Biography of Tavan Tolgoi residual coal deposits

I published an article ”Tavan Tolgoi” in the “Daily News” newspaper dated July 21, 2007. This is not to retell the story, nor boasting about how “I told you so”. It has been exactly six years since then. Regretful six years. If we estimate only the coking coal, which is the highest-value part of Tavan Tolgoi deposits (TT), to be transported 20 million tonnes annually by rail, there is a 100 years of reserve. Geologists say extended explorations may double this figure. Furthermore, there is a high calorie coal reserves, currently estimated at 6 billion tonnes or enough to mine for 300 years. Overall, the TT contains 7.6 billion tons of coal reserve, according to Joint Ore Reserves Committee, an international evaluation system. In addition, South Gobi and Nariin Sukhait deposits each contain 400 million tons of reserve or enough to last 40 years to transport. Also, such high grade, large coal deposits have been discovered in Khovsgol and Khovd aimags. We do not know what else is there. Coal price was fairly good in 2007. Since the 1970’s, offers were made to Germany, Japan, North Korea and since the 1990’s, China, South Korean Samsung and Australian BHP were offered to use these reserves; however, they all refused. But when coal price started picking up since 2005, some companies from the U.S, China, Japan, Russia, Indonesia, Thailand, Australia, Chile, India and Brazil started showing interest and sent their proposals. Couple of years ago, a coal shortage occurred when coal mines of Hunter Valley of Australia, one of the largest coal mines of the world, were hit by a flood and coal price skyrocketed. Largest users of the coking coal are Japan, South Korea and China. Majority of coal expenses are in its transportation costs. Landlocked Mongolia have inadequacies in this aspect; however, Bugat, the area with the world’s largest iron production is not far from Mongolian border. Therefore, Mongolia has the advantage to cover its weaknesses. Naturally, Indonesia, the U.S and Brazil would not attempt to transport Mongolian coal to their lands. They just want to do business with Mongolia given the condition where the user is near. Japan and South Korea show interest in TT because they are highly dependent from Australian coal; thus, face risks of flood and other disasters, and wanted to reduce this import risk by creating a small dependence from Mongolia. Otherwise, coal is one of the most common minerals in the world. China, who is interested in Mongolian coal, is itself one of the largest coal producers in the world.

Chinese mine coking coal from the south of the country and ship it by sea to Tianjin and transport it via rail to Bugat. By mid-2012, coal price fell by 50 percent within just a couple of months. The deterioration of EU crisis led to a slowdown for Chinese economy. On the other hand, a new technology that can use alternative energy sources except oil and coal has been developed and began to be utilized. Chinese actively began adopting this technology of collecting combustible gases called methane gas which was developed in the U.S. Shale became the next trend. A couple of years ago when the former U.S President Bush stated “we invented a new alternative energy technology. The world will no longer depend on the Middle East soon,” he meant this shale technology. In the next few years, the U.S and Mexico will reportedly become the key energy producers in the world with shale. North China also have huge shale reserves and began utilizing it. Revolutionary changes have occurred in the renewable energy technology. A single windmill can generate 10 Megawatt power, they say. Such as this, coal is turning into ash. I said “coal will be ash” 6-7 years ago, not because I am a fortune-teller. Coal was never a valuable or expensive mineral. Because it is abundant. The dream of moving TT began in the 1970’s. Every economists knew that skyrocketed price of coal in 2007 was a temporary phenomenon. Therefore, I said something like “Tavan Tolgoi (Five Hills) coal will turn into ash if five hundred heads argue for five years,” in a bit of a rhyme. During this five year period, three government was formed and they all did nothing. They passed a law on strategic deposits and nationalized TT. According to a mapping of Tavan Tolgoi deposits made in 1970, a deposit named “Ukhaa Khudag” was given for use of a Mongolian company.

This almost led to civil war. Construction of a railroad south of the South Gobi province became a taboo. It seemed like all Mongolians owned the TT. It looked like the shares of TT was going to be distributed equally to the public. It looked as if the shares of TT was going to be sold for national companies at a discounted price. Then, a daunting investment law of 2012 banned foreigners from investing. Maybe, only achievement of this past five year was the birth of so many so-called fair citizens defending the wealth of their motherland and beating their chest! Russia, which had forgotten Mongolia, suddenly remembered us because of TT. They initially proposed to own shares worth USD 1.5 billion and repay by building a railroad. The plan was then altered to transport coal to Pacific ocean from 5 thousand km distance stretching through East Siberia and Far East. Then, it seemed as if they will be the only ones to build and own all railways in Mongolia in the future and that railway will have Soviet standard gauge. Then, they demanded majority stake of the TT shares. Actually, they were stirring up things with an ulterior motive to prevent any large minerals production in Mongolia and if that were to happen, no other countries except China and Russia were able to participate in it. Apart from that, they do not have any need for coal.

China actually had an interest to get coal from a neighboring country. Therefore, a Chinese state-owned enterprise (SOE) Shenhua competed in TT. However, they also did not like any involvement of a third country, causing as much trouble as possible for the US, Japan and South Korea. They were plotting to own the most of the shares of the TT. Japan and South Korea both wanted about 10 percent of the TT as they wanted to reduce their dependence from import and get certain supply from Mongolia even if the price was high. Because the Australian flood was a big lesson for them. The parties representing these countries are also SOEs. However, they have no mining experience and were just interested in its stake and did not plan on involving in mining and transportations. The U.S Peabody is not state owned, it is a stock-exchange listed, public shareholding company. It is the largest coal producer of the U.S and have over 130 years of experience in the field. They worked several years in the Chinese market with ever growing demand and gained some success. They mainly work with Chinese coal companies in Yunnan and Hunan, South Chinese provinces. They also acquired a deposit in Xinjiang. They are interested in working in the market of North China and seek new market. Government negotiated with all interested companies through the Chief of Cabinet Secretariat for three years. There were several cases where foreign company representatives were invited from abroad and then refused to see them, saying “no time, let us meet next time”. There is a say “those who ask bows and those who give sits”. The Parliament issued several resolutions and outlined that the interest of third countries should equal the two neighbors. However, Russia and China did not agree to this. Only Mongolians can think of a stupid idea to distribute TT equally among the public. TT is valuable because of its gigantic size. There are many deposits in Mongolia that equal one tenth of TT. Once you divide this huge residual deposits into ten parts, everything is reduced and will lose its meaning. Nobody will be interested in this divided strips. When nobody is interested, it is beneficial for the two neighbors. It is not like the world is missing out on Mongolian coal. During this period, a reason for Mongolian side, who was negotiating with international companies, to delay the TT negotiations emerged. Ivanhoe Mines Ltd was planning to use a deposit named South Gobi, which is south of TT. This company raised USD 500 million from the stock market. Not exactly raising. They loaned USD 500 million from China Investment Corporation under a share transferring condition and SouthGobi collected it at the Stock Exchange of Hong Kong. This way, their following works were accomplished very successfully. They obtained the mining license and permit to operate a mine. Other foreign investors were surprised at how Ivanhoe was succeeding in this country with much bureaucracy and tried to find the reason. Suddenly, they gained additional seven licenses without much of a hassle. Mongolian red tape fell apart before them. Soon, their stock value reached USD 4 billion. Such a valuable business. Ivanhoe Mines is a junior company that owns major stakes of the Oyu Tolgoi. They were not in a level to run this big scale operations. Rio Tinto was interested in buying their shares. Therefore, they sold SouthGobi along with Oyu Tolgoi shares. The deposit was valued at USD 4 billion at stock exchanges. They acquired it when it was expensive and tried to sell the rest to Aluminum Corporation of China Limited (Chalco). Actually, Rio Tinto lost so much from this deal. The value of SouthGobi which was raised in an instant, immediately fell by 10 percent after Rio Tinto’s acquisition. Illegally obtained licenses were confiscated and officials involved were arrested and put in jail. Ivanhoe intentionally inflated its share price and deceived Rio Tinto into buying it. The obstacle for SouthGobi to boost its share price in the stock market was TT.

Because if TT was taken by someone after enlisting, it will obstruct the growth of SouthGobi. Consequently, it may not even able to issue an IPO after TT. Therefore, they had to delay the development of TT as much as possible. Our people who participated in this operation, either knowingly or unknowingly, received their appropriate awards. I heard detail about this; however, no evidence has been found so far. So, let me not disclose it. It was an operation worth USD 50 million!. Actually, Mongolian side had no interest in moving the TT project. Because of personal gains. There were cases that Japanese and Korean sides were pressured to buy nine licenses owned by individuals for high prices if they want to be included in TT! Revenues earned from Mongolian coal sector began to exceed all other sectors. Even Erdenet Mining Corporation did not compare! Nouveau riche tends to show off their wealth lavishly. “To hell with foreigners! Down with the Imperialists! Let us kill the economic hitmen! It is enough to just shovel the coal and toss it beyond the Great Wall,” they said. Then they began to shovel and toss them across for real. “You see? There is no need for any infrastructure! Mongolians can run the TT,” they said. An SOE “Erdenes” was established. Everybody knows the outcome of that one. The Government, in order to “love” the people and distribute cash, always pressured and demanded Erdenes. They borrowed USD 350 million from Chalco and agreed to export coal until 2018. Took the money, distributed it, everybody got drunk and we ended up in debt. They needed to distribute again to win the next election and begged for another USD 200 million loan. Small-time swindlers began to sell trash to TT. Well, the businesses of SOEs are like that. It was only natural. Coal became ash! The situation before 2007 is back. Private coal companies were shut down. The old woman from the Golden fish folktale remains with her cracked pot, according to the tale. The debt amount borrowed from Chalco to distribute among the public is almost USD 300 million. Compared to this, the 70-year debt from former Soviet Union was repaid back in USD 250 million dollars. After getting rich by selling coal, there were boasts about developing other sectors and producing Mongolian brands. There are many things in the world that are more important than money. However, those are made possible by money. In order to develop other sectors, the “other sectors” must be founded first and that requires money. Mongolian brand coal has turned into ash. Felt slippers can never be a global brand. Our bad reputation became our brand in the end. 2013.5.11