Ivanhoe shares surge following move to attract new strategic investors
Shares in Ivanhoe Mines Ltd. surged more than 14 per cent Tuesday after the company said it will lift restrictions on its ability to issue shares to strategic investors, further straining relations with its biggest shareholder.
The Vancouver-based company announced it has given the requisite 60 days advance notice of its intentions to Rio Tinto, an international mining giant and Ivanhoe’s key partner on a huge copper-gold deposit in Mongolia.
The move will eliminate a covenant that’s been in place since October 2007, allowing Ivanhoe to issue more than five per cent of its common shares to third-party strategic investors “which could include major mining companies,” it said.
It also said Andrew Harding, chief executive of Rio Tinto’s copper division, has resigned from Ivanhoe’s board of directors.
Ivanhoe’s shares (TSX:IVN) gained $2.14 or 14.3 per cent to $17.07 on the Toronto Stock Exchange following the announcement.
David Huberman, lead independent director of Ivanhoe’s board and chair of its corporate governance committee, said eliminating the restrictions will “give the Ivanhoe board the flexibility to consider all available opportunities as part of its objective of realizing maximum value for Ivanhoe Mines shareholders.”
Although Huberman stressed that Ivanhoe intends to continue its co-operation with Rio Tinto on the development of the Oyu Tolgoi project, the move signals a deterioration of the relationship between the two mining companies.
Rio Tinto has already initiated an arbitration proceeding against Ivanhoe for its adoption of a so-called “poison pill,” which it says breaches the companies’ joint-venture agreement.
Poison pills are designed to protect companies from hostile or creeping takeovers by allowing them to flood the market with shares in the face of a hostile bid, making a takeover far more expensive than it would be otherwise.
Ivanhoe’s is triggered when any new investor acquires more than 20 per cent of the company’s outstanding shares. Rio Tinto, which already owns 29.6 per cent of Ivanhoe, would trigger the poison pill if it acquires more than 46.7 per cent as permitted by a prior agreement.
Oyu Tolgoi, which is jointly owned by Ivanhoe and the Mongolian government, is thought to be one of the top three copper and gold mines in the world. Rio Tinto has an indirect ownership interest in the mine through its stake in Ivanhoe, although the company has expressed interest in converting its equity into a direct stake.
The British-Australian miner also announced last week that it was in talks with Chinese aluminum company Chinalco about buying a minority equity stake in Ivanhoe or a direct interest in Oyu Tolgoi.
Ivanhoe appears to be setting up barricades to a potential move by Rio Tinto to take ownership of the mine, said John Ing, president of Toronto-based investment dealer Maison Placements.
“It’s part and parcel of who’s going to ultimately own the deposit. The agreement as originally structured was Rio Tinto with their deep pockets would finance the deposit, and they would get their ownership through the stake in Ivanhoe,” Ing said.
“Somebody somewhere in Rio Tinto has obviously done the math and woken up and said, ‘Well jeez, if we’re going to spend all this money, why aren’t we driving the bus?’”
The move to attract additional strategic investors also increases Ivanhoe’s bargaining power with Rio Tinto, said Ray Goldie, base metals mining analyst at Salman Partners.
“If Rio says, ‘We’d like to take you over,’ that would make it easier for Ivanhoe to say, ‘Well, we’ll see if we can find someone else willing to pay more than you are,’” Goldie said.
Ivanhoe’s decision to open itself up to strategic investors could dilute Rio Tinto’s stake in the company.
Although Rio Tinto wouldn’t comment Tuesday on Ivanhoe’s move, the company has already taken issue with the dilution of its stake that could result from the poison pill, which gives shareholders the right to double the company’s shares outstanding.
Rio Tinto also says the poison pill unilaterally extends its so-called “standstill obligation,” or a promise not to acquire more than a certain percentage of Ivanhoe, beyond the obligation’s current expiry date of October 2011.
Oyu Tolgoi is forecast to produce 1.2 billion pounds of copper and 650,000 ounces of gold annually in its first 10 years. The mine is expected to cost US$4.6 billion to build and will begin production in 2013.
Rio Tinto is a leading international mining group headquartered in the United Kingdom, combining Rio Tinto plc, a London- and NYSE-listed company, and Rio Tinto Ltd., which is listed on the Australian Securities Exchange.
Besides its stake in Oyu Tolgoi, Ivanhoe has a 57 per cent interest in Mongolian coal miner SouthGobi Resources (TSX:SGQ). It also has an 81 per cent interest in Ivanhoe Australia, an exploration and development company, and a 50 per cent interest in Altynalmas Gold Ltd., a company developing the Kyzyl gold project in Kazakhsta