Taven Tolgoi article:FEATURE-Mongolia frets as giant coal mine launch looms
* Uncertainty clouds development of massive coal mine
* Government silent after investment agreement "fiasco"
* Public opinion also crucial as 2012 elections loom
By David Stanway and Khaliun Bayartsogt
ULAN BATOR, Aug 8 (Reuters) - Mining coal from landlockedMongolia's largest and least populated province located in theGobi Desert, and then shipping it abroad, was never going to beeasy.
Banks and mining firms have been drooling over the 7.5billion tonne Tavan Tolgoi project, believed to be the world'slargest coking coal deposit and named after the "five hills"that rise from the empty plains of the south Gobi around 300 km(190 miles) from the Chinese border.
But last month's botched bidding process to develop thewestern block of the property has left potential investorsscratching their heads and put a much-heralded initial publicoffering of as much as $15 billion for the mine's eastern blocknext year in doubt.
At stake is the promise of prosperity for Mongolia's 2.8million citizens, many of whom live on the edge of subsistence.
The mine's transformational potential also has implicationsas a whole for the region, which produces more than half of theworld's steel and aims to wean dependence on primary coking coalsupplier Australia.
But Mongolians are worried that their two powerfulneighbours, China and Russia, will take their resources on thecheap unless key donors Japan and South Korea join the bidding-- a point crucial for parliamentary approval later this year.
"It's a big question mark on whether they can come up with adeal that can please everybody and have it approved inparliament when the autumn session opens in September," saidAkmal Aminov, an analyst at Eurasia Capital.
Mining giants and trading houses from across the globe wereinvolved in what had been promised to be a fair and transparentbidding war. But they are now unsure whether a hotly disputeddecision to award the mine to China's Shenhua ,U.S.-based Peabody and a mysterious Russian-Mongolianconsortium is final.
NOT THE FIRST HICCUP
At least 150 representatives from 20 global investment bankslanded in the Mongolian capital, a city marked by massiveconcrete block buildings built during its days as a Sovietclient state, in mid-January to pitch for a deal that couldraise as much as $15 billion for the Tavan Tolgoi coal mine.
Taking a night off from the task of drawing up bids, some ofthe bankers braved sub-zero temperatures and bracing winds togather in Ulan Bator's exotically named Grand Khaan Irish Pub.Tensions over the bid were enough to start a brawl.
The matter seemed to be settled in February, after asimilarly confusing sequence of events in which the governmentannounced a list of winners and then backtracked, leaving thedoor open for others to join at a later stage.
It eventually settled on BNP Paribas , DeutscheBank (DBKGn.DE: Quote) Goldman Sachs and Macquarie tolead the IPO, but recent events may have turned the lucrativelisting into a poisoned chalice.
The proposed share issue, possibly in Hong Kong, will coverthe eastern block, but its fate is intimately linked with thewestern section, the subject of July's abortive investmentagreement.
"You need clarity on both before you can have anythingmarketable to the public capital markets," said an UlanBator-based source involved in the process.
The investment agreement was expected to reach parliamentfor approval on July 7. But after South Korea complained theprocess was "unclear and unfair", Erdenes -- the state-ownedfirm in charge of Tavan Tolgoi -- said a final decision had notyet been reached.
Shenhua submitted its bid jointly with Japanese trading firmMitsui & Co , while the Russian-led consortiumoriginally included Itochu Corp , Sumitomo Corp, Marubeni Corp and Sojitz Corp .
However, none of them were listed in the investmentagreement, but Itochu and Mitsui, along with the KoreanResources Group, will be allowed to buy 30 percent of the coalpurchased by China's Chalco in a deal signed lastweek.
Terms to be reworked include management duties, equitysplits, mining royalties, participation from Japan and SouthKorea and production capacity, said a government source, adding"just about everything is back on the drawing board."
"A TYPICAL MONGOLIAN STRATEGY"
South Korea and Japan have been major donors to Mongoliasince it became a democracy in 1991, funneling money to thecountry in the hopes of securing trade deals.
But Mongolia's unique geopolitical problems dominateeverything from the divvying up of its resources to thedirection of its railways, and while it is eager to please itsallies, the success of Tavan Tolgoi will ultimately depend onRussia and China.
"Mongolia is landlocked and we are 98 percent dependent onRussia for fuel and 90 percent dependent on China for trade --there is no choice," said Baasanjav Enkhbaatar, chairman of theMongolian Mining Club, a private sector industry group.
Mongolia, facing elections next June, not only has tobalance the interests of Russia and China and its donors inJapan and South Korea, but must also appease public opinion.
"It is obvious what they did. You have China, you haveRussia, and they included the United States. It is a typicalMongolian strategy," said Oscar Mendoza, chief operating officerwith the Ulan Bator-based Frontier Securities.
"Did they use the Japanese and the Koreans to convince thepeople that this was not going to be handed to Russia and toChina, and then in the end, take out the Japanese and theKoreans anyway?"
Estimates show that mining-related foreign investment incoal to copper and gold could exceed $10 billion in the nextfive years alone, far higher than the country's total GDP ofaround $6 billion in 2010.
But Mongolia has been under pressure to spread the wealthand fulfil the promises it made at the last elections in 2008.
The democratic government hopes to put $250 million from theTavan Tolgoi project into its human development fund this year,and it has also pledged to distribute 10 percent of TavanTolgoi's shares to citizens, with some saying it might raisethat figure to 20 percent before polls open next year.
"The talk about shares to every Mongolian citizen is just toshow that politicians are implementing their election promises,"said Dambadarjaa Jargalsaikhan, an economist well-known in UlanBator for taking the government to task.
"Politicians are only promoting the IPO because theypromised to do so during the last election, but there is a lackof voice from critical experts or financial analysts on whetherthis IPO is the right way," he said.
Until the uncertainties over the investment agreement areironed out, the listing will remain under a cloud.
"It has been a fiasco and it is giving all the investmentbankers a headache," said Mendoza of Frontier Securities."Whoever did not win the initial bid for the Tavan Tolgoi IPO isvery lucky."(Additional reporting by Fayen Wong in Shanghai, Editing by EdLane)