By E.Saikhantuya
It is a busy time in Mongolia. Meaningful economic activities have begun on the Tavan Tolgoi deposit covering 68,000 hectares of territory in Umnugobi aimag. The state will own 100% of the deposit and two parts of it will be developed along different lines. Bids have been received from companies or consortia interested to be strategic investors on the western part, though the profit-sharing formula is yet to be disclosed, and, in a related but separate exercise, a foreign company will be hired to work as a mining operator on the eastern part. All proposals are being evaluated. We have already reported that three foreign entities are competing for selection as the mining operator, and now there are 15 major foreign and local competitors for the status of a strategic investor. These 15 comprise some 50 foreign and local companies.
The Government invited applications more than a year ago, and 11 companies and consortia expressed their interest. The Government met representatives of these companies on April 21, 2010. Then it changed its mind, formulated new terms for the proposed investment and asked for fresh proposals. Eight of the original 11 are among the 15 who submitted proposals to be considered a strategic investor in the western part before the deadline of 4 pm, 31 January. Most of them are major players on the international mining stage and the choice will not be easy.
The three who withdrew after the initial bidding were two Russian consortia and the Jindal Steel and Power Group of India. The Russians’ initial strong interests ebbed at the time of the economic crisis, but Oleg Deripaska, aluminum tycoon, did not give up. He is still in the fray, as part of the En Plus Group.
Russian Government hopes for the prize rest on The Russian Railway LLC which has tied up with Japanese and Korean companies. Its gest advantage comes from its ability to develop the road, construction and railway projects, as part of the total bid. Its partners in the consortium -- Japanese companies such as Sumitomo, Itochu, Sojitz and Marubeni, and Korean companies led by the Kores Group – are expected to take care of the mining proper. Russian media have stressed how “selecting neighbors as strategic partners will directly and positively impact Mongolia’s economic security”. In fact, this consortium is seen as having the backing of three national governments.
In contrast to this consolidation is Peabody Energy’s separation from its original Chinese partner, Xinhua Energy. In April last year, the President of Xinhua made a statement that his group was the most suitable candidate among the competitors for Tavan Tolgoi, making no mention of Peabody as partner. The US company possibly took it as a diplomatic snub and decided to compete in the bid independently. Xinhua Energy, in turn, entered into partnership with the Japanese Mitsui Corporation. It is interesting to see how the desire for the deposit is bringing disparate companies together. The prize is and one hopes the gain for Mongolia will be similarly .
The following is a brief account of the 15 bidders.
Xinhua Energy and Mitsui
As of 2010, Xinhua had 224.8 million tons of coal reserves, 14.5 million tons more than in the previous year. It accounts for 38% of Chinese coal exports and has annually grown 25% in both energy production and coal processing.
It started building a railway in Inner Mongolia investing USD4.7 billion in January, 2009 and President Lin Wen of Xinhua Energy indicated this railway will be connected to the one to be built from Tavan Tolgoi. It has also announced an irregular meeting of shareholders in Oriental Bay Hotel on February 25, 2011 at 9.02 AM, Chinese time, without indicating the agenda, however.
Mitsui of Japan started operations in 1947 with 37 employees and a capital of 195,000 yen and has grown to be one of the most powerful global companies, occupying a central place in the Japanese economy. It has 153 representative offices in 65 countries. Its major businesses are steel, iron processing, infrastructure, machinery, shipbuilding, satellite, chemicals, energy, food and retail services, electronics, telecommunications, financial markets and transportation. The number of employees in Japan is 6,000 and 41,000 in foreign countries.
Mongolyn Alt Group
This has the best chance among the three local consortia. The Group has 400 million tons of coal in Aduunchuluun mine, Tsagan Suvarge copper and molybdenum deposit, Eldev coal mine and Narinn Sukhait coal mine with a full range of operations including mines development, marketing and export. It is also part of the Chinhua-MAK-Narin Sukhait alliance, the first being an Inner Mongolian company. In addition to mining production and exploration, it has businesses in chalk mine, processing plant, cement, gas bitumen, construction material production and tourism.
Last year its coal output reached 5.1 million tons, a figure never before achieved in 88 years of mining in Mongolia.
Arcelor Mittal Limited
It is one of the world’s leading steel producers and is based in Luxembourg. In 2009, it processed 73.2 million tons of steel and made a profit of USD65.1 billion. It accounts for 8% of the world steel production and has 60 plants around the globe. It specializes in extraction and has operations in Algeria, Bosnia, Canada, Kazakhstan, Mexico, Ukraine and the US.
I-Tai Group
It is based in Inner Mongolia and was established in 1990. Its main business is mining machinery production. It has 4 subsidiaries and over 1,200 employees, and trade representative offices in India, Sri Lanka, Thailand, Indonesia, Turkey, Brazil, Peru and Argentina.
It has a good record of providing technical assistance to major projects, but its lack of exposure to mining might affect its chances to be chosen the investor in Tavan Tolgoi. Just last month, it began work in a new plant on 18,000 sq.m. built at a cost of USD32 million, to produce 20,000 machines every year, bringing a profit of USD80 million annually.
Peabody Energy Group
This is one of the giants in the race. Its annual coal production is 100 million tons, the highest in the world. It has deposits with proven reserves of around 9 billion tons, and produces 2% of the world energy consumption and 10% of the US consumption.
It turned 125 in 2008. It is reputed for its clean coal production, and use of environment- friendly and advanced technology. It works in 28 properties in countries spread over five continents, including China, Australia, and the USA. It extracts 8 tons of coal every second, and has wide experience of developing large mines economically and efficiently. It also follows the highest safety standards.
EN Plus Group
Little is known about this group, except that it is one of the many offshoots of the business tree of one of Russia’s richest men, Oleg Deripaska. It was officially established on February 21, 2002 and includes Bazovy Element Holding. It is one of the top aluminum producers in Central Europe. En Plus also owns 47.59% of the equity of Rusal. It produces 8% of Russia’s energy consumption. It mainly works in energy, coal, uranium and nonferrous metals. Observers do not rate its chances in Tavan Tolgoi high.
Fortescue Metals Group
This Australian company was established with this name in 2003. It owns iron ore mines with 6.3 billion tons of reserves in Australia.
Vale
This is another global giant. It was established in 1942 as a state owned enterprise and privatized in 1997. It accounts for 60% of Brazil’s and 15% of the global iron ore production. It has operations in 16 countries in the Americas, Europe, Africa, Asia and the Pacific region. Interestingly, it already counts Mongolia as one of the countries where it has production facilities.
It produces smelted metal, copper, coal, nickel, aluminum and energy and runs its own transportation company for its own needs. It also owns four ports in Brazil.
Russia-Korea-Japan consortium
The Russian Railway Association -- 50% state-owned and 50% under private ownership -- is in partnership with a Japanese consortium that includes Sumitomo, Itochu, Sotjitz and Marubeni, and a Korean consortium headed by Kores Group and including 11companies such as Samsung, LG, Samtan and others. The Korean Government supports the bid.
Among the Japanese companies, Sojitz has little experience in mining, but partners Marubeni and Itochu have been operating for over 150 years in ferrous metal and oil production.
MESCO Steel
This Indian company owns iron ore deposits, and produces steel. Its subsidiaries include Kalinga Steel, Mideast Integrated Steel and MESCO Airlines. It is also competing to win the bid for an operator on the eastern Tsankh.
International Coal Venture Limited
It is an Indian consortium representing large state-owned companies such as SAIL, NMDC, NTPC, RINL and Coal India. These companies mostly work in coal extraction and steel production.
Mongolian Auto Road Consortium
This local consortium is a combination of road and bridge construction companies, including Monrud, Erdene Zam, Gan Guur, Nasni Zam and Ard Capital.
Xtrata Group
Xtrata of Australia ranks fifth among the world’s top mining companies. It is listed on London and Swiss stock exchanges and has major copper, coking coal, gold, bronze, silver, nickel, and zinc mines among its 19 projects.
Erdos Chenlon Coal
There is little information on this company’s mining and production activities and experience. It is a Chinese company, perhaps too small to get noticed when Xinhua is in the running.
Signum Industrial
Its name is not in the list of registered business entities but its representative repeatedly mentioned on the closing day of the bid that it was participating from Mongolia.
Erdenes MGL forwarded proposals it received from these 15 companies and groups to the evaluation committee on January 31. The committee will now make a short list after thorough review, and then a working group appointed by the Government will hold talks with the short listed companies and consortiums.
It is interesting but idle to speculate which companies will make the short list, let alone who the final choice would be. It is also unclear how Mongolia and the bid winner will share the profits. The Government will offer a product sharing agreement whose details have not been made public. The MMJ will follow the story and keep readers informed.