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Mongolia Loan May Help Tavan Tolgoi Exit Chalco Deal, CEO Says

Mongolia pledged to give Erdenes Tavan Tolgoi LLC, its largest coal company, a $355 million loan that Chief Executive Officer Yaichil Batsuuri said may be used to help it exit an agreement to supply China.

Erdenes Tavan Tolgoi may use the funds to pay the $180 million it owes Aluminum Corp. of China Ltd. as part of a supply contract signed in 2011 for steelmaking coal, Batsuuri said yesterday in an interview in Ulan Bator. The $250 million that Chalco, as the Chinese company is known, gave the Mongolian miner as a prepayment can be repaid with coal or cash, he said.

Erdenes TT, as the state-owned company is known, halted deliveries to Chalco on Jan. 11 after it failed to pay a company that provides logistical support amid a cash crunch. The coal supplier is also seeking revisions to the contract signed with Chalco, it’s biggest customer, because prices were set at a level that’s now below the cost of extracting and delivering the coal, Batsuuri said.

“We wish to cooperate with Chalco in the future, but not in the way that we are working at the moment,” Batsuuri said at Erdenes TT’s offices in Ulan Bator. “We want to change our way of cooperation, especially the price mechanism.”

Erdenes TT exported 2.4 million tons of coking coal to Chalco in 2012, short of the three million tons it had planned to ship, said Batsuuri. Mongolia is the largest exporter of coking coal to China.

Mongolia exported 20.9 million tons of coal last year, down from 21.3 million in 2011, according to the National Statistics Office. The value of the exported coal in 2012 was $1.9 billion, compared with $2.27 billion in 2011, according to the agency.

Contract Talks

An executive team from Erdenes TT is holding talks with Chalco on future coal deliveries, said Batsuuri. The company will only supply coal after it revises prices and volumes with Chalco, he said. Erdenes TT loses $5 on every ton delivered because of rising transportation costs and the price its paid for the coal, Batsuuri said.

Yuan Li, a spokesman for Chalco’s parent, Aluminum Corp. of China, didn’t answer calls to his mobile phone yesterday. Chalco earlier this week said that officials from its international trading unit met with Erdenes TT in November to discuss prices and the volume of shipments. The fundamental terms of the accord shouldn’t be changed, the Chinese company said Jan. 22 in a e-mailed response to questions.

The $355 million loan will probably come from the Development Bank of Mongolia, Batsuuri said. The lender last year raised $600 million through the sale of bonds, according to its website.

Mining Wealth

Erdenes TT last year gave the Mongolian government about $310 million as part of a state-initiated program to distribute the nation’s mining wealth to all citizens, Batsuuri said. That compounded its cash crunch, he said.

The Mongolian government agreed in December to provide Erdenes TT a loan of $200 million and this week decided to increase that amount to $355 million, Batsuuri said.

In addition to paying Chalco, Batsuuri said the company will also use part of the government loan to buy equipment and develop the West Tsankhi block of the Tavan Tolgoi coal field, which is Mongolia’s largest with 6 billion metric tons of reserves. The participation of foreign companies including Peabody Energy Corp. and China Shenhua Energy Co. in West Tsankhi is still being reviewed by the government, he said.

Erdenes TT will also not sell shares to the public this year, according to Batsuuri, who said his preference is for an initial public offering no sooner than 2014.

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