One of the Rothschild barons is credited with saying that the time to buy is when there is blood in the streets. That may not have been literally true in 2007 when Rio Tinto plc (NYSE: RTP) provided $350 million in convertible credit to Ivanhoe Mines Ltd. (NYSE: IVN), but Rio Tinto got a pretty good deal in any event. The company converted nearly $401 million in principal and interest into just over 40 million shares at a conversion price of $10/share. On the day of the conversion, Ivanhoe shares closed at $18.
Rio Tinto now owns 34.9% of Ivanhoe with another 9% in outstanding warrants. Under the terms of the 2007 agreement, Rio Tinto was limited to holding 46.65% of Ivanhoe’s share until October 18, 2011. Rio Tinto also has a right of first offer for additional equity placements by Ivanhoe.
The two companies went to arbitration earlier this year following Ivanhoe’s adoption of a poison pill that prevents Rio Tinto from acquiring more Ivanhoe stock unless an offer is made to all shareholders. Rio Tinto says that violates the 2007 agreement that it has a right of first refusal on new equity. Ivanhoe says that nothing in its deal with Rio Tinto prevents Ivanhoe from adopting a shareholders’ rights plan.
That seems like a pretty fine hair-splitting. Ivanhoe says it wants “to protect all shareholders from coercive or creeping takeovers, while allowing takeover bids that are made to all shareholders….” In a shareholder vote on May 7, 95% of Ivanhoe’s minority shareholders approved the plan.
And Ivanhoe is a little touchy about the arbitration proceedings. An Australian newspaper report seemed to Ivanhoe to lay the blame for the arbitration delay at the company’s feet, so Ivanhoe fired off a press release titled “Alert Issued about false and misleading statements published by The Australian and Business Spectator.” The release says the two companies have nearly settled the selection of the arbitrator.
Ivanhoe also objected to the papers’ report that the cost of getting the company’s Mongolian copper-gold mines would be $4 billion. No, Ivanhoe says, it’s really $4.6 billion. Well, okay.
One newspaper also gets the maximum allowable stake to Rio Tinto wrong, printing 44% instead of 46.65%. Those are surely fighting words.
To be fair, the Australian newspapers didn’t do a very good job of fact-checking, but the stridency of Ivanhoe’s response is a little over the top.
The announcement of the 2007 agreement between Rio Tinto and Ivanhoe is available here. The announcement is pretty specific that Rio has “a right of first offer on future equity placements.” On July 13, 2010, Ivanhoe effectively canceled that agreement saying that it was exercising “its contractual right.” Such a right is not referred to in the 2007 announcement, but then maybe Ivanhoe left out the contract’s fine print.
This disagreement is far from over. At stake is annual gold production of about 650,000 ounces and copper production of 540,000 metric tons in the first ten years of the Mongolian mine operation. That’s definitely worth fighting over.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
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