In re Turquoise Hill Res. Sec. Litig.
| Decision Date | 02 September 2022 |
| Docket Number | 20-cv-08585 (LJL) |
| Parties | IN RE TURQUOISE HILL RESOURCES LTD. SECURITIES LITIGATION |
| Court | U.S. District Court — Southern District of New York |
Plaintiffs the Pentwater Funds bring a putative class action for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Securities and Exchange Commission Rule 10b-5 against Turquoise Hill Resources Ltd. (“Turquoise Hill”) Rio Tinto plc and Rio Tinto Limited (together, “Rio Tinto” or “Rio”), Rio Tinto International Holdings Limited (“RTIH”), Jean-Sebastien Jacques (“Jacques”), Arnaud Soirat (“Soirat”), Ulf Quellmann (“Quellmann”), Luke Colton (“Colton”), and Brendan Lane (“Lane”) (collectively, “Defendants”).
Defendants move to dismiss the Second Amended Consolidated Complaint (“SAC” or the “Complaint”). Dkt. Nos 129, 132.
The Court accepts as true for purposes of this motion the well-pled allegations of the SAC as supplemented by the documents incorporated by reference.
Turquoise Hill is a mineral-exploration and development company headquartered in Montreal, Quebec, Canada, and a majority-owned subsidiary of Rio Tinto. Its sole business is the operation and development of the Oyu Tolgoi copper-gold mine in southern Mongolia, the company's only material mineral-resource property. Dkt. No. 127 ¶¶ 38, 58. Its common stock trades on the New York Stock Exchange and the Toronto Stock Exchange (and previously also traded on the Nasdaq) under the ticker symbol “TRQ.” Id. ¶ 41.
Quellmann was the Chief Executive Officer (“CEO”) of Turquoise Hill from August 1, 2018 until his resignation on March 3, 2021. Before becoming CEO of Turquoise Hill, Quellmann was Vice President of Strategic Projects, Copper and Diamonds at Rio Tinto from March 2018 to July 2018, and Chief Financial Officer (“CFO”), Coppers and Diamonds at Rio Tinto from August 2016 to February 2018. Id. ¶ 42. Colton has been the CFO of Turquoise Hill since October 9, 2017 and briefly served as Turquoise Hill's interim CEO after former CEO Jeff Tygesen resigned on May 29, 2018 and before Quellmann assumed that role in August 2018. Id. ¶ 43. Lane served as Vice President, Operations and Development of Turquoise Hill from February 2016 until his resignation in March 2019. He was Finance Director of Rio Tinto Copper's Minera Escondida Limitada and Grasberg operation from 2013 to January 2016 and was a Rio Tinto employee while seconded to Turquoise Hill during the alleged class period- here, from July 17, 2018 to July 31, 2019 (“Class Period”). Id. ¶ 44. Quellmann, Colton, and Lane are referred to as the “Turquoise Executive Defendants.” Id. ¶ 45.
Rio Tinto, which consists of Rio Tinto plc (a United Kingdom company) and Rio Tinto Limited (an Australian company), is one of the world's largest metals and mining companies. Id. ¶ 46. RTIH is a wholly owned subsidiary of Rio Tinto and holds a majority interest in the common stock of Turquoise Hill. Id. ¶ 47. It also is the manager of Oyu Tolgoi and manager of a substantial portion of Turquoise Hill's receivables and liquid asset deposits. Id.
Jacques was the CEO of Rio Tinto from July 2016 until December 2020. Id. ¶ 49. He became deputy CEO in March 2016 and CEO in July 2016, largely as a result of his work in negotiating with the Mongolian government to restart underground development at Oyu Tolgoi. Id. Soirat served as the chief executive of Rio Tinto's Copper and Diamonds product group from 2016 to December 2020. Id. ¶ 50. Jacques and Soirat are sometimes referred to as the “Rio Executive Defendants” and together with the Turquoise Executive Defendants are referred to as the “Executive Defendants.”
The Oyu Tolgoi (the “Mine” or “OT”) underground mine in southern Mongolia is expected to be one of the largest copper mines in the world. Id. ¶¶ 3, 57. The Mine is jointly owned by Turquoise Hill and the Government of Mongolia. Id. ¶ 3. OT is comprised of an open-pit copper mine and an underground mine. Id. ¶ 5. The open-pit copper mine has been in operation since 2013. Id. Drilling of the underground mine began in 2010 but was suspended in 2013 due to ongoing disputes between Rio Tinto and the Government of Mongolia as well as insufficient project financing. Id. By far the largest amount of copper ore at the site, and 80% of the mine's reserve value, is located in the underground mine. Id.
OT is owned by Oyu Tolgoi LLC, a company 66% of whose equity is owned by Turquoise Hill, while the remainder is held by the Government of Mongolia. Id. ¶¶ 52, 61. In turn, Rio Tinto owns just over 50% of Turquoise Hill's common stock; manages the OT project under agreements between OT, Rio Tinto, and the Government of Mongolia; and, through RTIH, exercises near-total control over both the project and Turquoise Hill. Id. ¶ 52. During the Class Period, Quellmann, Lane, Colton and Soirat served on the Board of Directors of OT. Id. ¶ 54.
Rio Tinto has contractual rights with respect to Turquoise Hill's public statements about OT. In an April 2012 memorandum of agreement, Ivanhoe Mines (the predecessor for Turquoise Hill) entered into an agreement with Rio Tinto related to public disclosures about OT. It provided:
From the date of this Agreement that any and all public disclosure regarding the OT project (“OT Disclosure”) must be consistent with the information provided by the Rio Tinto Manager (unless Ivanhoe determines that other OT Disclosure must be made to comply with Ivanhoe's disclosure obligations under applicable Securities Laws) and Ivanhoe covenants and agrees that it will not file or issue any OT Disclosure without providing the Rio Tinto Manager with a reasonable opportunity to review and comment thereon.
Dkt. No. 127 ¶ 53; Turquoise Hill Resources LTD, General Statement of Acquisition of Beneficial Ownership - Amendment (Form S.C. 13D/A) (Apr. 20, 2012).[1]
Turquoise Hill's predecessor, Ivanhoe Mines, began initial work on the Mine as early as 2001, when it completed the first of five planned deep, large-diameter, concrete-lined shafts- Shaft 1, a 1,385-meter-deep shaft to be used for preliminary exploratory and access work and services on the underground-mine project. Dkt. No. 127 ¶¶ 61-62. In 2007, Ivanhoe Mines commenced work on a much larger shaft-Shaft 2-as part of the development of the underground mine. Work on Shaft 2 was conducted in 2007 and again in 2010 to 2013, when the sinking reached a depth of 1,167 meters. Id. ¶ 62. In August 2013, the underground work and funding for the project's underground-expansion phase came to a standstill amid a dispute between OT and the Mongolian government over financing and tax payments. Id. ¶ 63.
In 2015, Turquoise Hill, Rio Tinto, and the Government of Mongolia signed the 2015 Oyu Tolgoi mine-development and financing plan to begin Phase 2 of the underground expansion. Id. ¶¶ 6, 64. The deal included a $4.4 billion financing plan for the project that Jacques personally negotiated with the then Prime Minister of Mongolia. Id. ¶ 64. In May 2016, the Government of Mongolia gave OT formal notice to restart second-phase underground construction, and Rio Tinto, Turquoise Hill, and the Government of Mongolia publicly announced the approval of the development of the Mine. Id. ¶ 65. Defendants publicly reported that the total development cost for the Mine would be $5.3 billion and that the first production ramp-up would begin in the first quarter of 2021. Id. ¶¶ 7, 65, 80 n.6. Defendants refer to that milestone as achieving “sustainable first production,” an event that occurs after the “first drawbell” blasting. Id. ¶ 7.
In June 2016, Rio selected Jacobs Engineering Group Inc. (“Jacobs”) as the principal contractor for the underground expansion at Oyu Tolgoi. Id. ¶ 80.
The planned development of OT involved a mining method called “panel caving.” Id. ¶¶ 66-67. “Panel caving” involves a process by which mineral ore is undercut, drilled, and blasted in order to break off the ore; the ore then is removed and conveyed to tunnels or shafts that allow the ore to be brought to the surface. Id. ¶¶ 67-70. For panel caving to work, the construction of appropriate mine shafts is critical, as it allows for people, equipment, supplies, and mined ore to be moved between the surface and the underground mining area. Id. ¶¶ 71, 75.
By the beginning of the Class Period, the Mine's success depended on the construction and completion of primary crusher 1 and two key mine shafts and associated infrastructure, specifically, the Shaft 1 crusher and systems and Shaft 2. Id. ¶ 72. Shaft 2 was intended to be the main logistics hub for OT for both personnel and equipment needed to build the remainder of the underground Mine and, once finished, would increase mining expansion and productivity by at least a factor of five. Id. ¶¶ 74, 77. The timely development of Shaft 2 was also critical to the Mine's profitability as it would allow investors to capitalize on the Mine's copper production just as copper prices were expected to rise. Id. ¶ 77.
However as soon as the work on the underground project resumed in 2016, the project was plagued by delays and cost overruns as a result of engineering, procurement, and construction issues. Id. ¶ 8. The most significant of these issues concerned Shaft 2. Id. In particular, during the shutdown of the project, inspections of the Mine revealed potentially catastrophic issues with the work that had been done by a contractor on the steel headframes for Shaft 2. Id. ¶ 81. Due to the severity of these issues, construction on Shaft 2 was delayed for eight months and required over $30 million in additional costs (which alone accounted...
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