Canada-listed Turquoise Hill is taking Rio Tinto, its controlling shareholder, to arbitration over a disagreement on how to fund the cost blowouts at the Oyu Tolgoi project, in Mongolia.

The company announced on Thursday that it had started arbitration proceedings in British Columbia to seek clarity on the obligations of Rio Tinto to support the company in seeking additional financing for Oyu Tolgoi.

Rio Tinto last month said it would not consent to debt of more than $500-million in additional lending under the project financing for the underground project and that the balance of funding required would have to be met by way of a Turquoise Hill equity offering.

Oyu Tolgoi is set to cost between $1.3-billion and $1.8-billion more than the original $5.3-billion capital estimate.

Turquoise Hill said a special committee of its board, which approved the arbitration, concluded that Rio Tinto's approach to the financing of the Oyu Tolgoi project was “incompatible with the company's announced strategy to maximise debt and/or hybrid financing for the Oyu Tolgoi project so as to minimise the size, and defer the timing, of an equity rights offering (if any)”.

“The special committee believes that the arbitration will provide needed clarity from an independent third party as to the parties' respective rights and obligations with respect to the financing process,” the company stated.

The process would take between three and five months to reach a decision.

Turquoise Hill noted that it was “actively advancing” its evaluation of financing options for Oyu Tolgoi. Such options include additional debt from banks or international financial institutions, an offering of global medium-term notes and a gold streaming transaction. 

Details of the preferred funding options would be presented to Rio Tinto for consideration before the end of the year.