If Mongolia wants to get rich, it's now or never says Rio Tinto and Ivanhoe Mines

Mongolia's dilemma: democracy or wealth?

OYU TOLGOI, Mongolia, Nov 15 (Reuters) - If Mongolia wants to get rich, it's now or never.

That's what mining firms are telling Mongolia's parliament, which is in a position to unlock the country's mining sector by taking a landmark decision on a multi-billion dollar copper deal.

"If that happens, the floodgates will open," said Evan Jones, director of exploration firm Altan Rio. "These guys could create some serious wealth if they get their act together. Seeing as there's only 2.7 million people, they could really fix the place if they use it wisely. It's a huge deal for them."

The alternative, foreign miners warn, would mean Mongolia missing out on a China-driven boom in minerals prices and being consigned to impoverished obscurity for decades.

"If the deal doesn't go through, other major companies won't invest here," said Dogsom Ganbold, head of the National Mining Association. "There's a risk of them pulling out."

Mongolia's future hinges on parliament ratifying, or not, an agreement the government struck in June with miners Rio Tinto and Ivanhoe Mines, which plan to produce copper and gold from the colossal Oyu Tolgoi deposit in the Gobi desert.

Oyu Tolgoi's potential was enough to make geologists' eyes bulge on a recent tour of the site, where traditional Mongolian white tents stand alongside thousands of crates containing 720 km of drill core -- rock drilled out during the exploration phase.

If it goes ahead, the headframe for the main mineshaft, at 95 metres, would be Mongolia's tallest building. But Ivanhoe says it won't sink the shaft until the investment agreement is ratified.

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PARLIAMENTARY PRESSURES

The deal is on the agenda for parliament's current session but members face re-election in July and are nervous that approving it could lose them votes, as it would mean the project would escape a 68 percent windfall profits tax that parliament introduced last year. "The windfall profits tax was seen as a way of clawing back money going to Russia," said the head of one foreign mining firm, referring to Mongolia's biggest existing mine, Erdenet, which is 49 percent-owned by the Russian government.

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THE GOLDEN EGG

Although the windfall tax applies only to copper and gold, miners say the deal with Rio Tinto and Ivanhoe would set a standard for deals across the industry, effectively abolishing the windfall tax before it has yielded any benefit.

On the flipside, the two firms are offering the government 34 percent in the project, which could also set a precedent. But they say they can't wait forever as they are spending $30-40 million a month while equipment gathers dust in the Gobi.

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"The sooner this deal gets approved, the sooner people start to get the benefits," said Ganbold, a young carpenter, rubbing his eyes in the dawn coal smog that cloaks the capital. "With all its minerals, this should be a really rich country." The extent of Mongolia's mineral wealth is unknown, but geologists say comparisons with Chile or Indonesia are realistic.

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