UPDATE 2-Canada's Turquoise Hill rejects review of Mongolia deal

Mon Oct 15, 2012 3:06pm EDT

* Mongolia looks to review 2009 Oyu Tolgoi investment deal

* Move exacerbates concern over rising resource nationalism

* Shares fall 5.26 percent to C$8.11 on TSX

TORONTO, Oct 15 (Reuters) - Turquoise Hill Resources Ltd and its majority shareholder, Rio Tinto Ltd, have rejected a request from Mongolia to renegotiate an investment agreement for its Oyu Tolgoi mine, the world's largest undeveloped copper-gold project.

The Mongolian government's push to review the deal, which took effect in March 2010, sent Turquoise Hill's shares down more than 6 percent on Monday and added weight to concerns about rising resource nationalism in the landlocked Asian country.

The Canadian-listed miner, formerly known as Ivanhoe Mines, announced its stance in a news release on Monday.

Mongolia's new mining minister told local media in August that the government should try to raise its stake in Oyu Tolgoi, which will become one of the world's largest copper and gold mines when it reaches full production in 2018.

Mongolia previously tried to revise the deal about a year ago, with Turquoise Hill - then known as Ivanhoe - refusing to negotiate and Mongolia eventually affirming its support for the existing deal.

"This is just a matter of the government bowing down to political pressure to ask the company to renegotiate," said Adam Graf, a mining analyst at Dahlman Rose in New York.

"This is a major project in Mongolia, one that has led to rapid growth of the economy of Mongolia over the last five years," he said. "You have parties in that country that are coming out and saying that Rio is not giving (them) a big enough piece."

Under the current agreement, the Mongolian government owns 34 percent of the project, while Turquoise Hill holds the remaining 66 percent. Rio controls Oyu Tolgoi through its majority stake in Turquoise Hill.

Mongolia can increase its stake in the project to 50 percent only after an initial period of 30 years of commercial production.

With some $6 billion already invested and construction nearly complete, Oyu Tolgoi is expected to achieve commercial production in the first half of 2013.

By 2020, annual royalty and tax payments to the government of Mongolia are estimated to total about $1.1 billion, BMO Capital Markets analyst Tony Robson said in a note to clients.

"BMO Research believes the government's share of cash flow is not unreasonable compared with projects in other jurisdictions," said Robson, who has an "outperform" rating on the stock with a target price of C$13.75.

The Mongolian government plans to review all foreign mining investments, but pledged last month not to single out the Oyu Tolgoi deal.

Turquoise Hill's shares were down more than 6 percent at C$8.03 on Monday afternoon on the Toronto Stock Exchange. The Toronto-based miner has lost more than half its market value so far this year, mainly due to its largest shareholder, Rio Tinto, winning majority control of the company.

RISKING INVESTMENT

With metal prices well above historic levels, resource nationalism has become a top concern in the mining industry as governments and local stakeholders around the world demand a bigger piece of the pie.

Higher taxes and royalties on big mining companies are often used by politicians as populist moves to help rally the public and serve as platforms ahead of elections.

Earlier this month, Kyrgyz protesters stormed their government headquarters in a coup bid after the country's premier rejected demands to nationalize a gold-mining venture with Canada's Centerra Gold.

Indonesia sent shockwaves through the mining industry earlier this year with new regulations that restrict the export of raw ores, force foreign miners to divest over half their assets after 10 years of production and require domestic processing of ore by 2014.

If Mongolia keeps pushing to revise the Oyu Tolgoi deal, the country risks losing out on future foreign investment, said Mariyam Zhumadil, an analyst with Halyk Finance in Kazakhstan.

Smaller companies, in particular, could pull out of the country instead of making deals with a government that is not perceived as mining friendly.

Zhumadil also said Turquoise Hill and Rio could delay the start-up at Oyu Tolgoi until the issue is resolved.

Turquoise Hill maintains that its 2009 investment agreement with Mongolia is fair and legally binding, and can only be renegotiated if both parties agree.

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