Eurasia Capital’s research note on TT: The Government of Mongolia announced its preference to develop the deposit on contract basis with a global miner.
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Tavan Tolgoi: At the Crossroad
Government to retain 100% percent of Tavan Talgoi. The Prime Minister Batbold has confirmed today the Mongolian government’s preference to retain 100% ownership of the massive Tavan Tavan coking coal project and use a “mining contractor” model. Therefore, the international tender for equity stake in Tavan Tolgoi is now in doubt. While the equity sale option has not been entirely ruled out, the Government intends to hire a mining contractor to develop and operate Tavan Tolgoi deposit.
Tavan Tolgoi is among the world’s largest undeveloped coking coal deposits. The deposit with appr. 5.1bn tonnes in total resources is located about 200km to the north of China, the world’s largest coal consumer. Proximity to China, unique geology and economics of the deposit provide strong fundamentals to the project and raise optimism about its success. Production cost is highly competitive at US$9-US$10/ton of raw coal and US$15/ton for final product, and transportation cost in Mongolia at US$0.02/ton-km.
US$2.44bn investment is required. Total investment required in the first five years of Tavan Tolgoi development is estimated at US$2.1bn to achieve annual coal output of 15mn tonnes and US$2.44bn to achieve 30mn tonnes.
US$4bn additional government revenue by 2030. The deposit may generate for the government US$4bn revenue in the next 20 years if the production volume is 15 million tonnes per annum.
Interest by global and regional majors. 11 companies including Shenhua (China), BHP Billiton (Australia), Jindal (India), Vale (Brazil), Peabody (USA), a Russian consortium of Basel, Renova and Russian Railways, consortia from South Korea and Japan submitted proposals for participation in Tavan Tolgoi.
Coal diplomacy. Recent diplomatic activity reflects the interest of all major players in the mineral wealth of Mongolia. Mongolia has had high level government visits to/from China, Russia, Japan, India and the US. Cooperation agreements in the mining sector were signed with Russia, India and Japan.
In our view Tavan Tolgoi is large enough to be split among several contractors. It will allow accommodating competing interests of Mongolia’s larger neigbours with its own Third Neighbour Policy, which seeks to establish cooperation with countries beyond Russia and China. Additionally, dividing into several development areas may bring faster deposit development, as a wider area is covered in a shorter period of time, thus generating more revenue for the cash-strapped government. Moreover, it will create a competitive environment among mining companies vesting more bargaining power on the Government. By doing so, the risk of overly exposing the strategic asset to a single operator in particular in the times of economic downturn is mitigated.