Mongolia
President Tsakhia Elbegdorj set an end-of-year deadline to select companies to
develop part of its biggest coal field, seeking to resolve a year-long battle
for the resource between groups from five nations.

Peabody Energy Corp. (BTU) (BTU), OAO Russian Railways, and China’s Shenhua
Group are among companies affected by stalled talks to develop the West Tsankhi
area of the Tavan Tolgoi coal deposit, Elbegdorj said in his Ulan Bator office.
Mongolia is due to get a new government by September at the latest and
resolving the impasse will be among its top priorities, he said.

“We will push our government to negotiate with the interested parties within
this year,” Elbegdorj said. “The process continues but it cannot continue
indefinitely.”

The coal field would become the biggest foreign investment project in
Mongolia after Rio Tinto Group’s (RIO) $6 billion Oyu Tolgoi copper mine.
Picking the companies to develop West Tsankhi is also key to the planned $3
billion public offering of Mongolia’s state-run Erdenes TT, which holds the
rights to the land and would receive royalty fees from the operation.

Mongolia first announced and then said it would review an accord in July
that planned to give Shenhua Group a 40 percent stake in West Tsankhi, with
Peabody taking 24 percent and a Russia-Mongolian group the rest. The government
didn’t say who the Russia-Mongolia group included. Originally, Japanese traders
Itochu Corp. (8001) and Sojitz Corp. (2768) and companies from South Korea bid
as part of the group led by Russian Railways.

Local Development

Some local politicians called for Mongolia to develop West Tsankhi by
itself, Sukhbaatar Batbold, who went to the June 28 elections as prime
minister, said in an interview in March.

“Still we hope” that West Tsankhi will be developed by foreign investors,
Elbegdorj said.

West Tsankhi contains more than 1 billion metric tons of coal, compared with
about 6 billion tons in all of Tavan Tolgoi. About 68 percent is suitable for
steelmaking and the rest could be used in power plants, according to Erdenes
TT, which started mining the East Tsankhi area last year.

“If this situation can get resolved, the economic benefits to Mongolia are
second only to Rio Tinto’s Oyu Tolgoi mine,” said Jim Dwyer, the head of the
Business Council of Mongolia. “Given the complex, United Nations-like cast of
governments involved, the talks may not go so quickly.”

The Democratic Party, the opposition before last month’s parliamentary
election, expressed confidence yesterday it would form the next ruling party,
even as officials ordered another vote in two districts and early results
showed no group won a majority. The General Election Commission hasn’t said
when it will announce a final tally from the election.

Foreign Restrictions

The future of foreign investment in Mongolia’s mining came into question as
the country passed a law tightening the rules last month in reaction to the
Aluminum Corp. of China Ltd.’s announcement in April that it agreed to take
control of local coal miner SouthGobi Resources Ltd. (SGQ)

The takeover sparked a public outcry and sped up the passage of the foreign
investment law, which gives the government and parliament the right to review
acquisitions of Mongolian companies in the media and communications, mining,
and banking fields.

The reaction to the law, passed in May, has been mainly positive and it is
unlikely to be changed by the incoming government, Elbegdorj said. It also
doesn’t seek to attack Chalco, as the aluminum maker is also known, or bar
China from investing in Mongolian companies, he said.

“Since the passing of the law, I really don’t hear substantial or really big
concern to make some changes,” Elbegdorj said.

Chalco shareholders approved the agreement to buy as much as 60 percent of
SouthGobi.

“We are not closing the door” to Chinese companies, Elbegdorj said. “We are
just regulating the issue and clarifying the venue for discussing the issue.”

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