BERAL, INC.
Andrew Racz
Director of Research
300 East 54 Street, Suite 26C
New York, NY 10022
Phone: (212) 319-6949
Fax: (212) 753-1944
E-mail: mlikar@aol.com

Do not bet against Casablanca

December 10, 2010
 

After September 11, Peter Lynch of Fidelity Gave The Advice …
“Betting Against The United States Was Always A Bad Bet!”

In the early part of December, 2010, Robert Friedland the Chairman of Ivanhoe put together a 6½ billion deal probably the largest transaction in the history of the Gold Mining Industry.

Mongolia is the 6th largest country in the world, it has 2.5 million inhabitants, but one of the most up to date structures as far as its mining industry is concerned.

The modernization of Mongolia actually started when an American entrepreneur, Robert Friedland, discovered gold and copper in what it called Oyu Tayo Company. . The mine has a capacity of 650,000 ounces of annual gold production which is equivalent at 1,400 ounce level an equivalent $900 million annual income and at the $2,000 ounce level $1.3 billion per annum. Add to 1.2 billion pounds of copper production, worth another billion dollars the potential figure of $2 billion annual revenue is in order. Considering that the production is estimated to last 35 years we are talking of serious numbers. As a comparison with inflation adjusted we are talking of a total revenue of $1.5 trillion, equivalent to the U.S. balance of payment deficit for Fiscal 2011. The striking issue is that America has 350 million people and Mongolia is populated only by 2½ million people. History has never seen comparisons.

The financial community originally expected another “Miracle of 34th Street”, from Robert Friedland. After all, Mr. Friedland made his reputation of hard work, good sense for mining, persistence, and theatrical performances that sometimes people thought is either Robert Redford or Michael Douglas. All his life he really calculated in numbers, bigger and bigger numbers. He was with a humble educational background a real mathematician.

Now, to put together the Mongolian mine he had to deal with stockbrokers, bankers, and giant corporations like Rio Tinto. Eventually he sold 42% of his company Ivanhoe to Rio Tinto. However, another $6 billion was missing for conclusion to construct the world’s largest gold and copper mine.

Bingo! The negotiations were successful. A $6 billion complex equity and banking arrangement was made in Ulaanbaatar every aspect of the bank financing , project financing, warrant exercise, was meticulously put together. In fact, Robert Friedland put together a $6 ½ billion financial package which gave 49% of Ivanhoe to Rio Tinto but enabled Ivanhoe to go into production in two years with a potential $2 billion annual cash flow. Considering that Ivanhoe started 5 years ago with less than $100 million, the achievement to reach the current level was equivalent to the Manhattan Project or the Marshall Plan.

So what happened? Mr. Friedland created a fully financed mine with Rio Tinto’s balance sheets. He succeeded as a businessman.

He disappointed of not playing Michael Douglas but the disappointment was felt mainly by the hedge funds. These are the boys who want instant performance. They even forget the word cash flow.

They are missing the boat. Just look at Netflix, just look at Apple Computer. Two companies who stock market value came from operating cash flow. Mr. Friedland at the age of 60 negotiated the largest potential cash flow generating gold and copper mine. Imagine – which is a possibility – if gold goes to $3,000 and the total cash flow will hit $3 billion. We live in a world when even large investors want to see results instantaneously. It doesn’t come from ash flow; it comes from usually from takeovers, where imaginary event guides misguided investments and lead to not only disappointment but unnecessary market corrections.

In December 2010 Mr. Friedland and his team and Rio Tinto and its team worked for a businesslike solution. There was no theatrical event or even future theatrical performance.

Where is Casablanca?

Actually, the hedge funds were right. The saga of Ivanhoe is not over. There are so much minerals in Mongolia that the possibilities and endless. Suppose Mr. Friedland goes into partnership with the Russians and puts some of his shares in a new company which contains Russian’s share of Mongolian Uranium. Jointly they can raise $1 billion in the Hong Kong stock exchange. Putin will take Mongolia seriously and the publicly owned Uranium company will try to buy some of Mongolia’s 34% interest in Ivanhoe to access the Mongolian copper at its birth. Suppose he buys 5% of Mongolia’s 34% and asks to place Mr. Medvedev on the Board.

The three arrangements of cards can give rights to real and speculative possibilities and Ivanhoe’s stock can jump 50%.

If the hedge fund stayed short and stayed in the picture, some would be forced into liquidation. If the bankrupt hedge funds are domiciled in Western Europe, this could lead the sharp rise in the price of gold.

The story is not over because the asset base of Mongolia is so enormous that to contemplate a permanent peace and permanent price structure is against human experience.

One thing is sure: the world has not seen the last of Robert Friedland and Ivanhoe. And, the price of gold. The hedge fund will buy and sell and they going to be sometimes right, sometimes wrong.

It is the Mongolian version of Casablanca!

Disclaimer

Information contained herein is based on data obtained from recognized statistical services, issuers reports or communications or other sources believed to be reliable. However, such information has not been verified by us and we do not make any representation to its accuracy or completeness. Any statement non-factual in nature constitutes only current opinions which are subject to change. BERAL INC. or their officers, directors, analysts or employees may have positions in the securities or commodities referred to herein, and may as principal or agent buy and sell such securities or commodities. An employee, analyst, officer or a director of BERAL INC. may serve as a director for companies mentioned in this report. Neither the information nor any comment expressed shall constitute an offer to sell or a solicitation of an offer to buy any securities or commodities mentioned herein. There may be instances when fundamental, technical and competitive opinions may not be in concert. This firm may from time to time perform investment banking or other services for or which investment banking or other businesses from any company mentioned in this report.

 

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Andrew Racz. 300 East 54 Street, Suite 26C, New York, NY 10022
Phone: (212) 319-6949 Fax: (212) 753-1944. E-mail: mlikar@aol.com

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