Mongolia’s Debt to Chalco Stalling $4 Billion Tavan Tolgoi Deal
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Mongolia’s accord with a group planning to develop its largest coking coal deposit for $4 billion is being stalled by the government’s $150 million debt to a Chinese state-owned company, Mongolian minister Enkhsaikhan Mendsaikhan said.
“Basically one issue is left,” Enkhsaikhan said by phone from Ulaanbaatar on Thursday. “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 $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 percent 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 percent 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 U.S. mining company Peabody Energy Corp.
Retain Ownership
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, Enkhsaikhan said.
“Chalco and Shenhua have to meet each other and try to resolve this problem,” he said. “If necessary, I hope the governments will be involved.”
Energy Resources Chief Executive Officer Battsengel Gotov is responsible for negotiating on behalf of the consortium, said Enkhsaikhan. Battsengel can’t comment because of a media “blackout period,” spokeswoman Ariunaa Baldandorj said.
While a target date to conclude negotiations has yet to be set, results are expected “within this month,” Enkhsaikhan said.
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 percent of the shares to be transferred to Mongolia after 30 years.
“We have almost reached an agreement on the railway, but it is still an open issue,” said Enkhsaikhan. “Maybe we need to talk a little more, once the Chalco debt issue is resolved.”
Erdenes TT has found it difficult to develop the deposit and market the coal on its own. Suspensions have occurred due to disputes with Chinese coal buyers as well as Australia’s Macmahon Holdings Ltd., the company’s main contractor for the site. Erdenes TT and Macmahon are currently locked in negotiations over payments.
To contact the reporter on this story: Michael Kohn in Ulaanbaatar at mkohn5@bloomberg.net
To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Indranil Ghosh, Abhay Singh
