Ivanhoe Mines Calls Lure Traders Speculating on Buyout: Options

Ivanhoe Mines Ltd.’s options show investors are becoming more convinced the copper and gold explorer will be a takeover candidate by March.

The number of March $20 calls has increased by 13,143 this month, the most among Ivanhoe contracts in the U.S., according to data compiled by Bloomberg. Buyers, who profit if Vancouver- based Ivanhoe rallies 28 percent to $23.20 by expiration in five months, helped lift the ratio of calls versus puts to the highest level since November.

Options traders are betting Ivanhoe will resolve arbitration with Rio Tinto Group, clearing the way for founder and Chief Executive Officer Robert Friedland to sell the company. Rio owns 49 percent of Ivanhoe and the companies are partners in the Oyu Tolgoi copper project in Mongolia, with an estimated 81 billion pounds of copper and 46 million ounces of gold, according to Ivanhoe.

“That really has been the exit strategy for Friedland all through his career,” Barry Schwartz, who oversees C$420 million ($418.6 million) at Baskin Financial Services Inc. in Toronto, said in a phone interview yesterday. “He starts these companies, finds a terrific play and cashes out,” he said. “It wouldn’t surprise me for Rio Tinto to come in.”

Bob Williamson, a spokesman for Ivanhoe, which has a market value of $12.9 billion, said he couldn’t comment. Tony Shaffer, a Rio Tinto spokesman, declined to comment. Rio’s market capitalization is 68.4 billion pounds ($109 billion).

14% Stake

Friedland controls about 14 percent of Ivanhoe stock. He sold Diamond Fields Resources Inc. to Inco Ltd., the world’s second-biggest nickel producer at the time, for C$4.56 billion in 1996 after setting up a bidding battle between Inco and Falconbridge Ltd. for Diamond Fields’s Voisey’s Bay nickel deposit in Canada.

Open interest for Ivanhoe calls has surged 25 percent to 168,052 contracts this month, compared with puts dropping 1.3 percent to 84,671. That boosted the ratio of calls to puts to 1.98-to-1 from 1.57 at the end of September. March call options with strike prices as high as $40 have been listed on U.S. exchanges. The shares closed at $18.11 yesterday.

“Ivanhoe would be attractive to a large buyer like Rio Tinto that’s looking to acquire proven assets in the ground,” Louis Meyer, a special situations analyst for Oscar Gruss & Son Inc. in New York, said in a telephone interview yesterday. “The idea may be to buy assets close to China so you can supply the market without having large shipping expenses. Mongolia is to China like Canada is to the U.S.”

Arbitration

Rio and Ivanhoe are in arbitration over Ivanhoe’s adoption last year of a shareholder rights plan and Ivanhoe’s claim that Rio broke an agreement not to discuss selling a stake in Ivanhoe or in the Mongolian mine with potential buyers without Ivanhoe’s permission. London-based Rio Tinto is barred from making a hostile bid for Ivanhoe under an agreement that expires Jan. 18.

“Clearly what Friedland is trying to do is prevent Rio from going to 51, 52, 53 percent of Ivanhoe without paying a control premium,” John Stephenson, a Toronto-based money manager at First Asset Investment Management Inc., which oversees $2.7 billion, said Oct. 21 by telephone. “He’ll probably get it.”

Open interest for March $20 calls has jumped to 13,401 contracts from 258 at the end of last month, the biggest gain among all Ivanhoe contracts, according to data compiled by Bloomberg. Call options accounted for seven of the 10 largest increases, the data show.

‘Wishful Thinking’

Traders using options to bet on takeovers are usually engaged in wishful thinking, according to Ophir Gottlieb, managing director of client services at San Francisco-based Livevol Inc., a provider of options-market analytics.

“Generally, out-of-the-money call purchases on takeover rumors are the single worst investment in finance,”Gottlieb said yesterday in a telephone interview. “Using them to speculate on takeovers is a losing bet almost all of the time.”

Ivanhoe agreed in 2000 to pay $5 million to acquire the exploration license for Oyu Tolgoi from Broken Hill Proprietary Co., now BHP Billiton Ltd., the world’s largest mining company. Ivanhoe paid $37 million to buy out BHP’s remaining right to any royalty from the mine in 2003.

Friedland got $440 million in cash and stock for his stake in Diamond Fields Resources in 1996. He later founded Indochina Goldfields Ltd. and listed it on the Toronto Stock Exchange the same year. The company was renamed Ivanhoe Mines in 1999.

‘Pivotal Stake’

“He’s got an ownership stake in the company, and if the shareholder rights plan holds, it is a pivotal stake,” Adam P. Graf, a New York-based analyst at Dahlman Rose & Co. who recommends buying the shares, said in a telephone interview yesterday. “Maybe he can or can’t use that to get a significant takeout premium from Rio Tinto.”

The Chicago Board Options Exchange Volatility Index rose 10 percent to 32.22 today as 3M Co. and United Parcel Service Inc. (UPS) slid after posting results and data on home prices and consumer confidence fueled concern the economy is faltering. 3M dropped 6.3 percent, while UPS declined 2.1 percent.

Traders boosted the price of bearish UPS options to the highest level since 2008 before the company’s quarterly report. The cost of puts to sell was 57 percent higher than calls to buy as of Oct. 21, according to data compiled by Bloomberg. The price relationship known as skew widened 20 percent since Oct. 4. For FedEx Corp., the company’s biggest competitor, the gap in option prices increased 8.6 percent during the period.

To contact the reporters on this story: Christopher Donville in Vancouver at cjdonville@bloomberg.net; Kaitlyn Kiernan in New York at kkiernan2@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Simon Casey at scasey4@bloomberg.net

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