Foreign investors on alert as Mongolia announces coalmine launch

ULAN BATOR Fri Feb 22, 2013 1:35am EST

ULAN BATOR Feb 22 (Reuters) - Mongolia will begin producing coal from a block of its giant Tavan Tolgoi mine this year, a senior official at the state-run company in charge of the deposit said on Friday, a step that may give foreign firms a way into the long-delayed project.

Major foreign mining companies, including U.S.-based Peabody Energy and China's Shenhua Group, have long sought to invest in the 7.5 billion tonne coal development at the core of a mining boom expected to transform land-locked Mongolia's fortunes.

Batdorj Enkhbat, the chief financial officer of Erdenes-Tavan Tolgoi (E-TT), told a mining conference that coal extraction at the western Tsankhi block would begin soon, providing a much-needed fillip for the cash-strapped company which last month was forced to suspend deliveries to its only customer China because of financial difficulties.

A local newspaper, citing E-TT, said production would start by April.

Domestic miner Khishig Arvin LLC would carry out the initial development work, but Enkhbat would not say whether E-TT would finally take on foreign partners. "We don't yet know the answer to the question," he said.

The development of the western block would add 888 million tonnes of reserves to the mine, bringing the total current exploitable reserves to 1.8 billion tonnes, Enkhbat said.

The project, situated near the Chinese border, is facing a host of financing problems and bureaucratic hold-ups as well as political opposition to the role likely to be played by foreign investors.

In 2011, Peabody and Shenhua were named as members of a consortium that would be granted the rights to develop Tavan Tolgoi's western block, but the Mongolian government was forced to backtrack after other bidders from Japan and South Korea branded the decision unfair.

Peabody was asked last year to draw up logistic and infrastructure plans for the block, with a view to becoming the temporary mine contractor ahead of any new bidding process.

Peabody was offered a contract by E-TT last month, but it has not yet made a formal decision whether to accept it.

In a statement, Peabody said it would continue to hold talks with the government on the development of Tavan Tolgoi but said it "would not comment on the status of specific discussions related to the project."

E-TT's chief executive Batsuuri Yaichil told Reuters in January that the company was under severe financial strain, and that Mongolia would delay a long-awaited international IPO for Tavan Tolgoi's eastern block until next year until the market improved.

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