Turquoise Hill CEO exits amid tension with Rio Tinto over funding of Mongolian copper mine

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Turquoise Hill Resources Ltd.’s chief executive officer Ulf Quellmann has resigned after months of tension between the company and Rio Tinto , its biggest shareholder, over the funding of its troubled Oyu Tolgoi copper-gold mine in Mongolia.

The Montreal-based company and London-based Rio, one of the world’s biggest diversified miners, ended up in arbitration after they couldn’t agree on how the giant underground operation should be financed.

Relations deteriorated so much that Rio recently informed Turquoise Hill it intended to vote against Mr. Quellmann in the coming annual general meeting. In a statement on Thursday, Turquoise Hill said that it was in Mr. Quellmann’s and the company’s best interests if he stepped down.

Steeve Thibeault, who was chief financial officer of Turquoise Hill for about three years until April, 2017, is coming back on an interim basis to serve as CEO while the company looks for a permanent candidate.

“Rio Tinto is supportive of the re-set in leadership at Turquoise Hill and is committed to working collaboratively and proactively with both Turquoise Hill and the government of Mongolia to enable the successful delivery of the Oyu Tolgoi project,” Rio spokesperson Matthew Klar wrote in an e-mail to The Globe and Mail.

The swift departure of Mr. Quellmann is the latest chapter in what has been a rocky couple of years for Turquoise Hill and Rio, which owns 51 per cent of the stock. Originally called Ivanhoe Mines Ltd., Turquoise Hill was founded by well-known junior mining promoter Robert Friedland. Rio’s involvement dates to 2006, when it helped finance the early development of Oyu Tolgoi. By 2011, shares in the company climbed north of $287, amid heavy promotion that Oyu Tolgoi was destined to soon become one of the world’s biggest copper mines. But after close to a decade of disappointments, delays and cost overruns, the shares have crashed by more than 90 per cent.

In 2019, Turquoise Hill shocked investors by increasing the capital cost projections for the underground expansion of the mine by as much as US$1.9-billion to US$6.8-billion. Turquoise Hill also delayed the startup date by about two years.

With Turquoise Hill facing a multibillion-dollar funding shortfall, Rio last year encouraged it to raise equity. But the company pushed back, worried that a sizeable equity raise would give Rio an even tighter ownership grip, and edge out vocal minority shareholders. Turquoise Hill in December unveiled a number of funding options, weighted heavily toward non-dilutive debt structures, such as a streaming deal and a notes offering.

In a note to clients, Scotia Capital Inc. analyst Orest Wowkodaw wrote that the ouster of Mr. Quellmann was a negative development for the share price because a dilutive equity raise is now much more likely with a Rio-approved CEO in charge.

“The replacement of Mr. Quellmann significantly reduces the likelihood of a non-dilutive [gold] streaming transaction to complete the development funding,” he wrote.

Mr. Wowkodaw estimates that about half of the US$2.5-billion financing needed will come from debt and the remainder from an equity raise, which he says could be priced at $15 a share, or about 16.5 per cent below its market price.

On Thursday, shares of the company fell by 9.5 per cent in trading on the Toronto Stock Exchange to close at $17.96.

Apart from clashes with its biggest shareholder, Turquoise Hill has also sparred with the Mongolian government, which owns 34 per cent of the project. Because of various delays, the timeline for the government to start earning royalties on the mine has been pushed back considerably. On two separate occasions, Mongolia has claimed Turquoise Hill owes it hundreds of millions of dollars in back taxes.

Scotia’s Mr. Wowkodaw expects that relations with Mongolia will improve with the departure of Mr. Quellmann.

“The appointment of a more Rio-friendly CEO likely accelerates the process to negotiate funding and a new partnership agreement with the government of Mongolia,” he wrote.

Rio Tinto itself is also under new leadership, naming Jakob Stausholm as CEO in January. Rio’s previous CEO, Jean-Sébastien Jacques, was forced to step down after an international backlash over the miner’s decision to destroy a 46,000-year-old Indigenous site in Australia to make way for an iron ore mine.

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