Source: Mineweb                         Date: 27 October, 2010

There are many risks in mining; even the risk that unimaginable individual success could become a risk in advancing an asset to productive and useful status. Ivanhoe Mines's NYSE stock price may have multiplied by a factor of more than ten in less than two years, but it seems that it's simply not enough for Robert Friedland, who owns a self-confessed 18.3% stake in the group, currently worth USD2.3 billion.

His stake, that is; Ivanhoe as a whole has a market value of USD12.4 billion. This is not a bad gain for Ivanhoe's re-discovery of Oyu Tolgoi in 2001 in the Gobi Desert. The discovery goes back forever: outcropping rocks in the area were smelted for copper some 700 years ago, during the times of Genghis Khan.

At the time of rediscovery in 2001, Ivanhoe's stock price was around CAD1.50 a share; it is now trading up around CAD24.00 a share. On 18 October 2010 Ivanhoe was back in the headlines on the announcement that it would be looking to issue fresh common shares to raise USD800 million, and perhaps USD200 million more, further fueling its apparent row with transnational miner Rio Tinto.

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Oyu Tolgoi is a USD-4.6-billion mine build, currently under way. The saga can be traced to 27 October 2006, when Rio Tinto completed a first private placement with a cash-strapped Ivanhoe. Rio Tinto has reacted to the latest news by, in effect, proclaiming that Ivanhoe has undermined Rio Tinto's claimed first right of refusal, dating to 2006. Ivanhoe seems to counter that the right pertains only to private placings, and not a general rights issue.

In July Rio Tinto announced that it had told Ivanhoe that it's taking to arbitration Ivanhoe's "breaches of the private placement agreement caused" by Ivanhoe's adoption of a shareholders rights plan on 5 April. The arbitration is now expected to be finalized by 5 February 2011.

In July Ivanhoe reacted - in part - by declaring that it has "exercised its contractual right and given 60 days’ advance notice to Rio Tinto of a forthcoming change in the agreement governing Rio Tinto's investment in Ivanhoe Mines". That, in short, meant termination of a covenant that's restricted Ivanhoe's ability to issue shares to "strategic investors".

Termination of the covenant meant that Ivanhoe could issue more than 5% of its common shares to one or more third-party strategic investors, "which could include major mining companies". To some observers, this seemed like an odd way of thanking Rio Tinto for so far risking billions of dollars, and making available the skills and institutional memory of a transnational mining group.

To date, Rio Tinto, which years ago agreed to the responsibility for developing and operating Oyu Tolgoi, has pushed, via Ivanhoe, significant investment and intellectual capital into developing the mine. On 29 June, a further USD393 million in cash went from Rio Tinto to Ivanhoe. To date, Rio Tinto has invested some USD1.73 billion in Ivanhoe, inclusive of convertible debt, and increased its ownership in Ivanhoe to 34.9%.

On current agreements, Rio Tinto's past and potential future investments in Ivanhoe comprises some USD2.5 billion. Agreements (up to now) state that Rio Tinto's stake in Ivanhoe can increase up to 46.6% by October 2011, when a standstill over Rio Tinto mounting a takeover bid for Ivanhoe expires.

As an alternative to the rights issue just announced by Ivanhoe, Rio Tinto, which believes there are "superior financing opportunities available" could exercise early its USD750 million or so warrants.

That aside, Ivanhoe's intended rights issue, even if successful, is nowhere near enough to finish the mine build. For months, Ivanhoe has ventured to find non-equity financing for Oyu Tolgoi. Months ago, the group referred to ongoing attempts to finance including apparent buy-ins from the International Finance Corporation, part of the World Bank, and the European Bank for Reconstruction and Development.

In June Ivanhoe signed a mandate letter, where the IFC and EBRD may each consider providing a two part finance package, being USD 300 million from each entity in the form of limited-recourse project financing, and a further USD1.2 billion in commercial loans under a "B loan structure". Now Export Development Canada, BNP Paribas and Standard Chartered have been added to the list of potential financiers. A debt package is anticipated to close during the "first half" of 2011.

According to recent updates from Ivanhoe, Phase I Oyu Tolgoi, which has been authorized and is under way, would cost an estimated USD4.6 billion. During 2013, production would start building up to an average annual production of some 1.2 billion pounds of copper (about 544,000 tons) and 650,000 ounces of gold, for the first 10 years.

Without further equity funding, when the mine starts building up, Oyu Tolgoi's project debt could be in the region of USD3 billion. At that stage, with all the build capital spent, risks would be at something of a peak; Rio Tinto, the major financier, may choose to allow its exposure to remain relatively diversified (Ivanhoe has other interests) and relatively modest, until mine output is proven, debt starts diminishing, and possible dividends loom.

Ivanhoe's direct stake in Oyu Tolgoi is at 66%, given the 34% held by the Mongolian government, which has been anything but a silent partner, securing from Ivanhoe the purchase of government bonds and handsome tax pre-payments.

Ivanhoe has other interests, including 57% of SouthGobi (full market value: USD2.2 billion), 81% of Ivanhoe Australia (USD1.3 billion), and 50% of Altynalmas Gold, which holds 100% of the Kyzyl gold project in Kazakhstan. Like Oyu Tolgoi, each of these assets needs significant development capital, and, if it comes to that, build capital. For now, Ivanhoe Mines needs friends with big balance sheets, and clout in capital markets. But it seems that one man, who seems to have everything, wants something else as well.