(Adds background, detail) Global miner Rio Tinto (RIO) RIO.L is...

(Adds background, detail)

Global miner Rio Tinto (RIO) RIO.L is willing to enter a new agreement with Mongolia to expand its Oyu Tolgoi mine as the government requested, two sources with direct knowledge told Reuters on Thursday, as both parties look to resolve an impasse over the multibillion-dollar project.

Mongolia had sought agreement with Rio to cancel the deal underpinning the mine's underground expansion, saying rising costs and project delays had eroded expected benefits.

Oyu Tolgoi is one of the world's largest-known copper and gold deposits, located in the South Gobi region of Mongolia.

The Mongolian government holds a 34% stake in the mine and Rio's majority-owned Turquoise Hill Resources TRQ.TO holds the rest.

Investment terms for the underground expansion were agreed in a 2015 deal known as the Dubai Agreement. Mongolia argues that agreement lacks legitimacy because it was not approved by the country's parliament, among other issues. The government also wants more tax revenues from the project.

Rio is open to replacing the underground development agreement with a new deal ratified by parliament, one of the sources said. Discussions could include fees Rio gets for managing the project and interest rates on partner loans, the source said.

Rio declined to comment. Sources declined to be identified due to the sensitivity of negotiations.

Rio Chief Executive Jakob Stausholm told investors on Wednesday he was convinced the miner would resolve the standoff.

Costs for the expansion have ballooned to $6.75 billion, about $1.4 billion higher than Rio's estimate in 2016.

First production is expected in late 2022 and will push annual output to nearly 500,000 tonnes over time, making Oyu Tolgoi among the world’s biggest copper mines.