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Rio clear to take over Mongolia project after Ivanhoe relents

Aerial view of traditional Mongolian tents which will house workers of Oyu Tolgoi copper and gold deposit in Mongolia
Aerial view of traditional Mongolian tents which will house workers of Oyu Tolgoi copper and gold deposit in Mongolia

By Cameron French and Clara Ferreira-Marques

TORONTO/LONDON (Reuters) - Global miner Rio Tinto is clear to take over Mongolia's coveted Oyu Tolgoi project, which promises to be one of the world's largest copper-gold mines, after project owner Ivanhoe Mines decided to scrap a controversial "poison pill".

Ivanhoe said on Wednesday it would ditch its shareholder rights plan, originally aimed at blocking Rio Tinto from raising its stake in the Canadian firm, as a separate agreement capping the global miner's holding at 49 percent expired.

Rio, which has built its stake in the miner as it has helped fund construction of Oyu Tolgoi, welcomed the decision.

"As the 49 percent cap on Rio Tinto's ownership of Ivanhoe expires today, we are free to increase our shareholding as we see fit," a Rio spokesman said.

Ivanhoe said Rio had recently told Ivanhoe's board that it intends to buy additional shares to raise its stake to more than 50 percent.

Ivanhoe's rights plan, backed by shareholders in 2010 and due to expire next year, was dealt a fatal blow in December when a court ruled it could not be used to dilute Rio's stake.

The ruling recommended Ivanhoe consider scrapping the provision, which would have triggered a massive rights issue in the event of a bid.

"Certainly Rio would like to own it, they would like to control it - it is their biggest copper project. They see it is a great asset and they are willing to back it," said analyst Nik Stanojevic at brokerage Brewin Dolphin in London.

"They want to buy it and they will think of a sensible way of getting hold of more of it."

Cancelling the shareholder plan will require approval of shareholders at the company's annual meeting on May 11.

TOUGH NEGOTIATIONS AHEAD

Analysts said Rio, still scarred by its costly takeover of Canadian aluminum giant Alcan in 2007, was unlikely to move aggressively to take over Oyu Tolgoi or Ivanhoe - or get into a potentially bruising battle with Ivanhoe CEO Robert Friedland.

Rio's preference, they said, is most likely to lie with a friendly deal with Ivanhoe directors to give Rio control of Oyu Tolgoi in a cash and share swap, leaving behind Ivanhoe's other assets, including stakes in coal miner South Gobi Resources, Ivanhoe Mine Australia and Kazakh project Kyzyl Gold.

Credit Suisse analysts valued the 66 percent stake in Oyu Tolgoi at $13.3 billion in a note earlier this week.

Rio's Australian shares traded a touch firmer on the news on Thursday, at A$66.80, but trailed the wider materials sector <.AXMJ>.

Friedland, one of the industry's best known entrepreneurs, may be ready to move on to fresh pastures. But he is also known for tough negotiation, having extracted a fortune from Inco for the Voisey's Bay nickel deposit in Eastern Canada - the 1990s deal that made his name.

There are no other apparent buyers for Oyu Tolgoi, with Rio already controlling a blocking stake in Ivanhoe. It already operates the project and is one of few companies with the deep pockets necessary to fund a similar sized mine.

This could allow Rio time to resolve key operational issues at Oyu Tolgoi, including power provision to the site.

Oyu Tolgoi, which translates to Turquoise Hill, is located about 50 miles north of Mongolia's border with copper-hungry China and is considered one of the world's largest copper and gold deposits.

Development of the $6 billion project was delayed for years as Ivanhoe hammered out a complicated royalty agreement with Mongolia, finally agreeing to a deal in 2009 that gave the country 34 percent of the project.

Once at commercial production in 2013, Oyu Tolgoi is expected to produce more than 544,000 tons of copper, 650,000 ounces of gold, and 3 million ounces of silver a year on average over its first ten years.

Ivanhoe also said it had obtained second $1.8 billion bridge loan as a stopgap measure while it negotiates $4 billion in long-term financing for Oyu Tolgoi. The bridge loan is subject to Rio's approval.

Shares of Ivanhoe were barely changed, last trading at C$19.31 on the Toronto Stock Exchange on Wednesday.

(Reporting By Cameron French and Clara Ferreira-Marques; Editing by Frank McGurty and Janet Guttsman)

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