Rio Tinto (NYSE:RIO) has won the arbitration in the stake fight against the Vancouver-based Ivanhoe Mines, in which Rio Tinto currently holds 49 percent. Ivanhoe was looking to set up bidding rounds for new investors for developing the world’s fifth largest copper mineral deposit at Oyu Tolgoi, Mongolia by enforcing a rights agreement against Rio Tinto. Rio’s stake is capped at 49 percent, and the firm is trying to increase the interest as soon as the stake agreement between Ivanhoe and Rio Tinto ends in January 2012. ((Rio Tinto wins fight against Ivanhoe poison pill, Reuters)) Rio Tinto’s interest in copper is understandable as there’s a massive under-supply and robust demand for base metals. This positive outlook has also grabbed the attention of other mining majors such as Vale (NYSE:VALE), Freeport McMoran (NYSE:FCX), and Barrick Gold (NYSE:ABX) that are looking to expand existing capacity and adding new mines.
In a previous note, we discussed how Rio Tinto is stepping up its copper exploration efforts in China through a joint venture with Chinalco.
Our price estimate of $82 for Rio Tinto implies about 70% upside to its current market price.
To safeguard the remaining stake from a Rio Tinto takeover, Ivanhoe was looking to raise a rights issue by the shareholder that could bar Rio Tinto to jack up additional equity. Ivanhoe’s shareholders approved a so-called “poison pill” rights plan last year to stop Rio Tinto from gathering more share. However, Rio Tinto contested the plan, arguing that it breached its rights.
The recent arbtration decision in favor of Rio Tinto has in a way ensured that other companies will avoid bidding in a company in which Rio Tinto already holds a 49 percent equity. As per the Canadian rules, Rio Tinto can buy any number of shares from up to five shareholders at a premium of less than 115 percent after the contract ends in January 2012. After that, the company can buy 5 percent additional equity every twelve months. Looking at the robust demand for copper, it is inevitable that Rio will continue to raise its stake in Ivanhoe mines.
Oyu Tolgoi’s rich deposit holds more than 35 billion pounds of copper and 45 million ounces of gold, and the production is expected to start in 2013. As per our estimates, we see the copper price moderating over the next five years, when the additional capacity from Rio Tinto, Vale, Freeport and Barrick Gold’s new mines kicks in, reducing the undersupply. Therefore, it is important for Rio Tinto to raise its interest in Ivanhoe mines as soon as possible to avail maximum benefit of the company’s 66 percent interest in Oyu Tolgoi mines.