Prophecy Coal May Stop Mining in Mongolia on Weak Prices

Prophecy Coal Corp. (PCY.T), which is trying to reach an agreement to sell coal from its Ulaan Ovoo mine to the Mongolian government, may keep the mine closed if the government doesn't increase the amount it is willing to pay, Chief Executive John Lee said Wednesday.

The Canadian company's shareholders are concerned that it is selling coal at a loss to state-controlled power plants, Mr. Lee told Dow Jones Newswires.

Earlier this year, Mr. Lee estimated that the Ulaan Ovoo mine would produce between 300,000 and 500,000 metric tons of coal for the Russian market in 2012. However, the company halted operations in July after producing about 300,000 tons. It shipped just 50,000 tons to Russian customers, stopping exports after it became unprofitable due to high shipping costs and mining royalties. The remaining stockpiles are being sold in the Mongolian market.

"We're subsidizing the coal supply to the Mongolian government at a break-even price at best," Mr. Lee said, estimating Prophecy's production cost around $30 a ton at Ulaan Ovoo against sale prices as low as $20 a ton to Mongolian power plants.

The move to stop production at the mine followed SouthGobi Resources Ltd.'s (1878.HK) announcement in June that it would suspend mining at its flagship Mongolian coal mine due to weak demand and uncertainty over whether its mining license would be suspended by the Mongolian government after Aluminium Corp. of China Ltd., known as Chalco, offered to buy a controlling stake in SouthGobi in April.

Mongolia's energy demand is driven by its booming mining-based economy, and its gross domestic product has more than doubled over the past four years, Mr. Lee said. However, no additional power infrastructure has been built in Mongolia in the past 20 years, and the power industry remains heavily regulated, he said.

This will lead to acute power shortages, with a shortfall of almost 2,000 megawatts over the next decade, Mr. Lee said. The Mongolia government has pledged to begin deregulating the power industry by 2014, which should provide opportunities for energy producers like Prophecy, he said.

Prophecy has spent the past year negotiating a power-purchase agreement with the Mongolian government before it proceeds with development of a second coal mine as well as a 600-megawatt coal-fired power plant in the Chandgana coal basin.

The Toronto-listed company is hoping to sell equity stakes in the power plant and has narrowed the field down to three Asian developers, Mr. Lee said, adding that partners could be announced in two or three months. Prophecy would retain a minority stake in the plant, while a consortium of as many as three developers could take the remaining stakes.

Prophecy is also in talks with three Asian finalists for the engineering, procurement and construction of the power plant, he said. The plant, which is expected to cost $1 billion, will be financed using 30% equity and 70% debt, he said, adding that the EPC companies are offering access to cheap financing in order to stay competitive.

Prophecy is hoping to finalize a power-purchase agreement with the Mongolian government by April, which would allow construction to start before winter, Mr. Lee said.

"We're aiming for a tariff that is lower than the rate at which Mongolia is currently importing power from Russia, which is around 9 cents a kilowatt hour," he said. The country's current power plants sell electricity to consumers at between 4 and 10 cents a kilowatt hour, depending on the plant's size, he added.

Write to Wayne Ma at wayne.ma@dowjones.com
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