September 9, 2016 / 9:17 AM / a year ago

Cash-strapped Mongolia puts giant coalmine back in play

5 Min Read

* Estimated coking coal reserves of 7.5 bln tonnes

* $4 billion cost of development equivalent to third of GDP

* Nationalist sentiment blocked previous development bids

* Mining generated 67.8 pct of Mongolia's H1 industrial output

By Terrence Edwards

ULAANBAATAR, Sept 9 (Reuters) - The long-delayed development of Mongolia's giant coal deposit at Tavan Tolgoi in the south Gobi desert is set to be revived as the North Asian country's new government looks for ways to stimulate its crisis-hit economy.

Recent attempts to develop the mine were stymied by nationalists in parliament worried about the involvement of foreign firms, but a financial crisis and a change of government in June have brought it back onto the agenda.

Slowing demand for coal and copper, Mongolia's chief exports, and a plunge in foreign investment have left the world's most sparsely populated sovereign country with soaring debts and a rapidly declining currency, forcing government to hike interest rates and slash spending.

Executives at Erdenes Tavan Tolgoi (ETT), the state firm in charge of the project, say they are now actively evaluating bids to revive the coal mine, one of the world's most promising, with estimated coking coal reserves of 7.5 billion tonnes.

"Currently, we're calculating the (potential) profits for Erdenes Tavan Tolgoi, and our lawyers are reviewing multiple proposals," said Samdandobji Ashidmunkh, chief economic development officer of the state firm in charge of the project.

"We are not ruling out any possibilities," he told Reuters on the sidelines of an investment conference in Ulaanbaatar. "If it's profitable for Erdenes Tavan Tolgoi and beneficial for the Mongolian economy, we're open to cooperate with anyone."

In 2014, the Hong Kong-listed Mongolian Mining Corp. (MMC) joined a consortium with Chinese state miner Shenhua Group and Japan's Sumitomo Corp. to develop Tavan Tolgoi, but though the deal was blocked by parliament last year amid hostility from nationalist backbenchers, another executive said the parties remained ready to revive it.

"The consortium still holds together," said Gotov Battsengel, chief executive officer of Energy Resources, an MMC unit that already extracts coal from a mine on the western edge of Tavan Tolgoi.

"I believe the offer is still on the table," he told the conference.

A spokesman for Sumitomo declined to say whether there were any new developments, but added: "We believe our preferential negotiating rights are still valid."

Ashidmunkh of ETT said it was "too early" to say whether this particular consortium represented the best deal.

The Shenhua Group did not respond to questions on the subject, and Mongolia's mining ministry did not immediately respond to requests for comment.

Changing Dynamics

About two thirds of industrial output in the first half of this year was generated by the mining industry, according to Mongolia's statistics bureau, and Tavan Tolgoi, along with the $4 billion investment required to develop it, could provide a huge boost to the $12 billion economy.

But development has been repeatedly delayed amid financing difficulties and concerns about the role played by foreign firms in the former Soviet satellite of 3 million people, which is wedged between China and Russia.

In 2011, the government awarded the project to a consortium involving Shenhua, U.S. miner Peabody and a team of little-known Russian and Mongolian firms, but it quickly scrapped the deal after unsuccessful bidders from Japan and South Korea complained that the process was not transparent.

The tender came in the middle of a mining boom that drove double-digit growth in GDP and encouraged politicians to seek more favourable terms with foreign investors. Mongolia also tried to renegotiate the 2009 investment agreement for its Oyu Tolgoi copper-gold mine, now run by Rio Tinto .

"Some policy mistakes were fuelled by nationalist sentiment," said Mongolia's new mining minister, Tsedev Dashdorj, at the conference on Thursday.

Legislators opposed to the Sumitomo-Shenhua consortium were voted out of parliament after a landslide election victory for the Mongolian People's Party (MPP) in June.

"The political dynamics in Mongolia have shifted very favorably for an ETT deal post election," said Nick Cousyn, chief operating officer for Ulaanbaatar-based brokerage BDSec, in a research note.

"With an MPP super-majority in Parliament and Mongolia in desperate need of investment, we see the odds of an ETT deal as being extremely high," he added. (Reporting by Terrence Edwards; Additional reporting by Yuka Obayashi in TOKYO and David Stanway in SHANGHAI; Editing by David Stanway and Will Waterman)

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