London Calling on Rio Tinto's latest fall from grace

London Calling on Rio Tinto's latest fall from grace

by Nostromo Research

28th October 2006

You might well have missed the news. Two weeks ago Rio Tinto announced a major investment in Robert "Toxic Bob" Friedland's Ivanhoe Mines. It was quickly compared in some quarters (such as the Financial Times) to the UK-Australian company's joint venture with Freeport in 1995, and its long-standing third share in the massive Escondida mine in Chle.

But, while Rio Tinto's link up with Freeport and commitment to the Grasberg mine in West Papua was condemned in Indonesia, West Papua and around the world, this recent announcement has fallen on largely inattentive ears

Rio Tinto is prepared to shell out around US$1.7 billion (only a little less than it did ten years ago to acquire the stake in Freeport) to bed down with Ivanhoe.

The obvious target is Ivanhoe's huge Oyu Tolgoi copper-gold deposit in Mongolia - certainly "world class" by any standard. And perhaps ultimately to gain control of Ivanhoe itself. But to get there Rio Tinto has to overcome a significant obstacle. For, back in the nineties, chairperson Robert Wilson went on record at an annual general meeting as promising that his company would never invest in Burma while the military was in power.

Not only has the junta's venomous hold on the people of Burma failed to diminish; Ivanhoe continues to run the Monywa copper mine, which is the biggest single provider of income and foreign exchange to the despotic regime.

The glint of riches in Mongolia is too bright for Rio Tinto to resist. The company never got as big as it is without possessing an almost uncanny insight into what projects will fly, and which are likely to get bogged down. It has its own interests already in Mongolia (as well as in another junior company operating there). And it's joined hands with Friedland before - when the latter's Vengold was drawn into part-financing Rio TInto's Lihir gold mine in Papua New Guinea.

If you read Rio Tinto's version of the deal, you won't find any mention of Burma. But, if you scrutinise carefully Ivanhoe's announcement, you'll see there is a "condition" requiring Ivanhoe to dispose of its holdings in Monywa as part of the arrangement with Rio Tinto..

Don't let this deceive you. The condition applies to the second phase of the financing, rather than to the initial stage which has already enabled Rio Tinto to purchase US$ 303 million worth of Ivanhoe shares (giving it a 9.95% stake). In the second phase Rio Tinto has indicated that it would acquire more shares (another 9.985% stake).

Following this (after shareholder approval from Ivanhoe shareholders) two sets of non-transferable warrants will be issued which, when fully excersied, will give Rio Tinto another US$808 million stake in Friedland's enterprise.

It's only at this point that Ivanhoe has to negotiate the divestiture of its joint venture interest in the Monywa mine.

So - to put it in a nutshell - Rio Tinto now has a significant stake ( and is building it further) in the most notorious single exploiter of people and resources under one of the world's most despised regimes.

And it's flagrantly broken its promise never to invest in Burma, while that regime benefits from such investment.