Mongolia pact with Rio Tinto raises hopes for investment revival

By Sonali Paul

MELBOURNE, May 19 (Reuters) - Mongolia sparked hopes on Tuesday that financing will start to flow for a string of stalled mining projects after it ended a long-running dispute with Rio Tinto over the huge Oyu Tolgoi copper mine.

The government and Rio Tinto reached an agreement paving the way for work to resume on a delayed $5 billion underground expansion at Oyu Tolgoi, resolving a row that has scared off foreign investors and put pressure on the country's sovereign rating.

The deal was seen as showing the government of new Prime Minister Chimediin Saikhanbileg is working hard to revive foreign direct investment (FDI), which slumped from more than $4 billion three years ago to just $276 million last year.

Mongolia's bonds rallied swiftly in heavy trade after the announcement, as did the share prices of some companies with projects in Mongolia, including Aspire Mining and Mongolia Energy Corp.

"This is a momentous agreement, not just for FDI inflows related to Oyu Tolgoi phase 2 development, but also for other FDI and portfolio inflows that it may spark," said Gaurav Singhal, Hong Kong-based credit analyst at Nomura International.

Mongolia's sovereign bonds due in 2022 were the biggest gainers, adding 4 points to be bid at 93 cents on the dollar. One bond trader said his desk alone saw $40 million of flows.

Standard & Poor's recently warned it may lower its sovereign ratings on Mongolia, saying that resolution of the Oyu Tolgoi dispute and revival of foreign investment were essential to easing economic pressure.

"This could improve market sentiment and improve investor confidence and also it could signal the government may make progress on other major projects," said S&P analyst Robert Zhong.

Aspire Mining, which wants to dig a 10 million tonnes a year metallurgical coal mine in northern Mongolia, welcomed the Oyu Tolgoi agreement, which landed just as the Australian company's chief was set to meet investors in Singapore.

"It's a very good day," Aspire Managing Director David Paull told Reuters. "For us this (dispute) was clearly a road block for investors."

Canada-listed explorer Kincora Copper, hunting for the next Oyu Tolgoi, said the Rio Tinto agreement was the last of three major hurdles that needed to be cleared to rebuild confidence among its own shareholders.

Kincora earlier this year won back exploration licenses that the government had cancelled in 2013 and hailed changes in Mongolia's investment laws.

"It puts Mongolia back in the game," said Sam Spring, chief executive of Kincora Copper.

(Additional reporting by Umesh Desai in Hong Kong; Editing by Richard Pullin)