China / Monglia/Chalco- yhanks.CHUIN-WEI YAP
BEIJING--Mongolia's government is planning to cancel a $250 million coal-supply deal with Aluminum Corp. of China Ltd. that it deems to be undervalued, a move that may deepen distrust between the Mongolia and its neighbor.
Meanwhile, the government is deferring an oft-postponed initial public offering for its state-owned Tavan Tolgoi coal project, a Mongolian government official said Thursday.
The diversified Chinese resource company, also known as Chalco, said it hoped Mongolia would honor the contract, which Mongolia is seeking to renegotiate, according to the senior official in Mongolia's Ministry of Mining, who didn't want to be identified. He added that the matter was between Chalco and Erdenes-Tavan Tolgoi, Mongolia's state corporate vehicle in charge of the massive namesake coal project, not the governments.
The official said the Mongolian government now sees the original terms of the contract with Chalco as "not [being of] benefit for the Mongolian side."
The Mongolian government, elected last June, is seeking to redraw policies seen by some as overly favoring global mining interests and potentially creating overreliance on China. Last May, Ulan Bator suspended SouthGobi Resources Ltd.'s SGQ.T-3.83%mining licenses on national-security grounds after Chalco bid for the Mongolia-focused Canadian coal miner.
Mongolia, which has huge and as yet lightly exploited mineral reserves, has been a prime beneficiary of a mining boom in recent years, but resource nationalism and a decline in the commodities market have thrown its future into uncertainty.
Erdenes-Tavan Tolgoi agreed last July to sell $250 million worth of coking coal to Chalco. Mongolia plans to repay debts as part of the contract's cancellation, the official said. Once the debts are resolved, it may seek to renegotiate the contract with Chalco to value the coal at a higher price.
Business leaders and investors have warned that proposed changes to Mongolia's laws, which could require existing miners to give up a larger portion of their projects to local interests, may undermine the viability of the country's fledgling mining sector.
The Business Council of Mongolia, which has more than 250 members, said in an open letter earlier this month that the legislation, if approved in its current form, would "halt current minerals exploration and development in Mongolia and greatly discourage any future investment."
It also threatens the development of Tavan Tolgoi, the nation's largest coal reserve, the council said.
Erdenes-Tavan Tolgoi has been seeking to raise as much as $3 billion via a public share offering that has been repeatedly delayed.
The IPO likely won't proceed this year, according to the most recent plan, the official said. Erdenes-Tavan Tolgoi officials couldn't be reached for comment.
Mongolia has also halted all coal exports, he said. China imported 19 million metric tons of coking coal from Mongolia last year, a decline of 4.9% from 2011, Chinese customs data showed. The value of the coal held up relatively better, falling 0.5% on year to $1.6 billion.
Chalco said in an emailed statement Thursday that it dispatched a team in November to Tavan Tolgoi to convey Beijing's views as well as "try to resolve the detailed questions and problems."
It had also communicated with Mongolia on "many occasions" to try to suggest "constructive methods of resolution," it said, adding, "We hope [Tavan Tolgoi] will strictly comply with the provisions of the agreement."
Among the new Mongolian government's policy changes were restrictions on foreign investment in strategic sectors, including resources. This was apparently in reaction to Chalco's bid for SouthGobi, which it eventually abandoned.
There have also been calls within the country to renegotiate a major mining agreement with Anglo-Australian resources giant Rio Tinto PLC, which controls Mongolia's copper-gold project at Oyu Tolgoi, the largest of its kind in the world.
Tsedenjav Sukhbaatar, Mongolia's ambassador to Beijing, told The Wall Street Journal in November that he doesn't expect the Oyu Tolgoi deal to be renegotiated.