and malfeasance infest Rio Tinto? To be fair, the rot began before his reign. The Mozambique scandal and the Guinea bribery scandal involved underlying actions that occurred before his ascendance. However, he has continued the degradation of any semblance of good corporate character, leading to the pi\u00e8ce de resistance of his reign \u2026 the blowing up of cultural heritage sites in Australia. The destruction of Western Australia’s Juukan Gorge cultural heritage sites is emblematic of Rio\u2019s actions under Mr. Jacques \u2013 a \u201cRio-first-and-only, whatever the cost\u201d corporate mentality; a high-handed disregard of business and ethical obligations; and a total disrespect of governments and non-governmental partners and co-investors.\n<\/p>\n
\nYou know that your corporation has gone astray when you have to \u201cclean house\u201d yet again. Mr. Jacques\u2019 tenure started with great hopes that Rio Tinto could put past scandals behind it. But we have now come full circle, and Mr. Jacques is leaving under a dark cloud. This is the time for the Board of Directors to put right the things that are indeed wrong. It is illegal and oppressive for Rio to order Turquoise Hill to undergo an equity raise despite the lack of any economic sense. We hope that it was not the Board itself who thought sua sponte that this was a good idea. Unfortunately, the press from last week makes Pentwater question whether it is in fact Rio\u2019s own Board who is responsible for all of these numerous acts of impropriety.\n<\/p>\n
\nA Financial Times article published Wednesday, November 25, 2020, states that the Government of Mongolia is calling for Oyu Tolgoi LLC to seek \u201can independent review into delays and huge costs blowouts in the underground expansion\u201d of the Oyu Tolgoi mine. As you know, Rio Tinto does not own the Oyu Tolgoi mine. Rio is simply the operator in charge of underground mine construction. The mine is co-owned by Turquoise Hill and the government of Mongolia. The article suggests that both owners of the mine want an independent investigation but that Rio is opposing this. If accurate, that is truly SHOCKING. Rio is nothing more than the contractor hired to build the mine. Do you really have the audacity to attempt to block the owners of the mine from conducting an independent investigation into you, their hired contractor? If so, it serves as nothing but confirmation that Rio\u2019s management team AND BOARD have a great deal to hide. And your actions would be further confirmation that Rio truly does not understand the concept of corporate governance, if it insists on blocking an independent investigation into itself. How can you possibly explain to the people of Mongolia and TRQ minority shareholders that you want to block an investigation into yourself if you truly have nothing to hide?\n<\/p>\n
\nWe can only hope that Rio\u2019s Board takes this moment to course correct, to provide transparency to the Government of Mongolia and Turquoise Hill, and to enter into a financially appropriate non-equity financing agreements to fund the cost overruns at Oyu Tolgoi necessitated by your own management. However, if Rio\u2019s Board continues with this oppressive behavior toward Turquoise Hill, Pentwater is prepared to go forward with legal action against the proper parties, including, you, the Board of Directors of Rio Tinto. We do not undertake this lightly, but enough is enough. 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. I sincerely hope to hear from you shortly and am free to discuss these matters at any time convenient for you.\n<\/p>\n
\nKindest Regards,\n<\/p>\n
\nMatthew C. Halbower
\n
CEO
\n
Pentwater Capital Management\n<\/p>\n
\ncc: Turquoise Hill Resources\n<\/p>\n
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