Rio wins ruling, Ivanhoe stock falls

While being on the hook for half of a US$6-billion mine construction is hardly small potatoes, it’s a bargain compared to shouldering the burden alone.

Rio Tinto (RIO-N) has a clear path to implement this strategy. An arbitrator is upholding the company’s right to maintain its 48.5% ownership in Ivanhoe Mines (IVN-T, IVN-N) and increase its equity position in the company, beginning on Jan. 18.

This is bad news for Ivanhoe, because it means that Rio will not have to launch a pricey takeover for all of Ivanhoe’s remaining shares to gain a controlling interest in the world-class Oyu Tolgoi copper-gold project in Mongolia.

Instead, Rio could acquire a greater-than-50% stake in the company, forcing Ivanhoe to help pay for the development of the project. 

While that clever move would curry favour amongst Rio shareholders, the arbitration ruling  was clearly a disappointment for Ivanhoe shareholders, who are  hungry for a healthy takeover premium. Rio did little to dissuade this disappointment – the company said in a statement that it had no imminent plans to take over Ivanhoe.

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

Rio Tinto shares were off 1.5%, or US76¢, to US$48.35 in New York on the same day. 

In a note to investors, Scotia Capital’s Tom Meyer said that the arbitration decision means Ivanhoe can’t trigger the poison pill anti-takeover defence it had sought to establish in the event that Rio makes a takeover offer.

Meyer’s maintains a three-sector “underperform” rating on Ivanhoe with an $18 target price.

Ivanhoe holds 66% of Oyu Tolgoi, one of the world’s biggest copper-gold development projects, while the Mongolian government owns 34% of the project. Oyu Tolgoi 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 that gave Rio the right to acquire more equity in Ivanhoe and prevent dilution, should it issue more shares.

In 2010 Rio filed with an arbitrator, alleging that Ivanhoe’s shareholder rights plan did not allow proportional ownership, and therefore served as a poison pill – or an anti-takeover measure – whereby the target company’s shareholders are permitted to acquire additional shares, usually at a discounted price, so that the acquirer has its position in the company diluted.

The latest arbitration ruling allows for Ivanhoe’s shareholder rights plan to remain in effect until April 2013. If it is triggered, Rio can maintain its ownership stake on a percentage basis.

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