On 9 December is shaping up to be a big day for Jakob Stausholm. Just ahead of his two-year anniversary as Rio Tinto’s chief executive, he will learn the fate of the mining giant’s tortuous efforts to buy out minority investors in Turquoise Hill Resources, the majority owner of a flagship project in Mongolia. Success would give the growth strategy a real boost; failure could mean senior heads roll.
Oyu Tolgoi, a USD 10 billion copper and gold mine near the Chinese border, is an epic saga dating back more than a decade. When it eventually scales up, it will be the world’s fourth largest excavator of the red metal. It has long been saddled with an unwieldy corporate structure, which involves Mongolia controlling 34 percent and Canada-listed Turquoise Hill, in which Rio holds a majority stake, owning the rest.
Cleaning up that structure prompted Stausholm to take two expensive steps. With Mongolia’s entire GDP a mere USD 15 billion, the country’s equity stake was only made possible by over USD 2 billion of historic loans owed to Turquoise Hill. The costs of repaying that debt and the accrued interest meant Ulaanbaatar stood to wait decades before receiving dividends from its own project. To stem political blowback regarding Rio’s alleged poor performance as the mine’s operator, Stausholm agreed a year ago to write off that debt.
Buying out the Turquoise Hill minority shareholders is Stausholm’s other initiative. Rio’s 51 percent ownership means it already consolidates USD 4 billion of the related Oyu Tolgoi debt onto its balance sheet. A successful deal would allow it to keep more of the earnings and increase Rio’s global copper production by 50 percent to around 900,000 tonnes by 2028. It also would be a way to rid Rio of similar complaints about its operational performance from the minority shareholders.
The process has been a shambles. Before Stausholm’s first offer in March, Turquoise Hill shares had been trading around C$25 ($18.35) apiece, valuing the equity at USD 3.7 billion. Some owners, including Pentwater Capital Management, which now holds a 15 percent stake, spurned the initial 36 percent premium. They also dismissed a sweetened C$40 bid. Even when Rio divulged its final offer of C$43 a share in September, valuing the company at USD 6.7 billion, Pentwater and another refusenik, SailingStone Capital, demurred. Determining the fair value has multiple answers, but the dissenters have come close to reaching the simple majority of non-Rio shareholders needed to block the deal.
Then things got really silly. In desperation, Stausholm deployed a peculiarity of Canadian securities law allowing Pentwater and SailingStone to have their Turquoise Hill valuations determined by an arbitration process, in return for sitting out the vote. While it wasn’t certain that process would award them much more, other shareholders feared the risk of an exclusive sweetheart deal was too great. Canadian regulators decided to investigate, which delayed the ballot yet again. On 18 November, Rio reversed course and scrapped the whole side deal.