Changes for Ivanhoe as Rio Tinto takes driver’s seat

Ivanhoe Mines (IVN-T, IVN-N) is shifting gears as it adjusts to Rio Tinto (RIO-N) having acquired a majority ownership stake in the company, and first production approaches at its Oyu Tolgoi copper-gold-silver mine in Mongolia.

Ivanhoe released its first-quarter results on May 15 and updated investors on development at Oyu Tolgoi, as well as management changes in light of Rio Tinto taking over the reins.  

During the first quarter Ivanhoe recorded a net loss of US$80.6 ­million, or 11¢ per share. The results marked a US$412-million decrease of year-on-year quarterly losses, which is down from US$493 million in net losses during the first quarter of 2011. The earnings discrepancy was attributed to a US$433-million shortfall Ivanhoe suffered last year on a change in the fair value of derivatives.

A US$30-million jump in first-quarter exploration costs to US$77 million was offset by a US$20 million rise in coal revenues from Ivanhoe’s 60%-owned Ovoot Tolgoi mine, which totalled US$40 million. Ivanhoe also registered US$10 million in foreign exchange gains, and US$15 million in long-term investment and interest income.

The company reported a consolidated cash position of US$750 million as of May 15.

Ivanhoe has completed 82% of the first phase of development at Oyu Tolgoi, and it remains on track for initial production in the latter half of this year. Mining and stockpiling of first ore from the open pit started in late April.

Ivanhoe has spent US$4.6 billion developing Oyu Tolgoi, with the mine’s phase-one budget projected at US$6 billion. Rio tightened its grip on the company in April when it took control of 51% of Ivanhoe’s shares, and ushered out president and CEO Robert Friedland.

Rio will now play an even bigger role in negotiating up to US$4 billion in financing for the project, and cover interim capital requirements through a US$1.8-billion, non-revolving credit facility. Ivanhoe has drawn down US$1.4 billion from the facility to date.

“We believe the fundamental outlook on the Oyu Tolgoi project remains very constructive, with Rio Tinto in full control of building and operating the project,” Canadian Imperial Bank of Commerce World Markets analyst Alec Kodatsky says in a research report. “It remains one of the best copper development projects in the world, and is now fully financed and entering production this year.”

Kodatsky lowered his 18-month price target on Ivanhoe to $19  from $26 following the financing news and looming share dilution from Rio’s financing stipulations, but maintains Ivanhoe’s “sector outperform” rating.

Under the bridge-financing terms Rio could increase its stake in Ivanhoe to as much as 62% if shareholders do not exercise their rights to buy more shares at an US$8.34-per-share subscription price.

“The new financing package will be dilutive to net asset value (NAV), and Rio has gained further ownership and ability to defer a full takeout of the company,” Kodatsky notes. “However, we believe with this new agreement, any concerns about Rio’s view on the project or Ivanhoe’s financing risks should be alleviated.”

Ivanhoe’s management team has been overhauled. Former chief financial officer for Rio’s copper group Kay Priestly has been named Ivanhoe’s CEO, while Chris Bateman — another Rio executive — has stepped in as Ivanhoe’s chief financial officer position.

Rio appointed David Klingner as Ivanhoe chairman, replacing interim chairman Michael Gordon. Klinger is an Australian-based geologist who has held a number of positions with Rio, including head of exploration.

At Ivanhoe’s annual general meeting on June 28, shareholders will be asked to vote on a proposal to rename Ivanhoe as “Turquoise Hill Resources” — with “Turquoise Hill” being a direct translation of the Mongolian words Oyu Tolgoi. Rio has already indicated its intention to divest Ivanhoe’s non-core assets and focus on Oyu Tolgoi.

“Further catalysts would include the divesture of the remaining subsidiaries, which the company has indicated as an ongoing process,” Kodatsky writes. “We believe Ivanhoe’s effort to daylight the value of its non-core assets should help further narrow the discount implied by current share prices, versus our NAV of the company.”

Ivanhoe’s major subsidiary holdings include its 58% stake in SouthGobi Resources (SGQ-T) and 59% share in Ivanhoe Australia (IVA-T). SouthGobi operates the Ovoot Tolgoi coal mine in Mongolia, which is being pursued by Aluminum Corporation of China (Chinalco), while Ivanhoe Australia’s main asset is the Osborne copper-gold project in Queensland.

Ivanhoe Australia has a reported market value of US$552 million, and CEO Peter Reeve recently told Reuters that up to eight bidders have expressed “preliminary interest” in the company, including Anglo American (AAUKY-Q)and OZ Minerals.

Ivanhoe’s shares have taken a tumble since Rio assumed majority ownership in late April. Prices have dropped 32%, or $4.21, to a presstime close of $8.74, on average trade volumes totalling 1.27 million shares per day.