Mongolia coal mine sparking international interest

Tavan Tolgoi is a huge coal mine in the Tsogttsetsii district of the southern Mongolian province of Ömnögovi. It is an extremely rural open pit coal mine that is hundreds of miles from any form of efficient transport and faces many difficulties because of this, the nearest railway, for example, is over 400 kilometers from the mine, making the transport of coal time-consuming, expensive and laborious.

At the beginning of 2010 Mongolia news media reported that the government had plans to develop the untapped resources of coking coal deposit, one of the largest reserves in the world with an estimated 6 billion metric tons of coal. The mines proximity with China, just 200 kilometers, also makes it an attractive development as China is the largest coal consumer in the world.

Waves were recently made in hard commodity markets when Mongolia news reports revealed that the government had decided to sell a 30% stake in Erdenes-Tavantolgoi, a government-owned company that had been charged with developing the mine at an expected cost of around $2 billion. The announcement was a turn-around from the government policy expressed in February when Prime Minister Sukhbaatar Batbold had insisted the state was seeking to remain in control and possession of 100% of the mine.

State-ownership of mines generally makes international investors wary and at the time the feasibility of the project was called into question, industry commentators such as Business New Europe estimated that an initial investment of $2 billion would be needed by government to develop the mine’s coal-producing capacity and raise output to 15 million tons per year.

A further investment of $2.44 billion tons was needed to raise output to 30 million tons, though estimates showed that over the next 20 years, the mine could generate $4 billion in revenues if output remained at 15 million tons.

The isolation of the mine is revealed in the breakdown of investment requirements for a 15 million ton output. A massive 60% of all investment would be spent just on building a rail link and power plant capable of producing 600 Megawatts.

In June of 2010 the government then began to change their policy on the mine, backing away from their insistence on 100% ownership and instead indicated to Mongolia news media that they wanted a government-run company to own a “significant percentage” of the mine, with private foreign and domestic company’s allowed to buy shares in the rest of it.

“The government is trying to keep the various parties happy, making sure that Mongolia retains control of Tavan Tolgoi, while the government also needs investment from foreign companies,” said Eurasia Capital Management’s CEO, Alisher Ali Djumanov, whose company has over $100 million invested in the region.

The Mongolian government remained reticent in providing exact details of their new policy, refusing to reveal, for example, what quantified a significant percentage.

It was not until July that Minister for Minerals and Energy, Dashdorj Zorigt, announced after a parliamentary vote that the government would retain a 40% share in the company that owned the mine, while 30% would be sold as shares to interested stakeholders. The remaining 30% will be available for purchase by domestic businesses and individuals.

The interest in Tavan Tolgoi is significant; no less than ten international mining corporations have expressed interest in the project these include BHP Billition Ltd., Mitsui & Co., Xstrata Plc, OAO Russian Railways and Sojitz Corp., all of which are in negotiations with the Mongolian government over contracting rights, while China Shenhua Energy Co. the biggest coal producer in China, has also expressed an interest.

China is particularly interested in the coking coal deposit as its imports and production of coking oil cannot keep pace with demand from steel works, with imports of the coal this year already looking to be the highest on record.

The 30% sale is expected to raise funds of around $1.5 billion for the government to out towards the development of the mine.