Just a few months after Rio Tinto (RIO-N) took a controlling 51% stake in Ivanhoe Mines (IVN-T, IVN-N, IVN-Q), billionaire founder and chief executive Robert Friedland has resigned from the company, along with five other members of the senior management team and six directors.
The resignations were announced together with a comprehensive financing plan structured to secure Rio Tinto’s direct participation in — and support for — funding the development of the massive Oyu Tolgoi copper-gold-silver project in Mongolia.
Open-pit production at Oyu Tolgoi is expected by mid-year and commercial production from the first phase is anticipated in the first half of 2013.
“Given the costs and capital expenditure involved in Oyu Tolgoi, this project was simply too big for their management team,” comments one industry observer, who requested anonymity.
Under the new financing plan, Rio Tinto will provide a bridge-funding facility of up to US$1.5 billion to help ensure that the first phase of Oyu Tolgoi’s construction is uninterrupted. Rio Tinto will also provide full support for completing a project finance package of US$3 billion to US$4 billion by third-party lenders.
Ivanhoe has been negotiating project financing with a consortium of national and international institutions and banks since 2010. Under the new agreement with Rio Tinto, the two companies have set a goal of concluding all project-finance arrangements by the end of the year. Rio Tinto says it may also advance senior loans to Oyu Tolgoi LLC as an alternative to, or in addition to, the project-finance package on terms no less favourable than those available through the international financial institutions or commercial banks.
The two companies have also agreed to go ahead with a rights offering of Ivanhoe shares at $8.34 apiece to raise up to $1.8 billion. The offering will be supported by a standby commitment for the full amount from Rio Tinto.
“Rio is required to acquire any shares not taken up under the rights issue, which could, under various scenarios, increase Rio’s stake in Ivanhoe to 64.8%,” Adam Graf of New York-based investment bank Dahlman Rose writes in a note to clients, adding that “it appears that Rio is now closing in on taking over Ivanhoe.”
Rio Tinto also commits to support the construction of a coal-fired electrical power plant in Mongolia, which falls under the requirements set out in Ivanhoe’s investment agreement with Mongolian authorities. Under the agreement, Oyu Tolgoi must source all of its power requirements from Mongolia within four years from the start of commercial production. Power during its initial years of operation will come from China.
In exchange for securing all projected capital requirements for Oyu Tolgoi over the next four to five years, Ivanhoe has agreed to toss out much of its senior management and board.
Seven Ivanhoe directors — Marc Faber, Edward Flood, Robert Friedland, David Korbin, Livia Mahler, Tracy Stevenson and Dan Westbrook — have resigned effective immediately and will be replaced by six Rio Tinto nominees, four of whom will be independent directors. Two directors — at least one an independent — will be nominated by Friedland for as long as the mining financier owns 10% of Ivanhoe’s outstanding shares. The changes will be made within five business days.
Kay Priestly, chief financial officer of Rio Tinto’s copper group and a director at Ivanhoe, will replace Friedland as interim CEO, and Rio Tinto will nominate a new CEO and chief financial officer. Ivanhoe’s outgoing senior management include president John Macken, chief financial officer Tony Giardini, deputy chairman Peter Meredith and executive vice-president Sam Riggall. The senior managers have also resigned from management posts at Ivanhoe’s subsidiary companies.
“This agreement sets the stage for the Oyu Tolgoi project’s transition to a major mining operation in the coming months,” Friedland said in prepared remarks before markets opened on April 18. “The measure of certainty that Rio Tinto’s financial resources and global industry leadership bring to the realization of our long-cherished Oyu Tolgoi dream is reassuring for the people and government of Mongolia, and for Ivanhoe shareholders.”
On a conference call discussing the omnibus agreement, Michael Gordon, the new interim chair of Ivanhoe’s board, declared that the Vancouver-based company “is now in great shape with secure financing.”
Des Kilalea, a London-based analyst at RBC Capital Markets, writes in a research note that the financing package “assures the development of phase one of OT and further cements Rio’s control of the project,” and notes that there are several possible “permutations on the final restructuring of Ivanhoe.”
“Rio has stated that it is only interested in OT, which suggests that the next step will be a rearrangement which sees the 66% of OT moving into Rio,” the analyst continues. “In the meantime the positive is that project funding is secure for phase one, which should also ensure continued support of the Mongolian government for Ivanhoe and Rio.”
Ivanhoe owns 66% of the Oyu Tolgoi project and the Mongolian government owns the rest. The company’s other assets include a 58% interest in Mongolian coal miner SouthGobi Resources (SGQ-T); a 59% interest in copper-gold miner Ivanhoe Australia (IVA-T, IVA-A), which is also developing a molybdenum-rhenium discovery; and a 50% interest in Altynalmas Gold, a private company developing the Kyzyl gold project in Kazakhstan.
Tom Meyer, a mining analyst at Scotia Capital in Toronto, has lowered his 12-month target price on Ivanhoe to $12 per share from $15 previously and reiterated his “underperform” rating. “In our view there are currently better investment opportunities than Ivanhoe,” he outlines in a client note.
During the conference call one participant asked why she would, as an investor, put more money into Ivanhoe when Rio Tinto “could gobble up the company and give me a dollar per share.”
Interim chair Gordon retorted that he couldn’t speculate or comment on Rio Tinto, but said that Ivanhoe’s newly structured board of directors would be “majority independent,” and as a board would be “seeking to act in the best interests of the company.”
“There is tremendous underlying value in Ivanhoe [and] the OT project . . . and we are going to start to see incremental value delivered as we commission this project and start to ramp up to full commercial production,” he continued. “We believe that this mine and mining complex has the potential to be one of the highest-valued copper mining complexes in the world.”
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