December 2014
In October, 2014, the Government of Mongolia sent invitations to six parties to bid for Tavan Tolgoi, according to Decree No.268 of the Government, of which the full text was published in the Mongolian Mining Journal.
Two of the six sent in their bids. Among the four who refused to participate, one was Russian Railways JSC. Its President, V.Yakunin, explained his position in a letter to the Mongolian Government, which read in part, “Russian Railways is not able to accept the terms of the international bid…Transporting Tavan Tolgoi coal through Gashuunsukhait will have a negative impact on the amount of mineral products transported through Zamiin-Uud which belongs to the Russian-Mongolian jointly owned Ulaanbaatar Railway.”
These are blunt words, and we can see that the main issue with Tavan Tolgoi would be the railway. A Mongolian Working Group has started negotiations with the selected consortium. Its members include ministers and State secretaries.
This group is being assisted by a Sub Working Group of 12 members, including supervising authorities of Foreign Investment and Professional Inspection, the head of the strategy and policy planning department of the Ministry of Mining, the Executive Director of the State- owned Mongolian Railway, and representatives of entities such as the National Association of Mongolian Mining and Coal Association. At the moment, the talks are focused on two subjects: the railway, and exploration and processing. Fresh sub-groups will be formed when transport and sales issues are taken up.
The selected consortium comprises Mongolia’s Energy Resources LLC, China’s State-owned China Shenhua Energy, and Japan’s Sumitomo Corporation. It is expected that new companies will be set up to take charge of each different acitivity.
To make a success of operating Tavan Tolgoi, the railway has to be built as soon as possible. The consortium is committed to investing $4 billion on the project and $1 billion of this amount has been kept aside for the 267-km railway from Tavan Tolgoi to Gashuunsukhait.
All decisions have to comply with several strict guidelines listed in Decree No. 268. First, the consortium has to form a new company exclusively for the job of building the railway. Since this company will have to repay all existing debts incurred by the Mongolian Railway on the groundwork done on the Tavan Tolgoi-Gashuunsukhait railway under leadership of former Minister of Road and Transport A.Gansukh, a thorough evaluation and audit has to be made of the accounts related to the work. If there are questions on how the $800 million was spent, the new company may very well refuse to have the debt to the Chinggis bond fund transferred to its account. It will be interesting to see how this particular issue plays out.
It is almost definite that Shenhua will be in charge of the TT-Gashuunsukhait railway work. In any case, proper arrangements for reaching all the mineral output from TT to Japanese and Korean markets through China will be the responsibility of Shenhua. The consortium won the bid on thepromise of ensuring that 25 per cent of the total output is sold in third markets, thus fulfilling a long Mongolians dream of being an international competitor.
Selling Tavan Tolgoi coal — whether to Chinese consumers or a third market — and in the process increasing the value of the deposit for its shareholders and new investors, cannot be possible without the railway in place. The pace of the work will depend directly on how fast we can solve the issue between the Mongolian Railway and the new company to be established. Talks on investment in and collaboration on the railway are held almost every day.
The accompanying chart shows the amounts of money the last two governments spent on the railway, first when Kh.Battulga was the minister in charge, and then under A.Gansukh who followed him in the job. The audit will be a complex operation. To remind you, Energy Resources, which now owns 51 per cent of the consortium, signed a Concession Agreement to build the TT-Gashuunsukhait railway in 2012, only to see it cancelled later the same year, and then forced to transfer the right to Mongolian Railway.
You can see from the chart how all this suspension and resumption meant much unnecessary expenditure. The efforts to block or at least hinder the construction of the railway have not been given up even now, as the letter from Yakunin makes evident.
Investors, including international banks and financial organizations, are showing great interest in the project. This is only natural as the consortium includes two leading multinational companies and the coal deposit in question is likely to be operated for 100 years, Several major banks of China are ready to step in, but first basic agreements on a number of issues have to be reached between the Government and the consortium.
The most important of these is the TT-Gashuunsukhait railway, whose progress is hindered by the mess created during what was called preparation work. The accumulated dirt has become a stone wall. We cannot wish it away, so can only hope the negotiations between committed partners will soon find a way to move on with the railway construction.