By Michael Kohn
ULAN BATOR (Reuters) - Mongolia's Democratic Party (DP), which failed to win enough seats in last month's elections to govern alone, has agreed to form a coalition with populist fringe parties in a move that could worry foreign investors, local media said.
The broadly free-market DP won 31 of the 76 seats available in the June 28 poll, eight short of an overall majority, causing concern among foreign investors that the party would be forced to make concessions to the growing number of "resource nationalists" in the country's parliament.
The new government, to be led as prime minister by DP chief Norov Altanhuyag, will include minority parties such as the Mongolian People's Revolutionary Party and Mongolian National Democratic Party, which both want to limit foreign investment in the booming mining sector, said local news portal news.mn late on Thursday. The coalition deal was struck earlier in the day.
The two smaller parties, which campaign together as the "justice coalition", also want to restrict the number of years a foreign firm can operate in Mongolia and have called for the coveted Tavan Tolgoi coal project to be kept under 100 percent Mongolian control.
They have also demanded a renegotiation of a 2009 government agreement which gave Canada's Ivanhoe Mines, now controlled by mining giant Rio Tinto, 66 percent ownership of the $13 billion Oyu Tolgoi copper-gold project.
"We anticipate substantial pressure for policies to be more populist and resource nationalist which in return will result in (an) elevated level of volatility for global Mongolian resource equities" Ulan Bator-based Frontier Securities said in a note to investors late on Thursday.
"Therefore investors would be well-advised to diversify their Mongolian portfolios."
The new coalition also includes the Civil Will and Green Party, which one analyst described as more closely aligned to the main DP's moderate stance on foreign investment. He said it could help dilute the influence of the nationalist parties.
"CWGP's policies are closer to those of the DP and reducing the presence of the 'justice coalition' is better news for foreign investors," said Luke Leslie, head of Mongolia and mining investments with private equity investor Origo Partners.
The DP, which will make up 75 percent of the new government according to news portal news.mn, replaces the administration of outgoing Prime Minister Sukhbaatar Batbold of the Mongolian People's Party, which ruled during the nation's communist era.
Riven by a factional split, it will go into opposition for just the second time in its 91-year history.
In 2010, the Mongolian People's Party dropped the word "Revolutionary" from its title to distance itself from its communist past. Later a breakaway faction led by former president Nambar Enkhbayar set up a new political party with the original name: the Mongolian People's Revolutionary Party.
Enkhbayar is currently on trial for five counts of corruption stretching back to his tenure as president and earlier as prime minister. His trial has been postponed several times and it scheduled to convene again at the end of July.
(Additional reporting by David Stanway; Editing by Mark Bendeich)