Rio firms up a pipeline jewel

Rio Tinto's cementing control of Ivanhoe – and its prized Oyu Tolgoi prospect – is well-timed to allow the company to end its tussle with Robert Friedland and fully focus on bringing the mine into production.

While it may only be a formality, Rio Tinto’s $US302 million purchase of another two per cent of Ivanhoe Mines finally cements its control of the group and its prize asset, the giant Oyu Tolgoi copper-gold prospect in Mongolia.

By moving to 51 per cent of Ivanhoe, and with anti-dilution rights to protect its position, Rio has finally buried the already-remote prospect that Ivanhoe’s founder, Robert Friedland, might devise yet another plan for preventing Rio from securing absolute control.

Rio effectively ended years of desperate and creative manoeuvring by Friedland to keep it at bay – or pay a massive control premium – in December, when it gained a favourable ruling from an arbitrator on a Friedland plan to establish a "shareholders’ rights plan" that would have severely diluted Rio’s stake in Ivanhoe if Rio lifted its holding above its then level of 44 per cent.

Subsequently, after Friedland tried but failed to find a third party to help fund Ivanhoe’s Oyu Tolgoi commitments and take on Rio, Rio lifted its stake to 49 per cent.

The arbitrator ruled that anti-dilution clauses in financing agreements Rio struck with Ivanhoe in 2006 would be triggered if the shareholders’ rights plan was activated. With that threat removed, Rio has moved relatively quickly to lock up outright control of Ivanhoe and its 66 per cent interest in Oyu Tolgoi (the Mongolian government owns the rest).

With Friedland, one of the world’s great resource sector entrepreneurs, already appearing to turn his attention to other interests – there is speculation of a $US1 billion float of Ivanplats – the residual question mark over Ivanhoe is whether Rio will continue to build its shareholding, bid for the minorities or pursue some other form of restructuring to simplify its exposure to Oyu Tolgoi, which is regarded as one of the two jewels in Rio’s pipeline of new projects. The other is the massive Simandou iron ore project in Guinea.

In the past there has been discussion of the possibility of using an in-specie distribution of Ivanhoe’s other assets to shareholders to enable the entity to be completely focused on the Oyu Tolgoi interest – and help Rio increase its own shareholding.

Despite Rio’s tremendous resurgence from its unpleasant experiences during the worst of the financial crisis and its balance sheet strength, bidding for the outstanding shares in Ivanhoe, which is capitalised at about $US13 billion, would represent a major commitment in an increasingly volatile and uncertain economic environment.

It is also possible that Rio might, having invited China’s Chinalco into the Simandou project as a major partner, want to further strengthen its alliance with that group, its own biggest shareholder, by partnering with it within Ivanhoe.

The timing of formalising its control of Ivanhoe and the ending of the distracting tussle with Friedland is quite neat for Rio, given that it can now focus entirely on bringing the mine into production rather than being embroiled in corporate machinations that threatened its multi-billion-dollar exposure to the project.

First ore from the project is scheduled for the second half of this year, with the first commercial production of copper concentrate due in the first half of next year.