(Repeats to fix headline formatting)
By Sonali Paul
MELBOURNE, April 19 Rio Tinto took a
big step toward owning a massive copper and gold project in
Mongolia and diversifying from iron ore, after agreeing to buy
more shares in developer Ivanhoe Mines Ltd and guaranteeing $3.3
billion needed to open the mine.
Successful development of the Oyu Tolgoi project is crucial
to reducing Rio Tinto's dependence on iron ore, which some
analysts say may be in surplus within the next three years.
Ivanhoe's founder billionaire Robert Friedland is
leaving the company as part of the deal announced on Wednesday.
The deal with Rio Tinto is essential for the Oyu Tolgoi
project to reach commercial production on target in the first
half of 2013, and should give shareholders some comfort going
into Rio Tinto's annual meeting in London on Thursday.
Investors will be looking for an update on the capital and
operating costs at Oyu Tolgoi, following a review released last
month by Ivanhoe, and not officially endorsed by Rio Tinto, that
put the capital costs at $13.2 billion, up from $9.55 billion.
Rio Tinto has invested more than $4 billion in Ivanhoe over
the past six years to position itself to take over the company
founded by Friedland and get its hands on the Canadian miner's
66 percent stake in Oyu Tolgoi, one of the world's largest
Along the way, Friedland, best known for turning the
Voisey's Bay nickel discovery in Canada into a C$4.3 billion
($4.4 billion) fortune, tried to ensure he would get a big
takeover premium for Ivanhoe.
Was Friedland outsmarted by the Anglo Australian miner,
which owns 51 percent of Ivanhoe?
Analysts say yes, but that was largely because falling
copper prices and tight credit conditions worked against Ivanhoe
as lenders balked at providing up to $4 billion to the
"Events have just conspired to help Rio use its financial
muscle. It's used patience and has been in a good position and
should be able to get the balance of the company without having
to pay a big premium," said Tim Gerrard, an analyst at Investec.
Friedland got a severance package on Wednesday and Ivanhoe
agreed to sell new shares at $8.34 a piece to raise $1.8 billion
to help finish digging the mine in the South Gobi desert.
"Ultimately, Friedland had always wanted someone to bid for
the balance of the company that wasn't owned by Rio," said Tim
Barker, a portfolio manager at BT Investment Management.
As recently as last August, Friedland argued Ivanhoe was
worth at least $34 a share.
At the time, Ivanhoe was trading around $25.50. Its shares
have since crumbled, after Rio Tinto won a fight against
Ivanhoe's "poison pill" defence last December and most recently
after Ivanhoe's cost estimates on Oyu Tolgoi soared.
"(Rio) will pay a premium at some point, but it'll be off a
lower base," said Investec's Gerrard.
Rio Tinto declined to comment on the sale of Ivanhoe's stake
in Mongolian coal miner SouthGobi Resources to China's
Chalco, which could be derailed after the Mongolian
government suspended its SouthGobi exploration licenses.
Ivanhoe's shares on Wednesday rose 16 percent to $13.64 in
New York and to C$13.49 in Toronto.
Future price gains are likely to be limited, analysts said,
effectively capped by the $12.79 a share that Rio Tinto has
agreed to pay to convert warrants that Ivanhoe will issue to the
Anglo Australian miner over a three-year period into shares. Rio
Tinto stands to own as much as a 64.8 percent stake in Ivanhoe.
Rio Tinto's shares gained 3 cents to A$66.53, trailing a 0.7
percent gain in the materials sector.
($1 = 0.9888 Canadian dollars)
(Reporting by Sonali Paul; Editing by Ryan Woo)