Rio Tinto, Ivanhoe, Riversdale and Copper
mineweb.com
Barry Sergeant takes a closer look at why Rio Tinto has been in the headlines so much over the last week and why copper is doing so well
Interviewer: Geoff Candy
Posted: Friday , 10 Dec 2010
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GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Barry Sergeant on Mining and with me as always, the eponymous Barry Sergeant. Barry if we look at what's been going on in the mining world this week, Rio Tinto's name comes up quite often both with regard to Oyu Tolgoi and Ivanhoe and also with a little company called Riversdale Mining. Perhaps if we start with the Oyu Tolgoi debacle - there've been a lot of spats here and there between Ivanhoe and Rio Tinto about the massive Mongolian project called Oyu Tolgoi - what's the latest development?
BARRY SERGEANT: The bottom line is not complicated - from day one, not that many years ago, Ivanhoe has been cash strapped relative to the size of the development at Oyu Tolgoi, which is close to US$5billion. That is only phase one. The partner that has come along is Rio Tinto, which is one of the top three mining companies in the world by value, and there have, for at least the past couple of years, been tensions between the majority shareholder in Ivanhoe - a Mr Robert Friedland who owns 18% of the stock and Rio Tinto. He has been trying to develop the deposit himself and trying to access capital. Now that has simply not been possible and in the past few months or so, we've seen the two parties run into particularly sticky situations, including going to arbitration, etcetera. As of yesterday, that is off. Rio Tinto is going to support a US$1.2billion rights issue out of Ivanhoe, have put up a very large interim loan package and at the same time it has agreed not to raise its stake above 49% for the next two years or so. The focus is very thrown onto Rio Tinto - not only their capital and financial expertise, but also their mining expertise because what it has got out of this, is full management of the development. That must have been a bit of a blow for Mr Friedland. The stock price yesterday was off 15%, but even so his stake is worth $2.5billion which is not too bad - even though that stock two years has come up 15 times or so since then - although as I said, there was a bit of profit taking yesterday. He now looks a lot more relaxed and immediately Rio Tinto has moved the recommissioning of the mine forward by six months.
GEOFF CANDY: What does it mean that Rio Tinto now has full management control - how does that change the dynamics of the relationship?
BARRY SERGEANT: Rio Tinto, a trans-national miner, number three mining company in the world by value - it has specific expertise in copper although gold at Oyu Tolgoi is very much an important product and they know exactly how, when, etcetera - the whole story. It has an entire encyclopaedia of institutional knowledge as to how to do this kind of job. By comparison Ivanhoe is just nowhere near that and it has access to just about every type of intellectual and also financial resource. That is what it's going to be applying here, at full steam - because every day that you don't have a dollar in the ground when you're developing, is a dollar lost on the revenue line.
GEOFF CANDY: What do you then make of rumours - and we saw some reports out of Reuters earlier yesterday and today about sources close to the deal saying that Ivanhoe might look to sell itself off in two phases - do you think that's an inevitability given the size of Oyu Tolgoi and Rio Tinto's interest in it?
BARRY SERGEANT: Very much so - Ivanhoe is an interesting company with a stake in a listed coal company with gold interests as well as other interests and it doesn't make any sense to keep those companies inside such a singularly large development such as Oyu Tolgoi. But having said that Mr Friedland's empire is very messy. He has a whole lot of private companies - there are other listed companies like Ivanhoe Australia and so on. he is a great mining entrepreneur - if you look at his own track record, but when it comes to organisational and financial structuring, Robert Friedland is pretty much in the slow lane.
GEOFF CANDY: So clearly it's going to be a lot more negotiating and it's going to be a long process before we see anything come to light in terms of exactly what's going to happen to Oyu Tolgoi over the next 10 to 15 years.
BARRY SERGEANT: Very much so, yes but I don't think there's any question - if you look at the lead time even now, to when the mines first starts to produce revenues, it's going to be quite a few years before it will be in a position to pay dividends. Mr Friedland is not just going to get impatient about that, he also has a lot of demands to develop other assets within his listed and unlisted empire. Rio Tinto is probably going to get to take over sooner, rather than later.
GEOFF CANDY: Moving from Ivanhoe and Oyu Tolgoi to another interesting development that is happening within Rio Tinto - and that's a potential bid for Riversdale Mining - potentially a heated battle for Riversdale Mining - not just with Rio Tinto but perhaps with Tata in India.
BARRY SERGEANT: Yes - it's a very interesting one - that is a story happening in Tete province, northern Mozambique - the main development by a long way is Moatsi which is Vale, the worlds number two mining company, and number one in iron ore. The area has extensive coal deposits - specifically coking coal, hard coking coal, which is what you need in the iron ore business if you want to go to steel. BHP Billiton for example has a combined product mix which offers iron ore and coking coal - where it's number one in the world. Vale is looking at an appropriate positioning in Mozambique, which is about halfway to Asia. At the same time there are other developments in the area with the furthest advanced after Moatsi are the Riversdale deposits, in the same area. Vale is very well known for its massive logistical system at Carajás Mine in northern Brazil, in iron ore where it has mines, it has ports, it has facilities as well as ships. It's developing a similar type of package in Mozambique - it has already bought into existing railway lines and is busy with port buildings and so on. any number two that comes in here - and Riversdale is a relatively small company with a market cap of R2.8billion. it is going to need a major and it's just a question of time as to who comes along and takes up Riversdale.
GEOFF CANDY: Do you think Vale might bid for it?
BARRY SERGEANT: Well Vale has extensive interests in the area and it's also going across border like for example to Zambia that is developing copper mines and it has probably got enough in its cards in Mozambique in terms of unmined coal and is rather going to concentrate on developing with logistics for that.
GEOFF CANDY: Moving from Mozambique to the rest of the world - what's happening in the mining sector - any trends in particular that you've noticed lately?
BARRY SERGEANT: Something that I've been working on a lot lately, are the mineral rights issues in South Africa once again. What has come up in the past couple of weeks is specifically what's happening in platinum. I don't think it's any coincidence, but if you look at global mining companies, then the sub-sector, which is often the worst performer over the past 12 months, is platinum. Not just the big ones, but the smaller ones as well. If you go right to the top of the heap, the best performing mining stocks in the world, sub sector - probably not much that applies against this one, it is silver, followed by a tiny sector - tin, copper, copper stocks - the copper price which is close to an all time record right now, and certainly the best level at nearly three years. Then youve3 got geranium stocks - we've had a miraculous comeback in the past three months, followed by molybdenum and then coal stocks, non-Asian coal stocks. Then we get the first mention of gold stocks. So there has been profit taking in gold, which is not surprising - there's been a bit of a correction in the bullion price and next up we have diamond stocks followed by potash. So yes it's an interesting mix, but in terms of price developments, not that far out of what one would anticipate. Some of the laggers at the moment are including the tier two iron ore stocks - the top three people are doing absolutely fantastic. They are also diversified - that is Vale, Rio Tinto, BHP Billiton - but the tier two iron ore stocks of which there are dozens, with a good number of them being in Australia - those are surprisingly lagging behind. That is probably an area in which to look for value.
GEOFF CANDY: Indeed we'll have to keep an eye on it. |
