Mongolia halts landmark deal with foreign firms over massive coal mine

Mongolia halts landmark deal with foreign firms over massive coal mine

Tavan Tolgoi (Image from WikiMedia Commons)

Barely 24 hours after Rio Tinto-controlled Turquoise Hill (TSE:TRQ) got the go-ahead for the long-delayed expansion of the massive copper-gold Oyu Tolgoi mine, the Asian country authorities have struck again. This time, the parliament has decided to cancel a deal with a consortium of foreign firms to develop the giant Tavan Tolgoi coal mine near the Chinese border.

The move took investors by surprise as during the weekend Prime Minister Chimed Saikhanbileg said talks with China's Shenhua Energy and Japan's Sumitomo Corp. were in their final stages, Reuters reports.

A sticking point is the fact that Erdenes Tavan Tolgoi, the state-owned company that holds the license to the deposit, owes US$150 million to China's Chalco Group.

Located in the South Gobi desert, Tavan Tolgoi — mined since the 60s — is home to the world’s largest high-quality coking coal deposit used in steelmaking, with reserves estimated in 7.4 billion tonnes. However management of the operation has been characterized by bureaucratic bungling.

On again- Off again

In 2011 Mongolia's National Security Council rejected a deal struck with US giant Peabody Energy, China's Shenhua and a Russian-Mongolian consortium mid-September, just two months after they were announced as winners. At the time losing bidders from Brazil, India and South Korea raised serious concerns and Japan went so far as to call the bidding process “extremely regrettable.”

Foreign financial contribution is key to move the project forward. Tavan Tolgoi, the second largest mining investment in Mongolia behind Oyu Tolgoi, is located in an area without the roads and railways needed to quickly and economically deliver the coal to markets. It also lacks the power and water supplies to support big mining camps.

The mine is divided into six sections: Tsankhi, Ukhaa Khudag, Bor tolgoi, Borteeg and south-west and eastern coalfields.

Tavan Tolgoi is considered to be crucial to the efforts of Mongolia to convert its mineral wealth into economic gains.