Rio Tinto (RIO) plans to lay off as many as 1,700 employees and contractors at its newly built Oyu Tolgoi copper and gold mine after halting a more than US$5 billion ($A5.485 billion) underground expansion of the Mongolian operation amid a dispute with the government.
"Oyu Tolgoi is currently implementing the delay to the underground mine development announced earlier this month," a spokesman for Rio Tinto said, adding the company remained committed to resolving issues with Mongolia's government so development of the mine can resume.
The delay is the latest hiccup at the mine as the government exerts pressure on Rio in its efforts to maximize returns from the project, which is set to be one of the biggest drivers of the country's economy for many years.
For Rio Tinto, the mine is critical to its efforts to diversify earnings currently dominated by iron-ore mining in Australia's Pilbara region, but comes at a time when the company has committed to cutting costs and reducing debt that has swollen to more than US$22 billion (see John Abernethy's Tipping out Rio).
"While this is an upsetting time for everybody working at Oyu Tolgoi, we would like to emphasize that we are still an operating business, exporting concentrate to our international customers and infrastructure projects outside of the underground mine such as the road construction to Tsagaankhad will continue," Rio Tinto's spokesman said.
The company has estimated that up to 80% of the value of the project lies underground.
The mine, which lies in the southern Gobi desert about 80 kilometers north of the border with China, began trucking copper to customers in China in July.
Sam Walsh, chief executive of Rio Tinto, last week said the dispute centered among other things on the scale of investment needed, the number of Mongolians working on the project and the government's involvement in the decision-making process.
"We would rather pause and get these things right" than rush into the next phase of development, he said at the time.
Mr Walsh said the company was in talks with a syndicate of banks to extend a US$4 billion provisional financing package.
Rio Tinto in April signed agreements with 15 banks on pricing and terms, commitments which are set to expire in mid-December.
In late August it agreed to provide a US$600 million bridging loan to majority-owned Turquoise Hill Resources Ltd. (TRQ.T), which controls Oyu Tolgoi.
Almost 90% of the workforce at Oyu Tolgoi are Mongolian nationals and Mongolians hold more than one-third of management roles at the operation.
Rio Tinto has said the mine had by the end of June paid about US$1.1 billion in taxes and fees to the government.
Construction of a US$6.2 billion open-pit mining operation was completed early this year, but the inaugural shipment of copper was delayed several weeks as Rio Tinto lined up necessary approvals from the country's government.
Turquoise Hill, which owns 66% of Oyu Tolgoi while Mongolia's government owns the remainder, earlier this week said the mine will continue to ramp up output and is expected to produce between 75,000 and 85,000 metric tons of copper concentrate in 2013.
As many as 36 convoys of trucks are expected to leave the mine site each week by the end of the year, carrying metal to China.
At full output, Oyu Tolgoi is set to produce an average of 450,000 tons of copper and 330,000 ounces of gold a year, as well as silver and molybdenum.
The International Monetary Fund has estimated the mine will generate up to one-third of Mongolia's gross domestic product when it reaches full production, which had been expected in 2021.