Class action lawsuit a new challenge for Rio Tinto (ASX:RIO) share price

A disappointing quarterly production report may not be the only thing weighing on the Rio Tinto Limited (ASX: RIO) share price.

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A disappointing quarterly report may not be the only thing weighing on the Rio Tinto Limited (ASX: RIO) share price.

News of a class action lawsuit filed in the US against our largest iron ore miner is also casting a shadow over the stock.

The lawsuit accuses Rio Tinto of making false and misleading statements about the controversial Oyu Tolgoi project, according to the Australian Financial Review.

mining hat on lumps of coal representing mineral resources share price

Image source: Getty Images

Rio Tinto's share price under pressure

The Rio Tinto share price fell 1.1% to $95.23 in the last hour of trade when the S&P/ASX 200 Index (Index:^AXJO) lost 0.5%.

In comparison, the Fortescue Metals Group Limited (ASX: FMG) share price slipped 0.2% to $16.66 while BHP Group Ltd (ASX: BHP) declined 1.3% to $36.28.

Cost blowout and delays

The case against Rio Tinto is partly based on claims made by its former employee, Richard Bowley. He told a London court he warned his bosses of a cost blowout more than two months before Rio Tinto said the project was "on budget and schedule" in an October 2018 market filing.

As we now know, this turned out to be a farse. The massive Mongolian project was initially costed at US$5.3 billion in 2015. But delays and over-optimistic geologic assumptions sent costs soaring to US$6.8 billion while pushing back the start date by two years.

The project is now in limbo. Rio Tinto refuses to rescue the project and is leaving that task to Turquoise Hill Resources Ltd (NYSE: TRQ).

Funding limbo

Turquoise Hill, which is 50.79% owned by Rio Tinto, owns two thirds of Oyu Tolgoi with the balance resting in the Mongolian government's hands.

The Mongolian government doesn't have the cash to get the copper mine back on track either. Rio Tinto is pushing Turquoise Hill to undertake a multi-billion-dollar capital raise.

Little wonder the Turquoise Hill share price collapsed by more than 70% in the last five years and leaving shareholders feeling peeved.

Rio Tinto's class action co-defendants

The plaintiff in the class action is New Jersey resident Anthony Franchi, reported the AFR. Franchi claims Rio Tinto's and Turquoise Hill's false disclosures tricked him into purchasing Turquoise Hill shares at "artificially inflated prices".

The class action is for investors who bought Turquoise Hill shares between July 17, 2018 and July 31, 2019.

Besides Rio Tinto and Turquoise Hill, Rio Tinto's outgoing chief executive Jean-Sebastien Jacques and Rio's copper boss, Arnaud Soirat, have been named as individual defendants in the case.

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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