Negotiations drawn out over Mongolia's largest coal mine

By Terrence Edwards
ULAN BATOR, March 10 (Reuters) - Talks to allow a consortium led by China's Shenhua Energy to take over Mongolia's largest coal mine have yet to be completed, with the project still paying off debts to another Chinese state miner, an official said on Tuesday.
Mongolia is desperate to kick-start a deal expected to be worth as much as $4 billion, with foreign investment into the country falling 74 percent last year, largely because of disputes between companies and the government.
Last year, China's top coal firm Shenhua formed a consortium with Japan's Sumitomo Corp and Energy Resources LLC, a wholly-owned unit of the Mongolian Mining Corp, to take over the management of the Mongolian state-owned firm in charge of the huge Tavan Tolgoi coal deposit.
The mining project in the country's southern Gobi region includes the East and West Tsankhi blocks.
Negotiations with Shenhua were due to be completed before Mongolia's lunar new year in February, but have already missed the deadline, according to Mongolian Minister Mendsaikhan Enkhsaikhan, who oversees Tavan Tolgoi and other giant mining projects.
One challenge is how to handle debts owed to China's Chalco Group by Erdenes Tavan Tolgoi, the Mongolian state-owned firm in charge of the project.
Erdenes Tavan Tolgoi borrowed $350 million from Chalco in 2011 and agreed to pay back the debt in the form of coal deliveries from its East Tsankhi block. It still owes about $150 million to the company, as well as other commitments.
The government used most of the funds it borrowed from Chalco to finance a short-lived social welfare programme that distributed about $15 to every citizen each month.
"After the repayment of outstanding loans to Chalco, Erdenes Tavan Tolgoi still has an obligation to sell 80 percent of its coal (to Chalco) from the East Tsankhi mine for five years," said Enkhbaatar Myagmarulzii, a project manager working under the minister.
Mongolia has set up a working group to lead negotiations with the consortium, which will be entrusted with developing and managing both the East and West Tsankhi blocks, which hold a combined 1.8 billion tons of coking coal.
The Tavan Tolgoi project has attracted the attention of dozens of foreign investment banks and mining conglomerates, but its progress has stalled as a result of financial strains and interference from the government.
Mongolia's previous attempt to find investment for Tavan Tolgoi ended in failure, when its decision to award the project to a consortium consisting of Shenhua, Peabody Energy and a team of Russian and Mongolian firms was criticised by Japanese and South Korean rivals and subsequently annulled.
Erdenes Tavan Tolgoi is also still in dispute with MacMahon Holdings, which was contracted to develop the mine's east block. MacMahon claims it is owed about $30 million.
"It's a complicated issue, but the working group and consortium are seeking to reach a win-win solution now," said Myagmarulzii. (Editing by David Stanway and Pravin Char)


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