With its rich deposits of natural resources, you'd think by now Mongolia would be higher on the mining radar. But this impoverished, agrarian country entirely missed out on the recent worldwide mining boom, stymied by its own overzealous legal restrictions and a government hungry for an ever-greater share of mining profits.

However, it looks like things may finally be turning around for Mongolia. Last Tuesday, the country's parliament revoked four 2006 mining laws, a move that could finally kick-start development of Mongolian mining—starting with the much-delayed (and much-anticipated) Oyu Tolgoi project.

So could Mongolia become the next mining mega-star? Or will its government again be its own worst enemy?

Windfall Tax Revoked

In particular, the new legislation revokes a draconian windfall profits tax, which exacted a 68% tax on Mongolian copper and gold. The levy applied to any copper sold above $2,600/ton and any gold sold above $500/ounce. (For comparison's sake: Copper now trades around $6,470/ton on the LME; gold currently hovers around $960/ounce.)

Another revoked law gave the regime a 34% stake in mines explored without government funding—and a 50% share in projects that had such funding.

Intended to allow the government to capitalize on the high metals prices during the boom, the 2006 laws worked a little too well, scaring off many investors interested in the country's resources.

That was bad news for Oyu Tolgoi, one of Mongolia's more promising deposits. Owned by Ivanhoe Mines (TO: IVN) and Rio Tinto (NYSE: RTP), Oyu Tolgoi is a gold and copper treasure trove located in the Gobi desert, just north of the Chinese border. In March 2008, Ivanhoe estimated the mine held 45.2 million ounces of gold and 78.9 billion pounds of copper—nearly 3% the world's total supply.

And that's not all Mongolia has to offer. The country also possesses significant uranium and coking coal deposits—and, of course, more copper and gold.

A Change Of Heart

Under Parliament's new deal, the windfall tax is thrown out, and the government gets a flat 34% stake in Oyu Tolgoi and other mines. It can raise that share 50% after 30 years, once the two miners have recouped their initial investment of about $4 billion.

This legislation puts the government in a good position to now sign investment agreements with Ivanhoe and Rio Tinto—which could happen any day now. Just last week, Finance Minister Sangajav Bayartsogt told MarketWatch that he expected an agreement to be finalized over the next two weeks.

Of course, we've seen all this before: Negotiations surrounding Oyu Tolgoi stretch back as far as 2003, but something has always prevented an investment deal from being signed—most recently, the 2006 taxes.

This time, however, the deal's expected to stick, given a change in political priorities. In June 2008, the Mongolian People's Revolutionary Party swept the elections, gaining 76 seats in Parliament; the resulting coalition government has placed higher priority on developing Mongolia's mineral resources, reopening negotiations with Ivanhoe and Rio Tinto.

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