VANCOUVER (CP) -- Ivanhoe Mines' [TSX:IVN; NYSE:IVN] Mongolian copper project could be far larger than previously envisioned with the involvement of Rio Tinto [NYSE:RTP] as a partner, investment firm UBS suggested Monday as it raised its expectations for Ivanhoe shares.
UBS increased its price target on Ivanhoe Mines to C$15, up from C$12, on expectations that the involvement of British mining giant Rio Tinto could help increase the scale of Oyu Tolgoi project in Mongolia by some 50 per cent.
''We believe the Rio Tinto partnership could effectively remove previous capital and technological barriers,'' UBS analyst Tony Lesiak wrote in a note to clients.
However, Lesiak noted that his valuation of the company continues to assume a 25% political risk discount to reflect potential delays in the key investment contract with the Mongolian government and other issues.
''The satisfactory receipt of an investment contract and full investment by Rio Tinto may result in the lifting of the 25% risk discount which could increase our net asset value of C$17.50 per share,'' Lesiak wrote.
The copper and gold deposits at Oyu Tolgoi, which is hoped to being commercial production in 2009, are considered to be among the largest ever found.
Rio Tinto and Ivanhoe are expected to release a new integrated development plan for Oyu Tolgoi in the second quarter of 2007.
Lesiak said he now assumes a C$2 billion initial capital cost for Oyu Tolgoi to reflect a bigger mill, increased truck and shovel fleet, higher steel costs and other costs.
''The total life of mine capital for the project is expected to increase from C$5.57 billion to C$6.5 billion to reflect the higher initial capital cost and increased scope of the project,'' he wrote.
Under the agreement between the two companies announced earlier this year, Rio Tinto made an immediate investment of about C$345 million in Ivanhoe Mines for a 9.95% stake.
After the signing of an investment agreement between Ivanhoe and the Mongolian government, Rio Tinto has an option to take up 46.3 million more shares at C$9.54 for C$442 million. Along with an additional top-up right, that would give Rio Tinto up to 19.9% of Ivanhoe's issued shares.
Finally, Rio Tinto will also get warrants representing more than 92 million Ivanhoe shares that when exercised would bring its total investment to about C$1.7 billion and a 33.35% stake.
Exercise of the warrants requires approval by Ivanhoe shareholders.
Ivanhoe shares and those of other Canadian mining companies operating in Mongolia were hammered in May after the Mongolian parliament imposed a windfall-profits tax.
The new tax followed weeks of protests in which opponents set up tent camps, staged a brief hunger strike and burned effigies of Mongolia's president and Friedland.
Ivanhoe shares closed up 36 cents at C$10.96 on Monday at the Toronto Stock Exchange.
(c) The Canadian Press 2006
