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Mongolian coal mine put on hold
January 24, 2013

Tavan Tolgoi, the 7.5 Gt (8.2 billion st) coal project in Mongolia, will not go ahead this year as was originally planned because of financial difficulties.

Erdenes Tavan Tolgoi, the state-owned firm running the much-delayed development, is shelving the issue until the mine has more infrastructure in place, chief executive Batsuuri Yaichil told Reuters.

The company will receive government funds of $350 million to help repay its debts and will also seek to renegotiate a supply contract with the Aluminium Corporation of China (Chalco), he said. However, this is unlikely to be enough to develop the mine’s huge potential as well as build all the infrastructure required to deliver coal to market from the South Gobi, and the project is likely to face further delays. A $3 billion IPO has also been ruled out for 2013, Reuters reported.

The project is located 300 km (186 miles) from the Chinese border and was part of a mining boom that many expected would sweep through Mongolia. However, it has faced a host of financing problems and bureaucratic hold-ups, as well as disquiet about the role to be played by foreign investors.

The company’s problems have already forced it to suspend deliveries to China.

“E-TT (Erdenes Tavan Tolgoi) is facing ... financial difficulties. That’s why we stopped our coal transportation and export,” Batsuuri said.

A big investment agreement for the mine's western block involving China's Shenhua Group Corp Ltd, the U.S.-based Peabody Energy Corp and a Russian-Mongolian consortium was shelved in 2011 after being branded unfair by Japanese and South Korean rivals, and little progress has been made since.

Last year, Batsuuri's predecessor complained publicly that a government decision to make the company pay 937 billion tugrik ($669 million) into the country's Human Development Fund had held back progress on the mine. Batsuuri said the government had now agreed to help the company pay its debts.

Mongolia was planning to raise up to $3 billion in funds by listing the eastern Tsankhi section of the mine on foreign stock markets this year, but Batsuuri said such plans were now suspended.

The IPO, hotly anticipated because of its size and expected fees, has already been delayed several times and the further postponement is a blow to BNP Paribas, Deutsche Bank, Goldman Sachs and Macquarie, which were hired to handle the listing.

Batsuuri said Mongolia would also seek to renegotiate a coal sales deal with Chalco to bring prices in line with international levels.

In a deal signed in July 2011, Tavan Tolgoi originally agreed to sell $250 million worth of coal to Chalco, but it did not reveal the volumes involved.
Analysts have said the price could be as much as $20/t ($18/st) cheaper than the average prices of Mongolian coal delivered into China, which are already much lower than international rates.

Batsuuri said Tavan Tolgoi had received a $350 million loan from the Chinese company and had paid almost half of the money back in the form of coal.

In a statement issued to Reuters, Chalco ruled out the prospect of renegotiating.
 

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