Mongolia gets serious about mining

Two weeks after Mongolians watched their government sign an investment agreement for the Oyu Tolgoi copper-gold project on national television, they woke up to news that eight bidders had been shortlisted as partners for the huge Tavan Tolgoi coking coal project.

Reuters reported today that BHP Billiton (BHP-N), Vale (VALE-N), U.S. coal giant Peabody (BTU-N), India’s Jindal and China’s Shenhua were all on the list, as well as South Korea’s COPEC consortium, a group of Japanese companies and a Russian consortium including Gazprom and Renova.

The news agency sourced its story fromTemuulen Ganzorig, deputy director of Erdenes MGL, the Mongolian state company that it says will hold at least 51% of the equity in the project.

“There are feasibilities to be clarified [and] options such as to divide the deposits into two to three blocs,” Ganzorig told journalists on the sidelines of a conference in Beijing. Reuters had previously reported that the project could be split between bidders.

Tavan Tolgoi holds estimated reserves of 6.5 billion tonnes of metallurgical and thermal grade coal — making it one of the world’s largest undeveloped coal fields.

According to the UB Post, a Mongolian newspaper, the Russian consortium is likely a frontrunner. The newspaper wrote on Sept. 18 that Russia’s state-owned railway company, RZD, would likely get the partnership in return for its planned investment in Mongolia’s national rail system.

The mining licence would then be transferred to a Russian company with the capacity to develop the deposit.

In May, RZD reportedly signed a joint venture (called Infrastructure Development) with Mongolian Railways and Erdenes MGL, to invest a total of about US$1.8 million in upgrading the country’s rail network and lay new rail lines to mineral deposits in the country. RZD holds 50% of the joint venture.

Still, it’s anyone’s guess which company or companies will clinch the coveted deal.

Mongolia reportedly has hired JPMorgan and Deutsche Bank to sell up to a 49% stake in the project.

Tavan Tolgoi is in southern Mongolia, 250 km from the Chinese border and 540 km from the country’s capital of Ulaanbaatar.

After years of indecision, the government evidently is starting to get serious about developing its resources and keeping past election promises of distributing the country’s mineral wealth to its people. It is also fully aware that it needs to get the economy back on its feet, revive infrastructure development, create new jobs and alleviate poverty.

At this point it remains unclear whether Oyu Tolgoi will use coal from Tavan Tolgoi for power generation. Under the investment agreement Mongolia has signed with Rio Tinto (RTP-N, RIO-L) and Ivanhoe Mines (IVN-T, IVN-N), there is no obligation to use Tavan Tolgoi coal for power, if Oyu Tolgoi is ever powered by coal-fuelled generators. The likeliest place to source coal would actually be from SouthGobi Energy Resources‘ (SGQ-V, SGQRF-O) Tsagaan Tolgoi coal deposit southwest of Oyu Tolgoi, which could also be a potential site for a power station.