Temasek takes 5.5% stake in Ivanhoe Mines

Jun 12 • Mining, News • 1480 Views • 1 Comment on Temasek takes 5.5% stake in Ivanhoe Mines

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Temasek has taken a 5.5 per cent stake in Ivanhoe Mines of Canada, making the Singapore state investment agency the latest investor to gain exposure to Mongolia as it expands its natural resources portfolio.

Temasek confirmed that it had submitted a filing to US regulators that it now owned 40.85m shares in Ivanhoe, which would be valued at about $425m, based on Monday’s closing share price.

Ivanhoe controls a 66 per cent stake in Mongolia’s massive Oyu Tolgoi mine with the country’s government holding the remainder. The mine, which is still under development, is expected to be one of the world’s biggest new sources of copper and gold, and is near Mongolia’s border with China, the world’s largest consumer of copper.

Ivanhoe is itself controlled by London-listed miner Rio Tinto, which in December won a battle for control of the Vancouver-based group after an independent arbitrator ruled against Ivanhoe’s efforts to prevent Rio from increasing its stake.

Mongolia, whose economy grew 17 per cent last year and which sits atop vast deposits of copper and coal, has become a leading destination for investment by global mining companies such as Rio Tinto, Peabody and Shenhua.

Legislation currently restricts foreign ownership of “strategic industries”, including mining, in deals worth more than $75m to 49 per cent unless approved by parliament. However, Tsakhia Elbegdorj, the country’s president, has said the government is willing to reopen negotiations after this month’s parliamentary elections.

According to Ivanhoe, independent estimates indicate that the Oyu Tolgoi field contains approximately 41bn pounds of copper and 21m ounces of gold in measured and indicated resources.

Construction on the first phase of the complex, which is expected to begin commercial production next year, was four-fifths complete by April with backers of the project estimated to have committed $4.6bn in capital investment so far.

Rio Tinto has estimated that the complex could add a third to Mongolia’s GDP, employ up to 13,000 people, and emerge as a top five copper producer once it reaches full production.

The mining group, which in January increased its holding in Ivanhoe to 51 per cent, agreed in April to underwrite a $1.8bn sale of equity by the Toronto-listed company in a deal which was seen as tightening Rio’s control of the Oyu Tolgoi project and clearing the way for an eventual takeover of Ivanhoe.

Temasek already owns a range of energy and natural resources assets and in April joined with RRJ Capital, a private equity group owned by Malaysian businessman Richard Ong, to buy a stake in Kunlun Energy, a PetroChina unit.

Last month, it teamed up with RRJ again to invest $468m in Houston-based liquefied natural gas company Cheniere Energy, which is set to become a large exporter of LNG from the US.

Temasek was one of four companies to have invested in May a total of $1.13bn in Venari Resources, an oil exploration company operating in the Gulf of Mexico. The others were Warburg Pincus, Kelso & Company and The Jordan Company.
In South Africa, Temasek has an investment through Canada-listed Platmin, in which it invested $100m in March. It also has an interest in ­, a Chilean miner.


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One Response to Temasek takes 5.5% stake in Ivanhoe Mines

  1. guest says:

    Re: Prospectus dated June 8 for $1.8 billion rights offering of Ivanhoe Mines (IVN on NYSE)

    The proposed final prospectus for the upcoming Ivanhoe Mines rights offering seems improper, misleading, or incomplete in many ways. As currently written, the prospectus should not be approved.

    Ivanhoe Mines is a very successful mining exploration company, listed on the NYSE, that has been 51 percent owned by Rio Tinto since January 2012. Since then, Rio Tinto has changed the Board and top executives of Ivanhoe, and is using this rights offering to force repayment of a $1.8 billion bridge loan to IVN a year early. The rights offering would not be necessary if Rio Tinto had delivered on its December 2010 Heads of Agreement document[i] with Ivanhoe to obtain external credit financing for the balance of construction costs of the Oyu Tolgoi mine. (In addition, Rio Tinto is dropping its earlier commitment to finance the large $400 million power plant for the mine.[ii])

    Ivanhoe’s annual report briefing presentation from March 2012[iii] states that Rio Tinto invested $5.4 billion to obtain its 51 percent position, at prices as high as $25.34. The current offering is priced at $7.00 and is disclosed in the June prospectus to be designed to allow Rio Tinto to increase its position to 58 percent or more[iv] – in other words, by more than what the Canadian Securities Administration and Toronto Stock Exchange’s 5 percent creeping takeover rules allow a majority shareholder to do.

    The prospectus also notes Rio Tinto’s April 1 decision, after gaining control of Ivanhoe, to sell Ivanhoe’s 58 percent South Gobi Resources position to Chalco.[v] Not disclosed is the fact that Chalco is Rio Tinto’s 12 percent and largest shareholder – or that the proposed price of $8.58 per share (almost $1 billion total) would amount to about one half of South Gobi’s value as estimated by expert independent mining analysts at Bank of Montreal and at Maquarie in reports last summer.

    South Gobi’s business and prospects were larger and better at April 1 of this year than they were last summer.[vi] Chalco is a Chinese state-owned enterprise. The feelings of the Mongolian government toward China owning any Mongolian mineral reserves and mining rights were well known and have resulted in Mongolian discussion of suspension of South Gobi’s mining licenses and of the South Gobi (SGQ) stock falling to near $5.00. It also has resulted in open discussion by Mongolian authorities of changing the mining rights or Mongolian percentage ownership of the Oyu Tolgoi mining complex, which has been associated in time with a drop in Ivanhoe’s $15 March 2012 stock price to a recent low near $8 per share.

    The key factual point, not disclosed, is that the proposed billion-dollar transaction created by Rio Tinto is not at arm’s length, but to its own largest shareholder, at a price well below that studied by independent outside mining experts.

    Also important: Ivanhoe is only a mining exploration company; it has no previous record of actual mining. As would seem obvious, exploration results are the key to the useful evaluation of an exploration company.

    However, exploration results were withheld by Ivanhoe (and continue to be withheld) in a comprehensive report[vii] filed on March 29, 2012 after Rio Tinto gained and exercised control of the company in January 2012. This report, which is incorporated by reference in the prospectus, was a complex, 513-page exploration, mineral and resource report, referred to as an IDOP Technical Report, meant to provide a definitive update on exploration results. This report, however, relied on old data: on page 4, it states that the effective date of the mineral resource estimates of Oyu Tolgoi’s four major deposits are as follows: Southern Oyu: April 15, 2005; Hugo North and the Hugo North Extension: November 1,2006; Hugo South: November 1, 2003; Heruga: March 30, 2012. Ivanhoe has spent hundreds of millions of dollars in exploratory drilling since those dates. Results, whether good or bad, should have been included in this definitive document. But they were not. Withholding this sort of essential information on a $1.8 billion public offering is wrong.

    (It is also worth noting that public presentations made by former CEO Robert Friedland implied the results were quite favorable.[viii] Unfortunately these presentations, which were produced almost monthly, are no longer available on the Ivanhoe Mines website.)

    This omission of both drilling results and of a clear evaluation of these results does not seem to be an impartial action by the controlling shareholder Rio Tinto – especially given Rio Tinto’s potential interest in acquiring full control of the Oyu Tolgoi series of deposits. Indeed, Rio Tinto itself acknowledges the potential value of Ivanhoe’s resources, stating (in the March 2012 Ivanhoe corporate presentation) that the 23 kilometer-long Oyu Tolgoi series of deposits are the third-largest copper resource in the world and that the mine will be the second largest copper mine in the world by 2020. Rio Tinto describes the deposits as being “Tier I” – the type most coveted in Rio Tinto’s strategic goals.

    Since Rio Tinto’s annual presentations state it wants to own and operate such Tier I Mines and deposits, it is reasonable to believe that it wants to own more than the present controlling 51 percent of Ivanhoe. But is it reasonable for Rio Tinto to charge Ivanhoe and its minority shareholders a $73 million “standby purchase fee” for Rio Tinto’s commitment to purchase any and all of the 49% rights-related new stock that is not bought by existing institutional and public minority shareholders?

    What’s more, this “standby purchase fee” is described by Rio Tinto as a 4 percent fee, but their calculation is based on the total $1.8 billion offering. Since Rio Tinto already owns 51 percent of the company – and has committed to exercise all of its rights — this calculation should be based on the remaining 49 percent of the $1.8 billion offering. This makes the fee a little higher than 8 percent, not the stated 4 percent. Taking this logic further, if any of the other minority shareholders exercise their rights (which they will — former CEO Robert Friedland, for example, owns 13.67 percent of IVN and has committed to exercise his rights), the fee as a percentage will become even higher. To say the fee is only 4 percent is a gross and intentional misrepresentation.

    Additionally, on May 24, 2012 Rio Tinto charged Ivanhoe a $15 million “front-end” fee for a bridge financing facility,[ix] and is about to charge another $15 million “structuring” fee.[x] Both of these “fees” resemble a cash dividend payable only to the majority shareholder – Rio Tinto.

    Lastly, it is worth noting that several officers of Rio Tinto have recently taken additional appointments as directors of Ivanhoe, positions which could result in their having a clear conflict of interest between the majority (Rio Tinto) and minority shareholders.

    Perhaps Rio Tinto should have some obligation to describe why it is not using an underwriter, not using independent expert opinions, not taking responsibility for the accuracy or completeness of this prospectus and documents incorporated by reference, and for welcoming, in this offering, the continuation of the conflicts of interest inherent in having significant outside expert minority interests holding Ivanhoe. Rio Tinto appears, in its 2011 year-end balance sheet to have the cash resources simply to tender for the balance of Ivanhoe, or the ability and connections to encourage another mining company or mineral trading house to do so as a more useful partner to Rio Tinto.

    The prospectus has other deficiencies that could be corrected or made less offensive by the SEC. As currently written, the prospectus should not be approved.


    [ii] See paragraph 48 of the Memo of Agreement of 4/17/2012 (which is a portion of the Annual Information Form dated 3/30/2012).


    [iv] See p. 24 of June 8, 2012 Prospectus.


    [vi] See South Gobi’s quarterly reports.

    [vii] See IDOP Technical Report from March, 2012;jsessionid=0000q0m0jUecvRJDAd_0uPDh7Vf:-1

    [viii] For example:

    [ix] See Ivanhoe Annual Information Form, March 30, 2012, schedule E, page xvii in paragraph (b): “a $15 million (1 percent) front-end fee on the bridge facility, payable on the closing date” – which turned out to be May 24th. This fee is also mentioned on p. 19 of the June 8, 2012 Prospectus.

    [x] See paragraph (c) of the same section of the Annual Information Form: “a one percent ($15 million) structuring fee, payable on the date of the first advance” (of the proposed financing).

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