Turquoise Hill's dispute with Rio Tinto's copper mine in Mongolia explained

TORONTO (Reuters) - Canadian mining company Turquoise Hill Resources Ltd is locked in a feud with its largest shareholder, Rio Tinto Plc, over the underground expansion of its massive Oyu Tolgoi copper mine in Mongolia.

Tensions between mine operator Rio and Turquoise Hill's management and minority shareholders have spilled into the open in recent months. Rio owns 51% of Turquoise Hill, which in turn owns 66% of the mine.

Here is an explanation of the dispute.

 

WHAT IS OYU TOLGOI?

Oyu Tolgoi is one of the world's largest-known copper and gold deposits, located in the South Gobi region of Mongolia. The Mongolian government holds a 34% stake in the project with Rio's majority-owned Turquoise Hill owning the rest.

Open-pit mining began in 2011. First production from the underground expansion is slated for 2022, climbing to 500,000 tonnes of copper per year at full capacity in what would make it the world's third-largest copper mine.

 

WHAT WILL THE EXPANSION COST?

Rio in 2019 announced a 30-month delay and a cost overrun of up to $1.9 billion due to difficult geology, putting total expenditures in a range of $6.5 billion to $7.2 billion.

Costs for a coal-fired power plant to supply power to the mine would come on top of that figure.

 

WHY ARE MINORITY SHAREHOLDERS UPSET?

Turquoise Hill in November launched arbitration proceedings against Rio, saying the miner's approach to funding the expansion is "incompatible" with its own.

Rio in September said it would borrow $500 million to develop the mine, with any remaining funding gap met by a Turquoise Hill stock offering.

Turquoise Hill shareholders fear that would allow Rio to take a greater stake in Turquoise Hill that underplayed its full valuation.

Pentwater Capital, which holds a 9.23% stake in Turquoise Hill, and Sailingstone Capital Partners, which holds 3%, accuse Rio of mismanaging costs and unfairly restricting Turquoise Hill's ability to obtain financing to pay for those costs.

The Canadian mining company wants to extend the timeline it has to repay some debt while also exploring other funding options, including a possible gold stream, to delay or avoid a stock offering.

 

WHAT HAPPENS NEXT?

Turquoise Hill has said arbitration, which could take up to five months, would provide needed "clarity" on mine financing. It said on Dec. 1 that the board of Oyu Tolgoi had approved forming a special committee to conduct an independent review of cost overruns and delays at the mine.

An outside firm of experts is to report to the special committee within six months of commencing the investigation, according to the company.

Rio declined comment.

Turquoise Hill has said it would need to raise $1.1 billion via bank debt, bonds or a metal stream if it and Rio extend the timeline to repay existing loans and raise new debt as planned.

However, the Canadian mining company said it may need to issue at least $3 billion of additional stock, if it cannot amend its debt repayment terms or secure other financing.

 

(Reporting by Jeff Lewis; Editing by Ernest Scheyder and Will Dunham)