Rio, Ivanhoe Relationship Sours

SYDNEY—The close relationship between global miner Rio Tinto Ltd. and Canadian company Ivanhoe Mines Ltd. appears to be unraveling just as their biggest joint project starts moving toward production.

At the center of the dispute lies a slow-motion tug-of-war over control of Mongolia's Oyu Tolgoi mine, the world's largest undeveloped deposit of copper and gold, due to start production in 2013.

In a world where miners habitually bemoan the dwindling number of blockbusting discoveries, the site 550 kilometers south of Ulan Bator stands out, with measured, indicated and inferred reserves of 81 billion pounds of copper and 46 million ounces of gold, worth around $300 billion at current market prices.

"Ultimately that is just such a fantastic asset, and [Rio Tinto chief executive] Tom Albanese has openly stated that they want to own more of Ivanhoe," says Paul Young, a mining analyst at Deutsche Bank in Sydney.

Rio said Friday it was seeking arbitration over a shareholder rights plan adopted by Ivanhoe's board in April.

Rio said the plan was in breach of a private placement it agreed with Ivanhoe in October 2006, under which it has provided the Canadian company with US$1.73 billion, primarily for investment in Oyu Tolgoi.

Ivanhoe retaliated Tuesday by suspending restrictions on new strategic investors.

Ivanhoe said in a statement that the move would allow third-party strategic investors, "which could include major mining companies," to take stakes of at least 5%, in effect diluting Rio's own holding.

Oyu Tolgoi is two-thirds owned by Ivanhoe and one-third by the Mongolian government.

Rio, in turn, controls 29.6% of Ivanhoe, and is allowed to increase its stake to 46.65% by October 2011. Ivanhoe's executive chairman, Robert Friedland, holds another 22%.

Some analysts say Rio is intent on retaining the option of increasing its holding in Ivanhoe to a majority stake, with Ivanhoe's board equally intent on capping its control at 46.65%, or even reducing it.

Under the shareholder rights plan adopted by Ivanhoe's board in April, any party making an acquisition above 20% of the company would trigger a so-called poison-pill clause, allowing existing shareholders to purchase fresh shares and dilute the party's stake.

Such poison-pill clauses are commonly used in the U.S. to prevent creeping stake-building by suitors.

Tuesday's announcement would similarly risk diluting Rio's stake, keeping majority control out of its reach.

One issue raised by several observers is that Ivanhoe may fear a third party taking out a stake as an informal proxy for Rio, thus boosting the Anglo-Australian company's effective position above 50%.

Any such concerns would have been heightened by a Securities and Exchange Commission filing by Rio last week, in which the company said it was having "ongoing discussions" with Aluminum Corp. of China, or Chinalco, over the Chinese company acquiring a minority stake in either Ivanhoe or Oyu Tolgoi.

Chinalco holds 9% of Rio's stock and acts as a joint-venture partner with the Anglo-Australian company in the Simandou iron ore project in Guinea.

In a statement Monday on the issue, Ivanhoe highlighted that the shareholder rights plan "does restrict Rio Tinto ... whether acting alone or in concert with another party, from acquiring additional Ivanhoe shares in the market."

"(Ivanhoe) are protecting themselves," said Glyn Lawcock, an analyst at UBS in Sydney. "If Rio ever does decide to make a bid, they want to make sure they get a full price, not a cheeky price."

The Mongolian government may also be wary of Chinalco's involvement. China would be the major consumer for the mine, but Ulaanbataar is prickly about Beijing and Chinalco is a Chinese state-owned company.

"The government is carefully analyzing the situation to make sure that the interests of Mongolia and its shareholding in Oyu Tolgoi are ensured and that strategic interests of the country are well protected," said Dashdorj Zorigt, Mongolian minister for mineral resources and energy.

A spokesman for Rio Tinto said the arbitration process was expected to be "quite rapid" but he didn't comment on the company's strategy.

An Ivanhoe spokesman in Vancouver also didn't offer comment on the company's motivation, while Chinalco executives couldn't be immediately reached for comment. —Ellen Sheng in Hong Kong and Zhang Yajun in Beijing contributed to this article.