Turquoise Hill gets proxy backing in shareholder row

Turquoise Hill Resources (TSX, NYSE: TRQ) announced Friday that proxy advisory firm Glass Lewis has endorsed the company’s rejection of the candidacy of Pentwater Capital Management nominee Matthew Halbower for its board.

Pentwater, a US-based hedge fund and currently Turquoise Hill’s largest minority shareholder, has been raising concerns about the company and its governance over the past few months, alleging it had made “inadequate and misleading disclosure of important financial information.”

The fund, which has a 9% interest in Vancouver-based Turquoise Hill, said it had become increasingly worried at the mismanagement of an underground expansion of the mine and the timing of market disclosures.

Turquoise Hill said it intends to further progress its engagement with several key stakeholders, including Rio Tinto, to address the longer-term funding requirements of the massive Oyu Tolgoi copper project in Mongolia, which has been plagued with cost overruns.

Specifically, Pentwater questioned the mining firm’s publicly stated improved liquidity position and the veracity of its $4 billion funding shortfall.

Calling for improved transparency and mitigation of conflicts of interests, Pentwater then nominated Halbower — its founder and CEO — to replace Russell Robertson, one of the longest tenured directors on Turquoise Hill’s board.

Earlier this week, Pentwater received a positive recommendation from proxy firm ISS for Halbower’s election to the board, stating that the dissident has highlighted “legitimate concerns around governance, delays, cost overruns and the company’s disclosure regarding the gravity of funding shortfalls,” and that “the company’s history of communication with minority shareholders is of particular concern.”

However, Turquoise Hill has dismissed Pentwater’s accusations, saying “they are without merit” and part of a campaign in which the shareholder seeks to paint an inaccurate picture of the board and management of the company.

“The board believes the disruptive actions taken by Matt Halbower on behalf of Pentwater coupled with the inattention to properly assess critical information demonstrate a lack of understanding of the mining industry and the complexities of the Oyu Tolgoi project. This highlights concerns that the board had and reaffirms the decision to reject his candidacy,” the company said in a press release.

In its report issued this week, Glass Lewis wrote that Turquoise Hill’s governance framework and board composition “appear to facilitate appropriate independence” within the context of a controlled company, including appropriate safeguards to protect the interests of minority shareholders and to manage conflicts of interest with Rio Tinto, its majority shareholder.

The advisory firm also pointed out that Pentwater “has failed to provide a convincing argument that the board suffers from a lack of independent directors or that the director selection process is actually controlled by Rio Tinto.”

“While Turquoise Hill experienced a decline in shareholder value in recent years and has faced challenges developing the Oyu Tolgoi project, we do not believe the dissident has made a credible argument that these issues are the result of mismanagement or poor oversight. We recognize that Oyu Tolgoi is a large complex project with considerable risks and development uncertainties and that the project’s cost overruns compare favourably with cost overruns at similar projects,” Glass Lewis added.

In May, Turquoise Hill announced that the planned expansion of the copper-gold project may require an additional cost of $1.8 billion due to geological challenges. It recently slashed the mine’s reserve estimate to reflect the changes in mine plan.

Production guidance raised

Meanwhile, Turquoise Hill has raised its gold production guidance for 2020 to 155,000-180,000 ounces, up from its previous guidance of 120,000-150,000 ounces, while copper production remains on track to achieve guidance of 140,000-170,000 tonnes.

The company also lowered its C1 cost guidance range for copper to $1.60-$2.00/lb from $1.80-$2.20/lb due to the positive impact from the increased 2020 gold production forecast.

As a result of cash cost reduction initiatives, the 2020 operating cash cost range has also been reduced to $780-$830 million from $800-$850 million.

Turquoise Hill says it had $1.5 billion of available liquidity as of June 30, which is expected to meet operations and underground development requirements into early 2022.