Source: The Australian                        Date: 16 September, 2010

Rio Tinto's executive and board gathered in bucolic Hampshire on Monday for their annual two-day strategy summit. The main topic of conversation for the re-emerging global miner was the next crucial stride towards an endgame in what must rank high on its list of next year's priorities by picking up another 5 percent of Robert Friedland's Ivanhoe Mines.

The coincidence of Rio's pow wow with the long established date for the crystallization of debt-to-equity swap with Ivanhoe is so delightful it is hard to believe it wasn't deliberately concocted by someone inside the Anglo-Australian. Ivanhoe and Rio, you see, are not seeing anything like eye-to-eye on the ground rules of their investment partnership. Rio  now owns 34.9 percent of Ivanhoe and, all things being equal, it can move at a time of its own choosing to 44 percent of the Godfather of Mongolian mining by exercising warrants over another 84 million Ivanhoe shares.

Ivanhoe is of interest to Rio  because the Canadian company owns 66 percent of Oyu Tolgoi, routinely touted as the world's biggest undeveloped copper project. Ivanhoe says phase one of its copper giant will cost USD4 billion to build. It will doubtless be wrong. Given the current state of project price inflation, it will certainly cost a heap more than that.

And Ivanhoe's problem is that, given the current ownership construct of the project, it is going to have to carry the whole of that funding. Just over two months ago now, Ivanhoe told Rio it would go looking for another strategic partner to help it secure the USD4 billion necessary to finance stage one of  Oyu Tolgoi. The timing is significant because the terms of the investment agreement require Rio be given 60 days notice of the termination of restrictions on the introduction of new strategic investors. Now, ahead of that announcement Ivanhoe instituted what Canadians call a "shareholder rights scheme" but what the rest of investment world knows as a "poison pill".

The aim of the scheme is to constrain any effort Rio might make to creep from senior minority to controlling shareholder in Friedland's company. If the scheme stands, Rio will not be able to move beyond 44 percent of Ivanhoe unless it makes an offer for the whole of the company. Rio  has challenged the legality of the proposed scheme on the basis that it retrospectively relieves the company of rights established under the October 2006 investment agreement that introduced it as a cornerstone shareholder in Ivanhoe.

The way Rio sees it, that agreement allows it to move to a maximum of 46.6 percent of Ivanhoe by October next year and, as well, it includes a "no dilution" clause. Further, the deal provides Rio with a call over any new capital that Ivanhoe might issue in the pursuit of cash to fuel its Oyu Tolgoi ambitions. That call could be made even if it sees control pass to Rio. Ivanhoe disputes Rio's view of the shareholder rights scheme saying it merely aims to prevent its partner creeping past 50 percent to control.

Rio has requested the arbitration available under the Canadian rules to sort out this dispute but Ivanhoe has been unable to meet the 60-day deadline for the necessary agreement on just who should be appointed to conduct that arbitration. So it would seem likely now that Rio will attempt to get the courts to appoint an arbitrator with a view to delivering a decision by late November. The outcome of that process might well determine the timing of whatever efforts Friedland is making to introduce a new strategic shareholder to Ivanhoe.

If the shareholders rights scheme overrides the 2006 investment agreement and Rio is frozen at 44 percent, unless it is prepared to make a full bid for Ivanhoe, then Friedland could issue the 5 percent and more he has signaled could be placed with a third party without Rio being able to redirect those shares to its own account. That is an outcome, needless to say, that would strongly disappoint Rio. After all, while Albanese plays good cop, the company has engaged in a strategy that aims ultimately to narrow even more Friedland's alternatives and to deliver Rio with a controlling interest, not in Ivanhoe, but in its headline project, Oyu Tolgoi.

Rio has already discussed with Friedland its desire to translate its Ivanhoe investment into a direct equity stake in the Mongolian copper play. And that remains the endgame here.