Mongolia President Sets 2012 Deadline for Picking Coal Partners

Mongolia President Tsakhia Elbegdorj set an end-of-year deadline to select companies to develop part of its biggest coal field, seeking to resolve a year-long battle for the resource between groups from five nations.

Peabody Energy Corp. (BTU), OAO Russian Railways, and China’s Shenhua Group are among companies affected by stalled talks to develop the West Tsankhi area of the Tavan Tolgoi coal deposit, Elbegdorj said in his Ulan Bator office. Mongolia is due to get a new government by September at the latest and resolving the impasse will be among its top priorities, he said.

“We will push our government to negotiate with the interested parties within this year,” Elbegdorj said. “The process continues but it cannot continue indefinitely.”

The coal field would become the biggest foreign investment project in Mongolia after Rio Tinto Group’s (RIO) $6 billion Oyu Tolgoi copper mine. Picking the companies to develop West Tsankhi is also key to the planned $3 billion public offering of Mongolia’s state-run Erdenes TT, which holds the rights to the land and would receive royalty fees from the operation.

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 say who the Russia-Mongolia group included. Originally, Japanese traders Itochu Corp. (8001) and Sojitz Corp. (2768) and companies from South Korea bid as part of the group led by Russian Railways.

Local Development

Some local politicians called for Mongolia to develop West Tsankhi by itself, Sukhbaatar Batbold, who went to the June 28 elections as prime minister, said in an interview in March.

“Still we hope” that West Tsankhi will be developed by foreign investors, Elbegdorj said.

West Tsankhi contains more than 1 billion metric tons of coal, compared with about 6 billion tons in all of Tavan Tolgoi. About 68 percent is suitable for steelmaking and the rest could be used in power plants, according to Erdenes TT, which started mining the East Tsankhi area last year.

“If this situation can get resolved, the economic benefits to Mongolia are second only to Rio Tinto’s Oyu Tolgoi mine,” said Jim Dwyer, the head of the Business Council of Mongolia. “Given the complex, United Nations-like cast of governments involved, the talks may not go so quickly.”

The Democratic Party, the opposition before last month’s parliamentary election, expressed confidence yesterday it would form the next ruling party, even as officials ordered another vote in two districts and early results showed no group won a majority. The General Election Commission hasn’t said when it will announce a final tally from the election.

Foreign Restrictions

The future of foreign investment in Mongolia’s mining came into question as the country passed a law tightening the rules last month in reaction to the Aluminum Corp. of China Ltd.’s announcement in April that it agreed to take control of local coal miner SouthGobi Resources Ltd. (SGQ)

The takeover sparked a public outcry and sped up the passage of the foreign investment law, which gives the government and parliament the right to review acquisitions of Mongolian companies in the media and communications, mining, and banking fields.

The reaction to the law, passed in May, has been mainly positive and it is unlikely to be changed by the incoming government, Elbegdorj said. It also doesn’t seek to attack Chalco, as the aluminum maker is also known, or bar China from investing in Mongolian companies, he said.

“Since the passing of the law, I really don’t hear substantial or really big concern to make some changes,” Elbegdorj said.

Chalco shareholders approved the agreement to buy as much as 60 percent of SouthGobi.

“We are not closing the door” to Chinese companies, Elbegdorj said. “We are just regulating the issue and clarifying the venue for discussing the issue.”

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

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

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