Canadian copper miner Turquoise Hill Resources Ltd. is invoking force majeure related to its Chinese contracts for metal shipments from its Mongolian mine, amid COVID-19 border restrictions, and several employees testing positive for the deadly virus.
Force majeure is a clause that allows companies to limit certain legal liabilities in the face of an unforeseen catastrophe, such as a once-in-a-century pandemic.
The Montreal-based miner operates the Oyo Tolgoi copper and gold complex in Mongolia, a landlocked country in Asia that borders Russia to the north, and China to the south.
On Tuesday, Turquoise Hill said in a news release that COVID-19 restrictions have resulted in delays in border crossings between China and Mongolia, affecting the shipment of copper concentrate from Oyo Tolgoi, and the movement of workers from the capital city Ulan Bator to the mine site. In addition, the company said two people have tested positive for the virus at the mine site, after it conducted almost 10,000 tests.
The development is the latest in a litany of setbacks for the miner over the past few years, which have included a massive capital blowout at Oyo Tolgoi, a public dustup with its biggest shareholder, and the recent sudden departure of its chief executive officer.
Rick Rule, an extractive industry investor, and former CEO of Sprott U.S. Holdings Inc., said that due to intense volatility, Turquoise Hill has become a no-go investment for the vast majority of investors, however, for a small subset of speculators, it is tempting.
“People who have the intestinal fortitude to suffer loss in hopes of gain do well to pay attention to stories that everybody else is afraid of, and this is one certainly that everybody’s afraid of,” Mr. Rule said.
“I think it’s a superb speculation.”
The Oyo Tolgoi mine started open pit mining in 2011, and was once promoted by company founder Robert Friedland as one of the most promising new copper deposits in the world. But in 2019, the company shocked investors by jacking up the capital cost projections for its underground expansion by US$1.9-billion to about US$6.7-billion. Management also repeatedly clashed with Rio Tinto, its biggest shareholder, about how to fund a multibillion-dollar capital shortfall. Years of tension came to a head last month with the departure of Turquoise Hill’s chief executive officer, Ulf Quellmann, who was replaced by Steeve Thibeault. The Rio-friendly appointee came out of retirement to take over the CEO position, and had previously served as chief financial officer of Turquoise Hill.
The company has also clashed with its other major stakeholder, the Mongolian government, which owns a 34-per-cent stake in the mine. On more than one occasion, Mongolia has claimed that Turquoise Hill owed it hundreds of millions of dollars in back taxes. The government is also looking at tinkering with the profit-sharing agreement around Oyo Tolgoi, after its timeline to start earning royalties on the expansion was pushed back by about two years because of various delays.
One thing working in Turquoise Hill’s favour at the moment is the materially higher copper price. The industrial metal has been one of the best-performing commodities this year, thanks to a snapback in Chinese demand, a recently passed US$1.9-trillion stimulus in the United States, and supply snafus in South America. Copper on Tuesday closed at US$3.99 a pound, up more than 75 per cent in the past year. Thanks to higher cash flows from copper, Turquoise Hill earlier this month said its funding shortfall for the mine expansion had fallen to US$2.3-billion, compared with US$3-billion.
“This could all magically work out,” said Joe Mazumdar, editor of investment newsletter Exploration Insights. “But there seems to be too many slings and arrows coming from multiple directions.”
“I would probably stay away,” he added.
Shares in Turquoise Hill were flat on Tuesday, closing at $20.27 apiece on the Toronto Stock Exchange.
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