Mongolia taps Shenhua to break China coal impasse

BEIJING--Mongolia is reaching out to China's largest coal producer China Shenhua Energy [1088.HK] in an effort to break a deadlock over the terms of a souring coal supply deal with another Chinese giant, Aluminum Corp. of China [ACH], Mongolia's ambassador to Beijing said Friday.

The growing squabble with China, its largest trading partner, underscores how swiftly changing political and public sentiment in Mongolia toward foreign investment in the country's fledgling mining sector could throw into disarray the development of its Tavan Tolgoi deposit, potentially the world's largest untapped coal reserve.

State-owned Erdenes-Tavan Tolgoi LLC, which owns the project, has halted coal exports in a bid to renegotiate an agreement reached last July to sell coking coal to Aluminum Corp. of China, also called Chalco, Mongolia ambassador Tsedenjav Sukhbaatar told the Wall Street Journal.

Under the original terms of the deal, Chalco lent Tavan Tolgoi $350 million to be repaid in coal, but capped the commodity's price at $70 a metric ton.

"Chalco was just using a moment when the government badly needed funding to get a deal that was unacceptable in the sense of normal international trade," Mr. Sukhbaatar said.

A new management team at Tavan Tolgoi, appointed last fall by the freshly elected Mongolian government, has repaid nearly two-thirds of the $350 million loan but now wants to redraw the contract to reflect fluctuating market prices for coal, he said. Coking coal import prices have since reached around $190/ton, according to the 52Steel.com consultancy.

The impasse had led in part to Tavan Tolgoi being unable to continue to pay for the logistical operations of transporting and exporting the coal to China, he said.

Mongolia is now tapping Shenhua, which is in the running as a candidate to develop part of Tavan Tolgoi, to try to resolve the dispute.

"What we're trying is to deal with Shenhua as the principal and the biggest coal company," he said. "They have the infrastructure. They are the international company. Chalco has nothing to do with coal."

Mongolia has held some talks on the issue with Shenhua, with no clear results, he said.

Shenhua's media office didn't respond to several calls for comment Friday. Chalco referred all questions to an e-mailed statement saying it hoped Mongolia would honor all the terms of its agreement, "including confidentiality arrangements."

All other forms of Mongolian commodity exports apart from coking coal are proceeding as normal, Mr. Sukhbaatar said.

He said Tavan Tolgoi isn't likely to hold its initial public offering this year as planned, as Ulan Bator would prefer the mine's infrastructure to be in place first as it would potentially improve the offer price.

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