Rio Tinto, Mongolia wrangle on Oyu Tolgoi costs but keep mine on track

MELBOURNE, March 1 Thu Feb 28, 2013 9:49pm EST

MELBOURNE, March 1 (Reuters) - Rio Tinto said on Friday it had failed to resolve cost disputes with Mongolia over the $6.2 billion Oyu Tolgoi copper and gold mine in talks this week but the two sides agreed on a temporary budget to keep the mine on track to start producing in June.

Rio Tinto's subsidiary Turquoise Hill Resources , which owns 66 percent of the project, said the two sides will continue talks through March. The Mongolian government owns the remaining stake in the project.

Oyu Tolgoi is crucial to both sides. At full tilt, it will account for nearly a third of Mongolia's economy, while Rio Tinto is dependent on the mine to drive growth outside of its massive iron ore business.

The battle has flared up ahead of a presidential election slated for June and just as Turquoise Hill tries to line up $4 billion in project finance for the next stage of the Oyu Tolgoi development to build an underground mine.

Political risk is a key factor for lenders considering making project finance commitments due on March 8, Reuters Basis Point reported on Thursday.

Progress had been made on disputes surrounding Oyu Tolgoi development and costs, the operating budget, project financing, and management fees, Turquoise Hill said in a statement, reiterating that production would not go ahead until they were resolved.

Mongolia's representatives on the Oyu Tolgoi board refused to approve the mine's budget for this year in January, pressing Rio Tinto to explain why capital spending on the project had blown out by more than $2 billion.

Rio Tinto has said that figure is incorrect and the project remains on budget of $6.2 billion.

Mongolia is wary that it is not benefiting from an investment agreement struck with Turquoise Hill in 2009, a view that has twice led parliament members to attempt to raise the country's stake in the project to 51 percent.

It is concerned it will not receive royalties for many years as operating and project costs have increased. Royalties are not due to be paid until Turquoise Hill recoups its investment.

"Some of the issues are complex, so it's natural that resolution is taking some time," Oyu Tolgoi President Cameron McRae said in a separate statement released in Ulan Bator.

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