Ivanhoe Mines Close to Agreement with Oyu Tolgoi

"We expect an agreement between the two parties by the end of this month; we still assume that the Mongolian government will take a 51% interest in the project," he wrote in a note to clients.

Once an agreement is reached, the serious mine construction can begin. Mr. Redstone is estimating that $4-billion will be needed for initial capital expenditures, plus $550-million for contingencies.

Those are monster numbers. But assuming that Rio Tinto Ltd. (RTP) exercises all its Ivanhoe warrants and debentures, that would lead to net proceeds of $1.9-billion, Mr. Redstone wrote. Asset sales could bring in another $500-million, and he figures the balance ($2.15-billion) would be financed with debt at an interest rate of 8%. He assumes zero funding from the Mongolian government.

Mr. Redstone expects Oyu Tolgoi to go into production in 2014, and become cash flow positive (with cumulative operating cash flow surpassing cumulative capital expenditures) in 2020.

His valuation of Ivanhoe does not include the company's holdings in SouthGobi Energy Resources Ltd, Ivanhoe Australia or the Bakyrchik gold project.