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Rio Tinto attacked by hedge fund Odey over Oyu Tolgoi financing

Published: 06:31 25 Nov 2020 EST

Rio Tinto PLC -
Oyu Tolgoi contains copper and gold

Rio Tinto PLC (LON:RIO) has been urged to come clean over financing plans for the huge Oyu Tolgoi mine in Mongolia run by 50.8% owned subsidiary Turquoise Hill.

Hedge fund manager Odey today published a letter written to the mining giant’s board expressing its concerns about the fairness of the financing package surrounding Oyu Tolgoi and the sustainability of the agreements with Mongolia’s government.

Reports have suggested Rio and Turquoise Hill are at loggerheads over ways to fill a funding gap to build the underground operation at the huge deposit.

Rio Tinto said in September it would raise funds for Oyu Tolgoi by rescheduling existing debt repayments subject to an equity raise by Turquoise Hill after the estimated cost of developing the underground operation ballooned by 40% to nearly US$7bn.

Turquoise Hill, though, is said to want to avoid issuing shares due to possible dilution of minority shareholders.

Fund manager Odey, which is a shareholder in Rio and has a short position in Turquoise Hill, says the US$4.4bn of project finance currently in place for Oyu Tolgoi is too advantageous for the lenders as it comes with a guarantee from Rio.

“The lenders have better security than a Rio Tinto bondholder: not only do they have a Rio Tinto corporate guarantee, but they also have first-lien security over the Oyu Tolgoi asset.

“Despite this, the lenders are indirectly charging Rio Tinto substantially more[ than a Rio Tinto bondholder of matching duration.”

Odey added it wants Rio Tinto to remove the project finance package at Oyu Tolgoi altogether and confirm if it intends to seek to refinance these US$4.4bn of loans through a rights issue.

The hedge fund also believes that the funding required for the project is US$4.5bn more than currently estimated, which with the replacement of the exiting project finance would mean a rights issue of US$8.9bn.

Canada-based Turquoise Hill believes the good performance of the open-pit mine currently operating at Oyu Tolgoi allied to higher copper and gold prices means it will need less cash than expected and that any sum can be covered by debt.

Odey, which presumably would see its short position in Turquoise Hill gain from any large dilutive share issue, urged Rio Tinto to break a non-comment clause about a right issue by its subsidiary and give shareholders an update on the situation.

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