* Mongolia sees Oyu Tolgoi dispute settled soon
* Oyu Tolgoi CEO sees "constructive progress" in talks
* IPO of state-owned Tavan Tolgoi seen delayed
By Clara Ferreira-Marques
LONDON, April 17 (Reuters) - Mongolia, hoping to arrest a slide in foreign investment into its critical mining sector, is planning a new law that it says will increase stability by reassuring investors their money will be protected from future rule changes.
Foreign direct investment into Mongolia dropped 17 percent to $3.9 billion in 2012, coinciding with a string of moves by the government that deterred investments in copper and coal.
Regulatory concerns peaked earlier this year when Rio Tinto threatened to delay the start-up of the $6.2 billion Oyu Tolgoi copper and gold mine until it resolves differences with the government over their investment agreement.
Ochirbat Chuluunbat, deputy minister for economic development, said the government was confident of resolving the dispute with Rio within as little as "several weeks".
Mineral-rich Mongolia is also seeking to woo investors with a law that will make all new investments subject to legislation, rather than governed by bilateral deals which might be challenged or reinterpreted by the parties at a later date.
"In the last six months we have noticed a slowdown of economic growth in Mongolia due to the reduction of foreign direct investment," Chuluunbat said, speaking on the sidelines of a London conference on Mongolian investment.
"So we have drafted a new law. We want to send a very strong message on the stability and clarity of the treatment of foreign investors in the future in Mongolia. If you invest today, your investment will be regulated over five, 10, 20 years by laws of today; future amendments will not affect the rules of today."
Mongolia's central bank governor, Naidansuren Zoljargal, told Reuters the law, which many investors said could replace existing legislation, was designed so that it could only be amended by a two-thirds parliamentary majority.
"It's going to be like an investment constitution," he said.
Chuluunbat said it could be put to parliament before July.
Mongolia is currently pushing through separate rules on foreign investment in strategic sectors, regulating investment by foreign state-owned investors.
Investors at the conference welcomed both government moves to scrap distinctions between foreign and domestic investors, and early indications of a further boost.
"Will everything go up the next day? No. But it will help the rebound in foreign direct investment, and it will help people like me raise capital," said fund manager James Passin of Firebird Management, which invests in Mongolia.
Ahead is also the need to resolve uncertainty around Oyu Tolgoi, one of the world's largest copper mines.
Rio and the government of Mongolia have been at loggerheads over issues including the rising cost of the Oyu Tolgoi mine - which delays the government's ability to benefit more fully from profits - and disagreements over tax pre-payments.
The mine is currently operating on a temporary budget.
"There is no big problem," Chuluunbat said, adding he expected a solution to be agreed before June elections.
Oyu Tolgoi CEO Cameron McRae told the conference the mine was on track to begin commercial production in June, adding there was "constructive progress" in talks with government.
"Whilst some of the issues are complex, I am confident these discussions will resolve them and we will deliver the promise of Oyu Tolgoi together," he said.
The high-stakes tussle is a major test for Mongolia's ambitions to become a destination for mining investment, but also for Rio and its new boss, pushing to diversify earnings away from steelmaking ingredient iron ore.
Mongolia's flagship coal project, Tavan Tolgoi, has also hit trouble, and Chuluunbat said an initial public offering of state-owned Erdenes Tavan Tolgoi would be put off for at least two to three years while the mine is developed.
"It will take some time for TT to go public. The operations are in bad shape and financials are not proven. We want to upgrade the operations over the next two to three years, increase the valuations of the assets, and that will enable us to get a good price," Chuluunbat said, adding there would also be a push to cut costs at Tavan Tolgoi.
"If objectives are not achieved it could be further" down the line.
Erdenes Tavan Tolgoi, which runs the much-delayed 7.5 billion-tonne development, is seeking to renegotiate a supply contract with the Aluminium Corporation of China (Chalco) , seeking to bring prices for its coal sales into line with international levels.
Analysts have said the price could be as much as $20 per tonne cheaper than the average prices of Mongolian coal delivered into China, which are already much lower than international rates. [ID:nL4N0AX2AM ]
Chuluunbat said negotiations with Chalco were ongoing.