ULAANBAATAR – Rio Tinto has offered to write off Mongolia's outstanding $2.3-billion debt for its share in Oyu Tolgoi mine to advance the copper-gold project, the prime minister said on Monday.

The offer could end the years-long tussle over the project which, when completed, will be the world's third biggest copper mine and comes after Rio's chief executive flew to Mongolia late last month, aiming for "a relationship reset".

Prime Minister Oyun-Erdene Luvsannamsrai said his office had received a letter from Rio Tinto agreeing to cancel the debt, conduct an independent audit into the financing of the project's underground expansion and improve governance.

The government has previously said Rio should also be held liable for the delays.

In its offer, Rio also agreed to cover the costs of the much-delayed expanded underground section of the mine, which would be completed by 2023.

Mongolia owns 34% of Oyu Tolgoi, one of the world's largest-known copper and gold deposits. Rio controls the rest through its 51% stake in Toronto-listed Turquoise Hill Resources (TRQ) and operates the mine.

Shares in Turquoise Hill climbed as much as 14.7%, their highest in four months, after the announcement.

Rio's relations with the Mongolian government have been increasingly fractious amid mounting concerns in the government that the economic benefits of the $6.75-billion expansion project, which is behind schedule and $1.4 billion over budget, are being eroded.

As it stands, Mongolia is paying for its stake in the project and its share of construction costs, which have been accumulating interest at 6.5% per year since 2009, by deferring dividends and it is not due to see any payout before 2041.

By cancelling the debt, Rio Tinto would bring back the payout for the government.

The offer will be reviewed by the Mongolian Parliament for approval.

A Rio Tinto spokesman said the offer made to Mongolia "aims to reset the relationship and allow all parties to move forward together", without providing details of the debt writedown offer. He said it "reflects months of discussion between Rio Tinto, TRQ and the Government of Mongolia" to understand the government's priorities and provide economic value to Mongolia.

Turquoise Hill and Rio had also disagreed over funding for the expansion project before reaching a deal in April.

In October, Rio delayed first production at the underground development of Oyu Tolgoi by three months to January 2023, after Turquoise Hill estimated additional funding required for the project had ballooned to $3.6-billion.

Rio Tinto has highlighted geotechnical difficulties and the Covid-19 pandemic for the delay and cost overruns. Mongolia promptly commissioned an independent report into the ballooning costs and delays, which blamed mainly management problems.

"Rio's apparent agreement to the government terms provides a potential path to move forward, but this will come at a substantial cost to the economics of the project," RBC Capital analyst Tyler Broda said in a note.

"Considering the high-margin and long-life of the Oyu Tolgoi underground, resetting the partnership does allow Rio to maintain longer-term optionality and would reduce the potential that they lose all interest in the mine."

A flurry of issues have hung over the project in the past few years attracting the attention of minority shareholders and the authorities.