Erdenes Tavan Tolgoi LLC will begin this year to mine Mongolia’s West Tsankhi coal area as part of the debt-laden company’s plan to ramp up output and pay off money owed to Aluminum Corp. of China Ltd.

Erdenes TT, as the state-owned company is also known, will pick a contractor in the next few months to start work at West Tsankhi with target output of 2.6 million metric tons for 2013, Chief Executive Officer Yaichil Batsuuri said yesterday in an interview in Ulaanbaatar. Erdenes TT will also mine as much as 5 million tons at its main East Tsankhi site this year, up from 2.5 million tons in 2012, he said.

The move marks a turnaround in Mongolia’s policy two years after the nation named China’s Shenhua Group, OAO Russian Railways, and Peabody Energy Corp. (BTU) of the U.S. among companies due to develop West Tsankhi, which is part of the 6.4 billion ton Tavan Tolgoi coal basin. Companies from Japan and South Korea also bid to help develop West Tsankhi.

“Many parties could not find a common language, that’s why the consortium didn’t work,” Batsuuri said, referring to initial plans for the foreign companies to work together as a group. “Just in order to increase our output and get over our current financial problems” Erdenes TT will begin to mine West Tsankhi by itself, he said.

A number of companies have already expressed interest in buying Erdenes TT coal from West Tsankhi, he said. Erdenes TT plans to announce its contract miner for West Tsankhi at the end of the month, he said.

Repaying Debt

Mongolia’s biggest state coal miner is seeking to boost output as it needs to repay Aluminum Corp., or Chalco as the Chinese company is known, $186 million with deliveries of the fuel. Erdenes TT stopped coal shipments to Chalco, its only customer, for three months this year in a dispute over price. The Mongolian miner resumed deliveries last month and may be able to repay Chalco about six months from now, he said.

Erdenes TT also owes about $200 million to Development Bank of Mongolia LLC, which is also state-owned, he said. The company shipped less than it planned to China last year as growth in Asia’s biggest economy slowed.

“If we compare the financial problems with the overall picture of the project, the debt problem is small,” Batsuuri said.

Erdenes TT envisions increasing output to 15 million tons next year and more than 30 million tons by 2017, he said. That would be more than Mongolia exported last year after output fell 7.7 percent to 28.6 million tons on a slowdown in Chinese demand, the World Bank said in an April report.

Partnership Eyed

As production rates increase, Erdenes may still pursue some form of partnership with foreign companies as Mongolian coal miners have no experience producing more than 10 million tons a year, he said.

“We would like to work with one of these international mining companies” such as Peabody, Anglo-American Plc. (AAL) and Chinese firms including Shenhua, Batsuuri said. “They have good management, engineering, and equipment. We need them. We would like to work with them on marketing.”

Erdenes TT has scaled down its investment program as the rail line the company needs to reach Chinese buyers will be built by other Mongolian state entities, he said. A rail line could cut transport costs by half since 40 percent of Erdenes TT costs are currently tied up in paying for trucks to take the fuel about 260 kilometers (162 miles) south to China, he said.

The state will also take responsibility for adding power capacity that the company can tap, he said.

Washing Facility Builder

This leaves Erdenes TT to focus on a $400 million plant to wash coal, which produces a more value-added product, and a $100 million water supply project, he said. The company plans to pick the builder for the washing facility this year and start operating it in two or three years, he said.

“We urgently need this project,” which will produce 20 million tons of coal a year, he said. “When we have this plant ready, the price for our coal will double.”

Once Erdenes TT increases output, adds the washing plant and other infrastructure, and improves management and efficiencies, the company will return to the idea of an initial public offering, Batsuuri said. The share sale, which was initially planned in 2011 and estimated to raise $3 billion, is still about a year or two years away, he said.

Mongolia has distributed 1,072 shares in Erdenes TT to each of its almost 3 million citizens in anticipation of the IPO that was slated for Hong Kong, London and Ulaanbaatar.

“We’re working hard” on the IPO, which will help to finance the company’s expansion and increase the value of the stock held by Mongolian citizens, he said.