Mongolia’s Tavan Tolgoi Coal Stalled as Politics Overtake Mining

Mongolia’s plans to develop part of the Tavan Tolgoi coal deposit, one of the world’s largest sources of the fuel, have stalled amid political jousting ahead of June parliamentary elections.

Progress on talks with companies including Peabody Energy Corp. (BTU), OAO Russian Railways (RZHD), and China’s Shenhua Group to develop the West Tsankhi part of Tavan Tolgoi have “stopped,” Prime Minister Sukhbaatar Batbold said. The $3 billion initial public offering of state-run Erdenes Tavan Tolgoi, which is developing the East Tsankhi part of the 6-billion-metric-ton field, was delayed yesterday as some politicians call for Mongolia to develop West Tsankhi itself.

“This is a democracy and there should be different opinions,” Batbold said in an interview in Ulan Bator, Mongolia’s capital, without saying which he supported. He backed Rio Tinto Group (RIO) last year against a group of 20 lawmakers who demanded that Mongolia get a bigger stake in the company’s Oyu Tolgoi copper project.

Batbold’s push to lure investors and modernize an economy that grew 17.3 percent in 2011 is being stymied as election campaigning unfolds. The Mongolian Democratic Party left Batbold’s coalition government in January and President Tsakhia Elbegdorj, formerly a member of the MDP, told an economic forum in Ulan Bator this week that the country has shown “no execution, no performance” since 2010.

“There is some election campaign posturing ahead of June,” said Randolph Koppa, chief executive officer of Trade and Development Bank, based in Ulan Bator.

Mitsui, Itochu

Batbold travels this week to Japan, which has several companies involved in the West Tsankhi bidding. Mitsui & Co. partnered with Shenhua in the bid and will persevere with it, head of resources Fuminobu Kawashima said earlier this month. Rival Japanese trading companies including Itochu Corp. (8001) are bidding with South Korean and Russian companies.

Mongolia first announced and then said it would review an accord in July that planned to give Shenhua Group a 40 percent stake in West Tsankhi, with Peabody taking 24 percent and a Russia-Mongolian group the rest. The government didn’t clarify who the Russia-Mongolia group included.

While the future of the West Tsankhi project remains in doubt the $3 billion initial public offering of Erdenes TT, as the company is also known, will be delayed since the state-run miner is the license holder for the area and would receive royalty fees from the ultimate bid winner.

Cash Handout

Erdenes TT also needs parliament to pass a new law to allow it to list shares in Hong Kong and determine what part of its equity will be distributed to the public, Chief Executive Officer Baasangombo Enebish said March 7 in an interview.

Batbold’s Mongolian People’s Party promised 1 million tugrik ($750) in cash to all adults among Mongolia’s 3.1 million people before the last election. The party must keep its promise and that can be done with cash or Erdenes TT shares, Batbold said. Legislation on this and on securities is being reviewed by parliament, he said.

It isn’t clear when legislation will pass or be adopted, Batbold said in his office at the state palace, where he presided over the annual Mongolia Economic Forum. He said he couldn’t give a time frame for the IPO of Erdenes TT.

Before Batbold came on-stage for the forum’s closing remarks on March 6, Elbegdorj made an unscheduled appearance. In his speech, Elbegdorj said that he didn’t take part in the annual forum this year because the government had talked much and delivered little.

Electoral Limitations

“We have limitations in our four-year electoral cycle,” Elbegdorj said. “Only one year of four is productive and half of that is winter,” he said.

Government staff has bloated by 50 percent in the past two years and the state’s involvement in the economy is too great, Elbegdorj said. Politicking and corruption have slowed the country’s major projects while the government has placed too much emphasis on mining, he said.

Current lawmakers should “rest peacefully and walk away” after the next election, Elbegdorj said. The next presidential election is scheduled for 2013.

The political tensions come as Mongolia’s economy enters a “red light” zone, according to Paul Holden, director of the Gunnison, Colorado-based Enterprise Research Institute. Bank lending rose 70 percent last year and money supply increased by 40 percent, Holden said on the sidelines of the Mongolia forum.

Risks Compounding

“Risks are compounding,” Holden said.

State spending doubled in the past two years in real terms with retail trade becoming the major driver of Mongolia’s record economic expansion last year, the World Bank said in a report last month. The country’s mining industry grew 8.7 percent last year to the economy’s 17.3 percent, the bank said.

State cash flows accounted for about half the country’s 11 percent inflation, last year, Naidansuren Zoljargal, a deputy governor at the Bank of Mongolia, told the economic forum. Spending has been driven by the politicians’ short-term election campaigning, hurting private-sector profit margins, and leaving the central bank to “clean up the mess,” he said.

Batbold denied that the government has stopped functioning ahead of elections, saying construction of major road and rail infrastructure will commence this year now that a study into the Tavan Tolgoi coal transport railroads has been completed.

Both East and West Tsankhi need rail links to boost output and cut costs. Mongolia is planning a $5.2 billion development that involves a route northeast to Russia and south to China.

Mongolia will pursue both routes simultaneously, Batbold said. How this will be financed is also becoming more clear, with the state-owned Development Bank of Mongolia LLC and “other institutions” working together, Batbold said.

The Development Bank of Mongolia will today start marketing dollar-denominated bonds as part of a $600 million Euro Mid Term Note program with ING Groep NV. (INGA)

“Not everything is about the election,” Batbold said. “Government has to work constantly.”

To contact the reporter on this story: Yuriy Humber in Ulan Bator at yhumber@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net

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