December 8, 2010 / 2:51 PM / 7 years ago

UPDATE 4-Rio, Ivanhoe OK interim finance pact at Oyu Tolgoi

* Rio to provide up to $1.8 bln in interim financing

* Two companies agree to suspend arbitration for 6 months

* Ivanhoe shares close down more than 14 pct on NYSE, TSX (Adds analyst comment; in U.S. dollars unless noted)

By Euan Rocha

TORONTO, Dec 8 (Reuters) - Mongolia’s huge Oyu Tolgoi copper-gold mine moved a step closer to getting built after Ivanhoe Mines (IVN.TO) and partner Rio Tinto (RIO.L) put aside an ongoing spat on Wednesday and agreed on a new financing plan.

Ivanhoe Mines said Rio, its largest stakeholder, has agreed to provide up to $1.8 billion in interim financing to continue development work on the $6 billion project, which is one of the world’s largest untapped copper-gold deposits.

Rio has also agreed to buy 20 million Ivanhoe shares at market price and immediately exercise rights to convert $300 million of warrants.

“This is good news for Ivanhoe and is reflective of its partner’s commitment to the project,” said Desjardins analyst John Redstone, in a note to clients.

However, the stock reacted negatively to the announcement and Ivanhoe shares closed down more than 14 percent on both the Toronto Stock Exchange and the New York Stock Exchange.

Salman Partners analyst Ray Goldie noted that the drop in the share price was partly due to investor concerns about dilution from Ivanhoe’s upcoming rights offering, which is expected to raise between $1 billion and $1.2 billion in proceeds.

“Also, as an investor, if you bought Ivanhoe on the basis that you thought it was going to be bought out next year, you now have to strike that (possibility) off the list,” said Goldie.

Development of Oyu Tolgoi was delayed for years due to complicated royalty negotiations between Ivanhoe and the Mongolian government. [ID:nSP495396]

The project is 34 percent owned by Mongolia and 66 percent owned by Vancouver, British Columbia-based Ivanhoe, which is developing it in partnership with Anglo-Australian miner Rio.

Ivanhoe shares closed down $4.21 at $24.99 on Wednesday in New York, down C$4.29 at C$25.28 in Toronto.

FINANCING DEAL

The $1.8 billion interim financing will allow Ivanhoe to continue construction at Oyu Tolgoi while a full project-finance package is negotiated. The two companies intend to have a comprehensive project-finance package in place by June 2011.

Ivanhoe, which is led by colorful mining financier Robert Friedland, said it will have already invested about $1.4 billion in developing Oyu Tolgoi by the end of 2010.

An Ivanhoe-Rio Tinto technical committee expects that the project will require a further $4.6 billion in capital from the beginning of 2011 through to the start of production in early 2012.

In exchange for its capital and commitments, Rio Tinto will have the right to a maximum ownership stake in Ivanhoe Mines of up to 49 percent during the next 13 months. Under previous agreements Rio’s ownership stake in Ivanhoe had been limited to about 46.6 percent.

The company is in the process of taking its ownership stake in Ivanhoe to 42.3 percent from the current 34.8 percent through its exercise of $300 million worth of warrants and the direct purchase of 20 million Ivanhoe shares. Rio will purchase half these shares directly from Friedland and the remainder from Citibank.

ARBITRATION SUSPENDED

The two companies have also agreed to suspend arbitration proceedings for six months. Rio Tinto initiated the arbitration process earlier this year after Ivanhoe adopted a shareholder rights plan. Rio contends the rights plan breaches its contractual rights under agreements with Ivanhoe.

The two sides agreed to suspend arbitration - instead of ending it outright - because there are still issues that need to be clarified, said a source close to the situation, who declined to be named.

Ivanhoe’s so-called “poison pill”, or shareholders rights plan, had been set to be triggered when Rio’s ownership moved above 46.6 percent, but Rio wants clarification that it can go to 49 percent without the plan taking effect, said the source.

Rio also wants confirmation that the shareholder rights plan would not extend the standstill agreement beyond the new agreed expiration date of January 2012, said the source.

Ivanhoe said the suspension would be revoked if Rio makes a formal takeover bid for Ivanhoe Mines, or if either company takes any action that the other reasonably believes prejudices its rights. ($1=$1.01 Canadian) (Reporting by Euan Rocha in Toronto and Eric Onstad in London; editing by Peter Galloway)

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