Ivanhoe Mines Ltd.'s prospects as a takeover target have been diminished and its share price plunged after Rio Tinto PLC, its largest shareholder and partner in the promising Oyu Tolgoi copper-gold project in Mongolia, said it's not planning a bid.
Rio's anti-takeover talk, sparked by a key arbitration victory, caused Ivanhoe shares to drop 22 per cent on the Toronto Stock Exchange on Tuesday, closing down $4.71 to $16.57.
"This is a negative for Ivanhoe shareholders who had been expecting an imminent takeover of [the company]" BMO Nesbitt Burns analyst Tony Robson said of the company founded by mining magnate Robert Friedland.
Investors have been expecting Rio, which currently owns 49 per cent of Ivanhoe, to launch a bid for the rest of the company as part of a global race for what's left of the world's shrinking resources.
Instead, Rio said it "currently has no intention of making a full takeover bid" for Ivanhoe following an arbitration ruling late Monday saying its shares are protected from being diluted as part of an Ivanhoe shareholder rights plan.
The ruling is a win for Rio in a long-running dispute with Ivanhoe, which had tried to prevent the world's second-largest miner from increasing its stake in the company.
While it means Rio can gradually accumulate a majority shareholder position in Ivanhoe, instead of making an offer to all shareholders, analysts believe the Anglo-Australian miner could still launch a takeover bid. In fact, the chances are greater if the shares are depressed.
Ivanhoe shares were trading at a high of slightly less than $29 in February, before falling to a 52-week low of $12.85 in October as the price of copper and other commodities nosedived amid concerns of a double-dip recession sparked by Europe's debt crisis and slowing economic growth in China.
Rio said Tuesday the arbitration ruling means it can buy additional Ivanhoe shares without being diluted by the rights plan once the standstill agreement that caps its shares at 49 per cent expires on Jan. 18.
"Thereafter, depending upon its assessment of Ivanhoe's business, prospects and financial condition, the market for Ivanhoe's shares, general economic and tax conditions, and other factors, Rio Tinto may seek opportunities to increase its shareholding in Ivanhoe to a majority position," the company stated.
While it said it has no plans to take over the company, Rio added that it also "reserves the right to change its intention in the future."
Analysts say Rio could also negotiate to buy only the Oyu Tolgoi project from Ivanhoe.
"It would be the most optimal outcome for Rio," Credit Suisse analysts said in a note, adding that full control of the project would increase its copper production by a range of 5 to 15 per cent from 2014 to 2020.
The $6-billion Oyu Tolgoi project is 66-per-cent owned by Ivanhoe and 34 per cent by the Mongolian government. It is expected to begin commercial production in the first half of 2013. Rio is already the project operator and is relying on production from the mine to help increase its copper business.
Ivanhoe's shareholder rights plan will remain in effect until April, 2013. Analysts say it will be up to the Ivanhoe board whether to trigger the plan if Rio continues to buy shares, instead of the entire company, which could also have a negative impact on other shareholders as they try to maintain their holdings.
That includes founder and chief executive officer Mr. Friedland, who owns a 14-per-cent stake in Ivanhoe and is a director.
"We will continue to strive to ensure that all Ivanhoe shareholders are treated fairly," Ivanhoe chairman David Huberman said in a statement on Monday.
Ivanhoe said Tuesday its lawyers are still evaluating the implications of the arbitrator's decision.