Rio wins filing, Ivanhoe stock falls

While being on the hook for half of a roughly US$6 billion mine construction is hardly small potatoes it is a bargain compared to shouldering the entire cost load alone.

Rio Tinto (RIO-N, RIO-L) now has a clear path to implement just that strategy as an arbitrator has upheld the company’s right to maintain its ownership stake in Ivanhoe Mines (IVN-T) and begin to increase its equity position in the company beginning on January 18th.

That was taken as bad news for Ivanhoe since it means that Rio will not have to launch a pricey takeover for all of Ivanhoe’s shares to gain a controlling interest in the world class Oyu Tolgoi copper and gold project in Mongolia.

Instead Rio will likely move up to just over a 50% stake in the company, forcing Ivanhoe to continue to help fund the development of the project. While such a shrewd move will curry favor with Rio shareholders it proved disappointing to Ivanhoe’s who, no doubt, were hungry for a healthy takeover premium.

The news sent Ivanhoe shares down 22% or $4.71 to $16.57 in Toronto on Dec. 13.

And indeed Rio did little to dissuade such an interpretation as it said in a statement that it has no imminent plans to takeover Ivanhoe.

In a note to investors Scotia Capital’s Tom Meyer also noted that the arbitration decision means Ivanhoe can’t trigger the poison pill anti-takeover defense it had sought to establish in the event that Rio did make a takeover bid.

Meyer’s maintains a 3-sector underperform rating on Ivanhoe with an $18.00 target price.

Ivanhoe holds a 66% stake in Oyu Tolgoi, one of the biggest copper development projects in the world, while the Mongolian government owns 34% of the project which is expected to reach commercial production in 2013.

Rio and Ivanhoe’s relationship reaches back to 2006 when Rio obtained a 19.9% ownership stake in Ivanhoe and secured rights to purchase additional shares in the future.

That agreement also included a clause giving Rio the right to acquire more equity in Ivanhoe to prevent dilution should it issue more shares.

Then in 2010 Rio filed with an arbitrator alleging that Ivanhoe’s shareholder rights plan didn’t allow it to maintain proportional ownership, and therefore served as a poison pill (an anti-takeover measure whereby the target companies shareholders are allowed to obtain more shares, usually at a discount, so that the acquirer has their position diluted).

The latest arbitration ruling allows for Ivanhoe’s shareholders’ rights plan to stay in effect until April 2013, but if it is triggered Rio’s can maintains its ownership stake.

Over the years Rio Tinto has taken over management of Oyu Tolgoi and increased its ownership in Ivanhoe to 48.5%.