China-Mongolia Coal Spat Heats Up

Escalating a standoff with Mongolia over access to a portion of its rich coal reserves, a Chinese state-run company threatened to seek legal action if its Mongolian partner fails to abide by their contract.

Executives with Aluminum Corp. of China Ltd., 601600.SH +1.16% or Chalco, said Monday that its $350 million coal-for-loans deal with Mongolia's Erdenes-Tavan Tolgoi LLC was agreed upon by both companies more than a year ago and sanctioned by both governments. Liu Xiangyu, the general manager of the Chalco unit that negotiated the deal, said Mongolian officials' recent objections to the terms of the deal are "baseless."

"A unilateral breach of the contract...could mean unlimited monetary damages," Li Dongguang, president of Chalco subsidiary China Aluminum International Trading Co., said Monday, adding that he hoped Mongolia "won't walk further and further away."

Mr. Li linked the coal spat to what he described as a wider trend in the new Mongolian government, elected in June, of attempting to revisit all its global mining deals.

A senior executive of state-controlled Erdenes-Tavan Tolgoi declined to comment on the legal dispute Monday. A Mongolian foreign-ministry official said he didn't have an immediate comment.

Last week, Erdenes-Tavan Tolgoi said it had halted coal exports to China and threatened to cancel the coal-supply deal. Mongolia's ambassador to Beijing, Tsedenjav Sukhbaatar, told The Wall Street Journal on Friday that the pricing terms of the deal, which he said capped Mongolia's coal exports at $70 a metric ton, were "unacceptable in the sense of normal international trade."

The dispute marks an early test in the development of what is considered one of the world's largest coal deposits. Energy-hungry China hopes to tap supplies of the Tavan Tolgoi coal deposit. But Mongolia faces a surge of resource nationalism at home as well as concerns over China's growing economic sway there.

It isn't clear how the dispute might affect the mining company's planned public offer, which has been delayed repeatedly and now taken off this year's calendar while the Mongolian government focuses on putting the mine's infrastructure in place.

Separately, the board of Erdenes-Tavan Tolgoi asked Chief Operating Officer Graeme Hancock to resign due to uncertainty surrounding the fundraising plans, according to a person familiar with the matter. The company needs to cut costs, the person said, and with a listing uncertain Mr. Hancock's position "is no longer as important to the company." Tsenguun Tsogt, head of the company's investment and financing department, declined to comment on the resignation.

The production under dispute represents less than 1% of the Tavan Tolgoi deposit, which by some estimates totals more than one billion tons of high-quality coking coal. Mongolia hasn't made any final decision about the development rights to other parts of the deposit after scotching a bidding process in 2011 that drew interest from China Shenhua Energy Co., 601088.SH -0.29% Peabody Energy Corp. BTU -2.56% of the U.S. and a Mongolian-Russian consortium.

Under the deal, Chalco had lent $350 million to help fund Tavan Tolgoi's operations, which was to be repaid in coal. Mr. Sukhbaatar said Friday that more than half the loan had been repaid but the Mongolian government now wants to completely renegotiate the deal. Mr. Sukhbaatar had said Mongolia was now keen to deal with Shenhua rather than Chalco on all bilateral coal matters, a move that could set up a potential contest between two Chinese companies. Shenhua has said it still needs to study the issue.

Chalco officials said they weren't aware if Shenhua had opened talks with Erdenes-Tavan Tolgoi but expressed confidence that Shenhua won't break ranks with another Chinese company.

Ms. Liu, general manager of the Chalco unit that negotiated the deal, said the terms of the deal pegged Mongolia's coal price to market movements and weren't capped at a single price. She declined to disclose specifics on pricing but said the contract price was higher than the market price at the time the deal was signed, though the term price declined in line with the global coal market last year.

Chalco was continuing to reach out to the Mongolian government, and was willing to consider more loans to tide over its operational needs if necessary, said Mr. Li of China Aluminum.

Erdenes-Tavan Tolgoi last year exported 2.37 million tons of coking coal, which is used to make metals, out of a planned three million to four million tons. China's total coking-coal imports reached 19 million tons last year.—Zhoudong Shangguan in Beijing contributed to this article.