Mr Friedland's promises have come to naught

Mr Friedland...promises have come to naught - Canadian entrepreneur Bob Friedland has a worldwide reputation

April 8 2002 - Sydney Morning Herald by Brian Robins

It's every mine promoter's dream: get control of a project for nothing upfront while making noises about a major expansion and, a few years later, have it valued at over $US100 million ($200 million) and back it into a public company.

Certainly this seems close to the script followed by colourful globe-trotting Canadian expatriate Robert Friedland, 51, the discoverer of Canada's Voisey Bay nickel province and rumoured to have been a master of ceremonies at the legendary Woodstock pop festival in 1969.

Except he's added a new twist: now he's seeking partners to help save the project.

Friedland took the Savage River iron ore mine off the hands of the Tasmanian Government in 1997 for nothing, while making encouraging noises about installing a mini-mill or maybe even a blast furnace to make steel - plans that came to naught.

Along with gaining control of the mine he was indemnified against outstanding environmental issues but did agree to outlay $13 million on remediation work in the future.

A few years after gaining control, Friedland reshuffled his assets, transferring the mine to a Canadian affiliate, Ivanhoe Mines, in return for shares, which gave him control of Ivanhoe to boot.

When this deal was being negotiated, Savage River Mines was valued at as much as $US125.3 million. Now, just two years later, the figure in the books is a more muted $US36 million.

Savage River has had a chequered history since its start in the late 1960s, ending up fully owned by Pickands Mather in the early 1990s after a clutch of local and Japanese investors were bought out. When Pickands Mather decided it couldn't make the mine pay, it walked away, with control transferred back to the Tasmanian Government.

When Friedland shifted control of Savage River Mines to Ivanhoe, which is listed on both the Canadian and Australian stock exchanges, it was marginally profitable and at the time bullish noises were made about lifting output, signalling optimism about its future.

But that optimism has long since evaporated and Ivanhoe is threatening to pull the plug unless it can restructure the project. Friedland has decided it is time to cut his exposure to the steel industry and wants to reduce his equity in Savage River Mines.

Negotiations are under way with two parties, most likely its two main customers - South Korea's Pohang Iron and Steel Co (Posco) and BHP Billiton - to sell them equity in the project, which may see Ivanhoe's stake cut to a minority holding.

Along with "diversifying the risk", Ivanhoe is looking to new parties to help fund an additional $US25 million to $US30 million needed for equipment to be able to boost output to 3 million tonnes a year from the present 2.4 million nameplate capacity in a bid to get further down the cost curve. At present, however, production is languishing at below 2 million tonnes, with output last year totalling 1.9 million tonnes, 460,000 tonnes below plan.

Not only are the operating economics of the project marginal but a deeply out-of-the-money currency hedge with UBS Australia isn't helping. Like much of the Australian mining industry, Savage River is wearing the collapse of the Australian dollar hard, with a currency hedging agreement in place at US68c.

UBS Australia has a project loan of $36 million and an obligation to deliver $US100 million under a hedging contract, at $US5 million a month, until February 2003. Ivanhoe is negotiating to shift this hedging contract into a project loan, with some success.

"The bank is taking a much more realistic stance than was the case with Pasminco," said Gordon Toll, chairman of ABM, the vehicle through which Ivanhoe holds Savage River.

If this hedging facility is marked to market, the accrued loss totals $35.83 million. And, to reinforce its stance that it means business in these negotiations, Ivanhoe remains poised to pull the plug.

"If suitable concessions from the major stakeholders are not obtained, or if the Savage River operations deteriorate, the company may not continue to provide financial support to ABM," Ivanhoe has warned shareholders. "In this case, ABM may not be able to continue as a going concern."

ABM chairman Toll said: "Right now, we're on the wrong side of a currency hedge and that's hurting us. It's a good, sensible development to diversify the risk.

"We'd still do it even without currency hedge."

The one possible upside for Savage River Mines is the improving outlook for the steel industry and the price of iron ore.

"The steel industry is deeply cyclical and we are coming out of the bottom of the cycle," Toll said.

Despite his woes in Tasmania, Friedland, who arrives in Australia today for a round of institutional investor presentations, has his sights firmly elsewhere.

Ivanhoe's share price has risen strongly over the past few months as Friedland has revved up publicity about Turquoise Hill, a remote copper-gold prospect in the Gobi Desert in Mongolia, which enabled him to raise $C65 million ($76.7 million) via a share placement just last month.Analysts have lined up with "buy" recommendations for this venture even though it is hundreds of kilometres from the nearest railway links and far from any infrastructure.

But few underestimate Friedland's chances of turning a buck on the way through. He went exploring for diamonds but found the massive Voisey Bay nickel deposit in Canada, which he sold for over $C4 billion to mining major Inco - making him perhaps the only person who has ever made money out of laterite nickel. Turning a dollar on blue-sky exploration prospects can be easier than operating a mine, especially since Voisey Bay is never likely to be developed.

So, even though Ivanhoe freely admits the Gobi prospect lacks any "sources of power, water, housing, food and transport", the punters are lining up. BHP Billiton holds basic rights over this prospect and can revive its interest in the coming months if it chooses.

Ivanhoe is already comparing Turquoise Hill to Indonesia's Grasberg mine, one of the largest copper-gold porphyry mines in the world, even though it has only preliminary estimates from one part of the prospect to hand.

Now based in Singapore, Friedland recently appointed Marc Faber to Ivanhoe's board. Faber, who mostly provides advisory services to fund managers, has been a long-time bull on the outlook for commodity prices, especially gold.