Rio Tinto takes majority stake in Ivanhoe

For the first time in recent memory, a creeping takeover in Canada has succeeded.

Rio Tinto Ltd. announced Tuesday it has done the inevitable, boosting its stake in Ivanhoe Mines Ltd. to 51% from 49% and seizing control of the Vancouver-based miner. Rio Tinto can now force changes to the Ivanhoe board of directors, and a source said it might happen after Rio conducts a strategic review of the company.

Creeping takeovers in Canada are extremely rare, particularly because target companies can block them with shareholder-rights plans (or “poison pills”). M&A lawyers said this is the first case they can recall in many years in which one large company got control of another without making an offer to all shareholders.

However, this was always a logical outcome in the unique Ivanhoe-Rio relationship. In fact, it is proof that the partnership between the two miners worked the way both sides hoped it would.

Ivanhoe and Rio first came together in October 2006. At the time, Ivanhoe needed help: It controlled the massive Oyu Tolgoi copper-gold project in Mongolia (arguably the world’s best copper project), but lacked the capital and local political support to develop it. Investors also had little faith in Mongolia as a serious mining district.

Rio Tinto’s strategic investment in Ivanhoe changed everything. In addition to providing Ivanhoe with vast amounts of capital, Rio played a key role in negotiations with the Mongolian government over Oyu Tolgoi. Also, it is now building the US$6-billion mine.

The partnership allowed Rio Tinto to gradually boost its stake in Ivanhoe as Oyu Tolgoi moved forward. If project development went as expected, investors knew that Rio would own 49% of Ivanhoe when a standstill agreement expired on Jan. 18. After that, it could go over 50%.

“There’s been a blueprint for this entire process that’s been public for a long time,” said Doug Bryce, a partner and M&A specialist at Osler Hoskin & Harcourt LLP.

“It’s the cost of developing a project of epic proportions that required billions and billions of dollars of capital.”

After Rio Tinto won an arbitration case that protected its 49% stake, the only remaining barrier to a takeover was Ivanhoe’s shareholder-rights plan. And last week, Ivanhoe’s board recommended the rights plan be scrapped after Rio indicated it may trigger the plan and create huge dilution. With the rights plan out of the way, Rio quickly jumped to 51% from 49% through a $302-million private transaction.

Rio is expected to take some time evaluating Ivanhoe, a source said, and is unlikely to push for major changes right away. If Rio wants to, it could propose changes to Ivanhoe’s board at the annual meeting in May.

Ivanhoe shareholders, including chief executive Robert Friedland, will watch and see what Rio Tinto decides to do. Rio wants to own Oyu Tolgoi itself rather than Ivanhoe stock, but has not made any promises to buy out minority shareholders.

Tony Robson, an analyst at BMO Capital Markets, wrote that one logical move for Rio would be to sell off Ivanhoe’s subsidiaries, and then bid for the company. He added that this is a good time to bid, as mining share prices are depressed and Oyu Tolgoi is not yet in production.

If Rio does not make a bid, Ivanhoe’s minority shareholders will start to enjoy massive earnings once the project reaches commercial production. That is expected in 2013.


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