Because of a dispute with the Mongolian government, Rio Tinto halted the development of its $5 billion underground mine expansion at the Oyu Tolgoi copper and gold mine in early August and announced on Aug. 14 that it plans to lay off as many as 1,700 employees and contractors, the Wall Street Journal reported.

“Oyu Tolgoi is currently implementing the delay to the underground mine development announced earlier this month,” a spokesman for the Anglo-Australian mining company said in a statement. “The company remains committed to resolving issues with Mongolia’s government so development of the mine can resume.”

Rio Tinto and the government have been at odds over the amount of profits that each will get. The two have also struggled with issues such as local labor and the government’s role in the decision-making process.

For Rio Tinto, the mine is critical to its efforts to diversify earnings currently dominated by iron-ore mining in Australia’s Pilbara region, but comes as the company has committed to cutting costs and reducing debt that has swollen to more than US$22 billion.

The company has estimated that up to 80 percent of the value of the project lies underground. The mine, which lies in the southern Gobi Desert about 80 km north of the border with China, began trucking copper to customers in China in July. It continues to operate and export concentrate to customers.

Sam Walsh, chief executive of Rio Tinto, said the company was in talks with a syndicate of banks to extend a US$4 billion provisional financing package. Rio Tinto in April signed agreements with 15 banks on pricing and terms, commitments that are set to expire in mid-December. In late August it agreed to provide a US$600 million bridging loan to majority-owned Turquoise Hill Resources Ltd., which controls Oyu Tolgoi.

Almost 90 percent of the workforce at Oyu Tolgoi are Mongolian nationals and Mongolians hold more than one-third of management roles at the operation. Rio Tinto has said the mine had by the end of June paid about US$1.1 billion in taxes and fees to the government, the Wall Street Journal reported.

Construction of a US$6.2 billion openpit mining operation was completed early this year, but the inaugural shipment of copper was delayed several weeks as Rio Tinto lined up necessary approvals from the country's government.

Turquoise Hill, which owns 66 percent of Oyu Tolgoi while Mongolia’s government owns the remainder, said earlier this week the mine would continue to ramp up output and is expected to produce between 75 and 85 kt of copper concentrate in 2013. As many as 36 convoys of trucks are expected to leave the mine site each week by the end of the year, carrying metal to China.

At full output, Oyu Tolgoi is set to produce an average of 450 kt/a of copper and 330,000 ozpy of gold, as well as silver and molybdenum. The International Monetary Fund has estimated the mine will generate up to one-third of Mongolia’s gross domestic product when it reaches full production, which had been expected in 2021.