Rio Tinto took a big step toward owning
a massive copper and gold project in Mongolia and diversifying from iron ore,
after agreeing to buy more shares in developer Ivanhoe Mines Ltd and guaranteeing $3.3 billion
needed to open the mine.

Successful development of the Oyu Tolgoi project is crucial to reducing Rio
Tinto”s dependence on iron ore, which some analysts say may be in surplus
within the next three years.

Ivanhoe”s founder billionaire Robert Friedland is leaving the company as part
of the deal announced on Wednesday.

The deal with Rio Tinto is essential for the Oyu Tolgoi project to reach
commercial production on target in the first half of 2013, and should give
shareholders some comfort going into Rio Tinto”s annual meeting in London on
Thursday.

Investors will be looking for an update on the capital and operating costs
at Oyu Tolgoi, following a review released last month by Ivanhoe, and not
officially endorsed by Rio Tinto, that put the capital costs at $13.2 billion,
up from $9.55 billion.

Rio Tinto has invested more than $4 billion in Ivanhoe over the past six
years to position itself to take over the company founded by Friedland and get
its hands on the Canadian miner”s 66 percent stake in Oyu Tolgoi, one of the
world”s largest copper discoveries.

Along the way, Friedland, best known for turning the Voisey”s Bay nickel
discovery in Canada into a C$4.3 billion ($4.4 billion) fortune, tried to
ensure he would get a big takeover premium for Ivanhoe.

Was Friedland outsmarted by the Anglo Australian miner, which owns 51
percent of Ivanhoe?

Analysts say yes, but that was largely because falling copper prices and
tight credit conditions worked against Ivanhoe as lenders balked at providing
up to $4 billion to the Toronto-listed explorer.

“Events have just conspired to help Rio use its financial muscle. It”s used patience
and has been in a good position and should be able to get the balance of the
company without having to pay a big premium,” said Tim Gerrard, an analyst
at Investec .

Friedland got a severance package on Wednesday and Ivanhoe agreed to sell
new shares at $8.34 a piece to raise $1.8 billion to help finish digging the
mine in the South Gobi desert.

“Ultimately, Friedland had always wanted someone to bid for the balance
of the company that wasn”t owned by Rio,” said Tim Barker, a portfolio
manager at BT Investment Management.

As recently as last August, Friedland argued Ivanhoe was worth at least $34
a share.

At the time, Ivanhoe was trading around $25.50. Its shares have since
crumbled, after Rio Tinto won a fight against Ivanhoe”s “poison pill”
defence last December and most recently after Ivanhoe”s cost estimates on Oyu
Tolgoi soared.

“(Rio) will pay a premium at some point, but it”ll be off a lower
base,” said Investec”s Gerrard.

Rio Tinto declined to comment on the sale of Ivanhoe”s stake in Mongolian
coal miner SouthGobi Resources to China”s Chalco, which could be derailed after
the Mongolian government suspended its SouthGobi exploration licenses.

Ivanhoe”s shares on Wednesday rose 16 percent to $13.64 in New York and to
C$13.49 in Toronto.

Future price gains are likely to be limited, analysts said, effectively
capped by the $12.79 a share that Rio Tinto has agreed to pay to convert
warrants that Ivanhoe will issue to the Anglo Australian miner over a
three-year period into shares. Rio Tinto stands to own as much as a 64.8
percent stake in Ivanhoe.

Source: Reuters