The Government of Mongolia expects the $5.1bn expansion of the Oyu Tolgoi copper and gold mine to be funded from the mine's cash flow until the issue of cost overruns has been resolved between the government and Rio Tinto.
Due to the surging costs at the mine, the government's debt to Rio Tinto's Turquoise Hill Resources subsidiary has been increasing, Minister of Mining Davaajav Gankhuyag was quoted as saying by Bloomberg Businessweek.
In a letter to Rio Tinto, the minister said: "Until the project financing is resolved I think it is proper to continue the underground mine with revenues from concentrate."
"The costs specified in the feasibility study are creating a high risk of reducing profits to the Mongolian side," Gankhuyag told the reporters.
Once construction is complete, the total cost to develop Oyu Tolgoi may go beyond $24bn, whereas the government had initially expected the figure to touch $14bn.
The government alleges that even as the complete infrastructure on the site is yet to be built, the cost overruns have been too high.
A task force that is auditing the $2bn invested in the mine in the first phase is expected to submit a report in two to three weeks.
The mine is owned 34% by the Government of Mongolia and the remaining by Turquoise Hill Resources. Oyu Tolgoi is located 550km south of Ulaanbaatar in the Gobi Desert.
In July, Rio delayed the underground expansion work over financing issues, which subsequently led to a delay in production during the mine's first phase.
Other issues that need to be resolved between both the parties include on taxes and royalties. Mongolia believes only the state has the right to collect royalties.
Last month, the mine commenced shipping concentrate and so far has exported 4,000t of concentrate, and it plans to ship about 30,000t this year to generate a revenue of $1bn.
The mining project has being touted as a major revenue generator for the country. Last week, Rio Tinto's CEO Sam Walsh said that both parties intend the second phase development to proceed.
Image: Oyu Tolgoi mine is located 550km south of Ulaanbaatar in the Gobi Desert. Photo courtesy of Rio Tinto Company.