Mongolia sees new rail link to China as key to coal sales

By Terrence Edwards

ULAN BATOR, April 9 (Reuters) - A $4-billion deal to revive Mongolia's giant Tavan Tolgoi coal mine will include building an extended cross-border rail link, a minister said on Thursday, a move that could stoke fears about the country's growing dependence on its giant neighbour China.

Mongolia's mining boom has slowed, partly as a result of the country's reluctance to hand over control of mineral assets to China. More than 90 percent of the Mongolia's exports already go to China.

China's Shenhua Energy will be crucial to Mongolia's strategy for selling coking coal from the huge Tavan Tolgoi mine to buyers in China and beyond, Minister Mendsaikhan Enkhsaikhan told a coal conference.

His comments marked a sharp turnaround from the past few years, when Mongolia's actions to block deals after China tried to take control of Mongolian mines led to a slide in foreign investment, including a 74 percent slump last year.

The country's wariness stems from hundreds of years of political dominance by China.

Shenhua and its consortium partners plan to build a 265 km (164 mile) railway from Tavan Tolgoi, Mongolia's largest coking coal mine, to the Chinese border as part of an investment agreement needing legislators' approval, Enkhsaikhan said.

Mongolia has asked for $4 billion from the investors to finance development of the mine. Mongolia would receive a $200 million advance payment to the miner while retaining full ownership, Enkhsaikhan said.

Enkhsaikhan is leading talks with Shenhua, Japan's Sumitomo Corp and Energy Resources, a wholly owned subsidiary of Hong Kong-listed Mongolian Mining Corp, to take over management of the state-owned firm Erdenes Tavan Tolgoi to run the mine.

Shenhua's influence over the heavily trafficked railways could help Mongolia's coal reach buyers in China, he said.

"Shenhua having its own railway network will provide the most favourable conditions," said Enkhsaikhan, whose chief role is to negotiate agreements for the country's largest development projects.

He also said that Sumitomo's marketing and sales expertise would play a critical role.

Another target for Mongolia is port access to reach new markets such as South Korea and Japan.

"The Chinese seaport and beyond are considered the most optimal options," said Enkhsaikhan.

The consortium would also be responsible for fulfilling commitments to Aluminum Corp of China (Chalco). In 2011, Erdenes TT agreed to repay $350 million it borrowed in coal deliveries. About $150 million worth of coal deliveries remain, Enkhsaikhan said. (Editing by Sonali Paul and Ed Davies)