Bloomberg News

Ivanhoe Falls After Mongolia Seeks Bigger Stake in Copper Mine

September 26, 2011

Sept. 27 (Bloomberg) -- Ivanhoe Mines Ltd. fell in Toronto trading after Mongolia said it wanted to boost its stake in one of the world’s largest undeveloped copper-gold mines two years after agreeing to cap its stake until 2039.

Ivanhoe, developing the Oyu Tolgoi deposit with Rio Tinto Group, fell C$1.51, or 9.1 percent, to C$15 yesterday at 4 p.m. in Toronto Stock Exchange trading, after earlier dropping as much as 21 percent. Rio declined 20.5 pence, or 0.7 percent, to 2,964.5 pence in London.

The government of Mongolia is seeking to boost its stake to 50 percent from 34 percent, Dashdorj Zorigt, Mongolia’s minerals minister, told reporters at Oyu Tolgoi on Sept. 25. Such an increase is permitted only after 30 years, according to a summary of the $10 billion project agreement from London-based Rio, which said the new proposal may alarm foreign investors.

Mongolia’s attempt to renegotiate the Oyu Tolgoi agreement follows pressure from lawmakers ahead of an election next year and highlights risks for overseas investors as countries seek greater control of raw materials. So-called resource nationalism is the biggest business risk for global mining companies, Ernst & Young LLP said last month.

“The future of Ivanhoe’s relationships with the Mongolian government has become darker,” Ray Goldie, a Toronto-based analyst at Salman Partners Inc., said yesterday in a note to clients.

In the “still unlikely event that” Mongolia were to unilaterally increase its stake in Oyu Tolgoi 16 percentage points by 2019, the project’s contribution to Ivanhoe’s net- asset value per share would drop to $19.85 from $23.93, Goldie said in the note.

Six Years

Ivanhoe expects the government of Mongolia to live up to its commitments in the 2009 agreement, the company said yesterday in a statement.

“The investment agreement for the Oyu Tolgoi Project remains a fair and legally binding contract that deserves and requires the unqualified support of all parties,” Ivanhoe said.

The project, 66 percent owned by Ivanhoe Mines, is halfway through completion and will be one of the world’s five-biggest copper mines, according to Rio, which controls Oyu Tolgoi’s management. Ivanhoe, 48.5 percent owned by Rio, spent more than six years negotiating with Mongolia before reaching an agreement in October 2009 to develop the site, which is scheduled to begin commercial production in 2013.

‘Unstable Environment’

“An unstable environment, where changes to agreements are forced, leads to investors being very apprehensive,” Cameron McRae, Rio’s Mongolia country director, said Sept. 24 in the capital, Ulan Bator. “The investment agreement is a contract. We’re going to honor it and we expect the government to honor it.”

A group of 20 Mongolian lawmakers wrote to Prime Minister Sukhbaatar Batbold on Sept. 7 demanding the Oyu Tolgoi accord be revised to give the country a 50 percent holding, China’s Xinhua News Agency said Sept. 20. Mongolia will seek to revise the terms for the project, Finance Minister Sangajav Bayartsogt told the News.mn portal in an interview published the same day. Mongolia has appointed chief of the cabinet office Chimed Khurelbaatar to start talks with the miners, Xinhua News reported on Sept. 22.

Mongolia may also seek to change the allotment of stakes in the Tavan Tolgoi coal deposit to investors including Peabody Energy Corp., the largest U.S. coal producer. The potential ownership changes at the country’s two biggest mineral developments come ahead of parliamentary elections next year.

Global Demand

Oyu Tolgoi may have average annual output of 450,000 tons of copper and 330,000 ounces of gold, Rio said. World demand for copper will grow 40 percent to 27 million tons by 2020, according to a Sept. 8 Rio presentation.

Rio is facing similar government moves in Mozambique and Guinea, where the company owns the proposed $10 billion Simandou iron ore project in a joint venture with Aluminum Corp. of China. Lawmakers in Guinea on Sept. 9 adopted a mining code that will hand the nation 35 percent of local commodity companies.

“Big companies develop big projects, have capital costs in the billions,” Gavin Wendt, founder and director of Mine Life Pty in Sydney, said by phone. “They don’t want to invest billions and find out they’re effectively having a big chunk of the project taken away.”

Rising demand led by China, the largest copper user, coupled with a global supply deficit pushed the price to a record $10,190 a ton on the London Metal Exchange in February. The three-month contract for the metal used to make pipes and wires traded at $7,266 a ton yesterday in London.

Foreign Investment

President Tsakhia Elbegdorj, a former journalist who led the peaceful revolution that ended more than 65 years of communist rule in Mongolia in 1990, said in June he’s concerned about how to “manage” the surge of foreign investment and ensure the windfall spreads among the nation’s citizens.

Oyu Tolgoi will boost the country’s gross domestic product by 30 percent by 2020, when it reaches full production, Andrew Harding, chief executive officer of Rio Tinto’s copper unit, said at a Sept 24. briefing.

Harding also said last week that the mine’s commercial operation could be delayed if uncertainty over power supplies for the project wasn’t resolved in the coming months.

Ivanhoe said in its statement yesterday it “remains confident” that Mongolia and China will reach agreement on electricity supply for Oyu Tolgoi in time to allow metals production to begin on schedule.

--With assistance from Soraya Permatasari in Melbourne, Elisabeth Behrmann and Nichola Saminather in Sydney. Editors: Steven Frank, Will Wade.

To contact the reporter on this story: Christopher Donville in Vancouver at cjdonville@bloomberg.net.

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Simon Casey at scasey4@bloomberg.net.


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