Mongolian PM confirms plan to scrap coal auction

By David Stanway

ULAN BATOR, Feb 8 (Reuters) - Mongolia's decision not to auction a stake in the massive Tavan Tolgoi coal project will allow the nation a greater return on the deposit, Prime Minister Sukhbaatariin Batbold said on Monday, confirming an earlier Reuters report that the sale would be cancelled.

The government had previously planned to sell a 49 percent share in the Tavan Tolgoi deposit, billed as the world's largest untapped coking coal resource, but sources said last week that the $2 billion auction had been cancelled in favour of a plan to keep 100 percent in state hands. [ID:nSGE61400Z]

"The 100 percent stake ownership option for Tavan Tolgoi is to ensure that we will benefit from value-added production," Batbold told the Mongolia Economic Forum. "The option has been suggested and recommended to the task force responsible."

Coking coal, used in steelmaking, is a higher-grade fuel than the type of coal used in power generation and is in great demand in Mongolia's neighbour China, which has the world's biggest steel industry.

Batbold said the 100 percent plan would be submitted to parliament for approval.

"For other strategic deposits we will consider each project on a case by case basis. Maybe in some cases domestic national investment can be involved."

Mining analysts say Mongolia is awash with mineral deposits awaiting development. But the poor landlocked state has made little headway, partly because years of deadlock over a massive copper and gold project, Oyu Tolgoi.

Mongolia concluded a drawn-out deal last year to develop Oyu Tolgoi with Ivanhoe Mines (IVN.TO) and Rio Tinto (RIO.L)(RIO.AX).

For Tavan Tolgoi, the government hopes to strike a deal with a global miner to develop the deposit on a contract basis, without a significant equity holding in the project.

"Contract mining is widely favoured throughout other countries. We must try to create the favourable conditions (for our economy to develop)," Batbold said.

Shortlisted bidders for the stake in Tavan Tolgoi -- which holds estimated reserves of 6.5 billion tonnes of coking coal -- included heavyweights BHP Billiton (BHP.AX), India's Jindal, Brazil's Vale (VALE5.SA), U.S. coal miner Peabody (BTU.N), and China's Shenhua (1088.HK).

A South Korean consortium, a group of Japanese companies, and a Russian consortium including Gazprom (GAZP.MM) and Renova were also named as bidders. Mongolia's state-owned Erdenes MGL was originally slated to own at least 51 percent of the project.

JP Morgan (JPM.N) and Deutsche Bank (DBKGn.DE) had been advising on the sale but sources told Reuters the two banks were no longer working on it.

(Editing by Ken Wills)