Rio trims Oyu Tolgoi in bid to cut costs

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.

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

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

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

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 a day of copper concentrate rather than 160,000 tonnes a day.

While the company said it may choose to expand to 160,000 at some stage, it was no longer committed to that expansion.

"At a time when all capital commitments are subject to increasing scrutiny, the company has recognised that committing to focus on operations at 100 ktpd ... provides the best return to stakeholders with installed assets, is the most prudent use of scarce capital resources and preserves all options for future expansion and development," the company said.

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

While those changes have cut the construction costs, they have lifted the forecast operating costs of the mine to US89¢ a pound of copper.

Bank of America analyst Oscar Cabrera had forecast operating costs of US65¢ a pound and said the changes would make the project "less robust than expected".

The company said its differences with the Mongolian government had not been resolved. Mongolia has budgeted for a "progressive" royalty rather than the stabilised 5 per cent royalty rate Rio said was agreed for the life of the contract.

Rio still hopes to begin commercial production from the first phase of Oyu Tolgoi at the end of June.