Rio Tinto, Mongolia closer to ending mine dispute

Mongolia and Rio Tinto have resolved some of the disputes that have stalled the expansion of their $6.6 billion Oyu Tolgoi copper mine.

"Within the last 10 days we could resolve certain issues; we have reduced the state of urgency," said Davaadorj Ganbold, one of three Mongolian nationals on the Oyu Tolgoi board, adding that some points remain to be agreed on.

"Issues related to cost overruns, the feasibility study and project financing are large and broad issues that cannot be resolved in four or five days," said Mr Ganbold, who is also executive director at Erdenes Oyu Tolgoi, the company that holds the government's 34 per cent stake in the project.

In July Rio delayed work on the expansion until disputes with the government on funding and other issues were resolved. While open-pit work continues, the dispute has led to the suspension of underground construction and the lay-off of about 1700 workers.

The saga has hurt Mongolia by weakening investor confidence and delaying other projects. Foreign direct investment in the country fell 47 per cent over the first eight months of the year.

Oyu Tolgoi is forecast to account for about a third of Mongolia's economy when in full operation.

Mongolia had listed 30 points of dispute with its partner over the mine. Chief among these have been criticism of cost overruns on the open-pit operation and objections to the mine being used as collateral for the financing of the underground portion.

On October 1, Mongolian board members said the number of outstanding issues was down to 15 following talks with Rio in London, conceding that some Oyu Tolgoi assets could be used as collateral.

Mongolia has also sought guarantees that the mine expansion will not be subject to cost overruns, a reset of Rio's management fees to be based on revenues earned rather than money spent, and a pledge that all money raised against Oyu Tolgoi assets be spent within the country.

Issues related to water use, transportation of the ore concentrate, exports to China and company management were also closer to resolution, Mr Ganbold said. Resolving the terms of the $4 billion project financing package remains the biggest hurdle as development of the second phase of the mine relies on another influx of cash. The deadline to approve the financing is December 12.

The second phase of the mine includes underground tunnelling needed to reach the richest parts of the ore body. The open pit section in operation will only yield about 20 per cent of the mine's wealth.

Commercial production started in July although Chinese customs delayed deliveries to customers for more than three months before releasing the first batch of concentrate from a bonded warehouse in China last week.

"The concentrate started to go last week, so the first official, touchable, visible cash flow has started to go to this joint venture company. That is big progress," said Mr Ganbold.