Shares of Ivanhoe Mines fell more than 12 percent on Monday after Mongolia said it plans to renegotiate a landmark deal related to the development of the huge Oyu Tolgoi copper-gold project.

Vancouver-based Ivanhoe's shares tumbled on both the Toronto Stock Exchange and New York Stock Exchange, despite a strong statement from the company that it expects Mongolia to honor the existing investment pact, which was signed in 2009 following years of negotiations.

Ivanhoe is developing the project in Mongolia's South Gobi region with Anglo-Australian miner Rio Tinto , which owns nearly 50 percent of Ivanhoe's outstanding shares.

The existing investment agreement gave 66 percent of the multibillion-dollar Oyu Tolgoi project to Ivanhoe, with the rest held by the Mongolian government. The deal says the government can raise its stake to 50 percent after 30 years.

However, a group of 20 parliamentarians in Mongolia has submitted a petition to the government asking it to reopen negotiations to increase the government's stake.

Mongolia's mining minister, Dashdorj Zorigt, told reporters on Sunday that the government has submitted a revised agreement to Ivanhoe that would speed up the timetable for it to increase its stake to 50 percent.

Ivanhoe and Rio Tinto have already sunk billions of dollars into the project, which is expected to begin initial production in 2012. Average annual output from Oyu Tolgoi during its first 10 years of commercial production is expected to exceed 650,000 ounces of gold, 3 million ounces of silver and 1.2 billion pounds (544,000 tonnes) of copper.

Ivanhoe, which is led by well-known mining financier Robert Friedland, argues that the existing investment agreement for Oyu Tolgoi remains a fair and legally binding contract.

The investment agreement has been fundamental in building Mongolia's reputation as an increasingly reliable and stable destination for foreign investment, the company said in its statement.

MONGOLIAN MOVE

I know the current agreement is based on law, but we need to change it, G. Bayarsaikhan, a lawmaker who signed the petition, told Reuters.

I know foreign companies are working in a high-risk environment, but the interests of both sides need to be taken into account, he said. Trust is the basis of business but any agreement must be of benefit to both sides. Agreements are made to be revised.

Bayarsaikhan said the petition calls for the ownership terms to be changed as soon as the foreign companies investing in the project recover their investment.

It could be five years, six years or 10 years, he said. 

We shouldn't focus on Oyu Tolgoi - Oyu Tolgoi is already done, he told Reuters in an interview. The agreement should stay. It shouldn't be changed.

The growing uncertainty around the investment agreement led to a sharp sell-off in Ivanhoe's shares on Monday. Its shares were down 11.2 percent at $14.22 on the NYSE, while its shares in Toronto were down 11.1 percent at C$14.67. Rio's shares were down 0.7 percent at 2,945.77 pence on the London Stock Exchange.

Ivanhoe shares, which touched a record high of C$28.98 on the Toronto Stock Exchange in February, have dropped roughly 50 percent since then as concerns about the global economy and the price of copper have weighed on the stock, along with fears that Mongolia would try to renegotiate the investment agreement.