* Oyu Tolgoi extension could help energize investor
confidence
* Will improve Mongolia's prospects, but will take time to
kick in
* Economy seen growing less than 1 pct this year - ADB
(Updates with external debt detail in paragraph 11)
By Terrence Edwards
ULAANBAATAR, May 9 (Reuters) - Rio Tinto 's RIO.L
long-awaited approval of a $5.3 billion extension for its giant
Oyu Tolgoi copper mine is fuelling hopes of a revival at last
for Mongolia, battered by a slowdown in neighbouring China that
has left it deep in debt.
Oyu Tolgoi, one of the world's largest undeveloped copper
projects, has been a bellwether for Mongolia since its discovery
more than a decade ago. But as discussions with the government
stalled in 2013 and prices collapsed, Rio put the flagship
project on the backburner - and confidence in Mongolia crumbled.
Rio's decision to go ahead with the costly and complex
expansion is a bet on copper's recovery for a miner that badly
needs to recalibrate its iron ore-heavy portfolio.
Mining executives, government officials, diplomats and
analysts say it is also a potentially game-changing boost for
Mongolia that could spark the unblocking of other projects and
restore investor trust, key steps for the country to meet debt
repayments due from 2017.
"This is a vital vote of confidence in Mongolia," said David
Paul, chief executive of Aspire Mining AKM.AX , which is
raising money to study a rail line for its Ovoot and Nuurstei
coking coal projects in the country's north.
The Oyu Tolgoi expansion could also be key to winning over
the public - in some cases reluctant to compromise with foreign
investors - to deals on troubled Tavan Tolgoi, Mongolia's
largest coal project, and the Gatsuurt gold mine owned by
Centerra Gold CG.TO .
The parliamentary speaker blocked a $4 billion investment
deal for Tavan Tolgoi last April on the day investors including
China Shenhua Energy 601088.HK , Japan's Sumitomo 8053.T and
Ulaanbaatar-based Mongolian Mining Corp were to sign.
Centerra Gold mine has been waiting on an investment deal
for Gatsuurt since 2010.
"We do believe the project will enhance Mongolia's economic
growth prospects by establishing the country as one of the
largest sources of high-grade copper globally," said Andrew
Fennell at Fitch Ratings, which downgraded Mongolia to B in
November. "However, near-term pressures remain."
According to Fitch, Mongolian sovereign and
sovereign-guaranteed entities face a combined $1.1 billion of
external bond maturities in 2017 and 2018 - before extra cash
from the underground mine begin to flow. First production is due
in 2020.
Rating agencies have repeatedly downgraded Mongolia since it
issued Eurobonds in 2012. According to the International
Monetary Fund, its sovereign spreads are among the highest of
all frontier economies; data from Fitch rank Mongolia, with its
$12 billion economy, as having one of the highest net external
debt ratios in its global portfolio.
RESOURCES HANGOVER
Mongolia is recovering from a crippling hangover.
It was the world's fastest growing economy in 2011,
according to the World Bank. At the peak of the boom,
Ulaanbataar was teeming with hopeful expatriates and sushi bars,
promises of luxury hotels and even a Louis Vuitton boutique all
jostled for a slice of the newfound wealth.
The capital is now instead dotted with unfinished skeletons
of buildings where financing ran out: an incomplete Hilton Hotel
and dozens of office buildings in the business district.
This year, as miners pull away from frontier projects, the
economy will grow less than 1 percent, and as little as 0.1
percent, according to the Asian Development Bank.
The country badly needs to restart stalled projects if it is
to cope with ballooning external debt - pegged at $21.6 billion
at the end of 2015 by the central bank - and avoid default.
At the high-profile weekend celebrations at the Oyu Tolgoi
mine, Mongolia brushed off worries of further hiccups and
promised consistency for a project that will employ some 3,000
more people with its expansion - 95 percent of them Mongolian.
"We are partners, like husband and wife, and sometimes you
have problems," said Prime Minister Chimed Saikhanbileg.
Despite some lingering political opposition, he promised the
outcome of Mongolia's legislative elections next month would not
change the approach for a project that is vital for the
country's future.
"Mongolia needs to see a sustained pick up in foreign direct
investment," said Anushka Shah, analyst at Moody's. "And that
will come from greater policy predictability."