Opinions are divided over how and with whom the Tavan Tolgoi coal mine should be operated. This difference in opinions can now be seen within the government and among the people.
The government made a decision to grant the right to extract, process, transport, and sell the coal to a consortium of Mongolia’s Energy Resources, China’s state-owned Shenhua Energy Group, and Japan’s Sumitomo Corporation. Despite receiving support from the President, this decision was opposed by the Speaker of Parliament. This move widened the cracks within the Democratic Party, which currently has the ruling power all to itself for the first time in history, and left a big fissure in Mongolia’s politics.
Z.Enkhbold, Speaker of Parliament, claimed that the draft agreement to be established between the consortium and the government is not consistent with Mongolian laws, and insisted that it must be discussed by the parliament.
Seeing the Tavan Tolgoi deal as an opportunity to promote themselves, all political forces – including parties that have seats in the parliament and those who do not, and independent members of parliament – are increasingly sharing their views on the topic. The same thing is happening among the people as opinions are becoming more divided. As a consequence, it looks like the final decision will be stalled until the formation of a new government, as the whole discussion is likely to be used for promotion during the upcoming election. It could worsen the current economic decline.
NATURE OF DIVISION
It is calculated by the globally accepted JORC code that the Tavan Tolgoi deposit has reserves of 7.4 billion tons of coking coal. The deposit’s extractable reserves are around 5 billion tons, which is projected to yield 250 billion USD in the next 50 years, providing that one ton would be sold for 50 USD at the border with China.
In order to reach this sales target, approximately 10 billion USD needs to be invested to build a power plant, a coal preparation plant that washes and deep processes coal, and a 270 km-long railroad to China. As coal and electricity will be almost entirely purchased by China, it is sensible to attract investment from a large, experienced company from China to mitigate risks.
That is why Erdenes Tavan Tolgoi attempted to set up a consortium with Shenhua Energy and US-based Peabody Energy to put the Tavan Tolgoi deposit in economic circulation. However, it did not happen in the end.
From 2011 to 2014, Erdenes Tavan Tolgoi had sales worth 800 billion MNT from exporting a total of 10.4 million tons of coal. The company has 610 full-time employees and around five thousand contractors. Also, they have a total debt of over 600 million USD and are currently selling coal for 32 USD per ton at the mine.
Energy Resources, which operates in four percent of Tavan Tolgoi’s total reserves, has been extracting coal for the last seven years. They raised one billion USD through loans and some 600 million USD through shares on foreign stock exchanges.
Energy Resources used the capital they raised on building a coal washing plant and a road to the southern border. Also, they were selected for the public tender on Tavan Tolgoi in a consortium with Shenhua Energy to extract coal and build a railroad, and Sumitomo to sell the coal to China and other international buyers.
It is clear that every option around how to run the Tavan Tolgoi project, which involves an enormous sum of money that would equal half of our economy, has always reflected the balance of power in politics.
The decision on how to make use of this world-class deposit will define the course of development for Mongolia in the future.
Ten percent of Erdenes Tavan Tolgoi is owned by the people and another 10 percent is owned by private companies. Therefore, there is a need to listen to these shareholders regardless of whatever decision is made.
However, it seems that the government is mocking the people once again when they explain that the shares given to the people do not come with the right to make choices.
Political parties acquire ruling power through elections. But, their financing is undisclosed, as the capability of our government weakens due to corruption. State-owned companies are now owned by political parties. In this situation, the people have no trust in the government. On the other hand, there is public discontent for the trend where private companies, despite having good internal governance, manage to have the government make decisions in their favor.
There is a strong likelihood that the status quo of political forces today will not allow the Tavan Tolgoi deal proposed by the government to go through.
PUBLIC EXPECTATION
The second biggest economy in the world still represents a strong demand for Mongolia’s coal to use for its steel production. We need to learn our lessons from how Canada took advantage of its geographical location, benefitting from being next to the world’s biggest market.
We will be able to compete with Australia, the United States, and other countries only when our coal is efficiently delivered to China’s east coast, where the biggest clients are.
Mongolia will only be able to substantially develop its coal industry by operating globally. This means the Tavan Tolgoi deposit will have to be managed in a way that it is profitable in the long term, environmentally friendly, stable, and beneficial to the local community regardless of price fluctuations. The infrastructure projects including roads, water, a power plant, and coal washing plant need to be managed properly to develop the West and East Tsankhis.
In order to be efficient and stable, everything including mining operations, safety, environment, and the workforce needs to be managed in an integrated manner. It will allow the Tavan Tolgoi deposit to have higher value. As a result, it will be profitable to offer Erdenes Tavan Tolgoi shares on the international stock market. The people of Mongolia expect that we would manage to do that.
However, there currently is a growing division over how Mongolia should develop the Tavan Tolgoi deposit in the most optimal way.
2015.04.29