Ivanhoe sells Jinshan stake

Ivanhoe Mines (IVN-T, IVN-n) is selling its controlling 42% stake in Jinshan Gold Mines (JIN-T, JINFF-o) to a Chinese gold-mining conglomerate, giving Jinshan powerful new owners with deep pockets and Ivanhoe some much needed cash after a net loss of US$457.7 million last year.

Robert Friedland, chief executive of Ivanhoe Mines, said a “substantial portion” of the $217-million sale would be dedicated to advancing the company’s significant and advanced gold and copper exploration ventures across China.

In a statement announcing the deal with China National Gold Group, Friedland also said a co-operative exploration partnership with China’s “pre-eminent government-owned gold group” would allow both companies, in partnership, to “focus on gold and copper exploration and mine development opportunities in China.”

China National Gold Group produces about 20% of China’s gold, and with more than 65 mines, controls 30% of the country’s known reserves. Last year it produced 78 tonnes of gold.

Analysts covering the Vancouver-based company estimate a significant portion of the funds will likely be channelled into sustaining development at Ivanhoe’s huge copper-gold project in Mongolia’s Gobi Desert. That project is costing Ivanhoe and its partner Rio Tinto (RTP-N, RIO-L) an estimated US$30-40 million a month.

“Ivanhoe has a significant cash burn and the sale of a non-core position in a gold mine will provide at least another six months of financing for Oyu Tolgoi,” says Tony Lesiak, an analyst who covers Ivanhoe at UBS Securities in Toronto.

Ivanhoe and Rio Tinto submitted a draft investment agreement for Oyu Tolgoi to Mongolia’s parliament in July 2007 and have yet to hear whether the government will approve the project.

Raymond Goldie, an analyst with Salman Partners in Toronto, estimates it will take at least another year before Ivanhoe gets the go-ahead for its flagship project and cash from the sale will come in handy.

“This will allow them to withstand what we think will be another year before the Mongolian government signs an investment agreement on the Oyu Tolgoi project,” Goldie says.

The sale will also enhance the valuation of the company, Goldie notes.

“We used to think Ivanhoe was worth about $12.25 a share and that was based on the fact that it had Jinshan on its books at US$17.3 million — which is how we valued it,” he explains. “Now they’re going to get $217 million for that asset so that’s a gain of about $200 million in valuation.”

Under the deal, China National Gold Group will acquire Ivanhoe’s entire holding of 67.5 million shares in Jinshan at $3.1115 per share.

China National Gold will also issue a promissory note of $7.5 million by June 26, 2010, together with accrued interest at 12% from March 31 of this year.

Ivanhoe will retain warrants to purchase up to 1.5 million shares in Jinshan, each exercisable to purchase one Jinshan share at $2.50 at any time up to June 26, 2009.

The deal, subject to Chinese and Canadian regulatory approvals, is expected to close on May 10 and Ivanhoe will record a gain from the sale in the second quarter of this year.

Reached at the European Gold Forum in Zurich, Jinshan’s president and chief executive, Jay Chmelauskas, told The Northern Miner the deal was a win for everyone involved and that Jinshan had been looking for a strategic partner for quite some time that could help it grow in China.

Chmelauskas, who joined the company five years ago, has shepherded Jinshan from an exploration- stage company to one that holds one of China’s largest producing gold mines with one of the largest deposits in the country. He says the next stage of growth will almost certainly entail some acquisition and merger opportunities.

For that, he says, China National Gold will be an excellent partner — not only does it have substantial financial resources but it also wants to make acquisitions outside China.

“China National Gold has tremendous access to very low-cost capital,” he says, adding that the Chinese government has been accumulating large sources of foreign capital and needs to reinvest that capital through companies like China Gold. “If you’ve got access to cheaper capital and a lot of it, it’s going to enable you to be very competitive in terms of what you can bring to the table.”

Chmelauskas points out that a number of large state-owned enterprises have been going off and making acquisitions overseas like Aluminum Corp. of China (ACH-N) or Chinalco and Minmetals. Jinshan, he says, will now be used as a vehicle to identify those opportunities and execute them because, among other things, it has a sophisticated, bilingual staff.

“We’re dealing with very sophisticated management on the Chinese side,” Chmelkausas says, noting that two members of its management team formerly worked as investment bankers for Deutsche Bank in Hong Kong.

Sun Zhaoxue, president of China National Gold, who will serve as chairman of Jinshan Gold Mines, previously held the number two spot at Chinalco. Sun joined China National Gold a year ago to turn the company into a successful state-run enterprise and has been assessing projects and opportunities ever since. Buying Jinshan is Sun’s first transaction.

Jinshan started producing gold at its CSH mine in China in July 2007 (see site visit, T. N. M. Dec. 31/07-Jan. 6/08) and to date has produced 33,280 oz. gold.

NowJinshan is ramping up its projected capacity to 120,000 oz. a year and is studying whether it’s possible to increase annual production by 50% to up to 180,000 oz.

Ivanhoe acquired its initial interest in Jinshan in May 2002. Since then, exploration work has established that the CSH mine has a measured and indicated resource, at a cutoff grade of 0.35 gram gold per tonne, of 171.3 million tonnes grading 0.71 gram gold per tonne for 3.9 million contained ounces.

In addition, inferred resources are estimated at 1.33 million oz. gold contained in 64.2 million tonnes grading 0.65 gram gold per tonne at the same cutoff grade.

Ivanhoe’s core assets are its massive Oyu Tolgoi copper and gold mine project, its large shareholdings in Mongolian coal miner SouthGobi Energy Resources (SGQ-V, SGQRF-O) and its wholly owned Cloncurry iron oxide-copper- gold (IOCG) exploration project in Australia.

At presstime, Ivanhoe was trading at about $10.82 per share; the company has a 52-week trading range of $7.80-18.