Shares in mining giant Rio Tinto were hammered lower again today in the wake of its discounted rights issue and as a cloud of uncertainty emerged over its gold and copper project in Mongolia.

At 11.15am, Rio shares were off $4.38, or 7.59 per cent, to $53.30.

The share sale, offering 21 shares for every 40 shares held at a price of $28.29, began yesterday.

Rio has also agreed to an iron ore joint venture with BHP Billiton to help reduce its high-level of debt.

CMC senior dealer James Foulsham said there might be a bit of position adjustment on the back of the share sale.

UBS also lowered its share-price estimate for Rio to $70 from $90, to reflect the rights offer.

Meanwhile investors might also have been disappointed by news out of Mongolia that Mongolian President-elect Tsakhiagiin Elbegdorj wants to change a proposed gold and copper mining deal with Rio and Ivanhoe Mines that would allow the government to buy an equity stake in the project.

I think an equity share is not a good proposal, Mr Elbegdorj said yesterday in an interview with Bloomberg News in the capital Ulan Bator, suggesting instead that the government take 50 per cent of the profit.

Mr Foulsham said the news might have had some impact on Rio's share price but he would be surprised if it was as much as today's share move.

Mr Elbegdorj defeated incumbent Nambaryn Enkhbayar in the May 24 presidential election, and will be sworn in today.

Mongolia has struggled to create a framework for foreign investment in its gold, copper and coal deposits, leaving projects in limbo. Coppers 39 per cent slump in the past year has hurt state finances, increasing the urgency of opening more mines as economic growth slows.

Ivanhoe has been trying for more than five years to complete an investment agreement with Mongolia to develop the Oyu Tolgoi copper and gold deposit, about 80 kilometers (50 miles) north of the border with China.

London-based Rio, the world's third largest mining company, agreed to buy 10 per cent of Ivanhoe in October 2007, calling the deposit the world's largest undeveloped copper-gold resource.

"I think now we are approaching the final moments to get a good agreement," Mr Elbegdorj said. I would like to say to the foreign investors, do not close the door, there are still opportunities.

Rio closed 7.8 per cent lower at 2154 pence on the London 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.

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

This agreement is the first agreement, he said.

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

Vancouver-based Ivanhoe in March 2008 estimated the copper resources in the project at 78.9 billion pounds and the gold resources at 45.2 million ounces.

Investors are also waiting for news on a government decision on who will win rights to develop Tavan Tolgoi, a metallurgical coal deposit.

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.

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 US-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 per cent this year, down from 8.9 per cent last year and 10.2 per cent in 2007, according to a March estimate from the Asian Development Bank.

The country has a population of 2.6 million people.

The president-elect also proposed that the government consider changing a 2006 windfall profit tax that imposes a rate of 68 per cent on revenue when copper prices exceed a certain amount per ton.

Instead he suggested a graduated system, for example a rate of 40 per cent when copper prices reach $8,000 per ton and 60 percent when they reach $10,000 per ton.

I think 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 public 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.

BLOOMBERG TORONTO