Mongolia: Could things be looking up for Tavan Tolgoi?

Sometimes an abundance of riches can be a headache.

That has been the problem facing Mongolia as it sorts out what to do with a huge coal deposit in the middle of the Gobi Desert.

The state-owned deposit, Tavan Tolgoi, has enough coking coal to feed China’s import needs for more than 40 years. However due to mismanagement and weak coking coal prices, the mine has fallen on hard times. In January, it was running so short of cash that it suspended shipments to its main customer. That customer, China’s state-owned Chalco, is also one of the mine’s biggest creditors, after a 2011 deal under which Chalco lent the mine $250m that was to be repaid in coal shipments.

So it is a sign of progress that Tavan Tolgoi resumed shipments to Chalco on Monday, ending a four month suspension during which Chalco had threatened legal action against the Mongolian mines.

However for Chalco, one of China’s biggest aluminum producers, the coal trucks that are once more ferrying their cargoes across the Gobi desert hardly signal the end of the company’s challenges in Mongolia. Tavan Tolgoi is still trying to renegotiate its original contract with Chalco to get more favorable prices. Furthermore, legislation passed last week could thwart Chalco’s ambitions to invest directly in Mongolia’s vast resources of coking coal, copper and gold.

Last year, when Chalco tried to acquire its own coking coal mine in the Gobi the deal was scuttled by political backlash in Ulan Bator, including the passing of a new investment law that restricted foreign investment. That law was amended last week to make it easier for most foreign companies to invest in Mongolia—but harder for state-owned companies like Chalco.

China and Mongolia have a somewhat fractious relationship. The resumption of coal shipments between Tavan Tolgoi and Chalco highlights Mongolia’s close economic dependence on neighboring China, which is Mongolia’s primary customer for commodities exports. Unfortunately for Chinese resources companies, the relationship seems to end there.