Rio sweeps the Ivanhoe board

Rio Tinto's brilliantly executed seizure of control over Ivanhoe gives it unchallengeable authority over one of the world’s best new copper resources just as it is nearing first production.

From the moment last December that Rio Tinto blew up Robert Friedland’s plans to create a poison pill to thwart its creep up the Ivanhoe Mines register it was inevitable that it would move to fully cement its grip on the company that Friedland founded and the giant Oyu Tolgoi copper-gold project it controls in Mongolia.

Overnight that happened. Rio, which listed its shareholding to a majority 51 per cent in January, has taken control of Ivanhoe’s board and management, with Friedland departing. Rio will nominate 11 of Ivanhoe’s 13 directors, as well as the chairman, chief executive and chief financial officer. Friedland will be able to nominate two directors as long as he continues to own at least 10 per cent of the company and six of the Rio nominees will be independents.

Rio gained its foothold on the Ivanhoe register in 2006 because Ivanhoe didn’t have the financial resources to develop Oyu Tolgoi. Phase one of the project – to get it into commercial production – is estimated to cost about $US6.2 billion and full development of the project could cost more than twice that amount.

From the moment the project was given a go ahead by the Mongolian government in 2009, tensions between Ivanhoe and Rio emerged as Rio converted warrants associated with the debt funding it had provided and built its shareholding towards a controlling position, with Friedland attempting increasingly desperate efforts to frustrate it.

The attempt to stave off Rio essentially ended in December when an arbitrator effectively blocked Friedland’s plan to create a poison pill that would have severely diluted the Rio shareholding if it continue to increase its stake without making a full takeover bid at a very substantial premium.

In recent months Ivanhoe has been seeking to raise funding for Oyu Tolgoi independently of Rio but, along with the dramatic re-shaping of Ivanhoe’s boardroom and management, the companies announced that, on top of $US1.8 billion of interim funding it provided Ivanhoe in 2010, Rio would extend the group another $US1.5 billion while looking to arrange a permanent $US3 billion to $US4 billion project financing facility that would enable Ivanhoe to repay the Rio funding.

Ivanhoe also announced a $US1.8 billion rights issue that will be underwritten by Rio and which could, if Rio decides to exercise various rights it has to Ivanhoe shares, lift its shareholding to between about 55 per cent and 65 per cent.

Once it has control of the boardroom Rio will also inevitably review the future of Ivanhoe’s non-Oyu Tolgoi interests. Ivanhoe owns 59 per cent of Ivanhoe Australia, 57.6 per cent of Mongolian coal producer SouthGobi Resources, 23.6 per cent of Entre Gold, which has mining licences adjacent to Oyu Tolgoi, and a major gold project in Kazakhstan.

The reason Ivanhoe hasn’t precisely determined the size of the project financing facility is that there might be asset sales once Rio has reviewed the non-Oyu Tolgoi assets. SouthGobi is already under bid by Rio ally Chalco, which could release between $US514 million and $US866 million, while the stake in Ivanhoe Australia and the Kyzyl gold project in Kazakhstan could be worth up to $US1 billion each.

Rio’s stalking of Ivanhoe has been brilliantly, and ruthlessly, executed and has now given it unchallengeable control of one of the world’s best new copper resources just as it is nearing first production. First ore from the mine is scheduled for the second half of this year, with full commercial production expected in the first half of next year. Friedland’s reluctant surrendering of his ambition to retain control of the project is a major victory for Rio’s Tom Albanese and his management as the group continues to make its flirtation with disaster during the global financial crisis an ever-receding memory.

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