Mongolia Relaunching Key Mining Talks Later This Month

By SIMON HALL

BEIJING–Mongolia is relaunching talks with international miners on developing its huge Tavan Tolgoi coking coal reserves following the controversial award of a contract in July and its cancellation just two months later.
Negotiations, which are set to kick off later this month, will include Japanese and Korean companies excluded from the July deal to develop the western half of the block, but hammering out a pact could take many months, government and company officials say.
The goal, said one Mongolian official familiar with the situation, is to award the contracts before Mongolian parliamentary elections in June. Failure to reach a deal could hinder plans for a multibillion dollar international initial public offering of the eastern portion of the mine slated for next year.
"We also need to keep the interest of Russian, Chinese, U.S. and now the Japanese and Koreans...we are now going slow on it and the previous announcements... don't hold anymore," he said.
Any eventual deal will need to accommodate increasing resource nationalism ahead of the elections, the need to satisfy neighboring Russia and China's demands and pressure from countries and companies that were excluded in early rounds of bidding.
In July, the Mongolian government awarded the rights to develop the western half of Tavan Tolgoi to China's Shenhua Energy Co. with a 40% stake, Peabody Energy Corp. with 24% and a Mongolia-Russia consortium, which got 36%.
In exchange they were to invest billions of dollars to extract the site's estimated 7.5 billion tons of coking coal reserves, an essential ingredient in steel making.
The deposit is 270 kilometers from the Mongolia-China border, and proposals had included transport links to China and Russia's Trans-Siberia railway network to allow the coal to be exported.
The July decision prompted protests from the governments in Seoul and Tokyo, as it excluded Japanese and Korean companies which had originally bid in consortia including the Russian and Chinese partners which got the deal in July. Japan's government is pressing Mongolia to include Japanese companies in a new contract, although some feel Mongolia's demand that all bidders to contribute to new rail infrastructure and not only get offtake deals are excessive, two Japanese executives said.
Companies which had been in the original Russia-South Korea-Japan consortium include state-run Korea Resources Corp. or Kores, Korea Electric Power Corp., steel giant Posco, Daewoo International Corp., LG International Corp. and Japanese companies Itochu Corp., Sumitomo Corp., Marubeni Corp. and Sojitz Corp.
One of the people said Mongolia will invite all companies originally short-listed to the talks in Ulan Bator, including all the members of a Russia-Japan-South Korea consortium.
Also, companies that are not being offered a chance to re-bid, such as Vale SA and ArcelorMittal, are complaining to the Mongolian government "so there is a chance that the whole process could start again from scratch...so this could take many months to sort out," one person said. Shenhua originally bid the contract in combination with Mitsui & Co.
Mongolia recently said it wanted to revise a 2009 contract with Ivanhoe mines Ltd., in which Rio Tinto PLC has 48.5%, to develop its Oyu Tolgoi copper reserve, by immediately increasing its stake to 50% from the current 34%. That request, which Mongolia on Thursday suddenly dropped, underscores the domestic pressures driving prime minister Sukhbaatar Batbold's efforts to get better deals for Mongolia's tiny, poor, but resource-rich population.
"We expected the Government to resolve the [Oyu Tolgoi] situation, but we did not expect this to happen so quickly and swiftly. Which is a great response to restore the confidence of investors in Mongolia," said Dale Choi, chief investment strategist at Ulan Batar-based investment bank Frontier Securities.
The delays could further delay the already complex multi-billion dollar IPO slated for London, Hong Kong and the Mongolian capital some time in 2012, as the contract miners are supposed to pay royalties to Erdenes Tavan Tolgoi, according to a person familiar with the matter. Erdenes TT is a unit of the Mongolian state-run company which owns the project.
German Chancellor Angela Merkel is due in Mongolia next week to sign a strategic energy agreement, although this isn't believed to be directly involved with the Tavan Tolgoi process, a Mongolian official said.
—Alison Tudor in Hong Kong, Min-Jeong Lee in Seoul, Mari Iwata in Tokyo and P.R. Venkat in Singapore contributed to this article

Source:Wall Street Journal