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I write about emerging and frontier markets in Asia. I now primarily contribute work to Forbes Asia. My most recent work and my complete bio can be found on Forbes Asia's site: http://www.forbes.com/sites/jonspringer/ If it is easier, you can find my recent work sorted by country on this... More
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  • Ivanhoe Mines: Unedited E-Mail From Anonymous Source Dated June 23, 2012 (Revised June 26) 5 comments
    Jun 26, 2012 9:31 AM | about stocks: TRQ, RIO

    Dear Jon,

    I greatly appreciate your ongoing coverage of IVN and thought you might be interested in the following memo, which I received about a day ago. I'm trying to help get this out to as many people as possible, ideally before the SEC officially approves the rights offering. Can you help? I have a version with footnotes (and which is formatted better) indicating where all of the facts come from which I can forward to you if you give me an email address that can accept attachments.

    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.

    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.

    1. If RIO achieves its stated goal of increasing its position in IVN to 58 percent via this rights offering, it will have violated Canada's anti-creeping takeover rules

    Ivanhoe's annual report briefing presentation from March 2012[i] 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[ii] - 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.

    2. RIO is changing the terms of the financing agreement to be less favorable to IVN and its minority shareholders

    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[iii] 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.[iv])

    Meanwhile, as part of the rights offering, Rio Tinto is charging 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.

    This is a questionable move to begin with, since it makes the financing problem even worse for IVN. But 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,[v] and is about to charge another $15 million "structuring" fee.[vi] Both of these "fees" resemble a cash dividend payable only to the majority shareholder - Rio Tinto.

    3. RIO's proposed sale of South Gobi to Chalco is not at arm's length

    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.[vii] 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.[viii] 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.

    4. The IDOP Technical Report, on which this rights offering is based, relies on extremely outdated data and deliberately omits updated results

    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[ix] 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.[x] 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.

    5. Ivanhoe Mines' Rio-Tinto-appointed board members have a clear potential conflict of interest

    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.

    The rights offering, as it stands, should not be approved

    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.


    [i] http://www.ivanhoemines.com/i/pdf/Corporate_Presentation-March-2012.pdf

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

    [iii] http://www.ivanhoemines.com/i/pdf/2010-12-08_HOA.pdf

    [iv] 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).

    [v] 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.

    [vi] 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).

    [vii] http://articles.chicagotribune.com/2012-04-02/news/sns-rt-chalco-southgobi--update-3l3e8f2027-20120402_1_coal-projects-chalco-hong-kong

    [viii] See South Gobi's quarterly reports.

    [ix] See IDOP Technical Report from March, 2012 http://sedar.com/CheckCode.do;jsessionid=0000q0m0jUecvRJDAd_0uPDh7Vf:-1

    [x] For example: http://www.melbourneminingclub.com/attachments/0000/0182/Ivanhoe_Master_November_11.pdf

    Disclosure: I am long IVN.

    Additional disclosure: I have placed no trades in Ivanhoe Mines since August 19, 2011, and will place no trades in the company for one week after this blog's original publication date.

    Stocks: TRQ, RIO
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Comments (5)
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  • Jon Springer
    , contributor
    Comments (4152) | Send Message
     
    Author’s reply » From Bob Johnson:

     

    Jon, I received the same or a similar email. I responded saying I did not feel I could be of help, and I also included this link to a Reuters article reprinted by mineweb. http://bit.ly/MHBZaL

     

    http://seekingalpha.co...
    24 Jun 2012, 04:28 PM Reply Like
  • Mercy Jimenez
    , contributor
    Comments (1891) | Send Message
     
    Latest on Southgobi:

     

    "SouthGobi Resources Ltd. said Tuesday that output at its main Ovoot Tolgoi mine will be curtailed by the end of this quarter. It cited a weak market and regulatory issues.

     

    SouthGobi said previously that Mongolian authorities asked for production to be suspended while they reviewed a plan by a Chinese government-owned company to acquire a majority stake in SouthGobi."
    http://bit.ly/OoWagU
    26 Jun 2012, 06:01 AM Reply Like
  • Jon Springer
    , contributor
    Comments (4152) | Send Message
     
    Author’s reply » Thank you very much Mercy!
    26 Jun 2012, 09:28 AM Reply Like
  • Jon Springer
    , contributor
    Comments (4152) | Send Message
     
    Author’s reply » This has been revised to include footnotes from the anonymous author. Please note this author is anonymous to me and used an anonymous e-mail to forward me this information.
    26 Jun 2012, 09:33 AM Reply Like
  • marpy
    , contributor
    Comments (688) | Send Message
     
    It was quite clear that most of the minority holders including the large shareholder were not to happy with RioTinto during the last shareholders meeting as most of them voted against the changes RioTinto was proposing for IVN. I suspect that they are waiting for better economic times and that we will then see the large funds and Freidland start to crank up the pressure on Rio. rio Tinto's interests are not at all alligned with the minority holders and that is obvious with every move that Rio makes.
    25 Jul 2012, 10:25 AM Reply Like
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