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June 23, 2014, 6:47 p.m. EDT

Rio Tinto's Mongolia mine hits another snag

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By Alexis Flynn

LONDON--One of Rio Tinto PLC's largest projects hit another snag Monday after the company running the $6.2 billion Oyu Tolgoi copper and gold mine in Mongolia was handed a new audit claiming unpaid taxes and penalties.

Turquoise Hill Resources Ltd., the Rio Tinto-owned mining company that owns the rights to Oyu Tolgoi, said it disputed the Mongolian Tax Authority's claims and that a failure to resolve the issue before the end of the month could jeopardize the mine's next phase of development.

"We strongly disagree with the claims in the audit report and are currently reviewing all options to resolve this matter," said Turquoise Hill Chief Executive Kay Priestley.

Rio Tinto and Turquoise Hill said they would consider taking Mongolia to international arbitration if they decide that the new tax claim amounts to a breach of their investment agreement.

Mongolian government officials didn't immediately respond to requests for comment.

An enormous copper trove that could eventually represent a third of landlocked Mongolia's economy, Oyu Tolgoi has been beset by delays and complicated negotiations between Rio Tinto, Turquoise Hill and the government.

Earlier this year, Turquoise Hill was forced to renegotiate with 15 of the international banks financing the project as talks continued to drag. Renewed agreements with foreign lenders were reached in May, though these are due to expire at the end of September.

Although Oyu Tolgoi's open pit mine has commenced production, an underground expansion has yet to go ahead amid continued wrangling between the government and the companies.

As a result, Turquoise Hill was forced to reduce its anticipated output for the year. It now expects Oyu Tolgui to produce between 135,000 metric tons and 160,000 tons of copper in concentrates for 2014, and 600,000 to 700,000 troy ounces of gold in concentrates, the company said in March.

Write to Alexis Flynn at alexis.flynn@wsj.com

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