Friday, April 20, 2012

Ivanhoe Mines: Nothing Much Has Changed

Ivanhoe Mines (IVN) made two major announcements on April 18, 2012, that should not have surprised anyone and do not change the volatile outlook for the company through Mongolia's national elections in June 2012.
Yet, Ivanhoe Mines shareholders rejoiced and sent the shares 16% higher on April 18 after losing about 25% in the prior 11 trading sessions.

Friedland Resigns

Announcement 1: CEO Robert Friedland and multiple members of the board are resigning. Rio Tinto (RIO) management will step into their place.

We have known this would happen eventually since December 13, 2011, when Ivanhoe Mines lost an arbitration hearing to Rio Tinto that cleared the way for Rio Tinto to take over Ivanhoe Mines. And this has certainly been clear since Jauary 25, 2012, when Rio Tinto raised its stake in Ivanhoe Mines to 51%. Bloomberg wrote two days later that they anticipated Rio Tinto would change management at Ivanhoe Mines.

As predicted months ago, management has changed. Inasmuch, this is not news, and nothing has changed.

Rights Offering

Announcement 2: Ivanhoe Mines shareholders will be able to exercise a right to purchase more shares of Ivanhoe Mines at CAD$8.34 in early May 2012. Actually, this seems to be a negotiated deal as part of Rio Tinto taking over Ivanhoe Mines and Mr. Friedland stepping out of the way. Canada's Globe and Mail had accurately reported there was an issue still pending for Rio Tinto with its takeover of Ivanhoe in Ivanhoe's shareholder rights agreement since the arbitration ruling in December 2011.

It seemed, by my interpretation, like the original rights agreement allowed for Ivanhoe Mines shareholders to gain 2 shares for every one held if the company was taken over. However, it has been noted since January 18, 2012, that Ivanhoe Mines plans to scrap that shareholder rights agreement at its annual meeting on May 11, 2012. Thus, in the end, we have an equity financing of about $1.8 billion that is part of the behind the scenes negotiated takeover of Ivanhoe Mines by Rio Tinto. We knew this was happening, didn't we? Not much changed.

But shares for $8.34 if you are a shareholder. Arbitrage! Cheap shares! One could argue that. It may be a good deal. It will depend on when Rio Tinto buys the company out, at what price, and what happens between now and Mongolia's elections near the end of June, more than two months away. Maybe this is a change. Maybe not as much as one would think.


Earlier this week, I spent a lot of time delving into the Oyu Tolgoi 513 page technical report in an article to point out that downgrades of the stock, as reported by the mainstream media, were flawed.

Downgrade argument one was that ore grades were lower. Factual response: ore grades were principally lower because Ivanhoe Mines changed how they calculated ore grades to a more stringent standard.

Downgrade argument two: costs of building the mines are up. Factual response: costs were higher mainly due to difficulties with the ventilation system for the underground mine and normal expectable inflationary pressures in a country that had 17.3% GDP growth last year.

Downgrade argument three: Oyu Tolgoi is behind schedule. Factual response: the open-pit mine is one year ahead of schedule. The underground mine is behind schedule, probably by a matter of months, because of the ventilation issues management is working to resolve.

Nothing changed that much.


I subsequently wrote an article about political problems facing Ivanhoe Mines sale of SouthGobi Resources (SGQRF.PK) to Chalco (ACH) a few days ago. The political climate, with elections approaching, is not changing.

The problems with Ivanhoe Mines sale of SouthGobi Resources have not gone away. If anything, they may escalate.

Mr. Friedland's resignation does not clear Ivanhoe Mines from being a political target through the elections. Ivanhoe Mines owns 66% of the Oyu Tolgoi copper-gold mine, and the government of Mongolia owns the other 34%. This mine is sizeable and has been politically targeted before.

This has not changed. Based on the timeline for Ivanhoe Mines' annual meeting and the share offering, it is not possible for Rio Tinto to complete a takeover of Ivanhoe Mines before the election. Thus, if anything, one could argue this election cycle may be some politicians' last chance to take a political populist swing at Mr. Friedland and Ivanhoe Mines.

The Media

Some articles on Wednesday were still looking back and saying, "Most recently [Ivanhoe and Rio Tinto] fended off an attempt by Mongolia in October to boost the country's stake in the [Oyu Tolgoi] project from 34 percent."

This is the absurdity of media coverage of Mongolia which any investor in Mongolia needs to be mindful of. Back on September 9, 2011, the media began to report that a group in the Mongolian parliament wanted to raise the country's stake in the Oyu Tolgoi mine. As the global financial media followed upon each other's reports, this ultimately became, "The government of Mongolia is seeking to boost its stake to 50 percent from 34 percent."

This report from September 13, 2011, from a Mongolian website makes a few things clear:
the head of the Oyu Tolgoi project is, was and has been Cameron McRae of Rio Tinto. (Rio Tinto took over Oyu Tolgoi's management long before they held 51% of Ivanhoe.)
the petition to change the government of Mongolia's stake in the Oyu Tolgoi project from 34% to 50% was submitted by 20 members of parliament.

The number of people who signed on to the letter to change the Oyu Tolgoi agreement eventually rose to 22. There are 76 members of parliament. 29% of the parliament made noise and the global media said the Mongolian government was on the brink of changing the agreement. There was never a chance the agreement was going to change, but Ivanhoe Mines' share price took a beating while this was reported for weeks.

If 29% of your government's parliament or congress said they were going to sign a bill banning all motorized transportation in your country, would you sell your car?

Here is a short list of articles talking about the Mongolian government seeking to raise its stake in the Oyu Tolgoi mine from 34% to 50% that I posted in my Mongolia news blog on September 27, 2011:

Bloomberg article I
Bloomberg article II
The Australian
WSJ (subscription required)
Financial Post

Things like 29% of the members of parliament wanting a change being sensationally reported as "the government plans to..." can happen. There are more things that can happen. Consider that there are reports going around that the Oyu Tolgoi mine will account for 1/3 of Mongolia's GDP by 2020. While this may be an exaggeration, it is no exaggeration that the Oyu Tolgoi mine is a big deal in Mongolia.


With last Friday's arrest of former Prime Minister (2000 - 2004) and President (2005 - 2009) of Mongolia Enkhbayar, the new and improved Mongolia Anti-Corruption Agency flexed its muscle.

Mongolia was ranked last year 120th out of 183 on the Corruption Perceptions Index. Four of Mongolia's estimated 10 richest people are in the government (#s 3, 5, 8 & 9 on the linked list). These men all belong to either the Mongolia People's Party [MPP] or the Democrat Party [DP]. Together these two parties hold 72 of the 76 seats in Mongolia's parliament.

Mr. Enkhbayar had started a third party, the Mongolia People's Revolutionary Party, the name of the former communist party. He seems a curious target for the first "big fish" to be taken down by anti-corruption charges. He has not held political office since 2009, yet the agency is pursuing charges against him for corruption while he was in office, now.

Do we believe there was no corruption by any members of the MPP and DP in office during the last 4 years, and it is only Mr. Enkhbayar that was corrupt?

Do we think in a country with vast mineral wealth there may have been, from time to time, some wheels greased to make deals for mining licenses and other business dealings?

Do we think flexing anti-corruption muscle on foreign entities would be an easier way to grab the political spotlight than pursuing a member of one of the two biggest parties, or one of their related businesses, during this election cycle?

Do we think during an election cycle anti-corruption laws could be enforced for the benefit of some candidates?

Do we think it is better to apply today's new rules to the past when many things were different? or to let the past stand as the way things were in the past, and apply new rules fairly to all persons and entities equally going forward into the future?

These are questions, not answers. I don't have the answers but one.

Nothing much has changed. Not yet.

Disclosure: I am long IVN.

Additional disclosure: This is a "no front-running zone." No trades were or will be placed for one week before or after publication of this article in any security mentioned in this article.
Jon Springer

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