UPDATE 2-Mongolia cabinet OKs Oyu Tolgoi deal with Ivanhoe

(Adds details, analyst comment. In U.S. dollars unless noted)

By Susan Taylor

OTTAWA, June 27 (Reuters) - Ivanhoe Mines (IVN.TO) said on Wednesday that the Mongolian cabinet has approved a draft investment agreement that will guide development and operation of its giant Oyu Tolgoi copper and gold project.

The agreement, which sets aside a 34 percent interest in the Gobi Desert project for the government, will now be presented to Mongolia's parliament.

That is seen as the final step in the approval process, conducted under a revised minerals law enacted last year.

Shares in Ivanhoe, which has been trying to hammer out an agreement with the government for four years, rose more than 3 percent to C$15.01 on the Toronto Stock Exchange and to $14 in New York.

"Negotiators for Ivanhoe Mines, Rio Tinto and the Mongolian government's working group have produced a blueprint for an effective partnership of corporate and state interests," Ivanhoe Chief Executive John Macken said in a statement.

"We have agreed that this partnership would own, finance, build and operate the Oyu Tolgoi project and its associated infrastructure."

The investment agreement remains subject to approval by the boards of Ivanhoe, which is based in Vancouver, British Columbia, and its partner international mining giant Rio Tinto (RIO.AX).

Ivanhoe owns the rights to Oyu Tolgoi, one of the world's biggest copper deposits. The company estimates initial phase development costs at $1.4 billion, with production starting in early 2010.

Rio Tinto, which paid $303 million for a 9.95 percent stake in Ivanhoe last year, will invest up to $1.5 billion to fund Oyu Tolgoi construction.

Ivanhoe called the investment agreement "commercially fair and balanced" with long-term assurances of a stable investment environment.

"We are reserving judgment until the details of the agreement are received," UBS analyst Tony Lesiak said in a note.

"These should outline the status of withholding taxes, water and power rights, potential cancellation of the windfall profits tax, and the potential introduction of management fees."

Measured and indicated resource estimates at Oyu Tolgoi show about 31.6 million ounces of gold and more than 32 million tonnes of copper.

Production forecasts for the mine, which has an initial life of 45 years, will be updated later this year.