Oyu Tolgoi Partners End in the Red - TheStreet

(Rio Tinto/Ivanhoe story updated with closing share prices)
NEW YORK (TheStreet) -- Shares of Rio Tinto (RTP) stock ended Wednesday's trading session in the red a day after the company said that it has chosen to exercise all its Series A warrants in Ivanhoe Mines (IVN) , demonstrating its continued dedication to the Oyu Tolgoi copper and gold project in Mongolia.

Rio Tinto American Depository Receipts settled down 4% to $43.60 Wednesday afternoon. Meanwhile, shares of Ivanhoe stock closed at $13.04, down 2.3%. Rio Tinto and Ivanhoe are development partners for the Oyu Tolgoi project.

The Oyu Tolgoi copper-gold project is seen from the air at the Oyu Tolgoi, Mongolia site, on Thursday Dec. 10, 2009.

In a written statement, Rio Tinto said that by exercising the warrants, its ownership of Ivanhoe shares will increase by 7.3% to 29.6% and provide sufficient funds to Ivanhoe to continue the development of the Oyu Tolgoi copper and gold complex in Mongolia on schedule. The warrants allow Rio Tinto to acquire more than 46 million shares of Ivanhoe at a subscription price of $8.54 a share, or about $393 million.

Andrew Harding, chief executive, Copper, Rio Tinto, said the company's decision to exercise these warrants demonstrates Rio Tinto's continued confidence in the quality of the Oyu Tolgoi deposit. After the action is completed, Rio Tinto will own 144.66 million shares of Ivanhoe.

If Rio Tinto were to exercise all of its remaining share purchase warrants and convert its $350 million loan to RioTinto for interim financing of the Oyu Tolgoi copper-gold complex into shares, it would own about 267.8 million shares of Ivanhoe, which represents about a 44% interest in Ivanhoe. Rio Tinto has the right at any time to do that.

Oyu Tolgoi is the world's largest undeveloped copper-gold project and is located in the South Gobi region of Mongolia. Ivanhoe studies indicate that Oyu Tolgoi contains about 81 billion pounds of copper and 46 million ounces of gold. Production at the Oyu Tolgoi complex is expected to begin in 2013, with a five-year ramp up to full production.

Meanwhile, Kitco analyst Jon Nadler's longer-term forecast for the metals sees gold price averages of $900 an ounce over a one-year period, down to $850 an ounce over a three-year period, and copper prices rising from $7,500 a ton over a one-year period to about $8,500 a ton over over a three-year period.

Nadler said that gold investment demand could abate with prices returning to a more balanced relationship between the yellow metal's prices and its fundamentals as the financial crisis ebbs and the European sovereign debt situation resolves itself. "We have been in crisis mode since late 2006 and nothing goes on forever," Nadler pointed out. "Absent a crisis-driven safe-haven and mainly speculative demand, gold's fair value lies in that $800 to $900 range."

Meanwhile an uptrend in copper prices will of course be dependent on the eonomic recovery, which "while not yet out of the 'fragile' state at the moment, will gain traction and demand for base metals," Nadler explained. That said, "a housing recovery means good news for copper."

These days, some 400 pounds of copper are estimated to be used in building the average home.

-- Reported by Andrea Tse in New York

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