Oliver Belfitt-Nash in Ulaanbaatar -

Share prices took another dive when the Mineral Resource Authority of Mongolia (MRAM) suspended the mining licenses of SouthGobi Resources on April 16 following state-run Aluminum Corporation of China's (Chalco) bid for a 57.6% stake in the company, only days after the arrest of former president Nambar Enkhbayar had also spooked investors. These back-to-back events have kicked off some heated debates as Mongolia's election season begins, which promises to bring a bruising campaign.

SouthGobi Resources is one of the country's largest exporters, shipping one in every five tonnes of Mongolian coking coal to China. The $1.17bn company is majority owned by Ivanhoe Mines (China sovereign wealth fund owns 13.8%), but Chalco earlier in April agreed with Ivanhoe to take it off their hands for a hefty 28% premium to the market. The announcement appeared to take the government by surprise and two weeks later it suddenly announced it would suspend SouthGobi's licenses, including that for the Ovoot Tolgoi coal mine, as they had not authorised the deal.

SouthGobi shares listed in Hong Kong shot up 17.1% to HKD60.00 following the announcement of Chalco's bid, before the news of the suspension of its license caused them to sink 9.9%. The price now stands at HKD51.75 as the Mongolian authorities review their options. Other major Mongolia-related stocks followed a similar pattern as the country's risk profile wavered, with Mongolian Mining Corporation jumping 9.8% to HKD8.10 and then falling back down 6.7% to HKD6.11.

Dependence on China is touchy subject for many Mongolian people, as shown by the country's bold plan to build a railway to Russia rather than rely on their nearer neighbours to the south. History still hangs heavy over the relationship between Mongolia and China, especially when Mongolian leaders are trying to win favour with the public. "This contract should be terminated immediately," says Jargalsaikhan Dambadarjaa, economist and local talk show host. "If someone doesn't disrupt the SouthGobi Sands deal, it will become Chinese property."

The problem is SouthGobi is listed in Canada and has no major Mongolian shareholders. Foreign investors are worried that if Mongolia finds a way to intervene in this case, it may do so in other deals in the future. Currently, there is no known legal reason for Mongolia to prohibit this deal or suspend the license. In order to act legally, Mongolian lawmakers must be quick. "We should create a legal environment that looks at the conditions and limits for foreign companies that purchase Mongolian strategic mining sites," says Bat Batjargal, a member of parliament. "It has become an urgent issue to create legal regulation on this matter."

Heated talk about resource nationalism is not new for Mongolia. Last year, a letter was sent by MPs to Ivanhoe Mines demanding a higher stake in Oyu Tolgoi, the country's flagship copper-gold mine. Ivanhoe Mines's market capitalisation dropped $7.7bn following the release of letter. That issue was promptly resolved when the government, Ivanhoe Mines and its project partner Rio Tinto released a joint statement honouring the original agreement. This time round, however, political reputations are on the line, so analysts worry that a deal might not be so quick in coming.

Despite the problems, Mongolia's GDP grew 17.3% in 2011. If there is a lesson to be learnt from that event, it may be for the government to push harder when negotiating deals with international investors over its resources. Mongolia certainly deserves to play a big part in the development of its major assets, but to sneakily slip in new laws specific to certain deals will only have disastrous consequences for the future of investment in the country.