Turquoise Hill investor denounces Rio Tinto’s deal with dissidents as unfair for other minority shareholders

Globe and Mail

PUBLISHED NOVEMBER 2, 2022

Rio Tinto PLC RIO-N +3.47%increase is being criticized for unfair treatment in its quest to buy Turquoise Hill Resources Ltd., after a select group of dissident shareholders were offered a potentially sweetheart deal, and the rest of the minority investors an amount that could turn out to be significantly less.

On Tuesday, London-based Rio said it had reached an agreement with Pentwater Capital Management LP and SailingStone Capital Partners LLC, under which they would be paid out 80 per cent of the takeover amount being offered to all Turquoise Hill shareholders, but potentially much more over time, depending on a ruling from an arbitrator.

“This is unbelievable,’’ said Jeff Banfield, partner with Bahamas-based hedge fund Caravel Capital Investments Inc., which is a Turquoise Hill shareholder. “The more we read into it, the more we are completely obliterated with shock.”

Rio Tinto deal with dissident shareholders clears path for $4.2-billion takeover of Turquoise Hill

Montreal-based Turquoise said on Wednesday that a special committee of its board learned on Sunday of Rio’s plans to cut a side deal with Pentwater and SailingStone. The committee suggested that the giant Anglo-Australian miner offer the same deal to all of its minority shareholders, but Rio quashed that idea.

Caravel is now mulling filing a complaint with both the Ontario Securities Commission and Quebec’s l’Autorité des marchés financier on fairness grounds.

Dissent rights for shareholders such as Pentwater and SailingStone exist for all takeovers of publicly traded Canadian companies, and give shareholders the right to challenge the fairness of a takeover price through the court system; however, they are rarely invoked.

“The dissenting shareholder clause is an extraordinary, obscure and archaic exception from the takeover rules, which I assume is why it has been so infrequently used,” Peter de Auer, a veteran financial-services professional and former director with Ontario Hydro Pension Fund, said in an e-mail to The Globe and Mail.

Fighting dissent claims through arbitration can be more expeditious than the court system, but is always more expensive. In the case of both Pentwater and SailingStone, it will likely cost both companies millions of dollars in fees to see the matter through to a conclusion.

However, the pair, which own around 16.7 per cent of Turquoise Hill shares, are betting that the arbitrator will rule that the takeover price for Turquoise is too low, and award an amount that is far and above the current $43-a-share takeover offer. The dissidents aren’t alone in believing the takeover price is too low. Scotia Capital Inc. argued that the fair market value of Turquoise Hill was closer to $50 a share.

Rio declined to comment for this story.

Heading into the Turquoise Hill shareholder meeting Tuesday on the deal, Rio had been adamant that it wouldn’t raise its takeover offer to assuage the dissidents. But barely 30 minutes before the start of the meeting, Turquoise pushed it back by a week, revealing later that it was motivated by the deal with the dissidents.

The drama was yet another turn in what has been a contentious and eventful deal since the get-go. Originally announced in March, Rio had to revise its takeover price for the 49-per-cent share in Turquoise Hill it doesn’t already own, higher on two occasions to bring the board around.

Despite the bump in price, Pentwater and SailingStone both denounced the $4.2-billion offer as far too low. Proxy advisory firm Institutional Shareholder Services also criticized the transaction and advised shareholders to vote against the deal. ISS said that over the long term, shares in Turquoise Hill are poised to trade dramatically higher than the takeover offer, owing to its exposure to the massively growing Oyu Tolgoi copper mine.

Turquoise Hill owns a 66-per-cent stake in the mine, with the Mongolian state holding the remainder. The deposit was discovered and initially developed by famed mining financier Robert Friedland.

Rio Tinto first invested in the company in 2006. Oyu Tolgoi went into production in 2011 as an open-pit mine but it was eventually plagued by multibillion-dollar capital-cost overruns, lengthy delays, disagreements between Rio and Turquoise about funding, and tax disputes with the government of Mongolia. Those problems have since been largely overcome and a major underground expansion of the project is planned over the next few years.

Shares in Turquoise Hill closed on Wednesday at $42.17 each on the Toronto Stock Exchange, just 83 cents shy of the takeover offer from Rio, suggesting that investors believe the deal is highly likely to get the nod from shareholders next week.