Mongolia's giant coalmine Tavan Tolgoi risks burnout

By bne IntelliNews January 29, 2013

Terrence Edwards in Ulaanbaatar -

Mongolia's enormous Tavan Tolgoi coking coalmine, a vital organ that has kept the Mongolian economy vibrant and healthy, is failing due to poor market conditions and a government intent on taking away the operating capital needed to keep pumping out coal to China.

"E-TT is facing... financial difficulties," Yachil Batsuuri, chief executive of the state-owned company that operates at the mine, tells bne, referring to Erdenes Tavan Tolgoi, the operator of the mine. "That's why we stopped our coal transportation and export."

The Tavan Tolgoi deposit, which holds 7.5bn-tonne of coal reserves, helped propel coal into the becoming Mongolia's largest export, most of which ended up in resource-hungry China. The Tavan Tolgoi coalfields lie just some 200 kilometres away from the Chinese-Mongolian border.

And "financial difficulties" may be an understatement, as the Mongolian government has been taking away most of its operating capital in order to restock its Human Development Fund. Though this fund was introduced as a means to drive the development of Mongolia's human resources, in practice it has been used as a cash pool to distribute to the general populace. The 2008 parliamentary election in Mongolia was characterised by politicians trying to outdo each other over how much money they planned to give citizens.

Batsuuri's predecessor, recently retired Baasangombo Enebish, said in August last year that the Mongolian government had taken from the company MNT937bn ($669m). Then in January, it was announced that the transport company responsible for the export of Tavan Tolgoi's coal would discontinue its services, as the state-owned miner had fallen behind on its payments. "We asked for $500m to bail out our debts and finance our operations before we start our infrastructure, wash plant structure, water-supply project," says Batsuuri, later adding that Mongolian Prime Minister Norov Altankhuyag had agreed to provide $350m.

Other debts incurred include the $350m advance payment made by Aluminum Corporation of China, or Chalco as it's commonly called, for coal. The government has since said it wants to renegotiate that payment and end the contract in an attempt to diversify its customer base, even though Prime Minister Altankhuyag admitted that would incur a $50m penalty.

Batsuuri says that Tavan Tolgoi has already delivered $170m worth of coal to Chalco, but now would like to pay the remaining $180m of the contract in cash. . "The government has also said that it will have multiple buyers, not only a single buyer. It decided to sell its coal at the world market price," says Batsuuri.

Though Mongolia depends on China to buy over 90% of the minerals it produces, it has always had a tense relationship with its neighbour to the south. Mongolia fears Chinese dominance over its prized resources. In 2012, when Chinese state-owned Chalco tried to buy Ivanhoe Mines' controlling stake in Mongolian-focused coalminer SouthGobi Resources, the Mongolian government immediately went on the defensive with the passage of legislation called the "Strategic Entities Foreign Investment Law" last May. That law eventually killed Chalco's $938m deal.

Analysts warn that Tavan Tolgoi's decision now to back out of this coal-trade agreement could further strain an already tenuous relationship. "This move could potentially make things much more difficult for Mongolia in the long term," says Vidur Jain, an analyst at Monet Capital Investment Bank. "If Chalco does not want to renegotiate the existing agreement, it could sour the relationship with their biggest customer, already fragile from last year's episode with the SouthGobi takeover bid."

"This could make it more difficult for Mongolia to acquire finance through pre-sale contracts in the future," Jain adds.

Batsuuri says all these problems have conspired to push back yet again the triple listing of Tavan Tolgoi on the stock exchanges of Ulaanbaatar, London and Hong Kong. "Not this year," Batsuuri says. "You see the world market situation. We decided to wait until the market recovers, the price of coal increases, and until E-TT starts regular construction of its wash plant, plus increase our export."

Also necessary is a new financial securities law currently before Mongolia's parliament. Representatives of Mongolia's Financial Regulatory Committee have said the law was written to reflect Hong Kong's listing requirements, to ensure a more streamlined listing process for Mongolia's firms there.

Last year, the Hong Kong Stock Exchange took a strategic approach to target more commodity-based companies. Mongolia Mining Corporation, whose Ukha Khudag mine lies within the same area as Tavan Tolgoi, is one company already listed there.

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