More on IVN Rio Tinto. Awareness increasing that OT is the biggest greenfield, copper porphry, find in the world.
My money stays on and in Entree. At $1.75, they are in the catbird seat in terms of leveraged exposure to Oyu Tolgoi.
Rio Tinto? Can you say "block caving"?
Behind the Rio Tinto, Ivanhoe deal Ivanhoe's Friedland expects big things out of Mongolia
NEW YORK - This week Canadians cashed in their Inco Ltd. stock but a new deal closed that heralds the start of a new Canadian mining powerhouse.
An agreement was inked in New York between Anglo-Australian mining giant Rio Tinto and Canada's Ivanhoe Mines, giving Rio 9.9% of Ivanhoe and an option to buy up to 40%. The two will jointly develop Ivanhoe's huge copper-gold discovery made in 2001 in Mongolia.
When a Rio executive was asked why only 40% was bought, he replied, "because that's all that was available."
Since the deal was announced on Oct. 18, Ivanhoe shares have jumped 40% and its market cap to $3.8-billion from $2.2-billion.
Ivanhoe's founder and executive chairman, Robert Friedland, spoke to me at length about the deal. He's touring financial capitals to talk with investors and analysts about the deal.
He rose to prominence after discovering the gigantic Voisey's Bay nickel deposit in Newfoundland in 1994 and selling it for billions of dollars in 1996 to Inco.
But with this deal, he does not want to sell out of Mongolia but to participate.
"Mongolia is about the discovery and development of a mineral province [a huge region of ore bodies] as opposed to a single asset like Voisey's Bay, which we think is a one-off," he said. "We wanted to bring in a strategic minority partner, which has brought strong operating and financial credentials."
When asked what his stake will be if Rio takes up 40% of the stock within five years, he said "about 20%."
This week, Goldman Sachs, JP Morgan, Macquarie Research Equities and others lauded Rio Tinto for getting involved because Ivanhoe's discovery is believed to be the world's largest undeveloped copper-gold resource. Citigroup called it "Mongolian Magic".
"We've been talking to Rio Tinto for 2 1/2 years," said Mr. Friedland. "But we have been approached by every major mining company in the world. We've never approached anybody. Never initiated a call and only accepted calls at the level of the CEO."
Some 30 confidentiality agreements were signed with mining giants interested in buying into the find. Everybody with size tire-kicked and negotiated.
"We ran a Dutch auction in reverse," explained Mr. Friedland. "Major mining companies always want to have 51% so they can access the cash flow. We said we wanted to sell the smallest possible percentage to someone who had the best expertise."
Mongolia, however, has some political challenges. A revenue-sharing deal with Ivanhoe has taken longer than some had hoped. And this spring, Mongolia passed a windfall profits tax, which imposes huge royalties on production unless they are refined or smelted inside the country.
"The agreement with Mongolia is not taking a long time," he said. "We're foreigners. We're guests in Mongolia and they want to know who, and what, they're dealing with."
"The windfalls profits legislation is that if copper is above US$1.40 a pound, the incremental tax rate starts going up. Below it, the tax rate is unmolested. It is a mistake for them to do it, in our considered opinion, but it wasn't completely crazy. It is likely to be renegotiated or appealed.
"And our deal with the government, when it happens, will ultimately have the force of law."
Rio Tinto's participation is clearly a vote of confidence in Ivanhoe as well as in Mongolia and helps put pressure on Mongolia's politicians.
"Rio Tinto's participation will help us achieve a better agreement for Mongolia and our shareholders. It will be a better and bigger mine. Rio Tinto also has the world's strongest mining environmental credentials," he said.
Dealing with politicians is always complicated, he said, including in Canada.
"When we were in Newfoundland, then-Premier Brian Tobin said 'not one pound of nickel in my province will be removed unless we built a smelter'. He had no power legally to do that."
Mr. Tobin's tangle was out of line and a smelter was never built. Development was unduly held up for years, but Inco is finally producing there.
"Rio Tinto gives us backup from two governments because its head offices are in London and Melbourne. Diplomatic backup is extremely valuable," he said.
Rio Tinto also has financial and diplomatic clout, knowledge about markets and the world's best expertise on block-caving, which is an automated underground mining technique that will be used in some of Ivanhoe's Mongolian mines.
Today, the project -- called Oyu Tolgoi -- is impressive. Ivanhoe has invested tens of millions per month, employing hundreds of people to build infrastructure and conduct more drilling to further define the reserves. The development will eventually include open-pit and underground mines that could produce for decades.
Mr. Friedland is not only a financier and salesman, but also one of the world's foremost mine finders. He's a dual citizen of the United States and Canada who has operated mines all over the world and lives in his airplane, making deals in the mining and technology sectors.
So it wasn't surprising that, true to his American and stock market roots, he concluded our interview with a pitch to Canadian investors.
"For 30 years, people in Canada bought Rio Algom [sold by Rio Tinto to BHP] which had uranium in Ontario and assets elsewhere. So the comparison is obvious. Now we are creating Rio Ivanhoe. And with the sale of Inco this week, Falconbridge, Noranda, there is $40-billion of secular mining money looking for a home. We suggest the new Ivanhoe. We're Canadian."
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