India's JSPL Among Eight Bidders for 49% Stake in Mongolia's Tavan Tolgoi Coal Deposit

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Researched by Industrial Info Resources (Sugar Land, Texas)--Indian sponge iron and steel manufacturer Jindal Steel & Power Limited (BSE:532286) (JSPL) (New Delhi) is one of eight bidders and the only Indian company shortlisted for acquiring a 49% stake in Mongolia's Tavan Tolgoi coal deposit. The winner of the bid is likely to be announced by the end of this year.

The other shortlisted bidders include BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia); China Shenhua Energy Company Limited (SHA:601088) (Beijing, China); Korea Power Engineering Company Incorporated (KOPEC) (Gyeonggi-Do, South Korea); Peabody Energy Corporation (NYSE:BTU) (St. Louis, Missouri); Vale SA (NYSE:VALE) (Rio de Janeiro, Brazil); a Russian consortium including Gazprom OAO (OTC:OGZPY) (Moscow, Russia) and Renova Group of Companies (Moscow); and a group of Japanese firms.

The Mongolian government has hired Deutsche Bank AG (NYSE:DB) (Frankfurt, Germany) and JPMorgan Chase & Company (NYSE:JPM) (New York, New York) to conduct the sale. The value of the deal is speculated to be at $2 billion.

State-owned Erdenes MGL LLC (Ulaanbaatar, Mongolia) will hold a minimum equity stake of 51% in the Tavan Tolgoi coal assets. Erdenes MGL was established in February 2007 as a state-owned commercial entity to develop the country's mining sector.

With estimated reserves of 6.5 billion tons of coal, 40% of which is reported to be coking coal, the Tavan Tolgoi open-pit deposit is among the 10 largest coal deposits in the world. It is also reported to the largest undeveloped coal deposit in the world. According to initial estimates, the Tavan Tolgoi coal deposit has the potential to produce 30 million tons per year of coal for the next three decades. The first level of open-pit mining is scheduled to commence in 2010, followed by the second level in 2011.

BHP Billiton had originally secured the rights to develop the deposit in the 1990s but returned the license to Mongolia as the project was determined to be economically unviable at the time. Reports in February this year indicated that Mongolia had received nine bids for mining rights to the coal deposit. Among those who submitted bids were Rio Tinto plc (NYSE:RTP) (London, England) and a consortium of Severstal' OAO (MCX:CHMF) (Cherepovets, Russia) and En+ Group (Moscow). Severstal' was later reported to have dropped out of the race. Itochu Corporation (OTC:ITOCY) (Tokyo, Japan) was also reported to be a potential bidder for the coal assets. At the time, Robert Lepsoe, Hong Kong-based advisor to the Mongolian government, said that the mine will be developed to initially sell coking and thermal coal and that the government plans to eventually develop power plants to export power to China.

According to reports in late September, the Mongolian government was considering a two- to three-way split of the coal deposit between bidders from Russia, China and a leading international miner such as BHP Billiton, in order to satisfy multiple political allegiances and ensure diversification in partnership. Mongolia is also reportedly unwilling to sell the entire stake of 49% to a Chinese firm to stave off large dependency on China.

According to Mongolia's Mineral Resources Authority, the mining sector accounted for 28.2% of the country's gross domestic product in 2008. The sector also contributed to 64.3% of Mongolia's gross industrial product and 80.7% of the total exports in 2008.

If JSPL were to emerge as a winning bidder, the firm proposes to transport coking coal from the Tavan Tolgoi deposit to steel plants in India. Since Mongolia is a landlocked nation, JSPL would be required to transport coking coal through Russia or China. The firm operates a 3 million-ton-per-year steel plant in Chhattisgarh and has firmed up plans for developing two plants of 6 million tons per year each in Orissa and Jharkhand. It is also exploring the feasibility of developing another 3 million-ton-per-year steel plant in Chhattisgarh. Coking coal accounts for nearly 50% of the raw material cost for a steel plant. India has 4.6 billion tons of proven reserves of prime coking coal but produces only 7 million tons per year of coking coal. Furthermore, Indian coking coal is poor in quality, due to high ash content, and needs to be blended with imported coal. This has led to several domestic steelmakers scouting for coal assets overseas to ensure steady supply of high-quality raw material.

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