Ivanhoe Mines is a Bargain, But...

Nov.17.08 | About: Turquoise Hill (TRQ)

One of the stocks I've loved and lost money on this year, a real heartbreaker, is Ivanhoe Mines (IVN).

What attracted me over a year ago was Ivanhoe's outstanding geology staff. IVN geologists have been hugely successful proving gold and copper deposits in Mongolia. Ivanhoe's Oyu Tolgoi discovery is a world class resource, capable of annual production of a billion pounds of copper and 330,000 ounces of gold for 35 years. Rio Tinto (NYSE:RIO) committed $2.4 billion to back development of Oyu Tolgoi, in exchange for 46% of Ivanhoe's stock. Oyu Tolgoi is situated close enough to China to connect it by rail to the port of Tiajin for bulk ore shipment to refiners in Canada. Ivanhoe has done an absolutely brilliant job of geology, commercial planning, and corporate finance. 

Except for one exasperatingly hopeless obstacle. The government of Mongolia tore up their agreement with Ivanhoe, held fresh elections, shot a few sore losers, and are idly reconsidering how much loot they want from Oyu Tolgoi. Ivanhoe shares dove from $12 to $2.

According to Ivanhoe's website,

Prime Minister Bayar has [recently] made it clear in public statements that he believes an Investment Agreement for Oyu Tolgoi can be concluded without the need for further consideration of amendments to the 2006 Minerals Law. The Parliamentary Working Group's intention, subject to joint-government concurrence, is to present the draft resolutions to the Parliament. When ratified, the resolutions would provide a broad mandate to speed up the process [of renegotiating an agreement].

I don't believe a word of it. Canadian ministers and trade representatives backing Canadian-based Ivanhoe have flown to Mongolia several times, trying to push this deal along. No luck. As far as the Mongol chieftains are concerned, Canada is a herd of fat northern hemisphere cows to be milked.

Minister of Roads, Transport, Construction and Urban Development Kh.Battulga has met with the Deputy Minister of Foreign Affairs and International Trade of Canada Drew Fagan, who is also in charge of Strategic Planning, and with Canadian Ambassador to Mongolia Ann Biolick. The Minister said a house town is planned to construct by Canadian frame-house technology in Batsumber soum of Tov aimag to develop this soum into a module one. Almost similar climate conditions of the two countries allow using the Canadian technology for the construction of modern houses, Kh. Battulga noted. The Canadian side said that the youth working in the private sector has possibilities for studying Canadian construction, particularly frame-house technologies, and invited the Minister to Canada.

Source: slightly incoherent Mongolian wire service.

That's the most frustrating aspect of following the drama in Ullan Baattar, the frozen capital city of Mongolia. Ivanhoe Mines is our only source of cogent information, and they're running out of money and time at Oyu Tolgoi:

Recent developments in capital markets have restricted access to debt and equity financing for many companies. As a result, the Company is reviewing its 2009 capital spending requirements. The Company also is assessing its options for financing future capital expenditures in light of prevailing conditions in international credit markets.

Source: IVN 2008Q3 announcement

At $2 a share, Ivanhoe is a bargain. But I think I'll wait for a new Investment Agreement signed in yak blood and witnessed by the grand vizier in charge of baksheesh.

Sources:

Disclosure: Author holds a long position in IVN