Pentwater Issues Letter to Turquoise Hill Calling for Increased Transparency in Financial Disclosures and Urges Shareholders ...
June 24 2020 - 7:30AM
Pentwater Capital Management LP ("
Pentwater"), the
largest minority shareholder of Turquoise Hill Resources Ltd.
("
Turquoise Hill" or the
"
Company") (TSX:TRQ) (NYSE:TRQ), has written the
attached letter to the Board of Directors. The letter
outlines yet another example of how the Board has benefited its
largest shareholder Rio Tinto by failing to disclose important and
necessary financial information to TRQ shareholders. Several
examples of the Board’s dereliction of its duty to provide full and
adequate disclosure include:
- Turquoise Hill refuses to disclose the amount of the
cost overrun for Shaft 2 and the reason for that cost
overrun. As the operator of the
mine, Rio actually works for TRQ and is TRQ’s contractor. In
July 2018, TRQ reaffirmed that Shaft 2 would be completed by the
end of 2018. Just ten weeks later, TRQ announced that there
would be material delays at Shaft 2 that resulted in Shaft 2 not
being completed until October 2019. How much of the
delay was Rio’s fault? How much did the delay of Shaft 2
contribute to the cost overruns? This information is
certainly available to the Company since Shaft 2 was completed over
7 months ago. Why won’t you let your shareholders know the
truth?
- Turquoise Hill refuses to
disclose if it was misled by Rio Tinto regarding the
budget. On March 14, 2019, Turquoise Hill
issued a press release which stated that it expected, “that project
cost was expected to remain within the US$5.3 billion
budget.” Exactly four months later on July 15, 2019,
Turquoise Hill issued another press release which stated that, “the
development capital spend for the project may increase by US$1.2 to
US$1.9 billion over the US$5.3 billion previously disclosed.”
Is it TRQ that was incompetent or Rio Tinto or both? Was
there a coverup or failure to disclose information? Is this
why one of TRQ’s board members resigned 5 days prior to the July
15, 2019 press release? Why won’t you let your shareholders
know the truth?
- Turquoise Hill refuses to
disclose the nature of its alleged $4 billion funding shortfall and
provide sufficient explanation as to how that amount was lowered
from $4.5 billion after just 60 days. TRQ stated in March
2020 that it had a $4.5 billion funding shortfall and then in May
2020 that it had a $4.0 billion funding shortfall. However,
it appears that the $4.0 billion number includes $1.9 billion of
amortization payments and $900 million of power plant
expenditures. Given that the government of Mongolia has
stated that it intends to build its own power plant and that
typically amortization payments can be extended with the payment of
a fee, is the real underfunding amount just $1.2 billion? You
refuse to let your shareholders know the answer. Why won’t
you let your shareholders know the truth?
- Turquoise Hill refuses to
disclose the proposed fee to be paid to Rio in connection with the
potential construction of the power plant.
Pentwater became alarmed last year upon learning that
Rio Tinto requested “several hundred million dollars of fees for
managing and overseeing the construction of the Tavan Tolgoi power
plant.” If true, that is an unacceptable fee and a conflict
of interest. Is this why the government of Mongolia now wants
to build the power plant itself? Why won’t you let your
shareholders know the truth?
We Need Your Support
We are seeking your support at the Company's
upcoming annual and special meeting of shareholders to be held on
July 24, 2020 to restore accountability at Turquoise Hill and give
minority shareholders back their voice.
We encourage our fellow shareholders to consider
the facts and take action against the current culture of
entrenchment, value destruction and misconduct at Turquoise Hill.
The interests of the Company's minority shareholders have been
disregarded for far too long. Your vote is critical to initiate
much-needed change, to restore accountability and to safeguard
minority shareholder interests in Turquoise Hill.
Shareholders are urged to vote only the GOLD
proxy:
- FOR the election of Matthew Halbower to the board of directors
of the Company;
- WITHHOLD in respect of the election of all of the management
nominees to the board of directors of the Company; and
- FOR the adoption of the shareholder proposal submitted by
Pentwater to amend the Company's articles to provide minority
shareholders of the Company with the exclusive right to nominate
and elect three of seven directors to the Board.
Shareholders are urged to read the full text of
Pentwater's proxy circular, related press releases and the June 24,
2020 Letter to the Turquoise Hill Board, which have been filed and
made available under Turquoise Hill's issuer profile at
www.sedar.com.
For further information contact:
MacKenzie Partners, Inc. Daniel Burch – 1-212-929-5748 Jeanne
Carr – 1-917-648-4478Email: SaveTRQ@mackenziepartners.com
Pentwater Capital Management LP
June 24, 2020
Dear Mr. Quellman and Members of the Board of
Directors:
I am writing to you regarding an unacceptable
lack of clarity in your financial disclosures. Turquoise
Hill’s 2019 fourth quarter financial results, released on March 21,
2020, served as the first public disclosure of TRQ’s alleged $4.5
billion estimate of the incremental funding requirement caused by
the delay and capital overrun in the underground development at Oyu
Tolgoi, announced more than 8 months earlier on July 15, 2019. How
the company reached the $4.5 billion figure was not explained in
any of the filings in any clear way. As you know, Pentwater
has made numerous attempts at more transparency from the Company on
this subject.
On the March 23, 2020 earnings call, one analyst
very reasonably asked for the underlying commodity prices that the
Company assumed to get to the very specific $4.5 billion figure.
You refused to answer the question. Upon being asked whether
the figure included the $924 million that the power plant would
cost if the Company fully financed and built it, you also did not
directly answer the question, but seemed to imply that it was
included. This is despite the fact that the government of Mongolia
has recently stated its intention to build the power plant by
itself, which, if accurate, would mean the Company will not have to
finance it. Finally, in response to yet another question,
management did directly confirm that the $4.5 billion figure
includes $1.9 billion of debt amortization repayments due over the
next five years.
Less than two months later, as part of the 2020
first quarter financial results released on May 13th, 2020, the
Company lowered its estimate of the incremental funding requirement
to $4.0 billion. The Company has since refused to re-affirm
the principal repayment figures included in the underfunding gap.
The fact that $1.9 billion of the remaining $4.0 billion of
underfunding are principal repayments that could easily be
negotiated into outer years is a highly material piece of
information that any transparent and thoughtful management team
would emphasize. Pentwater has asked you on numerous
occasions to provide clarity in this disclosure. You have
refused.
If the statements you have made on your earnings
call and disclosures are accurate, it appears to Pentwater that if
debt amortizations payments are extended and the government of
Mongolia does in fact construct its own power plant, the amount of
incremental financing needed is as follows:
|
|
$4,000 (claimed underfunding) |
|
|
- |
$1,917 (debt
amortization) |
|
|
- |
$ 924 (power plant
costs) |
|
|
= |
$1,159 (actual
underfunding) |
|
If accurate, this paints a drastically different picture of the
situation than the $4.5 billion figure provided by TRQ in March of
2020 or the $4.0 billion figure provided by TRQ in May. It
also is quite relevant since according to a TRQ press release dated
March 14, 2019, the existing project financing arrangements provide
OT the ability “to raise additional supplemental debt of up to $1.6
billion at the same attractive terms.” It appears to
Pentwater that simply moving forward with the supplemental
financing and extending amortization payments at the same time
would likely fill TRQ’s needed financing.
Unfortunately, you refuse to confirm or deny any
of this. Is it Rio’s goal to scare market participants into
selling their shares to keep the price of TRQ shares artificially
low? Your complete failure to provide adequate disclosure on
this matter is yet another example of how TRQ’s board and
management team are not independent and are fully beholden to Rio
Tinto – a majority shareholder that not only operates the mine but
with whom the Company also happens to currently be negotiating
various financing options.
TRQ minority shareholders deserve representation
on the Board. Without any minority shareholder representation
on the Board, there will continue to be lack of transparency and
disclosure on TRQ’s part in regard to any incremental funding
requirements. And until additional such transparency is provided,
Pentwater must prudently assume that the Company might be purposely
obfuscating and misleading the public markets on its true
underfunding needs to the benefit of its majority shareholder’s
position in financing discussions.
Regards,
Matthew HalbowerChief Executive OfficerPentwater
Capital Management
Turquoise Hill Resources (TSX:TRQ)
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