August 25, 2009 / 3:07 PM / 9 years ago

UPDATE 3-Mongolia paves way for Oyu Tolgoi, Ivanhoe soars

* Mongolian parliament amends key laws

* Investment agreement could be finalized in two weeks

* Ivanhoe shares rise 24 percent (Adds details, analyst comments. In U.S. dollars unless noted)

By Cameron French and Danielle Mario

TORONTO/ULAN BATOR, Aug 25 (Reuters) - Ivanhoe Mines (IVN.TO) and Rio Tinto’s (RIO.AX) Oyu Tolgoi copper-gold project appears to clear its final big hurdle after Mongolia’s parliament passed four amendments key to its development on Tuesday, driving Ivanhoe’s shares up 24 percent.

The $3 billion project, which will be a boon for Mongolia’s economy, has faced repeated delays since 2003. But the changes should clear the way for final approval of an investment deal that has already received a parliamentary green light.

Chief among the amendments is a repeal of a 68 percent windfall profits tax. The law, passed in 2006 to allow the state to benefit from historically high copper and gold prices, became an extra barrier to finalizing an Oyu Tolgoi deal.

Mongolia’s finance minister said the agreement with Ivanhoe will be concluded within two weeks. Ivanhoe and partner Rio Tinto (RIO.AX)(RIO.L) said they expect to sign a deal soon.

“Now we are in a position to make arrangements with the government to sign the Oyu Tolgoi investment agreement in the near future,” Ivanhoe CEO John Macken said in a statement. Ivanhoe’s Chairman and top shareholder is financier Robert Friedland.

SIX-YEAR STRUGGLE

Inking a deal would end a six-year struggle for Ivanhoe to complete a deal and access the billions of dollars of copper and gold buried beneath Mongolia’s Gobi desert, about 80 km (50 miles) from the border with copper-hungry China.

It would also help relieve concerns about debt-heavy Rio’s commitment to funding the project — certain funding obligations were set to expire in October if an agreement was not signed — and rekindle foreign investment interest in the resource-rich country.

“Everybody has been waiting for this deal,” said Yuji Iwasaki, chief operating officer of investment bank Frontier Securities, calling it a “precedent”.

John P. Finigan, CEO of Mongolia’s Golomt Bank, said Mongolia will generate the highest rate of GDP growth in the world over the next decade once the final agreement is inked.

Shares in Vancouver, British-Columbia-based Ivanhoe leapt C$2.30 to C$11.78 percent, finishing at its highest point in nearly a year. Rio’s shares fell 1.3 percent in London.

The news also appeared to help shares of Khan Resources KRI.TO, a small Canadian miner that holds licenses to develop the Dornod uranium deposit in Mongolia, but has seen its stock fall after Mongolia passed a Nuclear Energy law in July giving the state greater ownership over deposits.

Khan’s stock rose 19.4 percent to 40 Canadian cents.

HIGH COST PROJECT

The investment agreement must now be signed off on by the government — which has already approved the deal in principle — and survive a 30-day period in which it could be vetoed by the president.

Thoughts will then turn to costs for the massive project, which should produce an average 450,000 tonnes of copper and 330,000 ounces of gold over a 35-year mine life. Production could begin as early as 2013, Rio said.

Ivanhoe will likely release an updated cost estimate for the project in the fall, sources said, which will likely lift the price tag above recent figures around $3 billion.

Rio currently owns just under 10 percent of Ivanhoe, but can boost that to more than 40 percent if it meets funding obligations. The Mongolian government will take a 34-percent stake in Oyu Tolgoi under the terms of the agreement.

Under the amendments passed on Tuesday, the windfall profits tax on copper and gold will be canceled effective Jan. 1, 2011, well before the Oyu Tolgoi project is scheduled to begin production, which Rio said could be as early as 2013.

Parliament also passed amendments giving developers primary access to underground water resources and allowing foreign investors to finance the building of roads. It also passed a change to the corporate tax law. ($1=$1.08 Canadian) (Additional reporting by Euan Rocha, Lucy Hornby and Tom Miles)

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