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June 18 (Bloomberg) -- Mongolian President Tsakhiagiin Elbegdorj wants to change a proposed gold and copper mining deal with Rio Tinto Group and Ivanhoe Mines Ltd. to give the government cash instead of an equity stake.

The previous government signed in 2007 a draft agreement, giving it a 34 percent equity stake in the Oyu Tolgoi project and related taxes equivalent to 55 percent of profits. That accord was scrapped because of opposition from lawmakers.

“Half of the profit can belong to the Mongolian state, and half of the profit belongs to the investor,” Elbegdorj said yesterday in an interview with Bloomberg in the capital Ulan Bator. Elbegdorj was sworn in today after he defeated Nambaryn Enkhbayar in the May 24 presidential election. “An equity share is not a good proposal,” he said.

Ivanhoe, based in Vancouver, has been trying for more than five years to complete an investment agreement for the Oyu Tolgoi copper and gold deposit, about 80 kilometers (50 miles) north of the border with China. Mongolia’s economic growth has slumped and its budget deficit has widened, increasing the incentive for the government to attract more foreign investment.

While a profit-sharing arrangement rather than a government stake may be good news for investors, the possibility that a final deal could take years more to reach is “not so good,” according to Masa Igata, chief executive officer of Frontier Securities in Ulan Bator.

“No miner wants to wait three years,” he said yesterday. “If I were management of Ivanhoe or Rio Tinto, I might want to sell the stake to someone else.”

‘First Priority’

London-based Rio, the world’s third-largest mining company, called the deposit “the world’s largest undeveloped copper-gold resource” when it agreed to buy 10 percent of Ivanhoe in October 2007.

Elbegdorj said reaching an agreement is his “first priority” on the economic front, though he gave no more specific time frame for a deal than the next three years.

“We are approaching the final moments to get a good agreement,” Elbegdorj said. “I would like to say to the foreign investors: ‘Do not close the door, there are still opportunities.’”

Ivanhoe fell 8.7 percent to C$6.28 on the Toronto Stock Exchange yesteday, the biggest decline since May 25. Rio’s Sydney-traded shares dropped 9 percent to A$52.52 at the close on the Australian stock exchange.

Nick Cobban, a London-based Rio spokesman, said yesterday he couldn’t immediately comment. Bob Williamson, a Vancouver based media contact for Ivanhoe, declined to comment.

‘An Example’

Ivanhoe in March 2008 estimated the copper resources in the Oyu Tolgoi project at 78.9 billion pounds and the gold resources at 45.2 million ounces.

“If we make a good agreement, this will be an example for exploiting other big deposits and there is no space to make mistakes,” Elbegdorj said.

The government has yet to announce who will win rights to develop Tavan Tolgoi, a metallurgical coal deposit.

Mongolia’s budget deficit expanded to about 5 percent of gross domestic product in 2008, compared with three years of surplus before that, and a group of international donors including the World Bank, the Asian Development Bank, Japan and Russia are providing “multimillion” U.S.-dollar loans for a financial rescue package, according to an April report from the Singapore-based investment bank Eurasia Capital.

The nation’s economic output may rise 3 percent this year, down from 8.9 percent last year and 10.2 percent in 2007, according to a March estimate from the Asian Development Bank. The country has a population of 2.6 million people.

Proposed Tax Change

The president-elect also proposed that the government consider changing a 2006 windfall profit tax that imposes a rate of 68 percent on revenue when copper prices exceed a certain amount per ton. Instead he suggested a graduated system, for example a rate of 40 percent when copper prices reach $8,000 per ton and 60 percent when they reach $10,000 per ton.

Copper prices have slumped 40 percent in the past year to around $4,930, hurting state finances and increasing the urgency of opening more mines as economic growth slows.

“One big high rate is not very wise,” he said.

The new president will have to “balance” the foreign- investment interests of China, Russia, Europe and the U.S. with the interest of Mongolian citizens, said Ganzorig Ulziibayar, president of ACI Mongolia Financial Markets Association, an industry body aimed at promoting the country’s financial markets.

China and Russia, Mongolia’s two biggest trading partners, sandwich the land-locked nation and control its ability to export metals and energy deposits to the international market.

--Dune Lawrence, Stephen Engle. With assistance from Rob Delaney in Toronto, Brett Foley in London and Rebecca Keenan in Melbourne. Editors: Greg Ahlstrand, Teo Chian Wei.

To contact the reporters on this story: Dune Lawrence in Beijing at dlawrence6@bloomberg.net; Stephen Engle in Beijing at sengle1@bloomberg.net.