10/06/2011 09:43 EDT | Updated 12/06/2011 05:12 EST

Ivanhoe Mines reaffirms Oyu Tolgoi investment deal with Mongolian government

The Mongolian government backed away Thursday from an attempt to make changes to a key investment agreement for the Oyu Tolgoi copper and gold mine, sending shares of Ivanhoe Mines higher.

In a joint statement, Ivanhoe (TSX:IVN) and its partner Rio Tinto (NYSE:RIO) and the Mongolian government reaffirmed their continued support for the original investment agreement signed two years ago and its implementation.

"The shareholders are united in their commitment to secure the necessary project finance and bring the Oyu Tolgoi Project to completion and full production for the benefit of the nation of Mongolia," the group said.

"The people of Mongolia are reaping great benefit from the construction of the Oyu Tolgoi project and stand to benefit even more when the project becomes operational."

Last week, Ivanhoe received a letter from a representative of the Mongolian cabinet asking the company and Rio Tinto to discuss potential changes to the investment agreement.

The changes sought included an ability for the Mongolian government to increase its stake in the mine and the application of a sliding-scale royalty to the project.

Ivanhoe holds a 66 per cent interest in the project, while the Mongolian government holds 34 per cent. Rio Tinto owns 49 per cent of Ivanhoe and is managing construction of the mine.

The project, which is 50 per cent complete, is on track toward production of its first ore next year and commercial production of copper, gold and silver concentrate in the first half of 2013.

BMO Capital Markets analyst Tony Robson had an "outperform" rating on Ivanhoe and a $24 price target on the stock.

"The Oyu Tolgoi project is very impressive, being one of the world's largest copper mines now under construction," Robson, who was in Mongolia to visit the project this week, wrote in a recent report.

Robson noted that even if the price of copper today were cut in half, the project would still make money for investors.

The investment agreement was signed by the Mongolian government, Ivanhoe and Rio Tinto in October 2009 and may be amended by mutual consent of all three parties, something the statement acknowledged on Thursday.

"Ivanhoe Mines and Rio Tinto respect the position of the government of Mongolia and appreciate their continued support for the investment agreement," the statement said.

Ivanhoe shares closed up $2.03 or 13 per cent at $17.57 on the Toronto Stock Exchange.

The stock had traded as low as $12.85 — its lowest point in nearly two years — earlier this week in the face of the request by the Mongolian government.

Oyu Tolgoi is expected to produce 1.2 billion pounds of copper and 650,000 ounces of gold per year in the first decade of operation.

Rio Tinto is one of the world's major suppliers of aluminium, copper, diamonds, thermal and metallurgical coal, uranium, gold, industrial minerals.

In addition to its stake in Oyu Tolgoi, Ivanhoe holds a 57 per cent interest in Mongolian coal miner SouthGobi Resources (TSX:SGQ), 54 per cent stake in Ivanhoe Australia (TSX:IVA) and a 50 per cent interest in Altynalmas Gold Ltd., a private company developing a gold project in Kazakhstan.