Reuters reported recently that Rio Tinto's (RIO) mining engineer Bob Vassie would replace Ivanhoe Australia's (IVHOF.PK) interim Managing Director Ines Scotland. This continues the shake ups in RIO's subsidiaries in Mongolia and Australia. The most notable of these saw the resignation of Robert Friedland at Ivanhoe Mines when RIO bought majority control last April and re-named the company Turquoise Hill Resources (TRQ), its flagship holding in the Asia-Pacific region. Friedland, a mining legend retains a 10% stake in the company.
TRQ is famous for its fabulous mine at Oyu Tolgoi which recently won the public blessing of Monglia's parliament for expedited operations. The interesting point in the recent top-down managerial change at Ivanhoe Australia is the pattern of consolidated management RIO is forging in its Asian-Pacific properties. RIO owns 51% of TRQ and through it controls IVA and also 58% of South Gobi Resources (SGQRF.PK) with its immense coal mine at Ovoot Tolgoi. This mine is already in production and exporting to China. RIO;s re-organization and managerial integration of its subsidiaries expedites revenue growth.
The change at Ivanhoe Australia resembles last fall's major shake-up at South Gobi Resources in which RIO replaced the CEO, CFO and COO. South Gobi is now headed by President and CEO Ross Tromans, General Manager of Marketing at Rio Tinto Coal Australia. As noted, RIO controls South Gobi through TRQ whiose 58% stake of South Gobi is similar to its 59% position in Ivanhoe Australia. Both companies have seen an influx of RIO personnel. Via TRQ RIO also owns 50% of Altynamas Gold mine at Kyzyl in Kazakhstan. So Turquoise Hill Resources, a legacy of Friedland has become the nexus for Rio's integration of its regional holdings.
The constant in these moves is more direct control from RIO's corporate HQ over the operations and transactions of its layered family of subsidiaries. An ongoing re-branding accompanies this progress. This likely marks the wish of RIO, the world's third largest mining concern to proceed with its operations in a unified way as coal prices move off their bottom and production at TRQ's Oyut Tolgoi super mine (copper, gold and silver) and South Gobi's huge coal producing site at Ovoot Tolgoi ramps up to feed Chinese demand. RIO is among those who do not believe China's growth will grind to a crawl.
Positive recent developments for Rio Tinto's subsidiaries in Mongolia include South Gobi's September 4th vote of confidence from Mongolia's Mineral Resources Authority (MRAM). MRAM stated that South Gobi's exploration and mining licenses are in good standing. Moreover, coal prices that had plunged about 70% since fall 2011 are recovering (25% in December) which will restore profit margins. Since the 2007 spike and 2008-09 crash coal prices have varied between $53-$74/st. They were more stable on the low side of this range in 2012. South Gobi's year over year net loss of nearly $130 million on coal prices and ensuing production cutbacks should be offset by RIO's re-organization and consolidation of operations. China relies on coal for 70% of its energy and has shifted its internal investment back to infrastructure from enhanced consumer growth.
Additionally, late in December the release of South Gobi Attorney Sarah Armstrong and supportive words from Mongolia's Independent Authority against Corruption (IAAC) triggered a series of buy recommendations from those following these events. Similarly, the strong public affirmations of support from top Mongolian government officials for RIO, TRQ and accelerated production at Oyut Tolgoi suggest an upcoming bullish period in RIO's Mongolian enterprises. It certainly invited increased foreign investment. However, ambivalence does remain and the issue of corruption suggests that smooth sailing will not be unruffled. Mongolia needs to invite investment, curb fear of foreigners and indigenous corruption to generate and invest its mineral wealth. This could create sustainable growth for an economy troubled by inflation and currency valuation.
A glance at TRQ's site shows a Mongolian director and RIO's commitment to maintaining and improving local ecology. Rivers and springs are diverted to avoid contact with mining operations and ensure water purity and healthful grazing for flocks above and below the site. RIO -TRQ's health, safety and management system shows ecological sensitivity and brings to Mongolia know how likely to benefit grazing, herding and agriculture in that difficult climate and alkaline soil. Development in Ulaanbaatar should follow from this and support companies like Blue Wolf Holdings (MNGLU). RIO has done its homework and its approach is designed to maximize the long-term value of its sites and to leave nature improved by human development, the optimal goal of concerned stewardship. Maintenance and protection of wildlife habitat, use of renewable energies, reducing waste and rehabilitation of decommissioned sites indicate the degree of RIO's savvy and foresight in developing these properties.
The takeaway is that RIO has positioned its Asian properties, particularly the two major sites in Mongolia for sustained long-term growth. Its subsidiaries should perform strongly going forward and command solid market share even in global slowdowns and dips in commodity prices. The parent corporation has consolidated management to strengthen its grip on methods for moving ahead. It has pleased major stakeholders like the Mongolian government. Thus it has established itself and its subsidiaries as value-buys in a problematic and changeable commodities market, mining sector and macro-economic situation. Given local issues and the predictably tentative steps of Mongolia into world markets the ascent will not be all smooth but the prognosis is good.
Disclosure: I am long TRQ.