Rio Tinto cancels Mongolia's debt of $2.3 billion as part of the government's cost of developing Oyu Tolgoi copper and gold mines.

The Mongolian prime minister said Rio (ASX, LON, NYSE: RIO) would cancel the $2.3 billion debt owed by Mongolia as part of the government's cost of developing the giant Oyu Tolgoi copper and gold mine.

Rio Tinto has agreed to write off debt, independently audit the financing of the project's underground expansion and improve governance, according to a letter to Prime Minister Oyun-Erdene Luvsannamsrai posted on the Mongolian government's website.

The concession is part of a broader proposal to end tensions with Mongolia over the underground expansion project in Oyu Tolgoi and will speed up the timing of Mongolia's start to receive dividends, the letter said.

Rio's five proposals include ending the project's controversial financing agreement and covering additional investment until it goes into production, which is currently expected to start in the first half of 2023.

It also means that Erdenes Oyu Tolgoi, the state-owned company that holds a government stake in the project, will not incur additional debt when it starts operating underground.

Mongolian Prime Minister Oyun-Erdene Sangnansley read out letters from Rio Tinto and turquoise Mountain Resources.

"the above decision is difficult to make and represents our final offer," Stausholm said in the letter. "investors are transferring important value to Mongolia, which we believe will be the basis for a long-term partnership of mutual trust."

Mongolia owns 34 per cent of the mine, with Canada's Turquoise Hill Resources (TSX, NYSE: TRQ) holding the rest, with Rio Tinto having a 50.8 per cent stake.

The continued expansion of the project in the Gobi Desert has been plagued by delays and cost overruns, which sparked outrage by the Mongolian government that threatened to rescind the 2009 investment agreement, which is the basis of mine development.

Relations between Rio Tinto and the Central Asian country hit a new low in August, when an independent review rejected the mining giant's explanation for the project's delays and rising costs.

Jakob Stausholm, Rio Tinto's chief executive, traveled to Mongolia in November and said in an article in LinkedIn that he "listened to and understood" the Mongolian government's concerns.

The company's concessions to Mongolia are seen as a direct result of these negotiations. They need to be approved by the country's parliament, but the proposal has been supported by Wuyun Erdene, who was recently appointed chairman of the ruling Mongolian people's Party, who controls 62 of the 76 seats in parliament.

The final estimate for the development of the new mine, announced in December 2020, puts the cost of the underground portion of Oyu Tolgoi at $6.75 billion, about $1.4 billion higher than the original estimate for 2015.

The first production, originally expected at the end of 2020, was rescheduled in October 2022, and Rio blamed adverse geological conditions on the main reason for the cost and schedule review.

An independent report released in August suggested that this was probably due to mismanagement of miners.

Financial regulators in the UK and the US launched their own investigations into delays and cost inflation disclosed by Rio Tinto, which hit record highs two months later.

Turquoise Hill Resources shares plummeted on Oct. 14 after the company announced that it needed an additional $1.2 billion for expansion. It also said that due to problems related to covid-19, the first commercial production would be no earlier than January 2023, about three months later than the previous target.

Oyu Tolgoi is Rio Tinto's main copper growth project. Once completed, the underground part of the mine will increase metal production for construction, electric vehicles and renewable energy to 560000 tons per year from 125000-150000 tons in 2019. Rio Tinto said the figure corresponds to peak production and will be achieved as early as 2025.

By 2030, the business will be the fourth largest copper mine in the world, according to Rio Tinto. The mine is the country's largest source of foreign direct investment, creating thousands of jobs and generating nearly $3 billion in tax revenue over the past decade.