Mining giant Rio Tinto has made peace with partner Ivanhoe Mines to help develop a copper-gold project in Mongolia and capitalize on price increases predicted for both commodities.
Rio has suspended arbitration against Ivanhoe over the Vancouver-based company's adoption of a poison pill and will provide a financing package to help Ivanhoe develop the $6-billion (U.S.) Oyu Tolgoi project, considered one of the world's largest untapped copper-and-gold deposits.
The Anglo-Australian miner will also take over management of the project to help meet a fast-tracked production target of late 2012 - timing that would capitalize on an expected global copper shortage as demand grows and supply shrinks.
Both copper and gold hit records highs this week, driven by increased demand as investors turn to hard assets as a hedge against falling currencies and rising inflation. Copper in particular is making a comeback as China's appetite for the widely used metal grows, and investors flock to new copper-backed exchange-traded funds set to hit the market this week.
Rio is hoping to take advantage of the expected supply shortage in both gold and copper through the Oyu Tolgoi project. An independent analysis estimates annual production of 544,000 tonnes of copper and 650,000 ounces of gold for the first 10 years of a 59-year mine life.
"[The]agreement reinforces our commitment to the Oyu Tolgoi project, which is a natural fit with our strategy of focusing on low-cost, long-life assets with significant growth potential," said Andrew Harding, chief executive officer of Rio's copper division.
"We are looking forward to bringing Rio Tinto's world-class operating and technical capability to the development of one of the world's greatest copper-gold mines of tomorrow."
The agreement sees Rio offer $1.8-billion in interim financing to help Ivanhoe build the project six months ahead of schedule. Rio will also increase its stake in Ivanhoe to 49 per cent by January, 2012. That is up from an original standstill agreement to buy up to 46 per cent by October, 2011.
For Ivanhoe, the deal addresses a long-standing concern about how it would pay for the project.
Still, Ivanhoe shareholders weren't impressed and drove down the shares by 14.5 per cent on the Toronto Stock Exchange on Wednesday. Analysts said the reaction was likely owing to disappointment that a potential takeover of the company, which is led by well-known mining promoter Robert Friedland, won't come until at least 2012 as a result of the extended standstill agreement.
"People who bought Ivanhoe as a 2011 takeover candidate must strike [it]from the list," said Raymond Goldie, a mining analyst at Salman Partners Inc.
Mr. Friedland has raised billions of dollars from investors over the years and is perhaps best known for helping to create a frenzy around the Voisey's Bay nickel deposit in Labrador, which was eventually sold to Inco in 1996 for $4.3-billion (Canadian).
There was also some concern Wednesday about the $6-billion (U.S.) price tag of the Oyu Tolgoi project. Ivanhoe said the price includes about $1.4-billion already sunk into the project and that the $4.6-billion figure to finish it is consistent with previous forecasts.
Over all, analysts view the agreement as a step forward for the companies and the Oyu Tolgoi project. The agreement "demonstrates that Ivanhoe and Rio Tinto are focused on advancing the project despite the periodic friction between the companies," BMO Nesbitt Burns analyst John Hayes said in a note.
"With Rio Tinto's financing commitments and assuming management, the Oyu Tolgoi project is significantly derisked from a financing, operating and development perspective."
In a statement Wednesday, Mr. Friedland said Rio's decision to suspend arbitration against Ivanhoe for six months provides "potential" for a permanent truce.
Rio launched arbitration in the summer after Ivanhoe adopted a shareholder rights plan, also known as a poison pill, to prevent a creeping takeover of the company. Rio argued the rights plan breached its contractual rights under its agreements with Ivanhoe.
Ivanhoe said Wednesday the arbitration suspension will end immediately if a formal takeover offer is made for the company, or "if either company takes any action that the other reasonably believes prejudices its rights."
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OYO TOLGOI AT A GLANCE
Oyu Tolgoi is considered the world's largest undeveloped copper-gold project.
When it begins production in late 2012, it will rank as one of the world's largest copper-gold mines alongside Chile's Escondida and Grasberg in Indonesia.
The project is located in the South Gobi region of Mongolia, approximately 550 kilomeetres south of the capital, Ulan Bator, and 80 km north of the Mongolia-China border.
The mine is 66 per cent owned by Ivanhoe Mines and 34 per cent by the Mongolian government. Ivanhoe signed a long-awaited investment agreement with the Mongolian government in 2009, after six years of negotiations.