January 24, 2013 1:38 pm

Mongolia coking coal mine troubles mount

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A giant Mongolian coking coal mine has halted coal sales and delayed its planned public listing after it was forced to fund cash handouts to the electorate, a sign of growing troubles at the project that was supposed to be a flagship for Mongolian development.

The problems of Tavan Tolgoi, the state-owned mine, highlight the challenges for resource-rich Mongolia as the country seeks to develop its vast deposits of copper, coal, gold and silver. Mongolia’s $10bn economy grew more than 10 per cent last year and is forecast to be the world’s second-fastest growing this year, primarily because of mining developments.

But Tavan Tolgoi, which is considered a national treasure in Mongolia and is one of the largest coking coal deposits in the world, has suffered a dramatic decline in fortunes. Development has been paralysed by political wrangling, and the ambitious three-city public listing in Ulan Bator, London and Hong Kong that was to be a coming-out for Mongolia has been delayed yet again.

The chief executive of Tavan Tolgoi, Batsuur Yaichil, said Thursday that the public listing – originally planned for 2012 and then delayed to 2013 – would not happen this year because of “financial difficulties”, according to Reuters.

In a sign of how much times have changed, two years ago bankers were practically falling over themselves to get advisory roles in the Tavan Tolgoi listing and a toehold in Mongolia’s phenomenal growth.

The mine’s financial troubles stem from a handout programme under which the government gave 1,072 shares in Tavan Tolgoi to every Mongolian citizen – making good on a campaign promise to allow Mongolians to participate in the country’s mineral wealth.

In an attempt to win popularity ahead of elections last June, the government introduced a buyback scheme allowing citizens to exchange their shares for 1m tughrik ($760). That represents a hefty sum in a country where the per capita annual income is just $3,000. However, the buyback programme saddled the government with a bill of roughly $1bn – about a tenth of gross domestic product – at a time when Tavan Tolgoi itself was still unlisted and barely breaking even.

To recoup the cash, the government forced Tavan Tolgoi to pay for much of the cost. “The government ripped a big chunk of money out of the company, leaving it unable to develop the coal deposit,” said a person close to the situation.

Further complicating matters, Erdenes Tavan Tolgoi, the state-owned company that runs the mine, is mired in dispute with its creditor Chalco, the Chinese state-owned aluminium producer.

Last year Chalco paid $350m to Erdenes for forward-sold coking coal, which was to be delivered over an agreed time period at index-linked prices. However, earlier this month Tavan Tolgoi stopped shipping coal to Chalco because it ran out of cash, leaving about $180m of the contract unfulfilled, according to the person close to the situation.

Erdenes Tavan Tolgoi is negotiating with Chalco to try to get a more favourable price for the remaining coal shipments, this person added. The company is also in negotiations with the government of Mongolia about a sizeable loan that would allow the mine to continue its development.

While Mongolia’s economy has traditionally operated on laisser-faire principles, the state is trying to take a more active role in resources development. Parliament will soon consider a new mineral law, which in its current draft form would increase the role of the state and state-owned enterprises in the mining sector, as well as introduce mandatory 34 per cent Mongolian ownership for mining licences.

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