Ivanhoe drops the poison pill and secures financing

Rio Tinto (RIO-N, RIO-L) is moving ever closer to increasing its stake in Oyu Tolgoi through Ivanhoe Mines‘ (IVN-T, IVN-N) equity.

After winning a court ruling in late December of last year the sting was removed from Ivanhoe’s shareholders rights plan and Rio’s right to not be diluted out of its equity position in the company was upheld. The court decision paved the way for Ivanhoe to drop the listless rights plan all together, which it announced it was doing on Jan. 18.

Rio argued in court that the plan, which was introduced by Ivanhoe in April of 2010, went against a prior agreement between the two companies that ensured Rio could incrementally increase its equity position in the company.

The shareholders rights plan was widely read on the Street as being an attempt by Ivanhoe to force Rio into making a more expensive takeover offer for the entire company, thus winning a potentially rich premium for Ivanhoe shareholders.

But when the court came down on the side of Rio it was clear that the larger miner could simply continue on a path of buying a controlling stake in Ivanhoe….and offering no premium in the process.

And that is exactly what is underway now. Rio informed Ivanhoe that after Jan. 18, it would be moving beyond the 50% equity threshold in the company, regardless of whether the smaller company had a shareholders right plan in place or not.

Rio had been restricted to holding a 49% stake up until Jan.18 thanks to a standstill agreement between the two companies.

Lacking any counter-punch, Ivanhoe clearly decided that it was better to make nice and recommended that its investors end the rights plan on May 11 – the date of its next shareholders meeting. Until then it says investors should delay activating the plan.

Ivanhoe holds a 66% stake in Oyu Tolgoi with the Mongolian holding the remainder. The project is considered one of the worlds’ largest undeveloped copper and gold mines, and the companies estimate it will cost US$6 billion to develop.

In other news Ivanhoe’s board approved a $1.8 billion bridge financing that could be used to complete the first phase of Oyu Tolgoi.

In a note to investors, Scotia Capital analyst Tom Meyer called the bridge financing a positive development, provided it is approved by the bank credit committee and Rio Tinto, as it should give Ivanhoe some leg room on its long term project finance timeline.

Meyer has a $18.00 one year price target on Ivanhoe shares.

Both Ivanhoe and Rio are working toward arranging as much as $4 billion of financing for the project and anticipate having such financing in place by the second quarter.

Construction of the mine, which is being managed by Rio, is now more than 70% finished and initial production is expected in the middle of this year.

In Toronto on Jan. 18 Ivanhoe shares finished the day a penny higher at $19.30 on 1.23 million shares traded while in New York, Rio shares were up US$1.48 or 3% to US$57.59 on 3.18 million shares traded.