December 5, 2014 / 5:15 AM / 5 years ago

UPDATE 1-China Shenhua and partners bid for Mongolian coal project

* Shenhua forms consortium with MMC unit, Sumitomo

* Consortium handed in bid to develop east and west Tsankhi

* No details on the proposed ownership structure

* Shenhua shares drop more than 4 percent (Adds detail about bidding criteria, analyst quotes, share price movement)

BEIJING, Dec 5 (Reuters) - China Shenhua Energy Co Ltd will be part of a consortium bidding to develop the giant Mongolian coal project Tavan Tolgoi, the Chinese coal producer said on Thursday.

Shenhua said it had formed a consortium with Energy Resources LLC, a wholly-owned unit of the Mongolian Mining Corp (MMC), and Japan’s Sumitomo Corp. Shares of the Chinese company were down more than 4 percent on Friday, on track for their biggest daily drop in almost five months.

The consortium handed in the bid on Dec. 1 to the Mongolian government to develop east Tsankhi and west Tsankhi, two blocks of the Tavan Tolgoi project.

Shenhua did not provide any details about the proposed ownership structure, but according to a government resolution issued earlier this year, the winning team needs to be at least 51-percent controlled by a Mongolian firm with five years or more of domestic mining experience.

Analysts said only two local companies were likely to be able to meet the five-year requirement, including the MMC unit and Tavan Tolgoi JSC, a small Ulan Bator-listed miner.

“In terms of the 51-percent ownership for the Mongolian side, MMC is a clear winner,” said Saijarkh Narantuguldur, director at Khan Investment Management, a private equity firm in Ulan Bator.

Mongolia relaunched an international tender to develop Tavan Tolgoi as it tries to boost a flagging economy hit by falling commodity prices and a dip in foreign investment.

The deposit holds around 7.5 billion tonnes of coking coal, but Mongolia’s cash-strapped government has struggled to finance its development, and little progress has been made since an international bidding process collapsed in 2011.

In 2011, Shenhua was part of a consortium that was awarded the western block of the project, along with U.S. miner Peabody and a team of Russian and Mongolian firms, but the result was annulled after rival bidders from Japan and South Korea branded the decision unfair.

Peabody said this week that it was still planning to be an “active participant” in the latest bidding process.

The project has been caught up in a wider debate about the role to be played by foreign - and especially Chinese - firms in Mongolia’s economic development.

Mongolia rejected the potential takeover of Mongolia-based miner SouthGobi Resources by Chinese state-owned metals conglomerate Chinalco in 2012, though relations between the two countries have since shown signs of improvement. (Reporting by Terrence Edwards, David Stanway and Chen Aizhu; Editing by David Evans and Himani Sarkar)

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