An arbitrator cleared the way for mining giant Rio Tinto to take over Ivanhoe Mines , saying the $16 billion (10 billion pound) Canadian group's poison pill defence was not valid.

Anglo-Australian 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 defence put up by Ivanhoe does not apply to Rio Tinto, leaving the Vancouver-based firm vulnerable to Rio's advances.

Investors said the ruling effectively leaves Rio Tinto in control of Ivanhoe, and means Rio will not need to rush a bid for the company. It also spoils the chances of Ivanhoe's founder, billionaire Robert Friedland, of being able to set up a bidding war for the company.

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 a so-called poison pill rights plan last year to try to stop Rio Tinto from creeping up the share register after a 5-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 shareholder rights plan, 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.

RIO ABLE TO BOOST STAKE

Rio Tinto said the arbitrator backed its position, but declined to comment further.

Rio Tinto is currently examining the decision, but can confirm an independent arbitrator has upheld our claim in respect of Ivanhoe Mines' Shareholder Rights Plan, a spokeperson said in a statement emailed to Reuters.

After Rio's standstill agreement with Ivanhoe ends next month, Rio Tinto will be free to buy more shares without triggering the shareholder rights plan.

That means it will be tough for Friedland to reap as big a profit from selling Ivanhoe as he scored with his biggest success.

Friedland, 61, is best known for discovering a huge nickel deposit at Voisey's Bay in Canada, which his team stumbled on while searching for diamonds. It was sold for C$4.3 billion (2.7 billion pounds) in 1996.

Friedland said in August that based on the 1.4 times net asset value that top gold miner Barrick Gold paid for copper miner Equinox Minerals earlier this year, Ivanhoe would be worth $34-$46 a share. Ivanhoe last traded at $20.70.

Under Canadian rules, Rio Tinto 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 share 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, is expected to start in the first half of 2013. That partly hinges on securing power supply from China in a deal which has yet to be finalised.

Rio Tinto already runs the operation, looking to ensure the project does not end up facing claims like a Colorado gold mine once owned by Friedland's Galactic Resources. Acidic drainage from the mine leaked into a river, earning Friedland the nickname Toxic Bob.

Rio Tinto shares fell more than 2 percent to A$62.76 on Tuesday, amid a wider sell-off of risk assets on persistent worries about Europe's debt crisis.

(Additional reporting by Victoria Thieberger; Editing by Ed Davies, Lincoln Feast and Matt Driskill)