The government has accepted 66% owner Turquoise Hill's offer to waive US$2.4 billion of debt owed by state-owned Erdenes Oyu Tolgoi (EOT).
The Parliament of Mongolia has approved Resolution 103 that resolves the outstanding issues that have been subject to negotiations with the government over the last two years over Resolution 92.
Rio will work with the government and Turquoise Hill to finalise the remaining outstanding measures of Resolution 92, namely the formal termination of the Oyu Tolgoi Mine Development and Financing Plan (UDP) and resolution of the outstanding OT LLC tax arbitration.
The OT board, comprising representatives of Rio, Turquoise Hill and EOT have unanimously approved the start of underground operations.
First sustainable production is expected in the first half of 2023.
"The commencement of Oyu Tolgoi underground mining operations demonstrates to the world that Mongolia can work together with investors in a sustainable manner and become a trusted partner," Mongolian prime minister Luvsannamsrain Oyun-Erdene said.
Rio CEO Jakob Stausholm has visited Mongolia twice in the last few months.
"We would like to thank the government of Mongolia for their commitment to working productively with Rio Tinto and TRQ to reach this crucial agreement, that will see one of the world's largest copper growth projects move forward and firmly establish Mongolia as a global investment destination," he said.
"This agreement represents a reset of our relationship and resolves historical issues between the OT project partners.
"The OT underground development will consolidate Rio Tinto's position as a leading global supplier of copper at a time when demand is increasing, driven by its role in enabling decarbonisation and electrification in the race to net zero."
OT is expected to produce around 500,000 tonnes of copper per year on average from 2028 to 2036 from the open pit and underground, and an average of around 350,000t for a further five years, compared to 163,000t from the open pit alone in 2021.
By 2030, OT is expected to be the fourth largest copper mine in the world.
An updated funding plan has been agreed to address Turquoise Hill's current estimated remaining funding requirement for the expansion.
Until sustainable underground production is achieved, OT will be funded by cash on hand and rescheduling of existing debt repayments, together with a pre-paid copper concentrate sales agreement with Turquoise Hill.
The capital forecast for the project is $6.925 billion, including $175 million of known COVID-19 impacts to the end of 2021.
Forecasted remaining underground capital expenditure is roughly $1.8 billion.
A reforecast of capital costs will be conducted in the current half to incorporate further COVID-19 impacts, any additional time-based impacts and market price escalation and updated risk ranging reflecting the latest project execution risks.
Rio and Turquoise Hill have amended a 2021 heads of agreement over project financing.
Under the amended agreement, the rescheduling of principal repayments will be pursued to potentially reduce the OT funding requirement by up to $1.7 billion and a further $500 million of senior supplemental debt will be sought.
Rio will provide a co-lending project finance facility to OT of up to $750 million to be made available after sustainable underground production is achieved (with up to $300 million of such amount being available under a short-term secured advance directly to Turquoise Hill pending such co-lending).
Turquoise Hill has agreed to conduct equity or rights offerings of up to $1.5 billion, with an initial offering of at least $650 million by no later than August 31, 2022.
Rio owns 50.8% of Turquoise Hill and said it had no current plans to acquire additional shares, aside from participating in equity offers.
The board of OT board has also approved the signing of an electricity supply agreement to source power long-term from Mongolia's grid.
Rio will work with the government to support long-term renewable energy generation in support of the Mongolian grid.
Rio shares dropped 0.7% to A$106.96.