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MELBOURNE (Reuters) - An independent arbitrator cleared the way on Tuesday for mining group Rio Tinto Plc (RIO.L)(RIO.AX) to take over Ivanhoe Mines Ltd (IVN.TO), saying the $16 billion Canadian company's "poison pill" defense was not valid.
Anglo-Australian miner Rio Tinto, which owns 49 percent of Ivanhoe, has long been expected to bid for the company, coveting its majority stake in the massive Oyu Tolgoi copper and gold project in Mongolia.
The arbitrator ruled a poison pill takeover defense put in place by Ivanhoe does not apply to Rio Tinto, leaving the Vancouver-based firm vulnerable to Rio's advances and pushing its shares down roughly 20 percent in both Toronto and New York on Tuesday afternoon.
Ivanhoe shares fell C$4.20 to C$17.08 on the Toronto Stock Exchange, while its New York-listed shares fell $4.15 to $16.55, as analysts weighed in that the ruling gives Rio the ability to execute a creeping takeover of Ivanhoe.
The ruling prompted TD Securities to slash its price target on Ivanhoe shares to C$18.50 from C$31, as it factored out the takeover premium previously built into its calculation.
"With this arbitration (ruling), the poison pill cannot be used against Rio Tinto," said Scotia Capital analyst Tom Meyer in a note to clients. "Hence, we see the 'takeover premium' eroding from Ivanhoe Mines' share price over the coming trading sessions."
In a statement on Tuesday, Ivanhoe said it is continuing to evaluate the implications of the arbitrator's decision.
Rio said it reserved the right to increase its holding to a majority position from January 19, when an agreement limiting its stake expires, but added it currently had no intention of making a full takeover bid for Ivanhoe's shares.
"Rio Tinto reserves the right to change its intention in the future," the miner said in a statement.
Investors said the ruling effectively leaves Rio Tinto in control of Ivanhoe and means it will not need to rush a bid. It also spoils the chances of Ivanhoe's founder, billionaire Robert Friedland, of being able to set up a bidding war.
Ivanhoe shareholders were hoping that Friedland, who in the 1990s extracted a fortune from Inco for the Voisey's Bay nickel deposit in Eastern Canada, could replicate that success and force Rio into paying a huge premium for control of the company and the Oyu Tolgoi deposit.
"The game's played out already," said Tim Schroeders, a portfolio manager at Pengana Capital, which owns Rio shares.
Few companies would have the capacity to fund or execute development of Oyu Tolgoi and those that could would unlikely want to enter a bidding war against Rio Tinto, he said.
"It seems a pointless exercise to get into a bidding war if you've got someone who's in there already with a swag of equity," Schroeders said.
Rio Tinto has spent $4.2 billion since 2006 building its stake in Ivanhoe as the Canadian company raised capital to develop Oyu Tolgoi, one of the world's largest-known copper deposits. Rio is counting on the mine's production to underpin growth in its copper business.
Ivanhoe's minority shareholders approved the shareholder rights plan last year to try to stop Rio Tinto from creeping up the share register after a five-year-old agreement capping its stake at 49 percent expires on January 18.
Rio Tinto contested that plan, arguing it breached its rights, and the battle went to arbitration.
The arbitrator ruled that if anyone, including Rio Tinto, bids for Ivanhoe and triggers the company's poison pill, Rio Tinto is protected from having its 49 percent stake in Ivanhoe diluted, Ivanhoe said on Tuesday.
"We will continue to strive to ensure that all Ivanhoe shareholders are treated fairly," Chairman David Huberman said in a statement.
SPECIAL REPORT on Oyu Tolgoi: r.reuters.com/nas97p
After Rio's standstill agreement with Ivanhoe ends next month, Rio Tinto will be free to buy more shares making it hard for Friedland to reap as big a profit from selling Ivanhoe as he scored with his biggest success.
Friedland's team discovered the Voisey's Bay deposit, while searching for diamonds and sold for C$4.3 billion ($4.2 billion) in 1996.
Friedland said in August that, based on the 1.4 times net asset value that top gold miner Barrick Gold (ABX.TO) paid for copper miner Equinox Minerals earlier this year, Ivanhoe would be worth between $34 and $46 a share.
Under Canadian rules, Rio can buy any number of Ivanhoe shares from up to five shareholders at a premium of up to 115 percent. After that, it can buy up to 5 percent of Ivanhoe's shares every 12 months.
Schroeders predicted that Oyu Tolgoi, like any mega-project, would likely face development hiccups, which would depress Ivanhoe's stock price from time to time and create opportunities for Rio Tinto to patiently pick up shares.
Commercial production from the mine, 66 percent owned by Ivanhoe and 34 percent by the Mongolian government, and run by Rio, is expected to start in the first half of 2013. That partly hinges on securing power supply from China in a deal that has yet to be finalized.
Rio's Australian shares fell more than 2 percent to A$62.76 on Tuesday, amid a wider selloff on persistent worries about Europe's debt crisis. Its London shares closed up 2.1 percent.
Reporting by Sonali Paul and Victoria Thieberger in Melbourne, Clara Ferreira-Marques in London and Euan Rocha in Toronto; Editing by Ed Davies and David Holmes