UPDATE 3-Giant Mongolian coal mine puts $3 bln IPO on ice

Thu Jan 24, 2013 3:03am EST

* Tavan Tolgoi says facing financial problems, rules out 2013 IPO

* Looking to renegotiate supply deal with China's Chalco

* Says Mongolia govt will give $350 mln to help mine repay debts

* But 7.5 bln-tonne project likely to face further delays (Adds statement from Chalco, detail)

By Terrence Edwards

ULAN BATOR, Jan 24 (Reuters) - Mongolia's giant Tavan Tolgoi coal project is facing financial problems and an up to $3 billion initial public offering for the mine will not go ahead this year as originally scheduled, the chief executive of the company in charge of the deposit said on Thursday.

Erdenes Tavan Tolgoi, the state-owned firm running the much-delayed 7.5 billion-tonne development, is shelving the issue until the mine has more infrastructure in place, chief executive Batsuuri Yaichil told Reuters.

The company will receive government funds of $350 million to help repay its debts and will also seek to renegotiate a supply contract with the Aluminium Corporation of China (Chalco) , he said.

But it is unlikely to be enough to develop the mine's huge potential as well as build all the infrastructure required to deliver coal to market from the treacherous South Gobi, and the project is likely to face further delays.

The company's problems have already forced it to suspend deliveries to China.

"E-TT (Erdenes Tavan Tolgoi) is facing ... financial difficulties. That's why we stopped our coal transportation and export," Batsuuri said.

The much coveted project, situated around 300 kilometres from the Chinese border, was part of a mining boom expected to transform the landlocked country's fortunes, but it has faced a host of financing problems and bureaucratic hold-ups, as well as disquiet about the role to be played by foreign investors.

A big investment agreement for the mine's western block involving China's Shenhua Group Corp Ltd, the U.S.-based Peabody Energy Corp and a Russian-Mongolian consortium was shelved in 2011 after being branded unfair by Japanese and South Korean rivals, and little progress has been made since.

"This is a classic example of how an enterprise can be used as a cash cow by government to advance political goals," said Dale Choi, analyst with investors Origo Partners.

Last year, Batsuuri's predecessor complained publicly that a government decision to make the company pay 937 billion tugrik ($669 million) into the country's Human Development Fund had held back progress on the mine. Batsuuri said the government had now agreed to help the company pay its debts.

"We asked for $500 million to bail out our debts and finance our operations before we start our infrastructure, wash plant and water-supply project," he said.

"The prime minister said the government is going to provide us $350 million. It's very timely, important financial assistance."

Mongolia was planning to raise up to $3 billion in funds by listing the eastern Tsankhi section of the mine on foreign stock markets this year, but Batsuuri said such plans were now suspended.

"Not this year," he said. "We decided to wait until the market recovers, the price of coal increases, and until E-TT starts regular construction of its wash plant. Plus we need to increase our exports."

The IPO, hotly anticipated because of its size and expected fees, has already been delayed several times and the further postponement is a blow to BNP Paribas, Deutsche Bank , Goldman Sachs and Macquarie, which were hired to handle the listing.

CHALCO RETHINK

Batsuuri said Mongolia would also seek to renegotiate a coal sales deal with Chalco to bring prices in line with international levels.

In a deal signed in July 2011, Tavan Tolgoi originally agreed to sell $250 million worth of coal to Chalco, but it did not reveal the volumes involved.

Analysts have said the price could be as much as $20 per tonne cheaper than the average prices of Mongolian coal delivered into China, which are already much lower than international rates.

Batsuuri said Tavan Tolgoi had received a $350 million loan from the Chinese company and had paid almost half of the money back in the form of coal.

"Paying by coal is not profitable for the company. We are losing on coal trade. That's why the government made the decision to pay out the remainder. We will pay the remaining $180 million in cash."

He said Mongolia wanted to sell the coal at standard global prices, and was also seeking buyers other than China.

In a statement issued to Reuters on Thursday, Chalco ruled out the prospect of renegotiating.

It said it held discussions on prices with the management of Erdenes Tavan Tolgoi in November last year, and while it understood the difficulties facing the company and was willing to provide assistance, it would not change the July 2011 contract.

"We hope Erdenes TT will strictly comply with all the rules of the agreement, including confidentiality clauses," it said. "The foundation stone of mutual cooperation is to respect the solemnity of the contract." (Additional reporting by Wan Xu in BEIJING and Elzio Barreto in HONG KONG; Writing by David Stanway; Editing by Ed Davies and Joseph Radford)

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