Global diversified miner Rio Tinto PLC (RTP, RIO.LN) said late Friday it has referred Ivanhoe Mines Ltd.'s (IVN, IVN.T) shareholder rights plan to arbitration for breach of Rio Tinto's contractual rights related to its stake in Ivanhoe.

The main issues in the arbitration process relate to the breach of two key parts of Rio Tinto's private-placement agreement with Ivanhoe, a person familiar with the matter told Dow Jones Newswires.

First, Ivanhoe's rights plan could "substantially" dilute Rio Tinto's shareholding in Ivanhoe and therefore contravenes some of the terms attached to Rio Tinto's warrants that protect it from dilution, the person said.

Secondly, Ivanhoe's shareholder rights plans unilaterally extends the standstill agreement beyond October 2011 and caps how many Ivanhoe shares Rio can buy in the open market, the person added.

The arbitration process marks a hiccup in Rio Tinto's otherwise close partnership with Canada-headquartered Ivanhoe Mines. Rio Tinto isn't only a significant shareholder in Ivanhoe but is also the operator of Ivanhoe's Mongolian Oyu Tolgoi copper project, one of the world's largest untapped copper and gold deposits in which Ivanhoe has a 66% stake.

Rio Tinto has touted the Oyu Tolgoi project as an important discovery and is currently holding discussions with Ivanhoe to see if there are ways to convert its Ivanhoe stake into a direct stake in the Oyu Tolgoi project. Those discussions may or may not result in a deal, the person familiar with the matter said.

Rio Tinto voted against the rights plan at Ivanhoe's shareholders' meeting on May 7 but the plan was still approved by the majority of shareholders that voted.

"Before its adoption, Rio Tinto advised Ivanhoe that the Rights Plan would breach Rio Tinto's contractual rights. However, the board of Ivanhoe nonetheless adopted the Plan on April 6, 2010, over Rio Tinto's strong objection," Rio said in a statement.

Rio at the time owned a 22.4% stake in Ivanhoe but has subsequently increased it stake to 29.6% by exercising warrants. Rio Tinto can increase its stake to 44% through warrants and a convertible loan and up to 46.6% through purchases in the open market by October 2011, according to Ivanhoe.

The unnamed person said Rio could possibly increase its stake to somewhere in the region of the high 40% according to the standstill agreement that caps how much Rio can buy of Ivanhoe shares.

An Ivanhoe spokesperson wasn't able to comment on the arbitration process, but Ivanhoe said in April that the rights plan "does not affect the rights of Rio Tinto to increase its present...interest in Ivanhoe Mines through the exercise of warrants, a convertible bond and secondary market purchases during the current, five-year standstill agreement between Ivanhoe and Rio Tinto that is in effect until October 27, 2011."

The Ivanhoe spokesperson said a statement would be made in due course.

Rio Tinto sent a letter to inform Ivanhoe of its decision to refer the matter to arbitration. Both sides will likely spend a month choosing an arbitrator and then arbitrate on the matter in the ensuing months. The arbitration process should come to an end in September, the unnamed person said.

 
   Company Website: http://www.riotinto.com 
                    http://www.ivanhoemines.com

-By Alex MacDonald, Dow Jones Newswires; 44 20 7842 9328; alex.macdonald@dowjones.com
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