Albanese aiming for piece of the Mongolian pie

RIO Tinto's executive and board gathered in bucolic Hampshire on Monday for their annual two-day strategy summit.

The main topic of conversation for the re-emerging global miner was the next crucial stride towards an endgame in what must rank high on its list of next year's priorities by picking up another 5 per cent of Robert Friedland's Ivanhoe Mines.

The coincidence of Rio's pow wow with the long established date for the crystallisation of debt-to-equity swap with Ivanhoe is so delightful it is hard to believe it wasn't deliberately concocted by someone inside the Anglo-Australian. Ivanhoe and Rio, you see, are not seeing anything like eye-to-eye on the ground rules of their investment partnership.

It is said, mind you, that for all the commercial tension, Friedland and Rio boss Tom Albanese remain on pretty good terms. Albanese, for example, recently joined a partying throng at the Canadian billionaire's 60th birthday celebrations amid the ruins of the ancient Khmer capital of Angkor Thom.

With yesterday's 5 per cent in the bag, Rio now owns 34.9 per cent of Ivanhoe and, all things being equal, it can move at a time of its own choosing to 44 per cent of the Godfather of Mongolian mining by exercising warrants over another 84 million Ivanhoe shares.

Ivanhoe is of interest to Rio because the Canadian company owns 66 per cent of what it routinely touted as the world's biggest undeveloped copper project. It is called Oyu Tolgoi and it sits in Mongolia's chunky share of the Gobi desert.

Ivanhoe says phase one of its copper giant will cost $US4 billion ($4.2bn) to build. It will doubtless be wrong. Given the current state of project price inflation, it will certainly cost a heap more than that.

And Ivanhoe's problem is that, given the current ownership construct of the project, it is going to have to carry the whole of that funding. Just over two months ago now, 66 days to be precise, Ivanhoe told Rio it would go looking for another strategic partner to help it secure the $US4bn necessary to finance stage one of the world's biggest undeveloped copper project, Oyu Tolgoi, in Mongolia.

That number is significant because the terms of the investment agreement require Rio be given 60 days notice of the termination of restrictions on the introduction of new strategic investors. Now, ahead of that announcement Ivanhoe instituted what Canadians call a "shareholder rights scheme" but what the rest of investment world knows as a "poison pill".

The aim of the scheme is to constrain any effort Rio might make to creep from senior minority to controlling shareholder in Friedland's company. If the scheme stands, Rio will not be able to move beyond 44 per cent of Ivanhoe unless it makes an offer for the whole of the company.

Rio as challenged the legality of the proposed scheme on the basis that it retrospectively relieves the company of rights established under the October 2006 investment agreement that introduced it as a cornerstone shareholder in Ivanhoe.

The way Rio sees it, that agreement allows it to move to a maximum of 46.6 per cent of Ivanhoe by October next year and, as well, it includes a "no dilution" clause. Further, the deal provides Rio with a call over any new capital that Ivanhoe might issue in the pursuit of cash to fuel its Oyu Tolgoi ambitions. That call could be made even if it sees control pass to Rio. Ivanhoe disputes Rio's view of the shareholder rights scheme saying it merely aims to prevent its partner creeping past 50 per cent to control.

Rio has requested the arbitration available under the Canadian rules to sort out this dispute but Ivanhoe has been unable to meet the 60-day deadline for the necessary agreement on just who should be appointed to conduct that arbitration. So it would seem likely now that Rio will attempt to get the courts to appoint an arbitrator with a view to delivering a decision by late November.

The outcome of that process might well determine the timing of whatever efforts Friedland is making to introduce a new strategic shareholder to Ivanhoe.

If the shareholders rights scheme overrides the 2006 investment agreement and Rio is frozen at 44 per cent, unless it is prepared to make a full bid for Ivanhoe, then Friedland could issue the 5 per cent and more he has signalled could be placed with a third party without Rio being able to redirect those shares to its own account. That is an outcome, needless to say, that would strongly disappoint Rio .

After all, while Albanese plays good cop, the company has engaged in a strategy that aims ultimately to narrow even more Friedland's alternatives and to deliver Rio with a controlling interest, not in Ivanhoe, but in its headline project, Oyu Tolgoi.

Rio has already discussed with Friedland its desire to translate its Ivanhoe investment into a direct equity stake in the Mongolian copper play. And that remains the endgame here.

Scare campaign?

WELL, hasn't it been a jolly week or so for stoic QR National's boss Lance Hockridge and his resolute chairman John Prescott.

Just three working days after the coalminers' endured the humiliation of the collapse of their bid for Hockridge's crown jewels, his coal freight rail tracks, the National Competition Council moved to effectively remove the shadow of regulatory risk from the proposed IPO of QR National.

The NCC yesterday issued a pair of draft decisions that first rejected Asciano's attempt to seek a declaration of the Queensland coal network and, second, moved to certify for a decade Queensland's existing, though recently modified, rail access regime.

The NCC's decision triggered some diverting pyrotechnics last night. Asciano, quite predictably, indicated it would pursue its application no matter what the outcome of the NCC process, indicating it would lobby the Treasurer directly on the matter and consider a review of any decision by the Australian Competition Tribunal. Somewhat less predictably, the victorious Queensland Treasurer released a pretty spiky statement claiming the twinned decision "puts a lie" to Asciano's claim about the competition risks inherent in the plans to float QR National as an integrated freight service provider and rail track owner. "There are others who have attempted to cruel the QR National float by running inaccurate scare campaigns in the media about the effectiveness of the Queensland access regime," Andrew Fraser said.

"These are the same people who have complained about the supposed lack of competition in the Queensland coal network, despite telling their own investors that they are already forecast to achieve 30 per cent of the Queensland market-share by 2020.

"The proposed recommendation by the NCC puts a lie to those claims." Winners can be grinners, I suppose. But is Fraser really suggesting that Asciano has lied here?

Of course, for the moment at least, the public tension between Asciano and the government is not really the main game. The fact is QR National has dealt now with the two issues that threatened to cruel its approach on publicly listed freedom from the constraints of government ownership. The attempt to unbundle the tracks has disappeared and the risk that life unfettered by government ownership would be constrained instead by competition regulators has been substantively reduced.

The task remaining, mind you, is not insubstantial. All Hockridge and Prescott have to do now is demonstrate they have buying interest enough to support the IPO valuations demanded by the Bligh government.


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