The Mongolian government is trying to divide a coking coal mine among Chinese, Russian and American interests
A coalition led by China’s largest coal company Shenhua Group was granted a leading 40 percent share of a massive Mongolian mining project in July, leaving a Russian-Mongolian concern with 36 percent and U.S.-based Peabody Energy with 24 percent.
Why did the Mongolian government agree to a three-way, international division of spoils for the western Tsankhi block of the Tavan Tolgoi coking coal project?
Industry sources familiar with investing in Mongolia said the government, as expected, opted in part to satisfy China’s huge appetite for energy resources. The open pit Tavan Tolgoi, one of the world’s largest untapped mines, has proven reserves of 6.4 billion tons, including 1.2 billion tons in the Tsankhi block alone.
But the government in Ulan Bator also wants to use the mine project to strengthen its longtime political and cultural links with Russia, according to the sources. Moreover, including Peabody was seen as a nod to America’s role as a geopolitical balancer in Asia, especially for Mongolia’s relations with China and Russia.
Shenhua has long shown its interest in Mongolian coal investment. In 2009, the company started building an Inner Mongolia railroad line from the coal-belt city Baotou to Ganqimaodu at the Mongolian border – just 180 kilometers from Tavan Tolgoi.
Shenhua’s current annual production capacity is about 400 million tons of coal. The company currently has about 70 billion yuan in cash available for acquisitions, said Huang Qing, Shenhua board secretary.
Russia likewise has sought access to Tavan Tolgoi. And reportedly Moscow has pressured the Mongolian government for a stake in the pit by refusing to supply oil for up to a month, according to Mongolian media reports quoting the country’s minister of energy and minerals, D. Zorigt.
Peabody’s interest in Mongolia, far from its corporate headquarters in St. Louis, complements the company’s projects in China, including a recent coal mine deal with the government of Xinjiang Uygur Autonomous Region. The company is the world’s largest private coal concern.
A Peabody statement said the three-way split at Tavan Tolgoi has yet to be finalized. The company “continues to work with the government and other parties to reach agreement on definitive terms and conditions,” the statement said. Meanwhile, Shenhua remains mum about its coalition plans.
A Chinese investor doing business in Mongolia said the three parties may form an international joint venture to exploit the mine. Mongolian media reports said each of the winning bidders was required to pay an advance of US$ 1 billion.
Doubts and Dreams
A complicated mix of corporate and political goals appears to be driving interest in the mining project.
The Chinese investor said he thinks Russian companies chosen by the Mongolian government have until now shown only scant interest in developing Tavan Tolgoi. Indeed, the Russians may eventually cash out by transferring their mining rights as soon as the contract is signed.
The investor also said the Mongolian government plans to use some of the money raised through the bidding process on social projects. The rest would go toward eastern Tavan Tolgoi mines being developed by Mongolia’s state-owned Erdenes MGL LLC.
Erdenes is planning an initial public offering, perhaps on the Hong Kong or London stock exchange, in the first quarter 2012.
A separate investor with years of mining industry experience says disagreements between the three winning bidders may arise over issues such as feasibility studies, spending levels and public stock.
The Russian side lacks capital, the investor said, while the Chinese and American concerns may differ over the project’s rate of return. “For three to five years, it may be hard to see any output at Tavan Tolgoi,” he said.
A Huatai Securities research report said the three-way talks and the sheer size of the project may hold back a production startup until late 2013.
Another possible sticking point is transportation. Mongolia currently operates a single trunk railroad between the border with Russia and Erenhot, Inner Mongolia, that’s unable to meet current demand for freight trains and would be hard pressed to handle more coal trains.
The investment source said railroad plans for the Tavan Tolgoi mine have yet to be determined. But one option is to build a railroad south to Shenhua’s railhead in China. Another option is to build an east-west line linking Tavan Tolgoi to the existing north-south line between Russia and China.
The Chinese government favors the first option, but for national security reasons Mongolian officials are unwilling to open a new rail line at the China-Mongolia border, said the source.
The second option – which reportedly Russia prefers – would lead to the first upgrade for the Mongolian line to Erenhot since it opened about 60 years ago.
Another challenge is that Mongolia has Russian-style, broad-gauge railroad tracks, while China’s are standard gauge.
The Russian-backed option may have an additional advantage in that its Ministry of Railways and the Mongolia Ministry of Roads, Transport and Tourism each hold 50 percent of the Mongolian railroad operator, Ulan Bator Railway.