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Rio moves closer to Ivanhoe takeover

December 9, 2010

“Rio Tinto has moved closer to taking over Canada’s Ivanhoe Mines, owner of a vast Mongolian mining project, after Rio pledged up to $4.3bn in a multi-pronged financing deal that will boost Rio’s stake in Ivanhoe to 42 per cent from 35 per cent. Rio and Ivanhoe, the vehicle of mining entrepreneur Robert Friedland, also suspended arbitration surrounding their joint development of Oyu Tolgoi, a deposit that is expected to be one of the world’s biggest new sources of copper and gold.

In a complex agreement reached on Wednesday Rio will finance the completion of Oyu Tolgoi in exchange for options that allow it to raise its equity stake in Ivanhoe to 49 per cent by January 2012. In that month the 49 per cent shareholding cap lapses, allowing Rio to buy additional shares. Ivanhoe shares fell 13 per cent in early Toronto trading, as the prospect of an alternative buyer for Ivanhoe receded.”

Source: Financial Times, December 8 2010

Observations:

  • In July of this year Rio Tinto announced its intention to take control of the Oyu Tolgoi operation by increasing its share in Ivanhoe. However, the board of Ivanhoe made it hard for the company to gain a majority stake of the company.
  • The company is in full development of the operation in Mongolia, planning to start production in 2013. However, to have good access to the Chinese market the rail infrastructure connecting Mongolia and China needs to be improved.

Implications:

  • Most likely Rio Tinto will increase its stake of Ivanhoe rapidly after January 2012, as the Oyu Tolgoi deposit promises to be highly profitable if current copper price levels persist.
  • For some time rumors about potential involvement of an additional Chinese investor for the mine were going around. However, though strengthening ties with the Chinese industry and government last month, Rio has indicated to prefer developing the deposit without additional support.

©2010 | Wilfred Visser | thebusinessofmining.com

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