Mining group Rio Tinto has been accused by a US hedge fund of concealing the real cause of the delays that have held back its most important project.
In documents filed in New York as part of a class-action lawsuit, Pentwater Capital Management claims senior executives at Rio Tinto and its subsidiary Turquoise Hill Resources (TRQ) knew the $6.75bn expansion of the Oyu Tolgoi copper mine in Mongolia was in trouble months before the problems were disclosed to investors.
The 163-page complaint, which contains information from several managers at Oyu Tolgoi, comes as the London-based miner holds face-to-face talks with the government of Mongolia in Ulan Bator over a new financing agreement for the project. If they cannot reach a deal, the latest schedule for the mine could be at risk.
The underground expansion of Oyu Tolgoi is Rio’s most important growth project. At peak production, it will be one of the world’s biggest copper mines, producing almost 500,000 tonnes a year.
Although Rio is in charge of the expansion, it does not have a direct stake in the mine. Instead, it owns a 51 per cent stake in Toronto-listed company TRQ, which in turns owns 66 per cent of Oyu Tolgoi. The rest is owned by the government of Mongolia.
In its filing, Pentwater claims that as soon as work on the underground mine resumed in 2016 after a disagreement with the government was resolved, the project was “plagued with serious delays and cost overruns as a result of deficient engineering, procurement, and construction” by Rio and other contractors on a critical mine shaft.
“As a result . . . managers were effectively forced to rebuild much of Shaft 2 from scratch — a project that required workers to replace more than 40,000 bolts and approximately 95 per cent of the steel in the shaft’s headframe — and predictably caused costs and schedule delays to skyrocket,” the complaint said.
Despite being informed of these and other problems throughout 2017 and 2018, Pentwater claims that Rio and TRQ continued to tell investors the project was on track for a capital cost of $5.3bn and would achieve first production in the first quarter of 2021.
It was not until July 2019 that Rio announced the project would require an additional $1.2bn to $1.9bn in capital and was 16 to 30 months behind schedule.
Pentwater said that even then Rio “refused to come clean”, blaming the cost overruns on “unexpected and challenging geotechnical issues” and “complexities in the construction of Shaft 2”.
“In reality, the problems with Shaft 2 were internally documented, well known, and had been the subject of at least two whistleblower complaints,” the document said.
The complaint quoted a senior manager who worked at Oyu Tolgoi from 2013 to 2019 for mining contractor Redpath, saying the notion that geological issues were the primary cause of the delays was “one hundred per cent pure horseshit”.
″Rio Tinto believes that the complaint is without merit,” the company said. It is seeking to have the case dismissed. TRQ could not be immediately reached for comment.
Pentwater is the biggest minority shareholder in TRQ and lead plaintiff in a class-action lawsuit. It is seeking damages for investors who bought TRQ shares in the belief the project was progressing on time and on budget.
First production at the underground mine is now expected in October 2022.
