Cecilia Jamasmie | October 31, 2014

Mining giant Rio Tinto (LON, ASX:RIO) is set to take a US$2.5 billion writedown on its embattled Oyu Tolgoi copper project in Mongolia, as a long-running tax dispute with the country's government has caused delays and losses.

According to The Times (subs. required) Rio had flagged the possibility of a writedown as it reported its half-year results in August.

Citing a technical report by mine operator Turquoise Hill (TSX, NYSE:TRQ), the article adds the project's value has dropped from $9.9 billion to $7.4 billion in the last year, the report says.

The massive Oyu Tolgoi's open pit mine began operating last year, but an underground expansion was put on hold shortly after, as the Mongolian government became concerned that cost overruns would cut into profits.

A total $1.1 billion of that reduction was due to the delays and slower production ramp-up.

Chronicle of a writedown foretold

Talks between the world's second largest mining company and Mongolia on the expansion and reworking of the initial 2009 deal that first triggered an investment boom in the country, have dragged on for more than a year. Both sides provided fresh faces for the Oyu Tolgoi board in September to break the impasse and resumed talks in December.

In March, Rio Tinto said talks with the government on restarting development had been "constructive," and that the feasibility study would be finished by the end of June.

In May the mining giant fired about 300 workers from Oyu Tolgoi following a review aimed at reducing costs.

For 2014, Oyu Tolgoi is targeting production of 550,000 to 600,000 ounces of gold in concentrates this year, down from the 600,000 to 700,000 ounces Turquoise Hill, controlled by Rio, had forecast in August.

According to the International Monetary Fund thee mine has the potential to transform an economy that is on a par with Angola or Swaziland in national income per head. The IMF believes Oyu Tolgoi —located 80 kilometers north of the Chinese border—will be responsible for a third of the country's GDP growth by the time it is fully operational.