Truce called; Rio to take over OT managemnet, hold more shares in Ivanhoe

Shares in Ivanhoe Mines fell 14% on Wednesday after the company said it has reached a new agreement with Rio Tinto, which will result in Rio assuming management of the Oyu Tolgoi project, as well as taking a bigger stake in Ivanhoe. Ivanhoe said it now expects the project to cost around USD6 billion, USD1.4 billion of which will have been spent by the end of this year. Earlier estimates pegged the cost at USD4.6 billion.
The new deal includes support from Rio for a previously disputed rights offering, as well as a six-month suspension of existing arbitration over a dispute between the two parties on Ivanhoe's shareholder rights plan. Assuming all the transactions under the new agreement close and Rio exercises all the Ivanhoe warrants it holds, the group will own 48.4% of Ivanhoe. The two companies have also agreed that Rio Tinto cannot increase its holding in Ivanhoe beyond 49% until January 18, 2012.
Rio Tinto will immediately exercise USD300 million of Series B Ivanhoe warrants that it holds, and will buy 20 million Ivanhoe shares at market price. The shares will be acquired equally from Citibank and Ivanhoe Mines executive chairperson and CEO Robert Friedland.
Rio has also agreed to work with Ivanhoe on a “comprehensive” finance package for the Oyu Tolgoi project, and will provide Ivanhoe with USD1.8 billion in interim financing in the meantime. Analysts view the deal as overall positive for Ivanhoe, because the financing and other agreements with Rio Tinto will help ensure the project is going to get into production, expected to begin in late 2012.
As manager of the project, Rio Tinto will have full authority over the remaining construction, mining, production of concentrate and future smelting and refining, including the nomination of senior management to be appointed by the Oyu Tolgoi company board. Under the new deal, Ivanhoe's Friedland will continue as CEO but Mr. David Huberman, the lead independent director on the Ivanhoe board, will be nominated for appointment as chairperson from Ivanhoe's next annual general meeting, to be held in May 2011, the firm said.
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