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An employee looks at the Oyu Tolgoi mine in Mongolia's South Gobi region on June 23, 2012.David Stanway/Reuters

Rio Tinto and Mongolia have signed a deal for the supply of power to the miner’s giant copper mine extension at Oyu Tolgoi by mid-2023, with both sides saying the framework agreement marked a step forward after a protracted dispute.

The Oyu Tolgoi project is central to Rio Tinto’s push to diversify its portfolio away from iron ore, but it has faced a series of challenges as Mongolia’s fragile government wrangles over how to maximize benefits for the country.

First production at the US$5.3-billion underground expansion located near the southern border with China is scheduled for early next decade, creating one of the world’s biggest copper suppliers.

The construction of a 300-megawatt plant, close to the Tavan Tolgoi coal fields, to supply electricity to the mine will start in 2020 under the new agreement.

The plant is expected to be operational by mid-2023, slightly later than the 2022 date mooted after the government cancelled an earlier power agreement in February, 2018.

The Government of Mongolia owns 34 per cent of Oyu Tolgoi with the remainder held by Turquoise Hill Resources, which in turn is 51-per-cent owned by Rio Tinto.

In a joint statement with Oyu Tolgoi, the Mongolian government said the agreement was “a significant step toward enhancing the efficiency of the Tavan Tolgoi coal mines” and to supplying the wider region with domestic power.

The statement said the partners would also consider how to incorporate the use of renewable power.

Oyu Tolgoi would be the majority owner of the power plant, with funding possibly including third-party debt, the statement said, without giving further details.

Analysts welcomed the deal but said the 2023 deadline looked optimistic.

“This was the last major hurdle for the underground production,” said Badral Bontoi, chief executive of Mongolia-based market intelligence group Cover Mongolia.

A Mongolian government spokesman said the agreement was the first step to retain in the country the estimated US$150-million Oyu Tolgoi currently pays China for electricity each year, with the figure set to rise when the underground extension comes online.

Rio Tinto in July entered agreements with three Chinese contractors on designing a power station to supply Oyu Tolgoi.

On Monday, a spokesman declined to comment on the status of those tenders.

Rio Tinto’s shares fell by around 5 per cent in 2018 and were down 0.9 per cent on Monday.

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