ULAANBAATAR/LONDON, Dec 13 (Reuters) – Rio Tinto (RIO.AX)(RIO.L) has offered to write off Mongolia’s $2.3 billion outstanding debt for its stake in the Oyu mine Tolgoi in order to advance the copper-gold project, the prime minister said on Monday.

The offer could end the years-long fight over the project which, when completed, will be the world’s third-largest copper mine and comes after Rio’s chief executive flew to Mongolia at the end from last month, with the aim of “resetting relations”. Read more

Prime Minister Oyun-Erdene Luvsannamsrai said his office had received a letter from Rio Tinto agreeing to write off debt, conduct an independent audit of funding for the project’s underground expansion and improve governance.

The government has previously said Rio should also be held accountable for the delays.

In its bid, Rio also agreed to cover the costs of the much-delayed expanded underground section of the mine, which would be completed by 2023.

Mongolia owns 34% of Oyu Tolgoi, one of the largest known copper and gold deposits in the world. Rio controls the rest through its 51% stake in Toronto-listed Turquoise Hill Resources (TRQ) (TRQ.TO) and operates the mine.

Shares of Turquoise Hill soared 14.7%, their highest level in four months, after the announcement.

Rio’s relationship with the Mongolian government has been increasingly fractured as the government fears the economic benefits of the $6.75 billion expansion project, which is behind schedule and over budget by $1.4 billion. dollars, are eroded.

As it stands, Mongolia is paying its stake in the project and its share of the construction costs, which have accrued interest at 6.5% per year since 2009, with deferred dividends and it shouldn’t see any payments until 2041.

By canceling the debt, Rio Tinto would bring back the payment for the government.

The offer will be considered by the Mongolian parliament for approval.

A Rio Tinto spokesperson said the offer to Mongolia “aims to reset the relationship and allow all parties to move forward together”, without providing details of the debt write-down offer. He said it “reflects months of discussions between Rio Tinto, TRQ and the Government of Mongolia” to understand government priorities and bring economic value to Mongolia.

Turquoise Hill and Rio were also at odds over funding for the expansion project before reaching an agreement in April.

In October, Rio delayed first production from the Oyu Tolgoi underground development by three months until January 2023, after Turquoise Hill estimated the additional funding required for the project had ballooned to $3.6 billion.

Rio Tinto pointed to geotechnical difficulties and the COVID-19 pandemic for the delay and cost overruns. Mongolia quickly commissioned an independent report on soaring costs and delays, which attributed mainly management problems.

“Rio’s apparent agreement to government terms offers a potential path forward, but it will come at a substantial cost to the economics of the project,” RBC Capital analyst Tyler Broda said in a rating.

“Given Oyu Tolgoi’s high margin and long basement life, resetting the partnership allows Rio to maintain a longer-term option and would reduce the risk of them losing interest in the mine.”

A flurry of stakes has hovered over the project in recent years, attracting the attention of minority shareholders and the authorities.

Reporting by Anand Tumurtogoo and Clara Denina; Additional reporting by Sonali Paul in Melbourne and Kirstin Ridley in London; Editing by Christopher Cushing, Lincoln Feast and Jane Merriman

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