A Battle for Mongolia's Copper Lode

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TORONTO—Billionaire entrepreneur Robert Friedland built his fortune learning how to gain advantage over some of the world's largest and most powerful mining companies.

Today Mr. Friedland is finding that dealing with giants can be tricky sport.

At issue is ownership of resources buried deep in the Mongolian desert that are among the world's largest unexploited gold and copper deposits—a development with estimated reserves of 81 billion pounds of copper and 46 million ounces of gold.

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Robert Friedland invited Rio to take a stake in Ivanhoe Mines in 2006.

Mr. Friedland, the chief executive of Ivanhoe MinesLtd. and one of the sector's most colorful moguls, is on the back foot in a squabble with industry giant Rio Tinto PLC over Oyu Tolgoi, Ivanhoe's massive copper-and-gold project in Mongolia.

Last month, Rio Tinto increased its ownership in Ivanhoe to 51%, a stake that gives it effective control of the Canadian miner without having paid a premium to other shareholders—a move that Ivanhoe CEO and founder Mr. Friedland had fought to prevent.

Now in charge, Rio wants to hold on to Oyu Tolgoi but spin off or sell Ivanhoe's other mining assets, according to people familiar with the matter.

One of the people said, however, that Rio is in no hurry to make such a move. For a start, the Oyu Tolgoi project still has to overcome some key hurdles, including the conclusion of power-supply negotiations with Chinese authorities.

The intentions of Mr. Friedland, who holds a 13.7% stake in Ivanhoe, are less clear. According to people familiar with the matter, he is now looking to negotiate with Rio over an exit for himself and Ivanhoe's other shareholders.

If Mr. Friedland wanted to, he could also hold on to the bitter end. Canadian rules require a potential acquirer to own over 90% of a company's shares before forcing a full takeover, which Rio would be unable to do if Mr. Friedland maintains his current stake.

The self-made, 61-year-old billionaire has a colorful past that takes in student activism against the Vietnam War, a youthful friendship with late Apple Inc. co-founder Steve Jobs and some of the sector's potentially most-lucrative discoveries in recent decades. It has also included controversial forays such as Ivanhoe's past venture in military-run Myanmar.

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Chinese contract workers at the Oyu Tolgoi copper mine in the South Gobi desert in Mongolia in 2010.

Mr. Friedland, who currently spends much of his time in Singapore, declined to comment for this article. An Ivanhoe spokesman said Rio's "slim" 51% controlling interest "has not curtailed Mr. Friedland's long-standing and active service to Ivanhoe Mines."

The Ivanhoe spokesman said the company's future is for all the company's shareholders to decide, not just Rio and Mr. Friedland. The company is based in Vancouver and listed in Toronto and New York.

Mr. Friedland, who spent much of the 1970s traveling in India, where he studied Sanskrit, Hindu culture and Buddhism, once said he became interested in mining after stumbling upon an abandoned gold mine on property he was developing for a timber venture with Mr. Jobs, whom he met at Reed College in Portland, Ore., in the early 1970s.

Mr. Friedland came to prominence in the 1990s with a large Canadian nickel-deposit find. Through another company he controlled at the time, Diamond Fields Resources Inc., he sold that off to Canada's Inco Ltd. for about $3 billion, after stoking a bidding war.

Then in 2000, Mr. Friedland and Ivanhoe, a company he founded in the mid-1990s, paid $5 million to another mining giant, BHP Billiton PLC, to buy Mongolian exploration licenses. That was followed by a related $37 million payment three years later to acquire a right to some royalties BHP retained.

After exploring the prospect, Ivanhoe now is sitting on gold and copper that analysts say could be worth some $300 billion.

"You have to take your hat off to Ivanhoe—they invested a lot of effort into an area that had no history of major discoveries," said Terry Ortslan, a director at mining research firm TSO & Associates.

Lacking the firepower to develop Oyu Tolgoi on its own, Ivanhoe invited in another mining behemoth, London-listed Rio, which in 2006 took a 9.95% stake for $303 million. Since, Rio has invested over $4 billion to get to its current 51% stake, according to Ivanhoe.

But as Rio continued to build its ownership, analysts say the relationship frayed. In 2010, Ivanhoe adopted a shareholder-rights plan that allowed other investors to dilute Rio's stake if it continued to grow.

Last year, Rio challenged this clause in arbitration, and Ivanhoe abandoned the plan, clearing the way for Rio to go above 50%. Rio made that move on Jan. 24, without informing Ivanhoe, according to a person familiar with the situation. A Rio spokesperson declined to comment.

Rio now has a number of options, analysts say. One is simply trying to install new board members and management and then selling off the non-Mongolian assets piecemeal.

The company could also strike a friendly deal with minority shareholders by spinning off the non-Mongolian assets, plus cash, to investors, the scenario analysts such as those at Credit Suisse AG see as most likely.

Credit Suisse estimated in a recent report that around three quarters of Ivanhoe's net asset value is based on its holding in Oyu Tolgoi, which it values at $13.3 billion.

The rest of the company is worth around $3.4 billion, the bank figures. Those other assets include stakes in a gold project in Kazakhstan and a coal mine in Mongolia.

Mr. Friedland has been hit by setbacks before but is upbeat by nature, say some who know him. Some of his early mining promotions didn't make investors money, but Mr. Friedland was always able to drum up interest in new ventures. Ivanhoe's early days in Mongolia saw setbacks, including a local protest in which an effigy of Mr. Friedland in a top hat was burnt in the capital Ulaanbaatar.

Mr. Friedland has also proven controversial.

Ivanhoe once entered into a joint venture with a state-owned mining company in military-ruled Myanmar. Ivanhoe says the copper project, which it exited in 2007, brought investment into a developing country and was started before Canada placed sanctions on the regime.

—Gina Chon, Alex MacDonald and Dana Cimilluca contributed to this article.

Write to Alistair MacDonald at alistair.macdonald@wsj.com