First production from the underground is due in 2020 and will more than double the mine’s production, which currently comes from the open pit.
The underground comprises around 80% of the project’s overall value and the brownfields expansion has an internal rate of return of more than 20%.
“Long-term copper fundamentals remain strong and production from the Oyu Tolgoi underground will commence at a time when copper markets are expected to face a structural deficit,” Rio Tinto deputy CEO and former copper boss Jean-Sébastien Jacques said.
“In line with Rio Tinto’s other tier one assets, Oyu Tolgoi offers opportunities for further expansions, leveraging existing infrastructure and supply chains and will provide attractive returns for all shareholders and Mongolia more broadly for decades to come.
“This is a long-term partnership, built to create mutual benefit.”
More than $500 million has already been spent on early underground works.
The approval comes after the $4.4 billion financing was secured with export credit agencies and banks in December. The partners have agreed a senior debt cap of $6 billion.
Oyu Tolgoi is 66%-owned by Toronto-listed Turquoise Hill Resources, which in turn is 51%-owned by Rio.
The Mongolian government owns the balance of the project.
Mongolian Prime Minister Chimediin Saikhanbileg said the approval was a proud day for Mongolian and a clear sign it was “back to business”.
“This significant investment demonstrates the confidence of all the partners in both the Oyu Tolgoi mine and in Mongolia,” he said.
“It also demonstrates the attractiveness of Mongolia as a place to do business and invest, which will be a catalyst for further investments that will strengthen Mongolia's economy.”
The mine already has a workforce of around 3000, of which 95% are Mongolian, and the construction workforce is expected to peak at 3000.
The Hugo Dummett North underground deposit has a reserve of 499 million tonnes at 1.66% copper and 0.35 grams per tonne gold.
The deepest shaft will extend around 1.3km below surface.
Between 2025 and 2030, Oyu Tolgoi will produce 560,000 tonnes per annum of copper.
The current open pit, which cost $6.4 billion to develop and has been in production since 2013, delivers around 175,000-200,000tpa.
UBS described the project as high-risk, but said Rio was too invested to pull out.
Rio shares opened 1.7% higher at $A48.56 in early trade.
