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July 1, 2011

Ivanhoe Mines seen trying for stake sale before Rio standstill expiration, bankers say 


An interesting article for all Ivanhoe Aficionados....



Ivanhoe Mines seen trying for stake sale before Rio standstill expiration, bankers say 
Mergermarket

- Rio Tinto may still end up with controlling stake
- Could be put off by 30% to 40% premium needed
- Chinese, other major miners would be interested


Ivanhoe Mines (NYSE:IVN) may want to try to sell a majority stake within the next six months to a company other than Rio Tinto (NYSE:RIO), said a handful of industry bankers.

Several of these industry bankers, however, said third parties could be daunted by Rio's substantial ownership in Vancouver-based Ivanhoe, the Mongolian miner. With a standstill agreement between Rio and Ivanhoe set to expire on 18 January 2012, the Anglo-Australian mining giant may ultimately end up with a controlling stake in Ivanhoe, these bankers said.

The upcoming expiration of the agreement has sparked renewed industry chatter about what may happen to Ivanhoe's majority stake. Early last year, the company hired Citigroup and Hatch Corporate Finance to assess strategic options. Its shares have increased more than 225% since they began trading in New York in 2003, with CEO Robert Friedland's 15.47% stake now worth USD 2.8bn.

"I think Ivanhoe is playing every card they've got to boost what they get out of Rio Tinto, but I'd be surprised if anybody else would arrive at the table," an industry banker said.

Another of the bankers said Friedland's desire to cash out his Ivanhoe holdings could be behind speculation about a deal. "Maybe Friedland wants to get liquid," this banker said.

Last week, Rio Tinto increased its stake in Ivanhoe to 46.5% by exercising all remaining share-purchase warrants it owns in the company. Ivanhoe expects to use the USD 502m in proceeds from the exercise of the warrants to continue construction on its flagship Oyu Tolgoi copper-gold-silver mining complex in southern Mongolia, which is forecast to produce one billion pounds of the red metal and 500,000 ounces of gold. The maximum level of ownership interest Rio can achieve in Ivanhoe is capped at 49% until the current standstill limitation expires.

The two companies were scheduled to resume arbitration in June over a shareholder rights plan adopted by Ivanhoe last year, which restricts Rio Tinto, other shareholders and third parties from acquiring additional Ivanhoe shares in the market beyond the amounts provided for in existing contractual arrangements unless an offer is made to all shareholders.

An Ivanhoe spokesperson did not return phone messages by press time. A Rio Tinto spokesperson did not respond to emailed questions by press time. The companies have not publicly confirmed if they entered the arbitration as planned.

Rio Tinto claims the adoption of the poison pill breaches Rio's contractual rights under the companies' private placement agreement. Ivanhoe has a counter-claim that contends Rio Tinto breached its covenants in the private placement agreement, signed with Ivanhoe in 2006, not to engage in activities that could affect control of Ivanhoe without Ivanhoe's permission.

The arbitration between Rio Tinto and Ivanhoe will probably end in some sort of friendly manner, predicted the first industry banker. Another banker said that Rio's insistence to arbitrate Ivanhoe's shareholder rights plan can be seen as an indication that it wants to increase its position in the company to a controlling stake.

However, another of the industry bankers argued that as long as Rio Tinto has secure offtake agreements with the Oyu Tolgoi project, the company may be content to not increase its stake in Ivanhoe beyond 49%. Rio Tinto might be put off by the 30% to 40% premium it would likely have to pay to acquire more of Ivanhoe's shares beyond that cap, this banker said.

Rio Tinto's expertise as a mine operator would be attractive to a potential acquirer of the remaining stake in Ivanhoe, said one of the bankers. The presence of another partner could also serve to mitigate some of the jurisdictional risk of operating in Mongolia, said the same banker. The second industry banker noted, though, that Mongolia has become more friendly to the mining sector, which is providing much-needed direct investment in the country.

Chinese companies, hungry for copper and geographically adjacent to Mongolia, are likely to show interest in owning the portion of Ivanhoe not in the hands of Rio, three of the industry bankers said. These companies could include Minmetals Resources (1208:HK), which recently attempted to acquire Canadian copper producer Equinox (TSE:EQN), as well as Chinese state-owned metal giant Chinalco, which is the second largest shareholder in Rio Tinto.

Last year, Chinalco and Rio Tinto were rumored to have been preparing a joint takeover bid for Ivanhoe Mines. In addition to the Chinese, Teck Resources (NYSE:TCK), Xstrata (LON:XTA) or BHP Billiton (NYSE:BHP) would be logical suitors for the remaining stake in Ivanhoe not owned by Rio, two of the industry bankers said.

"Certainly the (Oyu Tolgoi) project is large enough that two majors could have a combined interest" in owning Ivanhoe, the second industry banker said. However, bidders would still have to contend with Rio's massive stake as well as Friedland's sizeable holdings in Ivanhoe, he said.

Ownership in Ivanhoe is divided between Rio, Friedland and other shareholders. Ivanhoe owns 66% of the Oyu Tolgoi project and the Mongolian government has rights on the rest of the project.

Ultimately, Rio and a third party could forge a similar partnership to the one Freeport-McMoRan (NYSE:FCX) and Lundin Mining (TSE:LUN) have to operate the Tenke Fungurume cobalt and copper project in Democratic Republic of Congo, said two of the industry bankers. Freeport is the operating partner and owns 56%, while Lundin owns 24%. The Congolese state mining company, Gecamines, holds the remaining 20% as a free carried interest, leaving Freeport to provide 70% of the capital funding and Lundin 30%.

Earlier this week, it was reported by this news service that SouthGobi Resources (CVE:SGQ), which is 57% owned by Ivanhoe, was put up for sale. The company's vice president of investor relations, Dave Bartel, however, said it was not on the block. One of the industry bankers argued that the potential sale of SouthGobi could suggest Ivanhoe may be trying to sell assets to increase the attractiveness of Oyu Tolgoi for a third party bidder.

by Matt Whittaker in New York


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