beyondbrics

News that Mongolia has chosen China’s Shenhua, the US mining group Peabody and a Russian-led consortium to develop Tavan Tolgoi – one of the world’s largest unexplored coal reserves – should come as no surprise to followers of the landlocked Asian country.

Sandwiched between Russia and China, Mongolia has long sought to avoid alienating either of these great powers, even as it tries to play them off against eachother.  At the same time it has sought “a third neighbour” policy by reaching out to the US. Ulan Bator’s decision to split a prize asset three ways between US, Chinese and Russian companies is a shrewd political manoeuvre in face of hard geopolitical realities.

So what is at stake?

The Tavan Tolgoi deposit – located in the South Gobi Desert and less than 200km from the border with China – has an estimated 6.5bn tonnes of coking-coal, a key ingredient for steel production.

Monday’s announcement pertains to developing the western part of the Tsanki block of Tavan Tolgoi, which as the handy graphic below from Reuters shows, has an estimated 1.2bn tonnes of coking coal reserves.

The Mongolian government is giving the selected companies the chance to develop roughly half of this deposit. Of this, Shenhua will have a 40 per cent share,  Peabody 24 per cent and the remaining 36 per cent is to be divided equality between the partners in the Russian-led consortium.

No official figures on investment costs have been released. However, analysts have estimated that investments to the tune of $7.3bn would be required to develop Tavan’s western block, according to Dow Jones.

That’s a big chunk of loose change. But the potential pay-off could be substantial.

As Javier Blas, the FT’s commodities editor reported, coal has seen a renaissance this year as consumption in emerging markets, such as China and India rises sharply. The rebound in demand, which has surprised the industry, has pushed up prices to a two-year high, triggering a wave of merger and acquisitions activity.

The market also appears to agree. Shares in Peabody Energy opened up 2 per cent to $60.47 in New York.

Related reading:
Mongolia’s future as commodities exporter, FT
Mongolia file, beyondbrics