Mongolian Government Opts for Ownership of Tavan Tolgoi Coal Deposits

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Mongolian government has opted to retain outright ownership of the Tavan Tolgoi deposit in South Gobi, the world's largest untapped coking coal deposit with reserves of 6.5 billion tons. In reversal of its earlier decision to auction off a 49% share of the coal deposits for $2 billion, the government is now contemplating alternative collaborative approaches, such as production sharing and contract mining, to develop the reserves.

According to the terms of the original deal, Erdenes MGL (Ulaanbaatar, Mongolia) was to hold a 51% stake in Tavan Tolgoi. Bidders shortlisted for the auction included Vale S.A. (NYSE:VALE) (Rio de Janeiro, Brazil), BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia), Peabody Energy Corporation (NYSE:BTU) (St. Louis, Missouri), Jindal Steel and Power Limited (BSE:532286) (JSPL) (New Delhi), and Shenhua Energy Company Limited (HKG:1088) (Beijing, China). Consortiums from South Korea, Japan and Russia, including Gazprom OAO (OTC:OGZPY) (Moscow, Russia) and Renova Group (Moscow), also were reported to have participated in the bidding process. Deutsche Bank AG (NYSE:DB) (Frankfurt, Germany) and JP Morgan Chase (NYSE:JPM-B) (New York) were the lead advisers for the sale.

Further decision on the Tavan Tolgoi deposits will be taken once a taskforce studies the full implications of the proposed schemes and passes on its recommendations to the country's parliament. The government, however, is planning to attract investments of $10 billion to $15 billion in the mining sector over the next five years.

In addition to the coal fields of Tavan Tolgoi and the copper deposits at Oyu Tolgoi, Mongolia has several other mineral deposits containing gold, zinc, lead, coal, copper and uranium. The government already has identified 15 sites for further development, in which it plans to hold a majority share of 51%. The projects were delayed due to a long drawn deal with Ivanhoe Mines Limited (NYSE:IVN) (Vancouver, Canada) and Rio Tinto plc (NYSE:RTP) (Melbourne, Australia) for the $4 billion Oyu Tolgoi mining venture, which was finalized last year.

The 2006 mining laws of Mongolia permit the country to hold as much as a 50% share in state-funded mining ventures and a 34% share in projects funded by the private sector. However, analysts have opined that with the total ownership of Tavan Tolgoi, the government is likely to feel the strain of handling multiple projects. The option of contract mining, if selected, is bound to cost the state exchequer heavily. On the other hand, the option of production sharing, if adopted, will open opportunities for private players to invest in the development of the Tavan Tolgoi deposit.

Mongolian foreign investment laws are investor-friendly, with the country having signed the "Double Tax" and "Mutual Protection and Encouragement of Investment" treaties with more than 30 countries. Foreign investors in select sectors, including mining, are offered customs duty and exemptions from value-added tax. The country also signed a stability agreement for foreign investments of more than $2 million. In addition to mining, tourism, agriculture and infrastructure have been identified as priority sectors for attracting foreign investments with free zones and technical and industrial parks being set up within the country.

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