Ivanhoe Mines to get US$388 million as Rio Tinto doubles ownership stake

By Brenda Bouw, The Canadian Press

VANCOUVER, B.C. - International mining giant Rio Tinto PLC (NYSE: RTP) is set to double its stake in Ivanhoe Mines Ltd. (TSX:IVN, NYSE:IVN) to about 20 per cent, a week after their joint Oyu Tolgoi mining project received long-awaited approval from the Mongolian government.

Tuesday's announcement sees Vancouver-based Ivanhoe receive US$388 million from the Anglo-Australian miner as part of a second phase of investment towards the copper and gold mining complex in southern Mongolia.

Ivanhoe will use the funds to help build and commission the open-pit mine at Oyu Tolgoi and to advance development of an underground mine.

When the investment is done later this month, Rio Tinto will own about 19.7 per cent of Ivanhoe. That's up from it's current level of about 9.9 per cent.

"This kind of removed a question about financing," BMO Capital Markets analyst John Hayes said of the announcement.

He said some of the money will go to the Mongolian government as part of the newly signed investment agreement between Rio, Ivanhoe and the country.

Hayes added that Ivanhoe is "well-positioned financially" to press on with the project.

Ivanhoe said Monday that the latest investment will increase its cash position to approximately US$725 million. The private placement funding is for about 46 million Ivanhoe shares at US$8.38 per share.

Ivanhoe shares were trading at US$12.59 on the New York Stock Exchange Tuesday, up 10 cents. The shares have traded at a low of US$1.55 and a high of $13.70 on the NYSE in the past 52 weeks.

On the Toronto Stock Exchange Tuesday, Ivanhoe shares were down a penny at C$12.99, with a 52-week range between $2.06 and $14.45.

Rio Tinto shares were trading up $2.15 to US$183.40 on the NYSE Tuesday.

The terms of the private placement were negotiated as part of the original Rio Tinto-Ivanhoe strategic partnership announced in October 2006 to develop Oyu Tolgoi.

The two companies will jointly engineer, construct and operate Oyu Tolgoi, which is said to be the world's largest copper-gold development project. Production was last estimated in 2005 at 70,000 tonnes of ore per day or 25.5 million tonnes annually. New production estimates are expected in the coming weeks.

The agreement allows London-based Rio Tinto to become the largest shareholder in Ivanhoe through investments made in stages totalling about US$2.4 billion and a maximum stake of 46.65 per cent.

That deal states that Rio Tinto could own about 43 per cent of Ivanhoe if the company maximizes its credit facility, along with other conditions. As well, Rio Tinto could buy more Ivanhoe stock to make up the balance of the 46.65 per cent allowed under the agreement.

Ivanhoe has also agreed to use no less than 90 per cent of the proceeds from the credit facility exclusively on the Oyu Tolgoi project.

Rio Tinto's option to complete second financing phase was scheduled for later this month. The company has arranged for an extension, but didn't wind up taking advantage of that option. That means a special Ivanhoe shareholders meeting set to approve the extension has been cancelled.

"With the completion of the Tranche 2 financing, Ivanhoe Mines considers that the company will have adequate capital for its current development plans and spending commitments," Ivanhoe stated Tuesday.

Ivanhoe also said its plan to sell a 9.9 per cent interest in the company to "one or two potential strategic investors" has been deferred.

Hayes said he wasn't surprised by this announcement, saying in the near term the major source of funding will come from Rio Tinto.

"It's clear Rio has an objective," Hayes said, adding that the Oyu Tolgoi project is a considered a treasure given its scale, and the fact that there are few mines like it in the world.

Tuesday's latest financing announcement comes a week after the Mongolian government signed a highly anticipated deal with Rio Tinto and Ivanhoe to develop the US$4-billion gold and copper mine.

The agreement on the Oyu Tolgoi has been renegotiated repeatedly after opponents complained it shortchanged Mongolia. Parliament had to repeal a windfall profits tax in August before the companies agreed to go ahead.

Mongolia will own 34 per cent interest in Oyu Tolgoi's licence holder, Ivanhoe Mines Mongolia Inc. LLC, and receive a $250 million advance payment against royalties and taxes under the agreement.

Ivanhoe will retain a controlling 66 per cent interest in the project.

As part of a separate agreement signed last week in conjunction with the Oyu Tolgoi investment agreement with the Mongolian government, Ivanhoe said it will be investing US$100 million in Mongolian government treasury bills on Oct. 20.

Mongolia also has the option to purchase an additional 16 per cent interest, under certain conditions and time frames.

Ivanhoe would continue to hold management rights over the project and a deciding vote at board and shareholder meetings.