Safe in Rio's clutches

After an extended tale of corporate stratagem, Ivanhoe Mines' final escape route from Rio Tinto has been cut off, putting Rio in a position to take absolute control of its partner.

One of the more entertaining episodes of corporate intrigue and manoeuvring appears to have ended after Rio Tinto emerged as the clear winner from a lengthy arbitration process with its reluctant Oyu Tolgoi partner, Ivanhoe Mines.

The favourable ruling from the independent arbitrator appears to end nearly two years of sparring between the companies, although one can’t discount Ivanhoe chief executive Robert Friedland’s ability to devise new ways to try to frustrate Rio and prevent it from taking absolute control of Ivanhoe’s giant copper-gold project in Mongolia.

The dispute related to Friedland’s attempt to wriggle out of the inevitable outcomes of the deals he struck with Rio in 2006 as part of its progressive provision of most of the funding for the multi-billion dollar Oyu Tolgoi project.

At that time Rio took up a 19.9 per cent holding in Ivanhoe and gained rights to acquire shares in future – and Ivanhoe granted Rio anti-dilution protection in the event it wanted to raise equity in future. As Rio progressively converted loans to Ivanhoe into equity, its shareholding kept mounting to the point where it was clearly in a position to move to effective control of Friedland’s company.

Friedland responded by establishing a "shareholders’ rights plan" that included a poison pill that would have severely diluted Rio’s holding if it moved above 44 per cent of Ivanhoe, and attempted to terminate a clause in their agreement that restricted his group’s ability to issue equity to third parties without first offering it to Rio. Subsequently he announced a $US1.2 billion rights issue to reduce Ivanhoe’s reliance on Rio for its share of the funding for Oyu Tolgoi and claimed that it was exempt from Rio’s right of first offer.

Rio responded to the shareholders' rights plan by referring it to arbitration and last night claimed victory. After a standstill agreement expires in January it will be able to acquire Ivanhoe shares and increase its shareholding beyond its current level of 49 per cent without being diluted and therefore is now in a position to take absolute control of Ivanhoe if it wants to.

Rio itself says it may seek to increase its shareholding to a majority position but has no current intention of making a full takeover bid.

The outcome of the arbitration puts an end to what was an already dwindling prospect of Ivanhoe escaping Rio’s clutches. Rio lifted its shareholding from 35 per cent to 44 per cent late last year after providing more debt funding for Oyu Tolgoi, taking up its share of the rights issue and acquiring shares from Friedland himself.

In effect Friedland, having failed to find a third party to take on Rio and provide the funding that could have maintained Ivanhoe’s independence, accepted the inevitable, although a victory in the arbitration might have re-opened an escape route.

Oyu Tolgoi is one of the two prospective jewels in Rio’s pipeline of new projects. The other is the giant Simandou iron project in Guinea. The Mongolian mine – the world’s largest and highest-quality new source of copper – is on schedule for first production late next year, although it won’t reach full production until 2018.

Having provided billions of dollars of funding via Ivanhoe over the years, as well as the management of the project, Rio has now secured its equity exposure and given itself options to increase it.

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