MINING FINANCE / INVESTMENT
Rio would be first in line to buy should Ivanhoe put itself up for sale
The miner, which has a minority interest in the massive Oyu Tolgoi copper-gold deposit in Mongolia would be very interested in getting Ivanhoe's stake as well. But, they would probably not be the only potential suitors
Posted: Friday , 08 Jan 2010
MELBOURNE/NEW YORK, (Reuters) -
Rio Tinto (RIO.AX), the mining giant with a minority interest in a huge, undeveloped copper-gold deposit in Mongolia, is likely to be at the front of a long line of potential bidders should its partner, Ivanhoe Mines (IVN.TO), put itself up for sale.
Ivanhoe -- which owns one of the world's biggest copper lodes, the Oyu Tolgoi project in Mongolia -- said on Wednesday it had hired bankers to consider ways to boost the group's value, sparking speculation that the $6.8 billion company could be up for sale.
Rio (RIO.L) owns 19.7% of Ivanhoe and has long coveted the Oyu Tolgoi project. Rio Chief Executive Tom Albanese has called the Mongolian project one of the "most attractive undeveloped copper-gold projects in the world."
But it is likely to run into stiff competition from other big copper miners including BHP Billiton (BHP.AX)(BLT.L), Xstrata (XTA.L) and Anglo American (AAL.L), investors said. Investment bankers also pointed to strong interest from resource-hungry China, as Oyu Tolgoi is located just 80 km (50 miles) from its border.
"It's very rare that these types of projects become available," said Tim Schroeders, a portfolio manager at Pengana Capital.
"If it becomes public that Ivanhoe are sellers, everyone's going to be obliged to have a look and see, because it's just not going to come around again."
To be sure, the timing is less than ideal for Rio. The London-based company only recently cut its massive debt load in half and has further to go.
"I'm sure they would probably prefer not to have to do something immediately," said Tim Barker, an analyst at BT Investment Management.
Even so, Barker said that as a shareholder, he would favor a deal, as long as the price was sensible. "It's the kind of asset they should have in their portfolio."
IN THE DRIVER'S SEAT
In anticipation of an Ivanhoe sale, competitors will closely monitor Rio Tinto.
"I see Rio as being in pole position and I see it as unlikely that anyone would want to step into that mix without knowing what Rio's position is," said one investment banker in the industry.
Under its partnership agreement with Ivanhoe, Rio can increase its stake to 46.6% of Ivanhoe's shares over the next two years.
The cap does not apply if a competing bid is made for the company, Ivanhoe directors waive the restrictions, or if founder Robert Friedland seeks to sell his shares to anyone other than institutional investors. In that event, Rio also has the first right of refusal to buy Friedland's shares. Friedland owns 22.8% of Ivanhoe.
Bankers and fund managers suggested that a joint venture between Rio and a Chinese bidder like Chinalco is a good possibility. Rio is looking to mend ties with the Chinese state-owned company after Rio spurned Chinalco on a $19 billion deal last year.
"Whilst the Chinese would like to get involved with it, because it's right on their doorstep, the impression has been in the past that the Mongolian government may not be interested in the Chinese coming in," BT Investment's Barker said.
"But why not? You could see the kind of structure that we saw with Escondida, 60-40, which gives ultimate management control to one party, but you're not completely at risk on the operation."
Bankers said that any buyer of Ivanhoe would need a balance sheet to support the billions of dollars that need to be poured into development of the Mongolian mine.
They also suggested that Ivanhoe might attract more interest if it first sells or spins off some of its other assets -- its majority ownership of a Mongolian coal miner and an Australian exploration and development company, as well as a gold miner in Kazakhstan.
BHP Billiton might be reluctant to commit capital to Oyu Tolgoi, having walked away from the project in 2004.
But more is known about the project now, and the world's biggest miner might be willing to bid in a consortium for Ivanhoe.
"I'd imagine there would be various groups put together to bid for Ivanhoe, rather than do it alone, because some people have strong balance sheets but not necessarily the expertise to develop the project," said Pengana's Schroeders.
(Additional reporting by Quentin Webb in London and Pav Jordan
in Toronto, editing by Matthew Lewis)