Ivanhoe Mines Copper and Gold FindRelations between Rio Tinto and Ivanhoe Mines started out well enough. In 2006, they signed an agreement to jointly develop the massive Oyu Tolgoi copper and gold mine. Ivanhoe already owned 66% of the Mongolian jackpot, so Rio gave financing in return for shares in Ivanhoe. And everything went just fine for a while. But then Rio began building up its position to the 35% it now holds in its partner. In addition, a standstill agreement between the two -- capping Rio's investment at 47% -- expires next October. Rio, of course, likes how this makes it easy to eventually take full control of both its partner and their shared mine. But Ivanhoe Founder and Chairman Robert Friedland feels very differently. A legend in his industry, he has a Steve Jobs-like knack for telling investors a great story. Over the summer, he made Ivanhoe sign a shareholder rights plan, or poison pill, to protect his company from "coercive and creeping takeovers." If effective, that would extend the standstill agreement indefinitely. But ultimately, a Canadian arbitrator will decide the contract's validity in the situation. Ivanhoe Mines also engaged investment bankers to assess "strategic options." And investors seem to be banking on Friedland, as his company's shares hit an all-time high a few weeks ago.
The Oyu Tolgoi Copper MineIt's easy to see why both Ivanhoe and Rio Tinto want the mine so badly. Set in Mongolia's south Gobi Desert, the Oyu Tolgoi mine is the world's largest undeveloped copper-gold project. The country is now one of the world's leading frontiers for metals and mining, due to its rich deposits of copper and coal so close to China. Earlier this year, BMO Capital Markets listed Oyu Tolgoi as the best new copper project for long-term profits. It also ranked the mine as the second-best new source of copper in terms of production capacity. Because of its location, Ivanhoe could find a white knight in a state-owned Chinese company. But even then, Rio has a signed right of first refusal over any third-party offer. So should Ivanhoe offer its shares to a bidder, Rio could not only deny the bid but also move to take immediate control of the entire company. Ivanhoe can only hope to find an interested party with a high enough offer that Rio can't counter. Speculation says that would have to amount to about C$40 per share. Some think that China's state-owned mining company, Chinalco ADR ( ACH), which wants to diversify out of aluminum, could offer that much. But Chinalco is also Rio Tinto's largest shareholder, so it would be much more likely to join teams with Rio if it really wants Ivanhoe. In the end, no third-party offer really exists, which shouldn't come as a surprise. Oyu Tolgoi is a multi-billion dollar project, and not too many players can handle that. So shareholders in Ivanhoe Mines have to trust solely in Mr. Friedland's ability to woo one of the few that can afford such a price tag. Right now, with all due respect to his skills and savvy, that seems like a tall order.
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