Rio Tinto is under fresh pressure from the Mongolian government over the cost of the $US5.3 billion ($6.6 billion) Oyu Tolgoi copper expansion, and says it is willing to "explore" ways to reduce the financial impact of the project.

The Mongolian government is a 34 per cent owner of the mine, but the nation's inability to fund its share of development costs has caused complications on several occasions.

The establishment on Wednesday of a "working group" between the government and Rio to "explore" the issues is the third sign of renewed sovereign risk in Mongolia within a week, after the Asian nation lobbed a fresh tax grab for $US155 million last week and after copper exports from the mine were halted by protests at the Chinese border.

Rio said the working group will explore "whether funding costs can be reduced to improve benefits from the Oyu Tolgoi project for all shareholders".

It is believed that reducing interest rates on loans linked to the project will be a particular focus.

Mongolia has in recent years offered to reduce its equity stake in the project in return for higher royalties once in production, and Rio accepted a change to the way royalties are calculated in 2015 as part of a tax settlement that saw the miner yield about $US148 million of value to the government.

No viable source
Rio owns 50.79 per cent of Turquoise Hill Resources, which owns 66 per cent of Oyu Tolgoi, and the mine is considered Rio's most important growth project.

The working group will also seek to accelerate plans for the mine to be powered by a Mongolian power source, as opposed to the current situation where it buys power from utilities in the nearby Chinese province of Inner Mongolia.

Rio was supposed to have found a Mongolian power source for the mine by 2017, but with no viable source available in the developing nation, it won permission in May 2017 to continue sourcing power from China while a Mongolian solution is developed.

The working group will also focus on community development in towns surrounding the project.

Rio said the establishment of the working group was a "win win" for the mine partners, but it did not prove to be a winner for Turquoise Hill shares, which slipped by more than 3 per cent in Tuesday trading Canadian time.

Turquoise shares have slipped by more than 10 per cent over the past week on the back of the tax grab, the interruption to copper exports and signs Mongolia wants to revisit the terms of the Oyu Tolgoi partnership.

On the several occasions in recent years that Mongolia has pushed for a bigger share of wealth from the mine, Rio has pointed to a 2009 investment agreement that outlined the terms of the partnership between the nation and the company, and Rio chief executive Jean-Sebastien Jacques hinted that he would not tolerate changes to the investment agreement.

"We want to work with the government of Mongolia to create long-term sustainable solutions that benefit all stakeholders and the country while staying true to the established investment frameworks," he said.

"We will continue to work together to solve outstanding issues as the joint working group progresses win-win solutions on matters such as power and community development."

Published Date:2018-01-24