Rio Tinto on Friday cut estimated reserves at its underground copper mine extension in Mongolia and confirmed it would face delays and higher costs after ground instability forced it to redesign its mine plan.

Oyu Tolgoi (OT) is Rio's biggest copper growth project but has faced geological challenges. In July last year, Rio estimated the project's capital cost at $6.5 billion to $7.2 billion, as much as $1.9 billion more than its initial estimate in 2016.

Rio said the updated feasibility study confirmed that recent cost estimate, and warned there could be further changes to reserves as it continues work on the design.

Rio also narrowed its estimated first production from its mine to between October 2022 and June 2023, 21-29 months later than its initial estimate.

Analysts at Citi estimated the changes in the mine plan reduce total production and copper tonnes by 11%."OT gets a lot of investor air time for RIO but the reality is it is small in valuation terms," Citi said, estimating a 3%contribution to Rio's total valuation.

Citi targets RIO at around A$96. Shares of Rio were down 1.5% at A$96.44, underperforming the broader market which was steady.

In a statement, Rio said the new design for the underground mine confirmed its caving method remains valid, and "will unlock the most valuable part of Oyu Tolgoi".

The Oyu Tolgoi deposit in south Mongolia is one of the world's largest known copper and gold deposits, with the open pit at the project contributing about 9% of Rio's total mined copper in the first quarter of fiscal 2020.

It is jointly owned by the Mongolian government and Rio's majority-owned Turquoise Hill Resources.

Last month, the miner entered an agreement for Mongolia to build a coal-fired plant to supply power to the Oyu Tolgoi mine.

(Reporting by Melanie Burton in Melbourne and Sameer Manekar in Bengaluru; Editing by Richard Pullin and Lincoln Feast)