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Rio Tinto to Buy up to 34% of Ivanhoe

Rio Tinto, the world's second-largest mining group, will increase its stake in Ivanhoe Mines once the Mongolian government approves Ivanhoe's Oyu Tolgoi project, a senior executive said on Tuesday.

Rio Tinto paid $303 million for a 9.9% stake in Canada's Ivanhoe last year and retains the rights to buy up to 34% in the firm.

"Our expectation is we would exercise those subject to a final investment agreement," Bret Clayton, Chief Executive Copper at Rio Tinto, told Reuters on the sidelines of a conference.

In April, Ivanhoe reached an agreement in principle on a draft investment deal with Mongolia on developing Oyu Tolgoi, a potentially huge source of copper and gold.

Now Ivanhoe and Rio are waiting for government and parliamentary approval before work can start.

"Assuming that we're able to finalise the investment with Mongolia we would be looking at exercising those additional tranches and warrants to increase our share in Ivanhoe," Clayton said.

If all the warrants and options that Rio owns are exercised it will represent a total investement of $1.5 billion.

In May, Ivanhoe Executive Chairman Robert Friedland said if approval was secured, work could begin in June or July. "We would have to get parliament's approval before the (parliamentary) session ends in early July, if we are to start that construction timeframe Ivanhoe is talking about," Clayton said.

Tax Exemption

Clayton said they had negotiated certain aspects of the 68% windfall tax on copper concentrate and gold with the government.

"They (the governement) realise if they continue down that road it will have an adverse impact on the investment to the country and they're willing to work with us to find an appropriate way," he said.

The President of Mongolia told Reuters in April the government might consider changing the tax.

Clayton said early production could start at Oyu Togoi in late 2009, and 5-7 years after the start-up it could produce 450,000 tonnes of copper annually.

Clayton said copper prices, almost $1,500 away from their record high, were reflecting market conditions because stock levels were declining and Chinese demand remained strong.

"China continues to be very strong and we are going to see that in the coming years and it is taking longer for the supply side to catch up," he said.

Copper for three-months delivery on the London Metal Exchange, a benchmark for the industry, is currently around $7,200 a tonne, almost 40 % firmer than its 11-month low hit in early February.