UPDATE 1-Rio Tinto set to decide on expansion of Mongolia copper mine

* Rio lining up funds for Oyu Tolgoi mine
* Copper chief says final investment decision expected early 2016
* Says could see copper supply deficit in 2 or 3 years (Recasts on Mongolia mine; adds comment, detail)
SYDNEY, Nov 26 Rio Tinto is lining up project financing for a $4 billion expansion of its long-delayed Oyu Tolgoi copper mine in Mongolia and will make a final investment decision early next year, a senior executive said on Thursday.
The mine, which started producing from an open pit over two years ago, is the biggest single foreign investment in Mongolia, and resolution of disputes over its second phase in May revived hopes for a string of other stalled mining projects.
"At the end of the day, what we need is consistency and stability and we believe we have the right environment today," Rio Tinto copper and coal chief executive Jean-Sebastien Jacques said at a Bloomberg News-sponsored forum.
"As we speak, we are putting together the project finance and anticipate that will happen this year," he said.
"We expect early in the next year we will be able to take a decision about restarting the underground construction."
The Anglo-Australian miner's Turquoise Hill Resources arm owns 66 percent of Oyu Tolgoi. The Mongolian government owns the remainder of the project, located in the Gobi desert near Mongolia's border with China.
Disputes over taxes and construction costs on the first stage stopped work on the second phase in 2013.
The underground expansion, with 25 billion pounds of copper and 12 million ounces of gold reserves, will make Oyu Tolgoi one of the world's top 10 copper mines and propel growth for Rio outside iron ore, where most of its revenue is generated.
Copper and other commodity prices are likely to remain subdued in the short term as markets come to terms with oversupply and slower Chinese growth, Jacques said.
"At some stage the winds will change and we will be asked how we are planning to grow the topline not just manage the bottom line," he said.
A supply overhang in copper that's left prices at their lowest in more than six years could take two to three years before shifting to a deficit, according to Jacques.
Separately, Rio Tinto declined to comment on a media report it was poised to approve an expansion of its South of Embley bauxite mine in Australia at a cost of $1 billion. Bauxite is used to make aluminium. (Reporting by James Regan in Sydney; Additional reporting bySonali Paul in MELBOURNE; Editing by Joseph Radford)


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