Business New Europe March 2013 edition by Ben Aris

I Eurasia

Tavan Tolgoi risks burnout

Terrence Edwards in Ulaanbaatar Mongolia's enormous Tavan Tolgoi coking coalmine, a vital organ that has kept the Mongolian economy vibrant and healthy, is failing due to poor market conditions and a government intent on taking away the operating capital needed to keep pumping out coal to China. "E-TT is facing... financial difficulties," Yachil Batsuuri, chief executive of the state-owned company that operates at the mine, tells bne, referring to Erdenes Tavan Tolgoi, the operator of the mine. "That's why we stopped our coal transportation and export." The Tavan Tolgoi deposit, which holds 7.5bn-tonne of coal reserves, helped propel coal into the becoming Mongolia's largest export, most of which ended up in resource-hungry China. The Tavan Tolgoi coalfields lie just some 200 kilometres away from the Chinese-Mongolian border. And "financial difficulties" may be an understatement, as the Mongolian government has been taking away most of its operating capital in order to restock its Human Development Fund. Though this fund was introduced as a means to drive the development of Mongolia's human resources, in practice it has been used as a cash pool to distribute to the general populace. The 2008 parliamentary election in Mongolia was characterised by politicians trying to outdo each other over how much money they planned to give citizens. Batsuuri's predecessor, recently retired Baasangombo Enebish, said in August last year that the Mongolian government had taken from the company MNT937bn ($669m). Then in January, it was announced that the transport company responsible for the export of Tavan Tolgoi's coal would discontinue its services, as the state-owned miner had fallen behind on its payments. "We asked for $500m to bail out our debts and finance our operations before we start our infrastructure, wash plant structure, water-supply project," says Batsuuri, later adding that Mongolian Prime Minister Norov Altankhuyag had agreed to provide $350m. Other debts incurred include the $350m advance payment made by Aluminum Corporation of China, or Chalco as it's commonly called, for coal. The government has since said it wants to renegotiate that payment and end the contract in an attempt to diversify its customer base, even though Prime Minister Altankhuyag admitted that would incur a $50m penalty. Batsuuri says that Tavan Tolgoi has already delivered $170m worth of coal to Chalco, but now would like to pay the remaining $180m of the contract in cash. "The government has also said that it will have multiple buyers, not only a single buyer. It decided to sell its coal at the world market price," says Batsuuri. Such a move will do little to soothe already strained relations with China, to whom Mongolia sells over 90% of its mineral resources to.

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operational, says Rio Tinto. Naturally, the government is extremely interested in the project and the Mongolian parliament was already pushing for a bigger slice of the Oyu Tolgoi pie at the end of 2011 and again in 2012. "Although it is hard to see how Rio would benefit from overspending on this project, discrediting the [investment agreement] could work in the government’s favour in their intention of increasing the state’s share of the mine," reckons Vidur Jain, an analyst at Ulaanbaatar-based Monet Capital. Government intrusions Projects on an economy-sized scale are always intensely political and prone to cost-related problems. On the one hand, the government wants to grab as much revenue as they can out of what lies in the ground; on the other, foreign investors tend to play down the costs initially in order to win the right to exploit the deposits in the first place. Shell fell into the same trap with the Sakhalin-2 field in Russia’s Far East. The Kremlin was incensed after Shell announced in 2006 that development costs were going to come in at double the original estimate, meaning that the state would have to wait a lot longer for its first payout. The Russian government promptly suspended Shell’s licence and arranged for stateowned Gazprom to buy a majority stake in the project – about half of Shell's 55% stake and half of Japan Mitsui & Co's – for a paltry $7.5bn. To add injury to insult, Shell also got itself into trouble on environmental grounds by disturbing the important local fishing industry. The partners developing the giant Kashagan oilfield in Kazakhstan also found themselves facing environmental impact allegations after the operator presided over long delays and cost overruns. Instead of 2005, delays now mean that Kashagan won't see first oil until later this year, while costs have soared from the initially envisaged $57bn to $136bn. A long drawn-out dispute with the Kazakh government was finally resolved in

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Eurasia

late 2008 when the shareholders in the project – Eni, Shell, Total, Exxon Mobil, ConocoPhillips and Inpex – agreed to give up part of their shares in the project to allow the state-owned KazMunaiGas to raise its stake to 16.81% from 8.33%. Further, a new operating company called the North Caspian Operating Company replaced the previous operator, Eni subsidiary Agip KCO. Rio Tinto has got into similar trouble by disrupting the centuries-old herding patterns of Mongolia's nomadic population in the Gobi desert. Indeed, the environmental problems could come back to haunt Rio Tinto. Oyu Tolgoi Watch, an NGO dedicated to monitoring the mining activities at Oyu Tolgoi, in cooperation with the Bank Information Center and London Mining Network, sent out a press release last year criticizing the International Financial Corporation (IFC), the World Bank's financing arm, for even considering a loan for the project. It described the environmental and social

impacts assessment (ESIA) as "an elaborate and costly hoax” that only concentrated on the construction phase of the mine while ignoring the impacts once commercial production began. Rio Tinto has also done little to uphold the "social contract" that was part of the package, argue its legion of critics. The company has earmarked only $1.5m to set up vocational training

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unconvinced of Rio’s sincerity. "They're just making show – it's show business. They pay some wages and give the odd scholarship to some young people or create an official training centre, and make a show for TV," said Ganbaatar in an interview last August. Speaking on the growing number of unemployed youth in Mongolia, he added: "They spend a lot of money

"Discrediting the investment agreement could work in the government’s favour" programmes and the renovation of four schools. Mongolian MPs have become increasingly vocal about these shortcomings. Sainkhuu Ganbaatar – Mongolia’s second most popular political figure according to the Sant Maral Foundation, a local pollster – remains

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on media, but they don't give any guarantee to get them employed." Rio Tinto in January forced out its CEO Tom Albanese in January following $14bn in write-downs. With so much riding on Oyu Tolgoi, a disaster at this project could spell disaster for Albanese's successor, Sam Walsh.

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