Vale, Xstrata Vie for Coal Asset Mongolia Sees as Springboard

Vale SA (VALE3), the world’s largest iron- ore supplier and Xstrata Plc (XTA), the No. 1 thermal coal exporter, head two of six groups shortlisted to develop part of Mongolia’s biggest coal asset as the nation seeks to become a resource hub.

ArcelorMittal (MT), Peabody Energy Corp. (BTU), a venture between Mitsui & Co. and Chinese coal producer Shenhua Group, and a Russo-Japanese-South Korean group led by OAO Russian Railways round out the shortlist, Baasangombo Enebish, head of the state- run Erdenes MGL LLC, which owns the asset, said March 5. It may take about four months to pick one to three winners for the Tavan Tolgoi field, he said.

“We see no reason to delay,” Enebish said in Ulan Bator, Mongolia’s capital in an interview. “Tavan Tolgoi is only the start. Mongolia would like to be one of the main commodity suppliers in Asia.”

Coal output doubled to 25 million metric tons to become Mongolia’s top export last year, encouraging the government to speed up Tavan Tolgoi’s development after years of debate. The mining industry can help fund broader economic growth, which may hit 10 percent this year, Prime Minister Sukhbaatar Batbold said last week. That would exceed China’s targeted 8 percent for 2011.

Mongolia attracted 15 initial bids to develop the field as floods in Australia curb supply. The price of steelmaking coal may rise to a record $340 a metric ton in the next quarter, according to UBS AG’s forecast in a Feb. 21 report.

The Asian nation is “definitely” where Noble Group Ltd., a Hong Kong-based commodity supplier backed by China’s sovereign wealth fund, wants to expand coal operations, Chief Executive Officer Ricardo Leiman said March 1.
Initial Offering

Tavan Tolgoi spans some 68,000 hectares, with coking coal located mainly in the central Tsankhi area, Enebish said. Tsankhi has been split into the western bloc, which will be developed by the winners of the tender, and the eastern side, which will be mined by Erdenes TavanTolgoi, a unit of Erdenes MGL. The unit will make an initial public offering of 29 percent to global investors this year or next, Enebish said.

West Tsankhi holds more than 1 billion metric tons of coal, 68 percent of which can be used for steelmaking and the rest as fuel in power plants, Enebish said. The tender winner will pay Erdenes TavanTolgoi royalties for mining and assist in getting the coal to ports in China and Russia for export to Japan and South Korea, among other countries, he said.

Output, marketing, and transport plans for West Tsankhi will be discussed with the bidders, Enebish said. The East Tsankhi block, which Erdenes TavanTolgoi is developing on its own, is due to start coal exports within two months and has an annual production target of 15 million tons, two thirds of which will be coking coal, he said.
China, Russia

“The main market is China, it’s more natural,” Enebish said. “But through China, through Russia, the government of Mongolia plans to reach third markets.”

West Tsankhi is located in the South Gobi region of the country, 270 kilometers (170 miles) north of the Chinese border. The nearest port is China’s Tianjin 1,570 kilometers away, with the closest Russian port of Vanino more than three times the distance, according to a November presentation by the Mongolian government posted on its website.

As coal investors help Mongolia establish the transport, energy and mining infrastructure at Tsankhi it will aid development of other deposits, Enebish said. That will make it easier to attract more investment into resources, he said.

“Mongolia is still an under explored country,” Enebish said. “We’d like to see Erdenes TavanTolgoi in five or ten years as one of the biggest coking coal mining companies.”

The Shenhua Group, which produced 320 million tons of coking and thermal coal in 2009, plans to have a capacity of 560 million tons by 2014, according to its website.

To contact the reporter on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

Source:Bloomberg