Pentwater Issues Public Letter on Corporate Governance to Rio Tinto Director Ben Wyatt
19 November 2021 - 1:00AM
Business Wire
Pentwater Capital Management LP ("Pentwater"), the
largest minority shareholder of Turquoise Hill Resources Ltd.
("Turquoise Hill") (TSX:TRQ) (NYSE:TRQ), wrote the following
letter to Rio Tinto plc (“Rio Tinto” or “Rio”)
(LSE:RIO) Director Mr. Ben Wyatt and the rest of the Rio Tinto
Board. Unfortunately, neither Mr. Wyatt nor any other member of the
Rio Tinto Board has responded to explain the continued corporate
governance breaches Rio Tinto continues to inflict upon Turquoise
Hill minority shareholders.
Dear Mr. Wyatt,
I write on behalf of Pentwater Capital Management, LP
(“Pentwater”), the largest minority shareholder of Turquoise Hill
Resources Ltd. (“TRQ”) to ensure that you are personally aware of
how flagrantly your fellow members of the Rio Tinto board have and
continue to breach all reasonable standards of appropriate
corporate governance with regard to Rio’s controlled subsidiary,
TRQ.
I am reaching out directly to you because you recently joined
the Board of Rio Tinto after your retirement from the Western
Australia Parliament. Given your notable interest in the rights of
indigenous peoples, I assume that when you joined the boards of
large corporations like Rio Tinto and Woodside Petroleum this year,
your intention was to guarantee good governance and ensure the
protection of the countries in which these companies operate.
When new board members take their seats, there is often the
temptation to defer to the other, more “experienced” board members
and C-suite corporate management types and to give the benefit of
the doubt, at least for a time, to the corporate culture of the
company one has joined. In the case of Rio Tinto, this would be a
grave mistake, especially because you are legally and
reputationally responsible for all decisions the Board collectively
makes from your first day as a Director.
Of course, you have intimate knowledge of Rio’s brazen actions
in Australia in regard to the Juukan Gorge, and I assume you are at
least aware of other misconduct and resulting criminal and other
government investigations across the globe, all of which at least
occurred or were initiated well before you joined the Board. But
there is one instance of flagrant, unacceptable corporate
governance on the part of Rio that is coming to a head under your
watch: Rio’s mismanagement and resulting coverup at the Oyu Tolgoi
mine, at the cost of the people of Mongolia and TRQ minority
shareholders.
TRQ owns 66% of the entity that owns the Oyu Tolgoi mine in
Mongolia. The Government of Mongolia owns the other 34%. Rio
Tinto’s interest in the mine is exclusively through TRQ. As TRQ’s
majority shareholder, however, Rio Tinto has controlled the
election of TRQ’s board of directors, has selected TRQ’s management
team and generally exerts absolute control over all of TRQ’s
actions. Rio Tinto’s interests in the mine, however, are
conflicted, as Rio also serves as the mine’s contractor and TRQ’s
primary negotiator with the Government of Mongolia. Remarkably,
even in purported negotiations between Rio Tinto and TRQ regarding
the mine, the TRQ representatives “negotiating” with Rio are often
merely Rio Tinto employees temporarily seconded to TRQ. Rio has
refused all attempts by minority shareholders of TRQ to have
representation on the board.
At this very moment, Rio is in negotiations with the Government
of Mongolia to compensate the government (which owns 34% of the Oyu
Tolgoi mine) for the cost overruns and schedule delays caused by
Rio Tinto. Hopefully you are aware that an independent group of
experts, consisting mostly of mining experts formerly employed by
Rio on the Oyu Tolgoi project, has already found that Rio Tinto
itself was responsible for the $1.5 billion cost overrun and two
year schedule delay. In addition, this same group of experts found
that Rio hid these facts from both the government and shareholders.
If you haven’t been provided with a copy of the nearly 200 page
report, we encourage you to ask Rio’s management team for a copy.
The report concludes that, “[Rio’s] lack of a comprehensive,
overall project management and project controls team, beginning
during project preparation and restart, is the fundamental reason
for the project delay and cost overruns.” (ICG Peer Report, p.
17)
The key thing that has made the negotiations so difficult with
the government of Mongolia is that Rio both failed to be honest
about the schedule delays and cost overruns at the time they were
happening and then ultimately fabricated a story about adverse
geotechnical conditions to cover up its own lies and mismanagement.
The report had the following to say on this topic:
- “The project began to fall behind schedule almost from the
beginning. The sinking (and commissioning) of Shafts #2 & #5
was critical to completing HNL1 on schedule. Shaft #2, critical to
support development and construction activities for the project,
was completed 461 days behind schedule. This caused a delay in the
mobilization of development crews, which is the fundamental reason
that mine development is behind schedule. The project team never
recovered from this delay.” (ICG Peer Report, p. 5)
- “It is inconceivable that Senior Management both on the Project
site and in the higher-level committees were not aware of these
shortcomings, as reports were generated on a regular basis by the
schedulers who were working in the Project Controls section and by
the relevant area managers. But there was also a culture on site
that did not welcome negative albeit actual, reporting.” (ICG
Report, p. 92)
- “ICG does not consider ground support variances due to design
changes Key Geotechnical Parameter changes. The Rio Tinto statement
that these isolated poorer than expected ground conditions
significantly impacted the schedule is misleading and not supported
in the documents reviewed.” (ICG Report, p. 111).
- In August 2018, Rio Tinto had its consultant, Broadleaf,
conduct a range analysis of chances that the base date of 28 May
2021 for Sustainable Production “had a zero likelihood of being
achieved.” (ICG Report, p. 44).
It has been publicly reported that a compensation package of
over $2 billion has been offered to the government of Mongolia.
Obviously, since Turquoise Hill (owner of 66% of the mine) has been
harmed by Rio’s concealed mismanagement just like the Mongolian
government, it is natural that Turquoise Hill should be compensated
as well. However, Rio is not compensating Turquoise Hill at all.
Instead, Rio Tinto is requiring TRQ to pay the compensation that
Rio should be paying to the government of Mongolia. Press reports
have stated that TRQ will be forgiving $1.6 billion of debt owed by
Mongolia to TRQ as compensation for Rio’s lies and
mismanagement.
This is outrageous. If Rio’s lies and mismanagement harmed
the owners of the Oyu Tolgoi mine, then all the owners of the mine should be compensated.
Rio should not be permitted to use its influence and control over
TRQ to get TRQ to pay $1.6 billion for the damages Rio’s actions
caused. TRQ minority shareholders are victims because of both the
billions of dollars lost due to Rio’s concealed mismanagement of
the underground construction and the billions of dollars that Rio
is forcing TRQ to pay to the government of Mongolia to compensate
it for Rio’s mismanagement.
Your resume suggests that you should care about corporate
governance and the protection against exploitation of the citizenry
of countries in which Rio Tinto operates. Among your accolades, you
have been awarded the Australian Defense Medal. You also served as
a lawyer in top Australian law firms and in the Office of the
Director of Public Prosecutions. Perhaps most notably, you have
served as the Western Australia Treasurer and Minister of
Aboriginal Affairs, an awesome responsibility. You have broken
glass ceilings for others who will follow in your footsteps and
have demonstrated a dedication to public service that is
admirable.
You were also criticized by some for joining the board of Rio
Tinto; it is perhaps understandable why some might see your joining
a bad corporate actor like Rio Tinto -- especially so soon after
leaving public service where you were an outspoken defender of
indigenous rights -- as concerning. To us, the fact that you joined
Rio Tinto so soon after your retirement from public service could
be read in one of two ways. Either you are using your social
capital to obtain lush board seats, or you are a true reformer,
believing that you can bring true change to the corporate culture
of Rio Tinto and, thereby, greatly improving society. We hope that
you are the latter.
In the next few weeks, there will likely be a compensation
agreement reached with the government of Mongolia. As such, you
will be forced to make a decision. Will you vote to allow Rio to
continue to exert its complete control over Turquoise Hill to force
Turquoise Hill and its minority shareholders to pay for Rio’s
mismanagement and dishonesty? Or will you be an advocate for good
corporate governance and use your voice to make sure that Rio does
not force TRQ to pay over $1.6 billion to the government of
Mongolia as compensation for Rio’s lies and project
mismanagement?
It is unfathomable to us that you would jeopardize and forever
blemish your otherwise commendable and storied resume as a fighter
for the good and moral side of history, all for the sake of going
along with the immoral actions undertaken by your fellow Board
members and Rio Tinto management. This is why Pentwater is hoping
that you can be one of the few people at Rio who actually starts to
clean up the current culture of corruption and put in its place a
genuine goal of operating Rio’s business honestly. What you decide
will surely have significant consequences.
I would be very pleased to speak with you anytime regarding
these matters to provide you with all of the information that I
have learned over the past decade that we have invested in TRQ and
Rio Tinto.
Kindest Regards,
Matthew Halbower Chief Executive Officer Pentwater Capital
Management
Cc: Members of the Board of Directors of Rio Tinto plc
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version on businesswire.com: https://www.businesswire.com/news/home/20211118005500/en/
David Zirin- Chief Operating Officer Pentwater Capital
Management 312-589-6401
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