Ivanhoe shares surge on strategy to attract strategic investors

Andy Hoffman

Vancouver — From Wednesday's Globe and Mail Published on Tuesday, Jul. 13, 2010 2:33PM EDT Last updated on Tuesday, Jul. 13, 2010 7:46PM EDT

After the dramatic events surrounding Ivanhoe Mines Ltd. (IVN-T17.18-0.37-2.11%) this week, two things are certain about Robert Friedland: The brash promoter still knows how to drum up a frenzy of interest in a mining project, and he’s not afraid of a fight.

Vancouver-based Ivanhoe and its chairman, Mr. Friedland, on Tuesday declared war on its biggest shareholder, global mining giant Rio Tinto (RTP-N46.35-1.23-2.59%) by unveiling plans to lift restrictions on Ivanhoe’s ability to issue shares to strategic investors.

The aggressive move, coupled with Ivanhoe’s decision in April to implement a “poison pill” that would frustrate any attempts by Rio Tinto to launch an unsolicited takeover, resulted in a flurry of trading in Ivanhoe’s shares, which surged 14.3 per cent on the TSX on speculation that the mining firm might garner interest from another potential suitor.

It also prompted the resignation of Andrew Harding, the head of Rio Tinto’s copper division, from Ivanhoe’s board of directors, setting the stage for a showdown between Ivanhoe and the world’s third-largest mining company.

The prize at the centre of the battle is control of the Oyu Tolgoi project in Mongolia, considered to be one of the world’s largest untapped copper-and-gold deposits. Ivanhoe recently estimated Oyu Tolgoi’s annual production would exceed 544,000 tonnes of copper and 650,000 ounces of gold for the first 10 years of a 59-year mine life.

“It has been well anticipated that there will be other parties interested in Oyu Tolgoi and this cracks the door open for them a bit,” John Hayes, an analyst with BMO Nesbitt Burns, said in an interview.

Officials from Rio Tinto – which already owns 29.6 per cent of Ivanhoe and has the right to increase that stake to 46.7 per cent as part of an agreement struck with Ivanhoe in October of 2006 – declined to comment on the dispute. However, a source close to London-based Rio Tinto said the company planned to exercise its right to appoint two additional members (for a total of three) to Ivanhoe’s board in the near future in a bid to exert more control over the company.

Rio recently disclosed that it has been in talks with its own largest shareholder, Aluminum Corp. of China (also known as Chinalco) about giving the Chinese state-backed company a stake in Ivanhoe or a direct interest in the Oyu Tolgoi project. Rio also disclosed that is interested in potentially acquiring a direct interest in the deposit rather than its equity stake in Ivanhoe.

Last week, Rio said it planned to refer Ivanhoe’s shareholder rights plan, or “poison pill,” to arbitration in British Columbia. Ivanhoe adopted the plan in April against the wishes of Mr. Harding, Rio’s sole appointment on the Ivanhoe board at the time. The arbitration process is expected to take 90 days.

After more than five years of delays, construction on Oyu Tolgoi, which is expected to cost $4.6-billion (U.S.), is now well under way and there are believed to be about 3,000 workers on site. Rio has spent more than $1-billion financing the massive mine but, as a minority shareholder of Ivanhoe without a direct interest in the deposit, it is not in charge of the project. Ivanhoe’s biggest challenge has been securing financing for its share of the building costs.

Mr. Friedland, a globe-trotting veteran of the resource sector, is well versed in playing potential suitors against one another to maximize shareholder value. He orchestrated the frenzy around the Voisey’s Bay nickel deposit in Labrador by pitting Canadian mining stalwarts Inco and Falconbridge against one another in a dramatic battle for control of the project. Voisey’s Bay was eventually sold to Inco in 1996 for $4.3-billion (Canadian), far higher than many anticipated.

When Ivanhoe struck its investment agreement with Rio Tinto in 2006, it appeared that Mr. Friedland had, in return for a much needed investment in Ivanhoe, given the mining giant a major advantage against competitors vying for control of Oyu Tolgoi. But with the adoption of the poison pill, which would flood the market with shares if Rio acquired more than 46.7 per cent of Ivanhoe, and with Tuesday’s decision to lift the covenant that prevented Ivanhoe from selling more than 5 per cent of its shares to a strategic investor, Mr. Friedland has shown Ivanhoe still has plenty of options if Rio were to launch a takeover bid.

“Rio was talking and trying to plan the future of Ivanhoe. But now Rio is saying, ‘We’ll plan the future of Ivanhoe, thank you very much,’ ” Mr. Hayes said.

Under the investment agreement, Rio has the right to match any offer for Ivanhoe’s shares from another strategic investor. However, the poison pill would prevent Rio from exercising that right beyond a 46.7 per cent stake in Ivanhoe.

Analyst Raymond Goldie of Salman Partners pointed to Anglo-American PLC as a potential suitor for Ivanhoe or an investor in Oyu Tolgoi. He said attempts to invest in Oyu Tolgoi by Chinalco or other Chinese state-owned enterprises would likely face opposition from the Mongolian government, which has a 34-per-cent interest in the project.




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