After Dispute Rio Tinto Raises Its Stake In Ivanhoe Mines

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Mining giant Rio Tinto (NYSE:RIO) will acquire additional equity in Vancouver based Ivanhoe Mines, in a bid to advance Oyu Tolgo, the world’s fifth largest copper mineral deposit at Mongolia. Rio Tinto, which currently owns about 51% in the Ivanhoe Mines, will also commit $3.3 billion mostly to finance the project. Earlier in December, Rio Tinto won a legal case against Ivanhoe for raising its stake in the latter.

The move will help Rio Tinto to ultimately reduce its over-dependence on iron ore. Rio Tinto has a product portfolio that spans across basic metals like iron ore, copper and aluminum to energy products like coal and uranium. It competes with mining giants such as Vale (NYSE:VALE) and Freeport McMoran (NYSE:FCX). We are in the process of revising our price estimate for the company.

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Ivanhoe: Path to Oyu Tolgoi Copper Mine

Ivanhoe has about 66% interest in Oyu Tolgoi mines, which is estimated to hold more than 35 billion pounds of copper and 45 million ounces of gold. Rio Tinto’s investment is crucial for both Rio Tinto and the project as Ivanhoe was finding to difficult to arrange financing due to recent correction in copper prices and tight credit conditions.

It is important for Rio Tinto to start production as soon as possible to avail the maximum benefit of the copper reserves before copper prices start moderating over the next five years when the additional capacity kicks in. Rio Tinto looks to start commercial production from the project by the first half of 2013. The mine will produce about 1.2 billion pounds of copper and 650,000 ounces of gold per year in initial ten years of operation. [1]  Such move will help Rio Tinto balance the dependence on iron ore and copper, which currently constitute about 40% and 25%, respectively of our current price estimate of the company.

Under the deal terms, Rio Tinto will provide a commitment to subscribe  $1.8 billion rights offering by Ivanhoe. $1.5 billion will be provided through bridge financing. In December 2010, both Rio Tinto had agreed to an additional $1.8 billion in interim funding to Ivanhoe.

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Notes:
  1. Rio Tinto tightens grip on Ivanhoe Mines, CBS News, April 19 2012 []
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