The government of Mongolia is seeking Rio Tinto’s mutual agreement to terminate the deal that underpins the rolling out of the Oyu Tolgoi mine’s $6.75bn underground copper mine expansion project, the Financial Times reported on February 7, citing sources with knowledge of the situation.

The new Mongolian Prime Minister, Luvsannamsrain Oyun-Erdene, was very vocal against the mining expansion even before he became PM. Now he has the backing of the ruling party, the Mongolian People’s Party (MPP), and parliament to work for a replacement of the underground development plan (UDP) for Oyu Tolgoi, located in the Gobi Desert.

“But rather than act unilaterally and risk future foreign investment in the country, Ulaanbaatar has asked the Anglo-Australian miner whether it is prepared to mutually terminate the plan, the people [sources] said,” reported the Financial Times

The underground expansion of Oyu Tolgoi has been dogged by problems and disputes with the government. The project — Rio’s most important — is already $1.5bn over budget and almost two years behind schedule.

The government threatened last month to halt development. It said delays and cost revisions had eroded the economic benefits the country had hoped to get.

At peak production, Oyu Tolgoi would be the fourth-biggest copper mine in the world, producing almost 500,000 tonnes from its existing open pit and underground mine. A decision on whether to start complex caving operations must be taken by June. The first production is expected in October 2022.

Rio Tinto has boasted for years how Oyu Tolgoi has created thousands of well-paid jobs and generated almost $3bn of taxes and fee revenue in the past decade for Mongolia. However, critics have said these gains are not particularly praiseworthy as they are mandatory. They point out how the Erdenet Mining Corporation is the government’s main tax revenue source and, unlike in the case of the Oyu Tolgoi project, it has actually built a town around its mine. 

Signed in 2015, the UDP, also known as the Dubai agreement, put the underground project back on track following an earlier disagreement between Rio and the government. 

However, the UDP has never been approved by Mongolia’s parliament. It has become a focal point for critics who say that the country should obtain a greater share of the financial benefits from the mine.

Former ministers and politicians are facing prison time over the handling of the Oyu Tolgoi project agreement. It is claimed that they agreed to an unfavourable deal for Mongolia so as to enrich themselves through insider trading and bribery. 

“The government has to fix the legitimacy issue,” said one person with knowledge of discussions, cited by the Financial Times. “Mutual termination of the UDP would achieve this.”

Rio has already told Ulaanbaatar it is prepared to “explore” a reduction of its project management fees and loan interest rates, according to documents seen by the financial daily.

However, it is unlikely to agree on a new development plan unless it also addresses some of the company's key concern. These include a long-term power solution and Oyu Tolgoi’s budget for 2021.

The push to replace the UDP comes ahead of the presidential election scheduled for June.