(Adds context, background and analyst comment throughout.)
Ivanhoe Mines Ltd. (IVN) Monday launched up to a $1 billion
rights offering and re-appointed the mining company's founder and
Executive Chairman Robert Friedland as chief executive, as it works
to develop its flagship Oyu Tolgoi copper-gold mine and bolster its
negotiating position in the event of a takeover offer.
Ivanhoe and its prized Oyu Tolgo project, considered one of the
best in the world, is often seen as a takeover target for
established copper producers looking for reserves because of
copper's positive fundamentals. Prices for the base metal are
trading around their highest levels since July 2008 and the
industry projects a possible shortage in the supply of the widely
used resource if demand stays steady or rises.
Ivanhoe and its major shareholder Rio Tinto Plc (RTP), one of
the world's biggest, are in arbitration over Ivanhoe's
shareholder-rights plan that could prevent Rio from, in effect,
completing a creeping takeover of Ivanhoe and gaining control of
the $5 billion Oyu Tolgoi project in Mongolia.
Under a standstill agreement that expires Oct. 27, 2011, Rio can
ultimately raise its stake in Ivanhoe to 46.6% from 34.9%. That
would have left Ivanhoe potentially exposed to Rio increasing its
stake to more than 50% by buying Ivanhoe shares in the open market
after the standstill agreement expires. However, Ivanhoe undermined
this option by adopting the shareholder rights plan in April.
Rio has challenged the rights plan in arbitration, arguing
Ivanhoe is breaching previous agreements between the two
companies.
"The goal of the offering is to ensure that Ivanhoe Mines
remains in a strong financial position to bring the Oyu Tolgoi
copper-gold mining complex into operation ahead of schedule in 2012
and to reinforce the company's independence to pursue strategic
alternatives to protect and enhance shareholder value," Friedland
said in a statement.
Ivanhoe has forecast production at Oyu Tolgoi will begin at the
end of 2012 with estimated average annual output during its first
10 years of more than 540,000 metric tons of copper and 650,000
ounces of gold. By comparison, Rio forecast it will produce 660,000
tons of copper this year.
Typically, a mining company has more negotiating leverage in
takeover talks, the more financing it already has in place to
finance a project and the closer the project is to production.
Rio declined to comment on whether it would fully subscribe to
the offering.
Ivanhoe said it believes the rights offering is exempt from Rio
Tinto's right of first offer to acquire shares issued by Ivanhoe
under terms of Ivanhoe's 2006 five-year private-placement agreement
with Rio.
Pursuant to the rights offering, existing shareholders can
participate on an equal, proportional basis in purchasing
additional common shares. Pricing hasn't been set.
In Toronto Monday, Ivanhoe is down 1.7%, or 41 Canadian cents,
at C$24.36 on 850,000 shares.
Friedland is succeeding current CEO John Macken, who will remain
president and continue to lead construction of Oyu Tolgoi.
Friedland will also participate in the rights offering to
maintain his 18.3% stake in Ivanhoe.
The management shuffle shows that Friedland wants to be
front-and-center in any negotiations triggered by a solicited or
unwanted takeover bid, said Adam Graf, a mining analyst at Dahlman
Rose & Co. Macken's expertise is in developing the mine, the
analyst said. Dahlman hasn't provided investment-banking services
to Ivanhoe during the past 12 months. Graf doesn't own the
stock.
"Does it necessarily mean that somebody is taking a run at the
company or that Friedland is putting (the company) in play, 'I
don't think so,'" Graf added.
Ivanhoe also set up the office of the chairman to evaluate
strategic alternatives. In addition to Friedland, this office
includes Peter Meredith, its deputy chairman for the past four
years, and Sam Riggall, who is executive vice-president of Ivanhoe
Australia and will take on the added duties of executive
vice-president, Business Development and Strategic Planning.
Friedland said talks are progressing with a group of
international financial institutions on a separate debt-financing
package that is expected to close in the first half of 2011. The
proposed multi-billion-dollar package is being considered by a core
lending group comprised of the European Bank for Reconstruction and
Development, the International Finance Corporation, Export
Development Canada, BNP Paribas and Standard Chartered.
In July, Ivanoe has said the debt financing would be in place in
the first quarter of next year.
-By Ben Dummett, Dow Jones Newswires; 416-306-2024;
ben.dummett@dowjones.com
(Carolyn King in Toronto and Alex MacDonald in London
contributed to this article.)