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An aerial view of traditional Mongolian tents, or ghers, which will house workers at Mongolia's Oyu Tolgoi copper and gold deposit.

STAFF/REUTERS

Canada's Ivanhoe Mines Ltd. is battling back against moves by the Mongolian government to secure a larger chunk of the promising Oyu Tolgoi copper-gold project, but investors are bailing out.

The Vancouver-based miner said it expects Mongolia to honour a 2009 investment agreement giving the country a 34-per-cent stake in Oyu Tolgoi for 30 years. Ivanhoe holds the remaining 66-per-cent interest. The company's stock lost about one-fifth of its value on Monday before recovering about half that loss to close.

Ivanhoe shares were already under pressure, falling nearly 20 per cent last week as Mongolia started to signal its interest in upping its stake to as much as 50 per cent.

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Ivanhoe said the existing ownership agreement of Oyu Tolgoi is legally binding and "deserves and requires the unqualified support of all parties." It also warned that revising the deal, signed after six years of negotiations, could harm Mongolia's reputation as a desirable place to invest.

"The investment agreement has been fundamental in building Mongolia's reputation as an increasingly reliable and stable destination for foreign investment," Ivanhoe said.

"With many significant resources projects still to be financed and developed ... Ivanhoe Mines is confident that Mongolia's leadership understands the fundamental importance of Oyu Tolgoi's contractual commitments and stabilized investment agreement."

Ivanhoe shares have been weighed down recently by the sliding price of copper, which has fallen alongside most commodities as fears mount about the threat of another global economic meltdown. Copper, one of the world's most widely used metals, has dropped almost 30 per cent to about $3.30 (U.S.) per pound from its high of about $4.60 in February. But industry executives expect the demand for the metal, used in power, construction and manufacturing, to remain strong for years to come as China, India and other emerging economies continue aggressive infrastructure building.

Mongolia, which holds parliamentary elections next year, is under pressure to grab more of the profits from Oyu Tolgoi as part of rising trend of resource nationalism among governments across the Asia-Pacific, Africa and South America.

A group representing about one-quarter of Mongolia's parliamentarians has submitted a petition to the government asking it to revisit the Oyu Tolgoi agreement. Mining Minister Dashdorj Zorigt said the government sent a letter to Ivanhoe, as well as its project partner Rio Tinto plc, asking them to consider discussions about changing the agreement. Rio Tinto owns 48.5 per cent of Ivanhoe's shares and is the project operator.

Construction of the $6-billion Oyu Tolgoi project, the world's largest undeveloped copper mine located in Mongolia's South Gobi region, is about 50 per cent complete. At full production, the mine is expected to pump out an average of 450,000 tonnes of copper annually for up to 60 years.

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Even the suggestion of changing the Oyu Tolgoi investment agreement has "done damage to investor perception," of Mongolia, said Dahlman Rose & Co. analyst Adam Graf in a recent note. "Should the Mongolian government not honour this highest-profile contract, we would expect international investors to shy away completely from large commitments and long payback periods," he said.

Still, analysts haven't soured on the stock. "Although the future of Ivanhoe's relationships with the Mongolian government has become darker, we retain our 'buy' recommendation on the shares of Ivanhoe Mines," Raymond Goldie, mining analyst at Salman Partners Inc. said in a note on Monday.

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