By Michael Kohn
ULAN BATOR (Reuters) - Mongolia's Democratic Party, which failed to win an outright majority in last month's elections, will discuss forming a new coalition government with a controversial party opposed to foreign mining, members said on Tuesday.
Mongolia has some of the world's biggest unexploited mineral deposits and is one of the hottest destinations for mining investment, resulting in its economy growing at more than double the pace of neighboring China in the past year.
New Democratic MP Tsedevdamba Oyungerel told Reuters the party was in talks with the Justice Coalition to form the next government following inconclusive elections held on June 28.
"They (a five-member working group) are open to any party, but I think we are going to the Justice Coalition because they offered first," she said, but added nothing had been finalized.
The Justice Coalition consists of the Mongolian People's Revolutionary Party (MPRP) and the Mongolian National Democratic Party (MNDP), and both have sought to reverse policies they believe to be over friendly to foreign mining investors.
More than a quarter of the 76-seat parliament is now held by politicians who advocate local control of mines.
The broadly free-market Democratic Party won 31 out of 76 seats, eight short of an overall majority. The Justice Coalition picked up 11 seats, causing concern among foreign investors that a new dose of resource nationalism was likely.
CONTROVERSIAL FORMER PRESIDENT
The MPRP is led by former president Nambar Enkhbayar, controversial figure in Mongolian politics whose ongoing corruption trial has turned him into both a pariah for some and a hero for others.
He has called for the $13 billion Oyu Tolgoi copper and gold mine project with Ivanhoe Mines to be renegotiated to grant better terms to the government, and also wants to keep the coveted Tavan Tolgoi coal mine, potentially one of the world's biggest coal suppliers, in local hands.
Rio Tinto has a majority stake in Ivanhoe and has full operational control over the Oyu Tolgoi mine, which is due to start production this year.
"The DP assembly voted to create a coalition government with the MPRP-MNDP coalition. The next step would be for the sides (to) sit down and work on terms of (a) coalition agreement," Enkhbayar Batshugar, the former president's son, said in an email.
But sources said Enkhbayar could be a potential stumbling block in any coalition agreement. He and his family have angrily accused the current president, the Democratic Party's Tsakhia Elbegdorj, of fabricating graft charges against him in order to undermine his political fortunes.
The DP group in parliament has also nominated party chairman Norov Altanhuyag to serve as the country's next prime minister, said reports leading news portal news.mn.
The 54-year old mathematician and career politician has held several high posts, including Deputy Prime Minister in the outgoing government and Minister of Finance from 2004 to 2006.
Mongolia's economy, driven largely by mining development, grew at a roaring 16.7 percent year-on-year in the first quarter of 2012, according to the World Bank.
In the run-up to the election, nationalist politicians introduced a law to cap foreign investment, but it was later relaxed to allow overseas firms to own more than 49 percent in Mongolian deposits with parliamentary approval. Foreign state-owned companies need parliamentary permission to invest at all.
(Additional reporting by David Stanway in BEIJING; Editing by Michael Perry)