Peabody Energy among those picked to develop Tavan Tolgoi

Shares of Peabody Energy (BTU-N) jumped US$1.30 or 2.2% to US$60.69 following reports on July 5 that Mongolia had chosen it as part of a global energy consortium including China Shenhua Energy and a Russian-Mongolian group to develop its massive Tavan Tolgoi coal deposit in the Gobi desert.

According to a Mongolian government website, Peabody will hold 24% of the project, Shenhua 40% and the Russian-Mongolian venture 36%, Reuters news agency reported. The decision reflects Mongolia’s geopolitical efforts to balance relations with China, Russia and the U.S.

South Korea has publicly criticized Mongolia, claiming in a statement that the announcement had come “without any kind of consultation with the [Korean] consortium companies,” Dow Jones reported.

Utlimately geopolitics ruled the day. “They can’t include everyone and the big three to please are the Chinese, Russians, and the Americans,” said an Australian mining executive who has exploration projects in the country. “The lobbying has been intense–right to the top of the USA for strategic and other reasons…Peabody was chosen to keep the Russians and the Chinese honest and bring Western thinking to the table.”

Peabody’s bid apparently trumped those of other Western companies including Vale (VALE-N), ArcelorMittal (MT-N) and Xstrata (XTA-L, XSRAF-O). Peabody-the world’s largest private-sector coal company-posted sales of 246 million tons and nearly US$7 billion in revenues last year.

In a statement on its website Peabody confirmed the news and said that it “continues to work with the government and other parties to reach agreement on definitive terms and conditions,” adding that the “agreements would then be submitted for consideration and approval by government agencies and parliament.”

Shares of Peabody had dropped 46¢ or 0.76% to US$60.20 by early afternoon July 6, however, after Dow Jones Newswires in Singapore quoted the head of the state-run company whose subsidiary owns the Tavan Tolgoi project, as saying that no deal has been completed.

“We are still in negotiations. It’s not yet finalized. Nothing is finalized,” B. Enebish, executive director of Erdenes MGL LLC, the parent of Erdenes Tavan Tolgoi (ETT), told Dow Jones Newswires.

Peabody Energy did not immediately respond to a telephone request for comment.

Like everything in Mongolia, it will likely take time before the deal is final and the paperwork completed. “The process with Tavan Tolgoi was lengthy but that was the same with the Oyu Tologi project,” the Australian mining executive noted. “Mongolia and its bureaucrats are on a very steep learning curve at the present and given the investment flows it’s not going to get any easier.”

Tavan Tolgoi is estimated to have reserves of about 6.4 billion tonnes of coal, a significant amount of which is high-quality steelmaking coking coal. The deposit  is about 270 km from Mongolia’s border with China and about 1,570 km from the nearest port in the northeastern Chinese city of Tianjin.