Mongolia eyes U.S. Peabody to develop giant coalmine

Tue Oct 16, 2012 5:24am BST

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* Peabody invited to submit infrastructure plans for Tavan Tolgoi

* Talks with Peabody could begin this week

* Discussions with foreign investors to restart in a few months

By Michael Kohn

ULAN BATOR, Oct 16 (Reuters) - The state-owned developer of the huge but remote Tavan Tolgoi coal deposit in Mongolia has invited U.S. miner Peabody Energy to help build infrastructure at the project ahead of a much-delayed bidding process, a senior company official said.

State-owned miner Erdenes Tavan Tolgoi Ltd (ETT), which holds the licences for the coal-rich Tavan Tolgoi area in the South Gobi desert, has asked the U.S. firm to draw up logistic and infrastructure plans for the project's western Tsankhi block, its chief operating officer Graeme Hancock told Reuters on Friday.

Industry pundits said the move puts Peabody in a strong position with the government, leading to speculation that it could get a bigger slice of the prized asset under a new bidding process than it was allotted under a previous deal that was scrapped amid criticism it was unfair.

The plan is to design infrastructure at West Tsankhi that can also be used at the east Tsankhi Block owned by ETT. Perth-based Macmahon Holdings and Germany's Operta are currently mining the east block under a five-year, $500 million contract.

"We have to make sure that we are designing everything, including the transport infrastructure and the wash plants for West and East Tsankhi ... So the sooner we have another partner ... to help us work through these issues, the better," Hancock said.

Talks with Peabody could begin this week, he added.

Total coal reserves in east and west Tavan Tolgoi are estimated at 6.4 billion tonnes, one of the world's largest.

FRONT-RUNNER

Hancock said that inviting Peabody to do the initial survey and infrastructure work was not connected to the longer-term development of west Tavan Tolgoi, which is still expected to involve firms from China, Russia, Japan and South Korea.

"There was a statement very recently from the Foreign Minister that the government intends to get these discussions underway again and conclude an agreement for a consortium within a few months," he said.

However, analysts see the decision as a clear sign that the government has its favoured partners and that Peabody is now in a stronger position than others in the consortium.

"There is the political context. It fulfils Mongolia's third-neighbor policy. The U.S. government wants Peabody here," said Dale Choi, an analyst at London-listed Origo Partners.

Mongolia's foreign policy wittingly seeks out business partners in countries beyond its giant neighbors Russia and China. The United States, Germany, Australia and Canada are among its preferred partner nations.

Last year, the Mongolian government announced that Peabody, China's Shenhua Group and a group of companies led by Russian Railways would be part of a consortium to develop the western block, which contains 1.8 billion tonnes of coal, 65 percent of which is high grade coking coal.

The deal would have seen China's Shenhua hold a 40 percent stake in the consortium, while Peabody would have taken 24 percent. A Russian-Mongolian consortium was allotted the remaining 36 percent.

However, the bidding process was quickly branded as unfair by participants from Japan and South Korea and rejected by Mongolia's National Security Council, which vets large foreign investment projects.

Hancock said that the decision to work with Peabody over rival Shenhua on infrastructure boiled down to Mongolia's occasionally tense relationship with China.

Earlier this year Mongolia moved to block the sale of coal operator SouthGobi Resources to the Aluminium Corporation of China (Chalco). Chalco eventually withdrew.

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