RPT-Mongolia considers parliament recall as $5 bln mine plan stalls

Thu Aug 15, 2013 5:32pm EDT

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(Repeats story from late Thursday; no change to text)

* Emergency parliamentary session could approve financing for Rio expansion

* Rio axed 1,700 jobs after putting $5 billion mine expansion on ice

* Oyu Tolgoi mine set to boost the economy by a third by 2020

By Terrence Edwards

ULAN BATOR, Aug 15 (Reuters) - Mongolia is considering an emergency session of parliament, looking to stave off an economic crisis sparked by uncertainty over the country's biggest mining project, weak coal prices and sliding foreign investment.

Mongolia's National Security Council, which is headed by the country's president, met on Thursday, and a government official said it could decide to recall parliament, now in summer recess, for what he called an "extraordinary" session.

That, among other measures, could accelerate the approval of financing for a $5 billion expansion to global miner Rio Tinto's giant Oyu Tolgoi gold and copper mine.

"The OT mine will be a main issue if there's (an emergency) session," the official briefed on the discussion said.

He said no date was fixed: "There's nothing clear today."

Rio said on Wednesday it would axe up to 1,700 jobs at the Oyu Tolgoi copper and gold mine, where it has put an underground expansion on ice due to disputes with the government.

The mass lay-offs at Oyu Tolgoi were seen by some in Mongolia as a move by Rio Tinto to pressure the government into easing its demands on the miner over project financing, and the extra session of parliament could spur progress.

"The job cuts at OT will have an immediate effect in Mongolia's economic and political environment," said Ankhbayar Bilguun, Chief Executive of Mongolian Investment Banking Group.

"Economically, we view that 1,700 families are being affected by this cut... Politically, this delay in underground operations will create doubt in populist politicians."

Delays at the giant copper-gold mine, as well as proposed changes in foreign investment rules, have led to a sharp drop in foreign direct investment in Mongolia and a sell-off in shares of smaller companies with projects in the country.

A drop in prices for coal, which feeds the state budget, has also hurt.

According to figures released by the Ministry of Economic Development on Thursday, foreign direct investment fell 43 percent in the first six months of 2013, with geology, mining and petroleum down by a third. The finance and construction sectors saw a drop of more than 90 percent.

PRESSURE POINTS

The mine expansion is vital to Mongolia as Oyu Tolgoi, 66 percent owned by Rio's Turquoise Hill Resources unit, is expected to boost the economy by a third by 2020. It is also crucial to Rio as it trims its dependence on iron ore.

Rio said in late July it was stopping all work on the underground mine until it resolved disputes over funding of the project and secured financing approval from parliament.

A provisional financing deal has been extended until the end of 2013, but the expansion could be on hold for longer.

Despite calls from key ministers for underground work to resume and Rio Tinto Chief Executive Sam Walsh saying that everyone wants the project to go ahead, disputes over rising costs, financing of Mongolia's share, and local representation in management have yet to be resolved.

The latest troubles follow the start of exports in July from the $6.5 billion open-pit mine at Oyu Tolgoi, where production is continuing to ramp up.

The launch of exports after last-minute delays came as a big relief for Rio Tinto and other foreign investors after the government had tried to renegotiate parts of the 2009 Oyu Tolgoi investment agreement over the past year.

But that relief was short-lived with the eruption of the latest dispute, which has only reinforced worries about political risk in Mongolia.

Ratings agencies have warned the economy was vulnerable as a result of its heavy dependence on commodity markets.

"Key pressure points are brisk loan growth on the back of the government's subsidised loan scheme; currency depreciation; and weaknesses in the construction and mining sectors," Fitch said last month after Mongolia's fifth-largest lender, Savings Bank, collapsed.

The Mongolian currency has fallen 13 percent to 1,559 tugriks to the U.S. dollar this year, and Mongolian Investment Banking Group predicts the tugrik will depreciate further to the 1,680-1,730 range by October due to a seasonal spike in imports. (Writing by Sonali Paul in MELBOURNE and Clara Ferreira-Marques in LONDON; editing by Keiron Henderson)

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