High costs to shrink Rio mine

Rio Tinto's most important growth project will cost more to operate and will produce less copper each year, under significant design changes announced for the Oyu Tolgoi mine, in Mongolia.

Design changes for the massive mine were introduced on Tuesday in a bid to offset soaring construction costs in the second phase, which Rio and its subsidiaries now expect to cost $US5.1 billion ($4.9 billion).

Analysts had previously expected the second phase to cost about $US4 billion, but the higher sum was confirmed in a Rio Tinto report on Tuesday, despite the design changes saving close to $US1.7 billion of construction costs.

The report was released by the Rio subsidiary building the project - Turquoise Hill Resources - and comes amid ongoing tensions with the Mongolian government over the cost of building, and the amount of royalties it will deliver to the developing nation.

Under the design changes, a $US500 million expansion of the concentrator at Oyu Tolgoi will be deferred indefinitely, meaning the mine will produce 100,000 tonnes rather than 160,0000 tonnes a day of copper concentrate.

While the company said it may choose to expand to 160,000 in the future, it was no longer committed to that expansion.

Construction of a $US1.2 billion power station for Oyu Tolgoi has also been scrapped, meaning the mine will have to obtain power from a "third-party Mongolia-based power provider".

While the changes have reduced the construction costs, they have raised the mine's the expected operating costs to US89¢ a pound of copper.

Bank of America analyst Oscar Cabrera, who previously estimated the mine's operating costs at US65¢ a pound, said the design changes would make the project "less robust than expected".

The company said its differences with the Mongolian government had still not been resolved, pointing to royalty expectations factored into Mongolia's 2013 budget that were worth more than Rio expected to pay under its 2009 investment agreement.

Rio still hopes to begin commercial production at Oyu Tolgoi at the end of June, assuming it can resolve its differences with the Mongolian government.

Phase one is almost complete, and Rio hopes to secure a financing package worth up to $US4 billion for the second phase of the mine