UPDATE 1-Mongolia confident of resolving Oyu Tolgoi battle by Dec 31

Tue Oct 1, 2013 2:43am EDT

* Concerns over financing terms, cost overruns to be resolved

* Progress made in building trust with Rio Tinto - official says

By Terrence Edwards

ULAN BATOR, Oct 1 (Reuters) - The Mongolian government is confident it can resolve disputes with Rio Tinto over a $5 billion expansion of the Oyu Tolgoi copper and gold mine by Dec. 31, the deadline for sealing financing for the project, an official said on Tuesday.

"I am very confident," the mining ministry's director general of strategic policy and planning, Otgochuluu Chuluuntseren, told reporters, when asked whether Mongolia would be able to resolve issues ahead of the deadline.

Rio Tinto started exporting from a $6.2 billion open pit mine at Oyu Tolgoi in July but halted work on Phase 2, an underground mine, in August and threatened to cut up to 1,700 jobs as the government refused to approve financing terms for the project.

The expansion is vital to Mongolia as it is expected to boost the economy by a third by 2020 and is key to Rio's effort to ease its dependence on iron ore. Rio's Turquoise Hill Resources Ltd unit owns a 66 percent stake in the mine.

The Oyu Tolgoi board, including three new Mongolian directors, met in London last weekend to try to resolve about 15 concerns that the Mongolian government has raised.

Mongolia has yet to be satisfied on three major issues: terms for project financing, an analysis of cost overruns at Oyu Tolgoi and feasibility studies for the mine's expansion, Otgochuluu said.

The government hopes to see a feasibility study for Phase 2 by early 2014, he said, and wants a detailed breakdown of costs for each phase of the mine's development, rather than accepting a figure of more than $14 billion for the whole development.

"The Mongolian government has equity so we have to closely follow the costs," Otgochuluu said.

Mongolia has a 34 percent stake in Oyu Tolgoi, but will not receive any share of the profit from it until Turquoise Hill recovers all the costs of the project, which it has funded with Rio's support.

While key issues remain to be resolved, Otgochuluu said progress had been made in last weekend's talks, and the government would be willing to tackle some of its minor concerns after work resumes on the underground mine.

"We made good progress for the sustainability of mutual trust," he said. "I don't want to jeopardise trust because of minor technical issues."

Uncertainty over Oyu Tolgoi, as well as changing foreign investment rules, have led to a 43 percent drop in foreign direct investment in Mongolia this year and rocked shares in smaller companies with projects in the country.

Rio Tinto had no immediate comment on the Oyu Tolgoi talks.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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