13D Filing: Sailingstone Capital Partners LLC and Ivanhoe Mines Ltd (IVN)

To be independent, management needs to be unconflicted, to have the freedom to build a staff capable of carrying out its business matters and to be compensated in a manner which creates strong alignment with long-term owners and other stakeholders. The current management team is comprised of seconded Rio Tinto executives, who operate without employment contracts from TRQ. Furthermore, TRQ management lacks the ability to hire new professionals, as all employment requests must be vetted and approved by Rio Tinto, even though it is Turquoise Hill who foots the bill. There are numerous examples that we are aware of in which reasonable requests for new hires have been refused by Rio Tinto. Finally, TRQ executives receive below-market cash compensation and, until recently, all of management’s long-term compensation has been paid in Rio Tinto stock, which is charged back to Turquoise Hill upon vesting. While we appreciate the recent change to the compensation plan, it doesn’t change the basic facts. This is a management team bound to Rio Tinto, with no job security, no ability to hire and, based on their tenure at Rio, likely far more leverage to Rio Tinto’s stock price than Turquoise Hill’s. Thus, the nature of this relationship virtually ensures that TRQ executives lack the structural independence necessary to manage for the benefit of all shareholders. To make matters worse, there has been limited disclosures of Turquoise Hill board members’ and executives’ economic exposure to TRQ or Rio Tinto, despite our repeated requests for this information. So, as shareholders we have no way to determine what, exactly, their incentives are.

In terms of being informed, TRQ independent directors and management are solely reliant on Rio Tinto for information. By extension, this means that anyone who is interested in learning about OT or TRQ is also solely reliant on what Rio Tinto will provide. The last four technical reports, which are the basis for publicly available data on the project, have been prepared by the same firm working in close coordination with Rio Tinto management and operations teams. To our knowledge, there has been no attempt to independently verify either the assumptions being used or the outputs, beyond the detailed audit and benchmarking analysis which SailingStone previously provided to the board. In addition, TRQ is regularly excluded from technical updates, including the most recent cost and timing review conducted by Rio Tinto. As a result, there is no way to determine how the project is progressing versus plan and what the capital spending is, independent of Rio Tinto. Our time on site leads us to believe that, in fact, the project may be under budget, which for most companies would be cause for celebration. Unfortunately, despite the existence of language in the 2010 Heads of Agreement (Schedule E, p 9) which specifically provides the minority shareholders with “reasonable access to the OT Project (including to all information, books, records and data) including for the purpose of…preparing technical reports; and carrying out such procedures as may be necessary in order for (Turquoise Hill) to comply fully with its disclosure and reporting obligations”, independent directors as well as TRQ management and staff often are not given full and unfettered access to data. As a result, it is difficult to provide the market with material updates unless the information is first pried from and then vetted by Rio Tinto internal processes. Rio is free to do what it likes with its own information, but should have no input on what is material to TRQ minority shareholders. That is best determined by an independent, incentivized management team and the independent directors.

Lastly, we are concerned that Turquoise Hill has no on-the-ground representation and no direct dialogue with the government of Mongolia, despite the fact that it is TRQ, and not Rio Tinto, that actually holds the license and permits to the project. The recent press release from Rio Tinto, highlighting the creation of its new office in Ulaanbaatar and announcing a re-commitment to Mongolia with no mention of or coordination with Turquoise Hill is explicit acknowledgement of Rio’s attitude towards minority shareholders. They simply don’t exist.

As the result of these concerns, and Rio Tinto’s repeated refusal to speak with SailingStone representatives despite numerous requests for meetings, including offering to fly to their London headquarters at Rio’s convenience, we ask that the board of directors consider the following:

1.

Conducting an independent technical report so that we can be certain that existing estimates of capital intensity and the development schedule are reasonable. Given the size and duration of this project, and the obvious potential conflicts of interest that exist between Rio Tinto and the minority shareholders, we believe that this decision is necessary to protect our multi-billion dollar investment.

2.

Creating a fully-staffed TRQ technical team who will have complete access to the OT project and will report back regularly to TRQ management and the independent directors. This would provide management and directors with the information necessary to determine what and when material updates should be made to the market, and could be the basis for more fruitful engagement with the host government.

3.

Implementing employment contracts for management and restructuring compensation plans to remove any real or perceived conflicts with Rio Tinto and to significantly improve alignment with TRQ shareholders. This could include increasing available cash compensation opportunities towards industry median levels, an increase in equity grants available to be earned based on specific performance targets and improved disclosure of managements’ and directors’ vested and unvested exposure to TRQ’s and Rio Tinto’s stock price.

As Turquoise Hill is a publicly traded company, and is not a subsidiary of Rio Tinto, it is critical that the board of directors and management team of TRQ be independent, informed and incented exclusively to generate long-term value for all TRQ shareholders.

We would like to meet with the board of directors to discuss solutions to these issues and the time frames to address them. We recognize that your schedules are busy, and stand ready to meet at your convenience. We look forward to your response.

Kind regards,

SAILINGSTONE CAPITAL PARTNERS LLC