Mongolian debt to chalco stalling USD 4 billion Tavan Tolgoi deal

Mr Enkhsaikhan Mendsaikhan, Mongolian minister, said that Mongolia’s accord with a group planning to develop its largest coking coal deposit for USD 4 billion is being stalled by the government’s USD 150 million debt to a Chinese state-owned company.

Mr Enkhsaikhan said by phone from Ulaanbaatar that “Basically one issue is left. Unfortunately, solving this issue depends not only on us, but also the Chinese side.”

Erdenes Tavan Tolgoi, the state-owned company that holds the license to the deposit, was saddled with the debt to Aluminum Corp. of China, or Chalco, in 2011 after Mongolia used a USD 350 million loan to provide cash handouts to citizens. While Erdenes has repaid a portion of the debt with coal shipments, an interest of more than 10% has inflated the amount outstanding.

Tavan Tolgoi, located 270 kilometers (168 miles) north of the Chinese border in the Gobi Desert, is one of several large scale mineral deposits that Mongolia expects will stimulate the economy. The country’s pace of economic growth was 7.8% last year after three straight years of double-digit expansion.

In December, a group comprising Energy Resources LLC, China Shenhua Energy Co. and Sumitomo Corp. won the permit to develop a portion of the Tavan Tolgoi deposits, beating a bid from US mining company Peabody Energy Corp.

Mr Enkhsaikhan said that Mongolia, which will retain full ownership of the Tavan Tolgoi deposit, has set a requirement that the debt be paid by the consortium. While Aluminum Corp. of China, or Chalco, didn’t participate in the bids, the presence of another state-owned Chinese company, Shenhua, in the group has come in the way of talks.

He said that “Chalco and Shenhua have to meet each other and try to resolve this problem. If necessary, I hope the governments will be involved.”

Mr Enkhsaikhan said that Mr Battsengel Gotov CEO of Energy Resources is responsible for negotiating on behalf of the consortium. Battsengel can’t comment because of a media “blackout period,” spokeswoman Ariunaa Baldandorj said.

He said that while a target date to conclude negotiations has yet to be set, results are expected within this month.

Another key issue between Mongolia and the consortium is the construction of a railway network to transport coal from the mine to the Chinese border. The railway line will be built on a Build-Own-Operate-Transfer agreement with 51% of the shares to be transferred to Mongolia after 30 years.

He added that “We have almost reached an agreement on the railway, but it is still an open issue. Maybe we need to talk a little more, once the Chalco debt issue is resolved.”

Source – Bloomberg