Key political risks to watch in Mongolia

Mon Jan 9, 2012

ULAN BATOR Jan 9 (Reuters) - Mongolia sits on vast quantities of untapped mineral wealth, the exploitation of which is likely to turn it into one of the world's fastest growing economies over the next decade.

But political uncertainty ahead of parliamentary elections in June 2012 has worried investors, with Mongolia's shaky coalition government under pressure to renegotiate a landmark 2009 investment agreement for the Oyu Tolgoi copper deposit, which is set to begin operations later this year.

The priority for Mongolia is the development of its tiny economy, and foreign investors want to know if the government can create a stable legal environment while handling the pressures exerted by impatient citizens as well as its two giant neighbours, Russia and China.

Following is a summary of key political risks to watch:

INVESTMENT POLITICS

The government has now formally given up on its idea of renegotiating the contract for the Oyu Tolgoi copper-gold mine, after earlier saying it wanted to look again at a 2009 deal with Ivanhoe Mines, now 49 percent owned by Rio Tinto .

Foreign investors were worried that renegotiating a deal two years after it was first signed would undermine confidence, but Mongolia is under pressure to boost revenues and meet ambitious social pledges made at the last elections in 2008. Some politicians have called for the prime minister to resign over his handling of the Oyu Tolgoi contract.

The controversy over Oyu Tolgoi's ownership has spilled over into another giant mine, the Tavan Tolgoi or "Five Hills" coal deposit.

Mongolia hopes to complete an investment agreement for the project before the end of 2011 as it races to launch a much-anticipated initial public offering, and meet the promises it made to voters. Its chief financial officer said in November it would be listed in London, Hong Kong and Ulan Bator, but the date was unclear.

An initial proposal to hand development rights in the project to China's Shenhua, Peabody of the United States and a Russian-Mongolian consortium was rejected, and the government is trying to devise another deal that will include Japanese and South Korean partners.

What to watch:

-- Progress of new laws through parliament. The Democratic Party said in early January it will withdraw from the coalition government ahead of the elections, leaving several ministerial vacancies.

-- Whether the government can produce an investment agreement for Tavan Tolgoi that will satisfy foreign partners and keep the public happy, and whether it can do it in time.

-- More inward investment. In November, commodities trader Trafigura and private equity investor Origo Partners Plc , formed a joint venture to develop Mongolian coal and iron ore deposits for export.

-- Whether foreign investors will be deterred by Mongolia's less than transparent approval procedures.

THE RESOURCE "CURSE"

Mongolia's dependence on mining has alarmed environmentalists and opposition politicians, and the country is already showing classic symptoms of "Dutch disease", including soaring inflation and high interest rates.

The government is trying to put in place structures that will protect it against fluctuating commodity prices, and is keen to use the proceeds from mining to pay for infrastructure, health and education programmes and develop other sectors.

It is under pressure to spread the wealth, and has already extracted "pre-payments" from foreign firms involved in both the Tavan Tolgoi and Oyu Tolgoi projects in order to give money to the public.

What to watch:

-- How Mongolia uses the proceeds from its mining projects. It has set up education and fiscal stabilisation funds, but it has also promised direct dividends for Mongolian citizens.

-- How it deals with rapid economic change as well as inflation as foreign investment transforms the country's mainly rural economy. The International Monetary Fund warned in November that Mongolia's economic policies are creating inflationary pressures.

GETTING ON WITH THE NEIGHBOURS

Many of Mongolia's 2.7 million citizens are concerned about growing Chinese and Russian influence, and their fears were not allayed by the plan to hand the majority of Tavan Tolgoi's western block to Chinese and Russian interests.

China already dominates Mongolia's economy, buying 90 percent of the country's exports in the first half of 2011.

Mongolia's growing dependence on Russia and China for fuel, power and transportation also poses a major risk to its mining sector. Russia has been known to turn off supply taps, and China is not averse to closing crucial railway links.

Mongolia also depends on Russia's railway network to fulfil plans to deliver coal to Japan and South Korea.

What to watch:

-- Will efforts to ease dependence on China merely increase Russia's hold, and vice versa? Is the Chinese market for coal and other minerals its only option in the short term?

-- How will the government handle growing nationalist sentiment, and fears about the role of foreign firms and workers.

(sourced Reuters)

Mongolia needs coal deal in 3 months to ensure IPO goes ahead

Thursday, 27 Oct 2011

Reuters reported that a contentious investment agreement on Mongolia huge Tavan Tolgoi coal deposit needs to be completed within three months to ensure that a much-heralded initial public offering for the project goes ahead on time.

Mr Terbishdagva Dendev a member of Mongolia Grand Khural parliament said on the sidelines of a conference in Hong Kong that discussions on an investment agreement for the western block of the coveted 7.5 billion tonne deposit were expected to get underway in November.

Mongolia plans to open the western block of the vast deposit up to foreign investors while the eastern block will be listed on international stock markets next year. An initial plan to grant 40% of the project to China Shenhua Group, 36% to a Russian-Mongolian consortium and 24% to Peabody Energy Corp of the United States was rejected by the Mongolian Security Council and branded as unfair by bidders from Japan and South Korea.

Mr Graeme Hancock chief operations officer with Erdenes Tavan Tolgoi the state owned entity in charge of the project told the conference that the scale of the IPO for the eastern block would depend on the investment agreement.

He said that "Once the terms of engagement on the west block are clear, that will have an impact on the IPO valuation. I am hoping there will be resolution on this in the very near future so this can be built into our future cash flow."

Mr Terbishdagva said that if an agreement was not signed within three months, the international IPO would have to wait until after Mongolia's parliamentary elections in June.

Analysts have expressed concern that political jockeying ahead of next year's elections was disrupting Mongolia's economy and harming its investment climate.

(sourced from Reuters)

Chinalco to buy 45 mln T of Mongolian coking coal

Fri Oct 21, 2011

SHANGHAI Oct 21 (Reuters) - Aluminum Corp of China Ltd (Chinalco) , the country's top aluminium producer, will buy 15 million tonnes of coking coal per year from Mongolia's Tavan Tolgoi mine over the next three years, it said in a statement seen on Friday.

Chinalco said it had signed the contract with state-owned Mongolian miner Erdenes MGL in July and the first delivery of coal to China was made this week.

Erdenes said in July that Chinalco would resell 30 percent of the coking coal to Japanese trading houses Itochu Corp and Mitsui & Co Ltd , and state-owned Korea Resources Corp .

The government has split the massive Tavan Tolgoi coalfield into two sections for development. The east Tsankhi area is owned by Erdenes TT, which is planning an initial public offering worth an estimated $10 billion, while the west Tsankhi block is being auctioned to miners via an international tender.

(sourced Reuters)

Mongolia picks Macmahon, BBM as contract miners for major deposit

Fri Aug 12, 2011

* Selection could mean India's Mesco Steel out of running
* Macmahon, BBM likely to start operations later this year -Erdenes Exec

ULAN BATOR Aug 12 (Reuters) - Mongolian state-owned miner Erdenes Tavan Tolgoi LLC has selected Australia's Macmahon Holdings Ltd and Germany's BBM Operta as mining contractors for the major East Tsankhi coal deposit, a top company executive told Reuters on Friday.

The government has split the massive Tavan Tolgoi coal field into two sections for development. The east Tsankhi area is owned by Erdenes TT, which is planning an initial public offering worth at least $10 billion to help fund the development of the deposit, while the west Tsankhi block is being auctioned to miners via an international tender.

The tender to pick mining contractors for east Tsankhi had also included India's privately-owned Mesco Steel. Its not clear how much the contract mining agreement is worth.

"Macmahon and BBM Operta have been chosen as contract miners for east Tsankhi," Erdenes MGL Executive Director B.Enebish told Reuters.

"They should be able to start mining operations this year."

Erdenes has said that it plans to produce 15 million tonnes of coal from the east Tsankhi field by around 2015.

To help bankroll the operations, it signed its first-ever term contract from the field with the Aluminium Corp of China Ltd , which will sell some of the coal to Chinese, Japanese and South Korean companies.

Mongolia Tavan Tolgoi mine begins shipments to China Chalco

Friday, 05 Aug 2011

Reuters reported that Mongolia massive Tavan Tolgoi project began shipping 4,000 tonnes of coal south to its new partner, the Aluminum Corp of China Ltd recently following a ceremony at the mine site.

The mine state owned operator, Erdenes Tavan Tolgoi agreed last week to sell USD 250 million worth of coal to the Chinese company from its east Tsankhi block a move designed to fund the deposit overseas listing scheduled for next year.

Erdenes confirmed that a total of 40 trucks each loaded with 100 tonnes of Tavan Tolgoi coking coal has already set off south to China. The mine, which could contain as much as 7.5 billion tonnes of high quality coking coal, is expected to help transform Mongolia tiny economy over the next decade and it has attracted the attention of scores of overseas investment banks and mining firms.

But it remains unclear when large-scale development of the property will begin with the results of a bidding process for the western section of the mine still in dispute.

(Sourced from Reuters)

Chinese, Mongolian companies sign $250m coal deal

Friday,July29, 2011 |By China Daily

ULAN BATOR -- A Mongolian and a Chinese mining company have signed a coal deal worth $250 million, local media reported Friday.

Under the deal, the Aluminum Corp of China Ltd (Chalco) will purchase coking coal worth $250 million as an advance payment from Mongolian state-owned company Erdenes Tavan Tolgoi (ETT), which holds the license for the giant Tavan Tolgoi coal deposit in Mongolia's south Gobi region.

The South Korean company Korea Resources Corp (Kores) and the Japanese companies Itochu and Mitsui signed a memorandum of understanding on purchasing 30 percent of the coal from Chalco.

About 50 high-ranking Mongolian and Chinese officials, including Chinese Ambassador to Mongolia Wang Xiaolong, attended the signing ceremony.

Earlier this month, the Mongolian government said it has chosen China Shenhua Energy, US mining giant Peabody Energy and a Russian-Mongolian consortium to develop the coal mine.

Japan complains to Mongolia over Tavan Tolgoi bidding

Fri Jul 22, 2011

TOKYO, July 22 (Reuters) - Japan has joined South Korea in filing a complaint with Mongolia over the bidding process for part of its massive Tavan Tolgoi coal development project, as firms from both countries appear to have been excluded from the winners.

Mongolia this month said it had picked U.S. miner Peabody Energy , China's Shenhua and a Russian Railway- Mongolia consortium out of six preferred bidders to develop the west Tsankhi deposit but later added the decision was not final.

Japanese and Korean firms were not mentioned in the announcement even though they are part of the consortium that includes Russian Railway. Instead the announcement says that Russian Railway is now part of a consortium with Mongolian firms but it is not clear what firms are being referred to.

Trading firm Mitsui & Co was also not mentioned although it is a partner with China's Shenhua.

The complaint said Mongolia's President Tsakhia Elbegdorj `in a visit last November called on Japan to help with the development of its resources, saying that bilateral partnerships in minerals development would be mutually beneficial.

"If it transpires that Japanese firms are not included in the winning camps, it would go against what the two governments have been working towards", the complaint said.

"It would be extremely regrettable."

South Korea has called the bidding process "unclear and unfair."

Company sources also said that the four Japanese trading firms in the consortium with Russian Railways -- Itochu Corp , Sumitomo Corp , Marubeni Corp and Sojitz Corp -- have also jointly filed a complaint with Mongolia but have yet to get an official response, sources said.

The west Tsankhi block of Mongolia's Tavan Tolgoi coal deposit which holds approximately 1.2 billion tonnes of mostly high-priced coking coal used in steel making.

Read more news about Tavan Tolgoi coal development project
Mongolia's Tavan Tolgoi coal resources could reach 7.5 bln T

Mongolia seeks balanced growth to avoid Dutch disease from mining boom

Monday, 14 Mar 2011

Mongolia needs to look beyond the coal and copper mines that are driving its economic boom to find a more balanced model of growth.

Mr Sukhbaatar Batbold PM of Mongolia said that investment in mining projects and speculation on the wealth they will create in the world’s most sparsely populated nation have made Mongolia’s tugrik the best-performing currency since the beginning of last year. That’s putting exports such as cashmere at a disadvantage and adding costs to newer industries such as tourism, food production and metal processing.

Mr Batbold said that it is important to have a good mining industry. But it is a tool of moving many other things forward. What we want to focus on is creating jobs in many other industries.

Mongolia needs to avoid developing Dutch disease where the financial benefits of a resource boom lead to a hollowing out of other sectors, according to the World Bank. Sandwiched by Russia’s far East to the north and 1.3 billion strong, resource hungry China to the south, the government is looking for ways to lessen its vulnerability to competition from its giant neighbor and reduce its reliance as a customer.

Mr Rogier van den Brink lead economist for Mongolia at the World Bank said that “Mongolia can’t compete with China on wages but it can certainly find areas in the Chinese economy where it could have an edge such as in cashmere meat and services. Diversifying from resources would be a solution similar to what the Dutch found to combat the resource disease.”

The discovery of gas in the Netherlands drove up inflation and damaged manufacturing. In Mongolia, Vale SA and Xstrata Plc are leading six groups bidding for 1 billion tonne concession at the Tavan Tolgoi coal project. Rio Tinto is developing the Oyu Tolgoi copper and gold deposit which it expects will account for 30 percent of Mongolia’s gross domestic product when completed.

The country also holds oil, potash, iron ore, uranium and the rare earth minerals used in Toyota Motor Corporation hybrid cars and Raytheon Company’s Tomahawk cruise missiles. Plans this year to begin mining part of Tavan Tolgoi and preparatory work for the 2012 start up of Oyu Tolgoi may cause the economy to expand 33 percent in dollar terms. That compares with a 10 percent growth in local currency terms. (sourced:bloomberg)

Vale, ArcelorMittal among 15 bidding for Mongolia coal mine

By Miyoung Kim and Yuko Inoue
SEOUL/TOKYO Mon Jan 31, 2011 (Reuters)

Resource-hungry Asian states are locking horns with steelmaker ArcelorMittal and miner Vale to develop the world's largest untapped coking coal deposit in Mongolia, scrambling for raw materials to produce steel.
China, Japan and South Korea are scouring the world from Africa, India, Australia and South America and snapping up iron ore and coking coal assets to diversify from heavyweight suppliers such as BHP Billiton and Rio Tinto.

Asian private and state-linked firms are among the 15 bidders vying for Tavan Tolgoi coking coal project, along with the world's top steelmaker ArcelorMittal SA and the top iron ore miner Vale of Brazil, according to a source with direct knowledge of the matter.
Mongolia, while poor and undeveloped, sits on vast quantities of untapped mineral wealth and analysts say it could be one of the fastest growing economies of the next decade.
The country's fledgling democratic government plans to keep ownership of the mine, estimated to house a total 5 billion tonnes of coal reserves, and give strategic investors a chance to develop its western block on a contract basis.

Over 20 investment banks will this month submit written proposals for the privatisation of Tavan Tolgoi, which could value it at up to $8 billion, The Independent on Sunday reported this week.
"It is the biggest undeveloped coking coal mine in the world, it is strategically important and that's why you see so many interested parties," said Carol Cao, an analyst with Macquarie in Hong Kong.
South Korea bidders in the race also included Xstrata, U.S. coal miner Peabody and consortia led by South Korea, China, Japan and India.
State-run Korea Resources Corp said its consortium is formed of nine Korean firms, two Russian firms and four Japanese companies to develop the Tsankhi block, which is estimated to have 1.2 billion tonnes of coal reserves.
"Mongolia has rich untapped reserves and the block in the auction is very attractive, as it is one of the few large-sized coal mines in the world left undeveloped," Korea Resources Corp said in a statement.

UNCERTAINTY
Steelmakers across Asia have been scrambling to secure new supply channels after devastating floods hit Queensland -- the heart of Australia's coal mining sector -- in December and January.
The Mongolian government is likely to decide preferred bidders in mid-February, after the Lunar New Year holiday starting this week, Korea Resources said.
But auction, which closed on Monday after two weeks of delay, faces uncertainty, as Mongolia has struggled to develop a consistent strategy when it comes to overseas companies buying into national assets.

It has long frustrated the global resources industry for dragging its feet on investment decisions. The government, hobbled by indecision and bureaucratic infighting, took years to conclude the agreement to develop the Oyu Tolgoi copper and gold project.
An initial 2009 bidding auction for the Tavan Tolgoi coal project attracted consortia from South Korea, Japan and Russia as well as mining giants such as BHP, Vale, India's Jindal, and China Shenhua Energy.
But the government abruptly announced the auction would be cancelled early last year and said the state would maintain control and foreign firms could bid for licenses to develop and run the mine.
A top executive at a Japanese trading firm said BHP, which previously expressed interest in the project, had pulled out.

BIDDERS
Members of South Korean bidding group include steelmaker POSCO, utility firm KEPCO, trading firms LG Corp and Daewoo International Corp, Russian Railways and Japanese trading houses Itochu Corp, Sumitomo Corp, Marubeni Corp and Sojitz Corp.
Sources told Reuters on Monday competing Mitsui is leading a Japanese consortium, which has partnered with China's state-run Shenhua Group.
Some investors said winning the deal could add lustre to the winner's stock price over the long-term. (Reporting by Rebekah Kebede in PERTH, Ju-min Park in SEOUL, sourced: reuters)

Two Japan-led groups to bid for Tavan Tolgoi coal mine

* Mitsui says has submitted proposal to develop coal mine
* Tavan Tolgoi seen as one of world's largest coal reserves
* Itochu-led group to submit proposal soon -source
* Mitsui ties up with Shenhua, Peabody -sources
* Itochu group includes Korean, Russian firms -sources

By Yuko Inoue

TOKYO, Jan 31, 2011 (Reuters) - Two groups led by Japanese trading houses will bid to develop Mongolia's Tavan Tolgoi coal mine, regarded as one of the world's biggest untapped reserves, eyeing demand from Japanese steelmakers keen to diversify their sources of coal.
The consortiums, one led by Mitsui & Co (8031.T: Quote) and another by Itochu Corp (8001.T: Quote) are expected to propose large infrastructure projects as part of their bid, including the establishment of railways and power plants, sources familiar with the matter said.
The government of Mongolia will keep ownership of the mine which has an estimated reserve of 6 billion tonnes, but will give strategic investors a chance to develop the western block on a contract basis.

Mitsui & Co (8031.T: Quote), Japan's No. 2 trading house, said on Monday it had submitted a proposal for a tender to develop the mine and buy coal from the project.
"We have submitted a proposal in accordance with the requirement of the tender," a Mitsui spokesman said. He declined to provide further details.
Mitsui was planning to partner with China's state-run Shenhua Group (1088.HK: Quote) (601088.SS: Quote), and Peabody Energy (BTU.N: Quote) of the United States on the bid, two industry sources told Reuters last week.

A group led by rival trading house Itochu Corp (8001.T: Quote) will also submit a proposal soon, a source in the consortium with direct knowledge of the matter told Reuters, asking not to be named because the information is not yet public. A spokesman for Itochu said he was checking on the matter.
Itochu has tied up with three Japanese trading houses -- Sumitomo Corp (8053.T: Quote), Marubeni Corp (8002.T: Quote) and Sojitz Corp (2768.T: Quote) -- as well South Korea's state-owned Korean Resources Corp and Russian's state-owned Russian Railways, the two industry sources said.

Japanese trading houses are eyeing the project in part as a way to tap demand from Japanese steelmakers, which rely on Australia for 60 percent of their coking coal needs and are eager to diversify procurement to other regions.
Steelmakers across Asia have been scrambling to secure new supply channels after devastating floods hit Queensland -- the heart of Australia's coal mining sector -- late last year.
Some investors said winning the deal could add lustre to the winner's stock price over the long-term.
"An investment in resource-rich Mongolia has a huge potential," Tomomi Yamashita, a fund manager at Shinkin Asset Management, said.
"It's an attractive theme that the market can play with."
The Itochu group may offer a project worth more than $1 billion, including the construction of a 400 km railway connecting Mongolia and Russia, sources said, as it aims to transport the coal to South Korea and Japan through the east Russian coast.
The Mitsui group plans to ship coal through China to Japan, the Sankei newspaper reported late last year.
The Mongolian government has set Monday as the deadline for bidders to submit initial proposals, and will decide which ones are qualified to proceed before launching the official bidding process.
The proposals must also include offers of an upfront payment to win the deal, said Ch.Baatbayer, a senior official at Erdenes MGL, the government entity that owns the mine.
A top executive at a Japanese trading house, who talked only on condition of anonymity, said global mining giants like BHP Billiton (BHP.AX: Quote) (BLT.L: Quote) which previously expressed interest in the project, have already quit. (Editing by Nathan Layne and Edwina Gibbs)

International Coal Ventures Pvt Ltd. to bid for coal block in Mongolia

Courtsey news Dow Jones Jan 10, 2011

India's International Coal Ventures Pvt plans to bid for developing huge coal reserves in Mongolia's Tavan Tolgoi mining deposit, sources reported.
Government officials and industry executives said that ICVL's interest in the Mongolian block comes at a time when coal and other resource sectors are seeing a wave of multibillion dollar mergers and acquisitions activity globally, much of it driven by increasing consumption in emerging economic giants China and India.
The Indian company is lining up for a tender offer by the Mongolian government scheduled January 17 to develop part of the Tavan Tolgoi mine in the country's southeast. The mine contains some of the world's largest unexploited reserves of coking coal, a key raw material for making steel. Overall, the mine has an estimated coking and thermal coal reserves of 6.4 billion tonnes.
A mines ministry official told Dow Jones Newswires that ICVL will likely bid for a share in the mine's western block with reserves of 1 billion tones.
About 70% of the block is likely to be coking coal, for which Indian steel companies mostly rely on imports, he added.
If ICVL bids, it will face stiff competition from Japanese and Korean companies.