Ivanhoe Update
Published by MAC on 2006-04-12
Ivanhoe update
12th April 2006
Do sanctions work?
That's the import of news from the notorious Robert Friedland mining company, Ivanhoe, that its operations in Burma (called "Myanmar" by its military rulers) have stalled, and that the (unnamed) provider of political risk insurance to the Monywa mine had "terminated" its relationships with the company because of US sanctions - as has the bank that earlier backed the project.
However, Ivanhoe now claims to have found a new banking backer, while Daewoo is said to be interested in forming a new joint venture with the Friedland enterprise. Meanwhile, Friedland - as CEO - exercised 1.5 million share options for a gain of $10.9-million during 2005.
Ivanhoe is also a "keen observer" of the Mongolian government's debates over how much the country is to benefit from its mining industry, potentially including partial nationalisation compulsory acquisition of around 30% of all foreign owned mines and an increase in royalty rates.
Korean Firms to Develop Myanmar Copper
As posted on Donga.com, an Asian business network
12th April 2006
A consortium of Korean corporations in the public and private sectors will jointly develop Myanmar copper mines which contain about 1.45 billion tons of copper with a Canadian mine company. Starting late this year, about 10,000 tons of copper produced in the mines will be shipped to Korea every year. The amount is seven times that of Korea's own production through last year (1,400 tons).
A government official said yesterday that three Korean corporations, including Korea Resources Corporations (KRC), Daewoo International Corporation, and Taihan Electric Wire, and the Canada-based Ivanhoe Mines agreed on the "Development Contract of Copper Mine in the Monywa region of Myanmar." Robert Friedland, chairman of Ivanhoe Mines, visited Korea in January and exchanged a memorandum of understanding about development of the mine with KRC President Park Yang-soo. He will officially sign the contract in July.
The KRC consortium will buy 25 percent of the stake that Ivanhoe Mines owns in mines in the Monywa region for $120 million. Daewoo International Corporation will have the largest stake of 10 percent, while KRC and Taihan Electric Wire will each own a 7.5 percent stake.
There are three copper mines in the Monywa region, including Sabetaung, Kysintaung, and Letpadaung.
The estimated combined copper reserves of the three mines are about 1.45 billion tons, the largest amount among the copper mines that Korean corporations have ever developed. Ivanhoe Mines has produced 39,000 tons of copper annually from Sabetaung and Kysintaung since 1996.
The KRC consortium will ship 9,750 tons of copper, an amount matching its investment stake of 25 percent, this year. It is planning to increase the shipment up to 12,500 tons next year by expanding production to 50,000 tons.
Experts said that shipment from Monywa mines would improve the supply and demand situation of the Korean copper market.
There is a serious shortage of copper supply as the copper price recently hit a record high in the London Metal Exchange.
Comment from Eric Snider:
It was revealed earlier this month that mine production from Sabetaung and Kyisintaung pits is expected to less than half of the originally scheduled 36,000 tonnes in 2006.
More interesting is the $120 million price tag that the KRC group is said to be paying for its 25% stake of Ivanhoe's half share in the mine. In its annual report for 2005 Ivanhoe lists its investment in the Monywa operation as having a total value of $140 million.
More believable might be the proposition that the Koreans are willing to make a major investment in the development of the Letpadaung deposit which is the key to the profitable expansion of the Monywa mine and the reason that Ivanhoe got involved in the first place. The original cost of developing Letpadaung was estimated at $390 million, but when there were no takers, Ivanhoe changed its tune and said the project could be done in stages. There were still no takers, whereupon the company talked about developing Letpadaung out of cash flow produced by the other mines in the Monywa operation. Nobody has ever admitted it publicly, but it appears that the military junta has other plans for its share of the profits of the Monywa mine, now that the Japanese merchant banks have been paid off.
Latest: the Monywa mine has resumed production, ending a month-long shutdown caused by a shortage of imported mine supplies.
Sanctions affect Ivanhoe's Myanmar operation
by Wendy Stueck, Toronto Globe and Mail
6th April 2006
http://www.theglobeandmail.com/servlet/story/LAC.20060406.RIVANHOE06/TPStory
VANCOUVER -- A copper mine in Myanmar partly owned by Ivanhoe Mines Ltd. was forced to temporarily close last month after the mine's bank and insurance broker cut off relationships with the project as a result of U.S. economic sanctions against the country, according to regulatory filings by the company.
The mine resumed production earlier this week, an Ivanhoe official said yesterday. But U.S. sanctions against Myanmar, formerly known as Burma, have started to "seriously impact the mine's ability to function in a normal way," the filing states.
The company is also wrangling with Myanmar authorities over import permits for mining equipment.
The lack of that equipment, combined with falling grades in the area being mined, resulted in lower production at Monywa in the last quarter of 2005 and is expected to hurt production in coming years.
Ivanhoe now expects copper cathode production of about 16,000 tonnes from Monywa next year, compared with about 34,000 tonnes in 2005.
Ivanhoe reported sales of $23-million from the joint venture last year. Their flagship asset is Oyu Tolgoi, a copper-gold deposit in Mongolia considered one of the prime undeveloped deposits in the world.
Ivanhoe is negotiating a stability agreement for that project with the government of Mongolia. Yesterday, thousands of protesters, some carrying signs objecting to Oyu Tolgoi, rallied in Mongolia's capital of Ulan Bator. With the project's potential to dominate the country's mining industry for years to come, it has become a lightning rod for debate over how Mongolia should manage its emerging mining sector.
Company estimates say Oyu Tolgoi could churn out more than 1.6 billion pounds of copper and 900,000 ounces of gold a year at peak production and have a mine life of more than 40 years.
In its filing, Ivanhoe said management remained "optimistic" that an agreement could be reached in a time frame that would not unduly delay the Oyu Tolgoi project. The company has been negotiating the agreement since 2003.
Ivanhoe periodically comes under fire for operating in Myanmar where a military junta has ruled since the 1960s. The junta refused to recognize results of a 1990 opposition election victory.
In a fact sheet on its website, Vancouver-based Ivanhoe says it has been working in Myanmar through a subsidiary company since 1992, five years before Canada imposed limited economic sanctions.
Ivanhoe says it had invested about $60-million (U.S.) in Myanmar by the end of 2000 and that its joint venture is "voluntarily improving pre-existing conditions at the Monywa site," including waste rock and untreated water.
Some activists and shareholders, however, reject those claims and say any foreign investment in Myanmar serves to prop up a corrupt military regime.
Ivanhoe Facing Tough Times in Myanmar
Vancouver: Courier Information Services
3rd April 2006
Ivanhoe Mines reports that the S & K Mine near Monywa in Myanmar, in which the Ivanhoe shares 50-50 stakes with a mining company owned by the country's military government, has temporarily closed down operations. In its Annual Report to Shareholders issued today, Ivanhoe says the shutdown has resulted from a shortage of fuel to operate mining equipment and chemicals needed for the heap leaching extraction process at the copper mine. Operations ceased at the beginning of March and have yet to resume.
The shutdown has occurred while world copper prices along with other base metals are a record levels and production continues to fall behind demand.
The report also says that plans to increase production at the Kyisingtaung pit and to expand the operations to the nearby Letpadaung copper deposit have had to be put on hold because the joint venture company has been unable to obtain a licence to import much needed additional mining equipment. "Without a substantial increase in mining capacity, these two deposits cannot be economically developed," the company says.
Moreover, the report says, the military government has neither approved nor denied plans to expand the operation to the Letpadaung area. As a result, mine production this year may sink "as low as 16,000 tonnes of copper cathode, down from approximately 34,500 tonnes in 2005".
Ivanhoe reports that it is also facing a new commercial tax on its share of production at the S & K mine which will result in an additional 8% net smelter charge on sales, What is worse, the company says, is that the new tax will be retroactive to the beginning of 2003. The report does not say whether Ivanhoe's J-V partner will have to pay the additional tax. The company is seeking a written legal opinion from the Attorney General of Myanmar on the applicability of the tax.
Economic sanctions imposed against Myanmar by the United States are also seriously impacting the ability of the Monywa mine to function in a normal way. At the end of 2005, Ivanhoe says, the mine's insurance broker and its off-shore banking institution terminated their relationship with the mine because of the sanctions. However, the management of the joint venture company has since set up a new banking relationship with an off-shore institution, according to Ivanhoe.
The report says that the Monywa mine, once the crown jewel of Ivanhoe's mining empire and presently its only source of mining revenue, has now become a "non-core asset" which the company is seeking to dispose of through outright or partial sale. In 2005, the company says, it signed an MoU with an "established large Korean corporation with the interest to sell a significant portion of the company's interest in the S & K Mine".
The interested partner is believed to be Daewoo International, which has been in talks with Myanmar's Mines Ministry. Daewoo already has a large stake in an offshore gas exploration venture along Myanmar's Arakan coast, as well as substantial interests in several industrial enterprises in the country.
Ivanhoe Operations Shut Down in Burma
Contact: Tin Maung Htoo (519) 860-4745, or Jameel Madhany at (613) 884-8015
Ottawa, April 4, 2006 – Canadian Friends of Burma (CFOB) has learned that Vancouver-based Ivanhoe Mines ceased production at its copper mine near Monywa, Burma on March 30 2006, according to its annual report issued yesterday. The company cited expected decreases in production, inability to import additional mining equipment, and an additional 8% tax imposed on copper exports from Burma. The company also said that it is concerned about timely approvals for the expansion of the Letpadaung deposit.
Ivanhoe Mines was operating in Burma on the basis of a joint-venture with Burma’s state-owned Mining Enterprise No.1 (ME-1); the biggest mining company operating in Burma. It invested USD $150 million in mid-1990 and an additional USD $390 million was planned to invest in the expansion of Letpadaung project, located six miles southeast of the existing Ivanhoe-operated mine in Burma. The company’s stated ambition is to increase annual production to 200,000 tons of copper within four years, making it one of the largest copper mines in the world.
Until recently, Ivanhoe Mines has made steady profit - more than $25 million each year – from the existing S&K Mine. It stands out as one of the most profitable foreign operations for Ivanhoe, and was once considered the pearl of their mining empire. Ivanhoe has also diversified and entrenched its investments in Burma by partnering in ventures such as the Modi Taung gold project, holding 65% of its shares.
CFOB does not support any foreign investment that contributes significantly to the viability of the military junta governing Burma, without any discernable benefit to the Burmese population. CFOB particularly opposes the fact that Ivanhoe willingly entered into a joint-venture with the military, thereby guaranteeing millions of dollars to the coffers of the repressive junta. CFOB is also aware of situations that shed light on the role of Ivanhoe Mines in environmental degradation, such as waste drainage into the nearby river, Chindwin, and complicity in forced labor, for instance in building roads that benefit Ivanhoe’s operations..
Recently, Vancouver-based shareholder activists submitted a shareholder resolution, calling on the company to prepare a report to shareholders describing the corporation’s direct and indirect security arrangements with the regime, policies and management practices that preclude it from directly or indirectly benefiting from forced labour. However, Ivanhoe Mines refused to include the resolution in the circular for the 2006 Annual General Meeting on May 12th.
CFOB regards the cessation of Ivanhoe’s business operation in Burma as a first step in the right direction, towards the complete withdrawal of all investment from Burma. CFOB believes that the social, political and economic situation in Burma is not stable enough to secure both the profitability and security of foreign investments. The shutdown of Ivanhoe’s operations in Burma sheds light on how difficult it is to do business in Burma in the absence of a coherent rule of law and enforced regulations in the country.
Canadian Friends of Burma (CFOB)
145 Spruce St. Suite 206
Ottawa, ON K1R 6P1
Tel: 613.237.8056
Fax: 613.563.0017
Email: cfob@cfob.org
Website: http://www.cfob.org
Ivanhoe CEO exercised options for $10.9-million
by Wendy Stueck Toronto Globe and Mail
5th April 2006Ivanhoe Mines Ltd. chief executive officer Robert Friedland exercised 1.5 million options for a gain of $10.9-million during 2005. Mr. Friedland did not receive a salary or bonus in any of the last three years. He was granted two million options this year. Of those options, 1.5 million are unvested and become exercisable at various dates over the next two years based in part on meeting development criteria at Ivanhoe's Oyu Tolgoi project. Mr. Friedland owns 31.85 per cent of the company. Oyu Tolgoi is a copper-gold project in Mongolia. IVN (TSX) fell 35 cents to $10.82.
Investors Await Mongolia's New Tax, Mining Rules
By James Attwood of Dow Jones Newswires
6th April 2006
SYDNEY (Dow Jones)--Under the watchful eye of global miners and investors, Mongolia's legislators this week resume debate on proposed changes to tax and mineral laws.
Although most observers expect only relatively minor changes to the investor-friendly legislation introduced in 1997, some say a more radical proposal for the state to take a greater share of foreign-owned mines is causing unease among investors.
"Nobody quiet knows how the numbers will stack up," according to one foreign diplomatic source.
Earlier this year the former communist Mongolian People's Revolutionary Party, or MPRP, formed a new government replacing a fragile power sharing arrangement resulting from a tied 2004 election.
To help shore up its position, the MPRP appointed the Republican Party's B. Jargalsaikhan as trade and industry minister, whose portfolio covers mining.
The new minister, who waged an unsuccessful campaign in the last presidential election on a populist platform of keeping the country's mineral wealth out of foreign hands, has foreshadowed significant changes to the mining law.
His proposal, which adds to two others being touted by the new government and members of parliament, is believed to contain compulsory acquisition of around 30% of all foreign owned mines and an increase in royalty rates.
"That has put the cat amongst the pigeons in a very big way," the diplomatic source said.
Support for Jargalsaikhan's proposal may be thin considering he is the Republican Party's sole parliamentary member and given the country's recent moves to open up its mineral wealth to private capital.
However, the nationalist measures may still hold sway with some more moderate MPs and their impoverished constituents.
Canada's Ivanhoe Keen Observer
The foreign investor with perhaps the keenest interest in the process is Canada's Ivanhoe Mines Ltd. (IVN), which is negotiating the development of an estimated US$1.4 billion copper-gold project in Mongolia's Gobi dessert.
Ivanhoe's Oyu Tolgoi project is being held up as an example of Mongolia's arrival as a global mining destination on the back of investor-friendly legislation, vast untapped resources and booming commodity prices.
It is also one of the few large-scale new copper development opportunities in the world, meaning copper forecasters and investors alike are paying close attention.
Inevitably, that mantle also puts Ivanhoe on center stage in the debate over how to tap the mineral wealth in the former Soviet satellite.
As parliament reconvened Wednesday, an estimated 3,000 protesters clashed with police, reportedly demanding the resignation of senior officials for their handling of negotiations with Ivanhoe over Oyu Tolgoi's operating conditions.
The Canadian company downplayed the incident saying much of the protests weren't even mining related, much less centered on Ivanhoe.
Neither is the company overly concerned by calls for a more equitable share of the country's mineral wealth, the spokesman said Thursday.
"That sentiment is nothing new and Ivanhoe is committed to negotiating a stability agreement that will ensure fair and equitable benefits for Mongolia and Mongolians as well as investors and shareholders," said Ivanhoe Mongolia's Layton Croft.
Croft's comments echo those of company president John Macken during a recent visit to Mongolia with former U.S. secretary of state James Baker, whose legal firm represents the Canadian company.
Ivanhoe is also confident any legislative changes regarding state ownership will be limited to deposits discovered with the help of state funds, which was not the case with Oyu Tolgoi.
In addition, proposals to lift the current tax holidays for foreigners are likely to be offset by the introduction of carry forward and deductibility provisions, Croft said.
He played down speculation that legislators may increase mining royalties from the current 2.5% rate. "Talk it might increase is about a year old and has really gone away to my eye and ear."
A senior Mongolian mining bureaucrat agreed the proposed royalty increase "is not going to happen again" after the country's "disastrous" hike to 10% in 1990 but local mining industry sources said the royalty could go as high 5%.
Despite Ivanhoe's confidence of a favorable outcome, the company said it will be keeping a close watch on how the parliamentary debate pans out.
Amendments To Take Months Not Weeks
Timing is also an issue as further negotiations over Oyu Tolgoi's stability agreement - and in turn the project's final go-ahead and financing - await the amendments.
The Ivanhoe spokesman declined comment on a likely timetable for the parliamentary process, while the mining departmental official said it would take months rather than weeks, meaning the stability agreement could be in place in second half of this year.
Onsite work continues at Oyu Tolgoi - billed as the world's largest copper-gold development project - ahead of an estimated mid-2008 production start.
Ivanhoe, which has hired Canadian Imperial Bank to seek an equity partner for Oyu Tolgoi, wasn't available for comment on financing options.
One possibility is a Korean or Japanese off-taker, such as Japan's Mitsui & Co. Ltd. (MITSY), with which Ivanhoe already has a relationship, while other partner possibilities are major miners Rio Tinto PLC (RTP), Companhia Vale do Rio Doce (RIO) and BHP Billiton Ltd. (BHP).
Ivanhoe inherited Oyu Tolgoi, or Turquoise Hill, from BHP Billiton in 2000. The 500,000 tons-plus of annual copper output would put Oyu Tolgoi up with the giant Grasberg mine in Indonesia, analysts say.