Rio Tinto plays the long game in Mongolia over Oyu Tolgoi mine A big increase in Rio Tinto's copper output has underlined the high stakes it is playing for at a flagship new mine in Mongolia, where the FTSE 100 miner is starting to reap the benefits of a $6bn investment but has frozen further development amid disputes with the government. Oyu Tolgoi produced 30,000 tonnes of copper concentrate in the third quarter, reaching capacity for the first time since it went into operation this year. The output, along with a speedy recovery from a landslide at Rio's Bingham Canyon mine in the US, helped push group copper output up 23 per cent in the third quarter compared with a year ago, Rio said on Tuesday in its quarterly production report. Rio raised its production forecasts for copper for the year and shares in the company rose 3.6 per cent. "The copper upgrades could have a carry-through effect to 2014," said analysts at Morgan Stanley. When complete Oyu Tolgoi - known as "OT" - will have an underground mine alongside the operating open pit and should be producing 400,000 tonnes annually, making it one of the world's biggest copper mines and helping to reduce Rio's heavy reliance on iron ore for most of its earnings. Rio controls the project through a majority stake in Turquoise Hill, which has 66 per cent of OT while Mongolia owns 34 per cent. The underground part of OT will cost a further $5bn to $6bn and yield most of the project's benefit. However, its development is on hold after disagreements between Rio and the Mongolian government, which wants to rethink the split of revenues between and the state over the decades-long life of the project. Rio's start-up of OT has also been hit by problems moving copper concentrate across the Mongolian border into China, just 80km away and the only realistic market for the mine's output. Shipments from OT have gone no further than a Chinese bonded warehouse because customers have not yet obtained approval from customs officials to collect the concentrate. Rio can recognise revenues from OT only once copper leaves the warehouse. The disputes show the problems that Rio has in developing the biggest foreign investment in Mongolia, a country that has only recently opened up to western mining projects. It also shows the complexity of managing a mine in a country so dependent on China, whose relations with its smaller northern neighbour sometimes flare into disputes. A mining executive from another company likens Rio to an animal trapped between two tigers. "They have their head in the mouth of one tiger and their tail in the mouth of the other," the executive says. Rio, which has Chinese state aluminium group Chinalco as its largest shareholder with more than 12 per cent, indicated on Tuesday that the customs issue should be solved by the end of the year. The dispute with Mongolia may be harder to resolve. Delays and cost overruns on OT jeopardise planned revenue flows for the government, which is prohibited from running deficits of more than 2 per cent. According to the OT investment agreement, the government does not start to see returns until investors including Rio have recouped their costs. But buoyed by optimism over the prospect of a national windfall, politicians have made a series of popular budgetary commitments to the Mongolian people, including a costly commitment to cap interest rates on mortgages. Munkhdal Badral, chief executive of market intelligence firm Cover Mongolia, says: "Cost overruns and the project financing are all things that the government of Mongolia probably didn't figure in at the time of the agreement signing." Rio is expected to insist it will not renegotiate the investment agreement and cannot guarantee Mongolia's level of dividends from OT. Analysts at Bernstein Research welcomed Rio's firm line. "The historical precedent for both developed and emerging countries" governments to demand an increased share of rents extracted along with the minerals from their soil cannot be ignored. We believe that this is ultimately a self-defeating strategy by host governments, but it is one with an impressively long pedigree," they said. A person familiar with Rio's thinking on the project said: "This is a 100-year project. You can't renegotiate, make a poor deal and then pay for it every day for the next 50 or 100 years. The platform has to be stable.