Disagreements between representatives of Rio Tinto PLC (RIO) and Ivanhoe Mines Ltd. (IVN) tasked with developing Mongolia's Oyu Tolgoi copper-gold mine could disrupt development of the mine, according to a regulatory filing.

In an offer document for the Canadian miner's $800 million to $1 billion rights issue announced Monday, Ivanhoe said disputes between a Rio-dominated technical committee charged with developing the resource and the board of Oyu Tolgoi's joint venture company could affect the project, which is slated to start production by the end of 2012.

Oyu Tolgoi is the world's largest undeveloped copper-gold project, with resources amounting to 81 billion pounds of copper and 46 million ounces of gold, worth around a combined $370 billion at current market prices. It is regarded as particularly important because of its location 80 kilometers from the northern border of China, the world's largest copper consumer.

"Representatives of Ivanhoe and Rio Tinto on the Technical Committee have expressed differing opinions on several issues that could affect key aspects of project development, including the determination and timing of capital and operating costs and project scheduling," the offer document said.

"Failure to reach a timely consensus by all Oyu Tolgoi Project stakeholders...could potentially affect the Oyu Tolgoi Project's current development schedule."

The Oyu Tolgoi joint venture is owned 34% by the Mongolian government and 66% by Ivanhoe, which in turn is 34.9% owned by Rio Tinto and 18.26% by its founder, Robert Friedland.

Rio is also able to raise its stake to 46.65% in Ivanhoe through the exercise of warrants as part of a private placement agreement between the companies in 2006, which also prevents the company from raising its stake any further before October 2011.

Rio and Ivanhoe have been locked in a dispute for several months in a thinly-veiled battle for control of the company. A shareholder rights plan introduced by Ivanhoe earlier this year, seen by analysts as an attempt to prevent Rio from seizing a majority stake in Ivanhoe, was referred to arbitration by Rio in July.

Several days later, Ivanhoe cancelled a clause banning it from issuing fresh equity to strategic shareholders, in a move seen as a further "poison pill" to prevent Rio from moving its shareholding to above 50%.

In its offer document for Monday's rights issue, Ivanhoe said it disagreed with Rio on the rationale and even legal basis for the latest share offering.

Previously, the 2006 private placement agreement had been seen as the main funding vehicle for Oyu Tolgoi's development, with Rio contributing funding each time it purchased a fresh tranche of shares through its warrants.

However, the offer document says the rights issue will now be necessary to "provide the capital necessary for the company to maintain its current pace of development" at Oyu Tolgoi.

"A representative of Rio Tinto has communicated to us a number of assertions, including that he believes that there are superior financing opportunities available to us" for developing the mine, while the rights issue "offend(s) a number of Rio Tinto's contractual rights".

Rio Tinto is able to subscribe to the latest share issue to prevent its stake from being diluted but would have to pay up to $350 million to maintain its stake in the company at its current level.

Spokespeople for Ivanhoe and Rio Tinto would not comment on the deal and whether Rio would take up its rights under the offer, although the company is expected to do so in accordance with its strategy of raising its stake in Ivanhoe.

The document warned that disputes between Oyu Tolgoi's five-member development committee, on which Rio Tinto has three appointees, and the Oyu Tolgoi joint venture's board, on which Ivanhoe and the Mongolian government dominate, could affect the mine's development and hit the company's share price.

"The board of directors of OT LLC...may not agree with the views of the Technical Committee, which could potentially result in the disruption, delay or suspension of development and operational activity, which in turn could potentially result in significantly increased costs to (Ivanhoe) and adversely affect its share price," it said.

 
   -By David Fickling, Dow Jones Newswires; +61 2 8272 4689; david.fickling@dowjones.com
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