(Reuters) - Shenhua Group, China's top coal producer, will form a joint venture with partners in Mongolia to build a cross-border rail link that will help ship coal to China, the company confirmed on Wednesday.
The deal marks a change in attitude in Mongolia, which has long sought to keep its powerful neighbour at arm's length amid fears about China's political and economic hegemony in the region. China buys more than 90 percent of Mongolia's exports and has sought big stakes in the country's strategic assets.
A signing ceremony for the new rail joint venture was held in the Mongolian capital of Ulan Bator on Monday. A spokesperson for the Chinese company, the parent of listed Shenhua Energy Group, confirmed the deal to Reuters on Wednesday.
The spokesperson said the final share structure for the joint venture has not been decided.
A Mongolian government official, however, told Reuters the Chinese firm will own 49 percent of the project, which will involve the construction of a 13-kilometre rail link from the Chinese border to a terminal where coal is delivered by trucks.
Yondon Manlaibayar, the director general of the department of railways at the Roads and Transportation Ministry, said a consortium of Mongolian firms, including state-owned miner Erdenes Tavan Tolgoi and the Hong Kong-listed Mongolian Mining Corporation, would share the remaining 51 percent.
Mongolia plans to spend $5.2 billion on the expansion and upgrade of its railway network, and last year hired Samsung C&T to lead construction of a 217-kilometre route south from the Ukhaa Khudag mine in the South Gobi region towards China.
A route to China would reduce the cost of shipping coal to customers in China - now largely done by road - and would also improve Mongolia's access to China's ports.
But an additional 27 kilometres of rail connecting the Shenhua line and Samsung C&T's line will be needed to complete the route. In the meantime, the temporary drop-off point will be established for trucks to deliver coal to the Shenhua joint venture rail to be carried into China, said Manlaibayar.
"They (the joint venture partners) don't want to wait for us to complete the whole line," said Manlaibayar.
Mongolian Prime Minister Norov Altankhuyag concluded a visit to China last October with an announcement that an agreement was made for the delivery of one billion tonnes of coal to Shenhua over the next 20 years.
The Shenhua joint venture project and the connecting 27 kilometres of line will be built using China's rail gauge, while the rest of the line uses the Russian standard, said Manlaibayar. A station for gauge transference will be built where the Samsung-led rail line ends, he said.
Mongolia's rail policy requires the use Russia's wider gauge standard, but some in the industry worry about the added costs of having to change standards at the end of the Samsung line.
(Additional reporting by David Stanway in BEIJING; Editing by Tom Hogue)