Battle in Mongolia takes ugly new twist
Monday, Vancouver-based Ivanhoe unveiled a plan to raise US$800-million to US$1-billion in financing through an equity rights offering, along with a management shakeup that returns Robert Friedland to the chief executive job.
In doing so, it revealed huge disagreements with Rio Tinto that go well beyond the arbitration that Rio is pursuing over Ivanhoe’s shareholder rights plan.
In its prospectus for the equity offering, Ivanhoe acknowledged that Rio is against the move, noting that Rio believes the offering violates its contractual rights and thinks there are “superior financing alternatives available.”
The fact that Ivanhoe is going ahead with it anyway suggests that relations between the two companies are not about to get any warmer. If successful, the offering could allow Ivanhoe to raise money without increasing Rio’s influence on the company.
The one thing both parties can agree on is that money needs to be raised. Oyu Tolgoi has a capital cost requirement of more than US$4-billion, and while Ivanhoe expects to secure a major financing package in the first half of 2011, the equity offering would fill in the gap.
Ivanhoe owns 66% of Oyu Tolgoi in a joint venture with the Mongolian government, and Rio Tinto owns about 35% of Ivanhoe, with a right to increase its stake to 46.6%. Rio is not happy with this scenario, and badly wants to turn its Ivanhoe shares into a direct stake in the project. (A standstill agreement prevents Rio from buying a controlling stake without buying the whole company.)
Rio has talked about bringing in the Chinese company Chinalco as another source of financing. But Ivanhoe decided to go with a rights issue, a common practice in Europe but highly unusual in North America.
It would force Rio to buy 35% of the stock being issued if it wants to maintain its stake. While the stock has not yet been priced, it will sell at a discount to Ivanhoe’s current share price.
Rio has a right of first offer on Ivanhoe share issues, but Ivanhoe contends it does not apply to this offering.
Merrill Lynch analysts Jason Fairclough and Peter O’Connor said that by offering the rights issue to all shareholders, Ivanhoe avoids Rio’s pre-emptive rights and still gets the funds it needs.
“The irony is that if this tactic is successful, Rio’s cash could end up giving more ‘leverage’ to Ivanhoe,” they wrote in a note to clients. They said that Rio could choose not to participate in the offering, but Ivanhoe may proceed anyway and dilute Rio’s stake.
A source close to Rio suggested the offering could reflect an inability by Ivanhoe to find a third-party investor. The source also pointed out that Ivanhoe previously said its financing package would be ready in the first quarter of 2011; now the company is saying first half of 2011.
In addition to the fight over financing, Ivanhoe revealed in the prospectus that it continues to argue with Rio over how quickly the project should be developed and how much it will cost.
Rio wants to take a more conservative course than Ivanhoe, and Ivanhoe warned that a failure to reach consensus “could potentially affect the Oyu Tolgoi project’s current development schedule.”
With many strategic alternatives to consider, it was not a shock to see Mr. Friedland return to the CEO role at Ivanhoe.
He was CEO for 10 years until 2006 and made a fortune selling the undeveloped Voisey’s Bay nickel-copper deposit in Quebec to Inco Ltd. in 1996 for $4.3-billion.
Mr. Friedland, the founder and largest individual shareholder of Ivanhoe, intends to participate in the proposed rights offering to the maximum permitted level to maintain his present 18.3% ownership stake.
John Macken, who has been CEO of Ivanhoe since 2006, will continue to lead the ongoing construction of the Oyu Tolgoi copproject.
The company said it is also establishing the office of the chairman as part of an ongoing commitment to maximize shareholder value.
pkoven@nationalpost.com
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