Mongolia riots blur outlook for big Ivanhoe mine

By Cameron French

TORONTO, July 2 (Reuters) - Rioting in Mongolia's capital over alleged election fraud could further blur the timetable for getting government approval for Ivanhoe Mines' (IVN.TO) big Oyu Tolgoi copper-gold deposit, analysts said on Wednesday.

Ivanhoe, which is 10-percent owned by Rio Tinto (RIO.L), has been trying to nail down an investment agreement to allow it to start construction of the massive Oyu Tolgoi mine, considered one of the largest copper-gold deposits in the world.

Early election results that showed a parliamentary majority for the Mongolian People's Revolutionary Party (MPRP) boosted Ivanhoe's shares on Monday as investors concluded a dominant party could push through an agreement on the mine that has been stalled by opposition from smaller coalition parties.

But the violence that has erupted since then could further delay the project if the election results are challenged. President Nambariin Enkhbayar declared a four-day state of emergency on Wednesday after rioting killed five people and injured hundreds.

"If there are political challenges to the election, then probably nothing will get done in parliament there until it gets solved," said Craig Miller, an analyst at BMO Capital Markets.

Ivanhoe agreed to a draft investment agreement last year that would give Mongolia a 34-percent stake in Oyu Tolgoi and clear the way for development of the mine.

However, the agreement was withdrawn about six months ago by the government amid opposition from smaller parties in the coalition government.

Oyu Tolgoi is expected to produce an average of 440,000 tonnes of copper and 320,000 ounces of gold a year over a 35-year mine life.

Rio and Ivanhoe have said the investment agreement could raise Mongolia's gross domestic product by more than a third.

However, before a new agreement is reached, Mongolia also plans to pass amendments to its mining law that could raise the ceiling on the stake the government can hold in major mines.

Ivanhoe's shares were down 45 Canadian cents, or 4.1 percent, at C$10.60 on the Toronto Stock Exchange on Wednesday.

The shares rose 9.3 percent on Monday after an independent polling group said MPRP was poised to take 44 seats of the 76-seat parliament in Sunday's vote.

"(The project) is now less certain than it was on Monday, but more certain than it was on Saturday, because it seems likely that the governing party will keep its majority," said Ray Goldie, an analyst at Salman Partners in Toronto.

Rio bought a 10 percent stake in Ivanhoe in 2006 and plans to raise its interest when he investment deal is approved.

Ivanhoe would not comment on the situation in Mongolia.

($1=$1.01 Canadian) (Reporting by Cameron French; Editing by Peter Galloway)