Source: The Australian                        Date: 20 July, 2010

It is impossible not to perceive the suddenly visible tension between Rio Tinto and its vehicle for Mongolian expansion, Ivanhoe Mines. It is part of another move in the Anglo-Australian's progress towards control of the world's biggest undeveloped copper prospect, Oyu Tolgoi.

Currently, Rio is a partner in Ivanhoe's Mongolian ambitions in everything but investment fact.

Rio is already embedded in the technical and financial progress of Ivanhoe's proposed USD4- billion Oyu Tolgoi project. It also led the final rounds of negotiations that successfully ended five tricky years of debate over Mongolian mining law and the mining agreements that ultimately secured investment in the project. But the uncomfortable fact for the mining giant is that it has no direct skin in the Mongolian game.

And that position would seem to be unsustainable, at least from Rio's perspective. Ivanhoe's most recent integrated development plan holds out the prospect that Oyu Tolgoi can sustain average production of 410,000 tons of copper and 455,000 ounces of gold over a 59-year mine life.

Rio is an owner of three of the world's biggest copper producers. It owns all of Utah's century-old and still-going-strong Bingham Canyon and very healthy minority positions in the BHP Billiton operated Chilean monster, Escondida, and Freeport's Indonesian lesser-monster, Grasberg. Oyu Tolgoi, along with an ultra-deep US deposit called Resolution, has long been announced as Rio's copper future. It owns 60 per cent of Resolution. Its exposure to Oyu Tolgoi is through a still growing minority stake in Ivanhoe.

So, when you boil it down, it would seem inevitable that Rio will attempt either to take control of Ivanhoe or move to meaningful level of direct ownership of Oyu Tolgoi LLC, the Mongolian company that owns the mining leases. As things stands, Rio has influence over Oyu Tolgoi through a 22.4 per cent stake in the Canadian Godfather of Mongolian mining, Ivanhoe. Rio is currently in the process of exercising USD393 million of warrants, converting them into a further 7.3 per cent of Ivanhoe. And, as soon as September 12, when a USD350-million loan along with USD108 million of capitalized interest converts into 45.8 million shares, Rio will control 42.9 per cent (fully diluted) of Ivanhoe.

Incidentally, Mr. Robert Friedland, the legendary executive chairman and founder of Ivanhoe, owns 23 per cent of the business and has denied loud and often that his interest is, or will be, on the market.

Rio says its "strong objection" to Ivanhoe's recently adopted shareholder rights scheme was ignored and it wants a third party to review an arrangement. The effect of the scheme is that Rio, or anyone else for that matter, is prevented from moving to control of Ivanhoe without making an offer for all the outstanding capital. Canadian takeover rules allow for a partial offer and, given Rio is headed for about 43 per cent, taking that one step further to control would have seemed logical.

"We been talking this issue through for a while now and we are just not getting a lot of love," a Rio insider has commented. Rio says it chose arbitration over a court process because it would be settled quicker and because it is less harmful to what needs to remain a civil, constructive relationship. What happens now is that an arbitrator has to be agreed on, or appointed by a court, within 30 days and then the process must kick off within 51 days.

Talk about the shareholder rights scheme have been bustling on since April, when the independent directors of Ivanhoe proposed an idea ostensibly aimed at ensuring all shareholders might benefit from any attempt Rio might make at taking control of its bridge into Mongolia and beyond. Rio sees it quite differently, arguing that the scheme is a breach of its "contractual rights". The whats and hows of those claimed breaches have not been spelt out.

In the meantime, though, Rio has been busy attempting to translate its investment in Ivanhoe into a direct stake in Oyu Tolgoi. The reality of these discussions, if not their detail, was confirmed in a statement to the the US Securities and Exchange Commission. "Rio Tinto's discussions with the Company (Ivanhoe) about long-term structures, including the potential conversion of its subsidiary's equity stake in the company into a direct ownership interest in the Oyu Tolgoi copper and gold mineral development project in Mongolia's South Gobi region, continue."

At the same time, Rio has been busy talking to Chinalco about both Ivanhoe and Oyu Tolgoi. In the same statement, Rio reported that Chinalco had "indicated an interest in acquiring a minority equity stake in the Company (Ivanhoe) or acquiring a direct minority ownership interest in the OT project. If any arrangement is agreed to, it may be a bipartite or tripartite arrangement with the Company and/or Rio Tinto," the statement said.

Then, hidden beneath an explosion of legalese, Rio spelt out the options it is working on. The company said it might seek further representation on the Ivanhoe board before raising the prospect of "availing itself of its rights to acquire additional securities" in Ivanhoe.

Rio then suggested it could yet approach Mr. Friedland "alone or jointly with a third party" with a proposal for the "long-term structure of its (Rio's) existing investment, a direct interest in the OT Project or other changes to the capitalization, ownership structure of operation of the company."

How Ivanhoe has received this stuff, well, you can only guess. Mr. Friedland is no one's idea of a shrinking violet. But it might well be illustrative of the sort of pressures and tension now afoot that Rio says its senior appointee to the Ivanhoe board, global copper boss Andrew Harding, recently resigned to concentrate on chairing the technical committee steering Oyu Tolgoi.

Mr. Harding's departure leaves Mr. Tracey Stevenson the only Rio representative on Ivanhoe's board. But it is understood Rio is now determined to lift its representation to the three it is entitled to under the investment agreements forged back in 2006. Mr. Harding's priorities could be instructive on two fronts. Rio might well be expressing its disappointment with being ignored in the discussion over the shareholders rights issue. And, the idea that Mr. Harding is going to spend time running the Oyu Tolgoi technical committee might well indicate, as has been rumored, that there is some discord between Ivanhoe and its shareholder over the planned shape of project.