Mongolia Refuses to Support Rio Tinto Financing Effort for Oyu Tolgoi

Mongolia is refusing to support Rio Tinto's efforts to raise as much as $6 billion in loans tied to its Oyu Tolgoi gold and copper mine in the Gobi Desert.

"The government of Mongolia does not support the Oyu Tolgoi Phase Two project-finance effort initiated by Rio Tinto, due to the still ongoing shareholder discussions," a Mongolian government official familiar with project said. "It's the right of minority shareholders to sort out issues we don't understand," he said. The government might support the financing if its concerns over the project were resolved, the official said.

The government doesn't have a veto over the lending and the official said the government isn't telling the lenders what to do. Nevertheless, the government's move could complicate Rio Tinto's relationship with its lenders.

Mongolia, meanwhile, hopes to pressure Rio Tinto without alienating the lenders, who the government needs to finance an ambitious infrastructure spending plan that includes railroads, power plants and mines.

Rio Tinto has said it hopes to close project financing this quarter. A consortium including private banks, the European Bank for Reconstruction and Development and the World Bank's International Finance Corp. are involved. Two people familiar with the financing said the amount could come in two chunks, of $4 billion and $2 billion apiece. The company has said it was seeking around $4 billion to finance the mine's Phase Two underground works.

Mongolian government officials and Rio Tinto executives have held meetings in the capital, Ulan Bator, this week to resolve differences over Oyu Tolgoi, which Rio Tinto controls. Oyu Tolgoi is the country's biggest investment project.

Under a 2009 agreement, the government holds a 34% stake in the mine. Government officials have complained that the Anglo-Australian miner hasn't been transparent about the operation and has structured the project's capital in a way that benefits the miner at the expense of the government.

Rio Tinto has rebutted that argument and said it is working closely with Ulan Bator to resolve differences. The company and some government officials have played down the notion that the dispute could affect the continued operations of the mine.

"We have always been fully transparent with all our shareholders regarding our project finances, costs and operations," Cameron McRae, head of Rio Tinto's Oyu Tolgoi unit, said in a prepared statement. "We will continue to hold as many frank and open discussions as needed to help clarify issues raised by the government of Mongolia."

The project financing would be used in part to build the second stage of Oyu Tolgoi, which includes a massive underground cave where the mine's most highly concentrated copper lies. Two people familiar with the project said the revised estimated cost of Phase Two is $7.1 billion, up from a previous estimate of $5.1 billion.

The mine's first phase cost more than $6 billion and took nearly three years of digging. It is an open-pit surface mine that began producing copper in recent weeks.

Oyu Tolgoi over its life is expected to produce an average of 425,000 tons of copper and 460,000 ounces of gold a year.

Rio controls the Oyu Tolgoi mine through its holdings in Toronto-listed Turquoise Hill Resources Ltd. TRQ.T +0.52%

Write to Alex Frangos at alex.frangos@wsj.com