Ivanhoe strikes trouble in Mongolia
TORONTO — All of a sudden, Robert Friedland is finding renewed trouble on key fronts in Mongolia. Less than two years after his company, Ivanhoe Mines Ltd., finalized an investment agreement to develop the US$6-billion Oyu Tolgoi project, politicians want to renegotiate it. And problems are also re-surfacing with joint venture partner Rio Tinto Ltd., as the two sides are sending mixed messages ahead of an important arbitration hearing.The long-simmering issues bubbled to the surface on Monday as Ivanhoe shares fell as much as 21% and ended that day at $15, the lowest closing price in more than a year. Investor confidence in Mongolia took a beating, and Ivanhoe’s low share price raised speculation that Rio could attempt a takeover bid. Rio is keen on having direct ownership of Oyu Tolgoi, and buying Ivanhoe would allow it to get that.
The renewed political risk could also make it tougher for Mr. Friedland to finalize a US$4-billion financing package that he is putting together for development of Oyu Tolgoi, a massive copper-gold project.
In October 2009, Ivanhoe and the government struck an investment agreement on Oyu Tolgoi after years of difficult negotiations. Under the terms of the deal, Ivanhoe got 66% of Oyu Tolgoi and Mongolia got 34% (a separate arrangement allows Rio Tinto to acquire up to 49% of Ivanhoe’s shares, which it maxed out Monday).
This month, 20 members of the Mongolian parliament petitioned the government to claim a bigger stake in the project. The move appeared to be politically motivated ahead of elections next year. Last week, a senior government minister confirmed that Mongolia wants to discuss potential changes to the deal. The government can boost its stake to 50% from 34% under the current arrangement, but not until 2039. Some politicians now want to speed up that timeline.
Ivanhoe issued a tensely worded statement saying that it expects the government to honour the current agreement, and Rio Tinto made similar comments.
“I think what we are demonstrating is that the investment agreement is a contract, and we’re going to honour our commitments and we expect the government to honour its commitments,” said Cameron McRae, president of Oyu Tolgoi LLC and Rio’s Mongolia country manager.
Ivanhoe and Rio have spent more than US$2.5-billion on construction so far, and the first phase of the mine is 50% complete. That money would never have been spent without a firm investment agreement.
Meanwhile, trouble is once again flaring up between Mr. Friedland and Rio Tinto (which is building the mine). It started last week, when senior Rio executive Andrew Harding suggested that commercial production at Oyu Tolgoi, scheduled for 2013, could be delayed if power supply from China is not secured. Ivanhoe retorted by claiming that a deal to secure power is progressing as expected.
Sources close to Rio said there was “nothing new” in this sudden dispute. They said that Mr. Harding’s comments reflect the fact that there is always risk when trying to strike a deal between Mongolia and China, where relations are always a little tense.
Another issue coming to a head is the arbitration hearing between Rio and Ivanhoe over the latter’s shareholder rights plan (or “poison pill”). The arbitration is scheduled for next month, and Rio hopes to strike the pill down and prevent Ivanhoe from issuing more shares if it receives a takeover bid.
Rio has a standstill agreement that prevents it from raising its Ivanhoe stake past 49% until Jan. 18 of next year, unless it makes an offer for the whole company.