A memorandum of understanding setting up a Mongolia-South Korea Business Forum was signed during the visit to South Korea of our Minister for Foreign Affairs, L.Bold. You represented Mongolia at the signing ceremony, which was attended by representatives of leading companies like Korean Air, Samsung, Hyundai Motors and Posco. What do you expect to result from the MoU?The Mongolian mining industry is poised for significant growth and the anticipated increase in revenue from the minerals sector will expand the country’s financial capacity. The plan is to use the money to help diversify our economy and to strengthen our economic base by setting up mega infrastructure projects.
South Korean companies have wide experience of implementing such projects, and their cooperation will be extremely valuable in developing our mining infrastructure. I was in the business team accompanying Minister Bold on his visit, and met several South Korean business leaders to persuade them to invest in Mongolia. The forum we set up would help facilitate continued talks in this matter.
We expect it to play a vital role in attracting South Korean investment in Mongolia, in arranging cooperation with State organisations, in improving the investment environment, and in convincing South Koreans about the mutual profitability of their investing in infrastructure projects here. That way, bilateral economic relations will be put on a sound footing.
What kind of cooperation are you seeking from South Korean investors in developing Erdenes Tavan Tolgoi? Is there anything concrete so far?Some progress has been made in identifying South Korean companies who will buy our coal, thus expanding our market beyond China. We are talking with KO Gas on extracting methane from coal beds. We are exploring ways of involving South Korean companies in certain projects in coal transporting, and road and railway construction. Right now, Samsung C&T Engineering &Construction is working in the Tavan Tolgoi - Gashuunsukhait rail project.
Erdenes Tavan Tolgoi had to stop coal exports because of operational problems. How are things now?The coal trade has been in difficulty since 2012, with prices falling 40 percent last year. Even as we near the end of the first quarter of this year, there is no major improvement. All coal exporting companies have had to curtail operations, and Erdenes Tavan Tolgoi is no exception. We have to remain optimistic that things will get better soon, but that may not be very rational. Therefore, we have taken several steps to reduce operating costs and implemented several contingency measures.
When will the Chalco debt be fully repaid? Will you continue to sell coal to Chalco after that?We have paid back $210 million in the past two years, and we have enough mined coal in stock to clear the remaining $140 million. We are making arrangements to supply this coal as soon as possible, but transport is really difficult.
Is Erdenes Tavan Tolgoi able to timely meet its dues to contractor companies, including transporters and extractors?In view of all the pressures put on transport companies last year because of problems in the coal industry, we decided to clear their dues as soon as possible and are even making advance payments in some cases. We also plan to increase our transport requirements so that companies in that sector can grow. To this end, we have made contracts with companies to use a total of 416 trucks this year, compared to about 250 trucks in 2013. At the same time, we have arranged with Energy Resources to transport our coal in 300 trucks owned by them, which are now idle as the company’s mine is temporarily closed.
The loan Erdenes Tavan Tolgoi took from Chalco was made over to the Government. Are you likely to get back this more than $300 million?After adjustment against taxes, our dues from the Government stand at around $250 million, and we are in talks on this. We have also claimed a reduction in our tax liabilities. Last year, almost MNT100 billion was waived from our taxes.
Is the agreement with Macmahon to operate in the East Tsankhi mine still in force?It is, but we are seeking an amendment of the existing terms as these put extraction costs very high. We shall reach a mutually acceptable solution, I am sure.
The work plan for the East Tsankhi says 20 million tons of coal will be mined annually, when it works to full capacity 2016. Is this target still achievable?Last year, we produced 2.3 million tons at the East Tsankhi, and approximately 2 million tons at the Baruun Tsankhi. This year’s expected figures are 5 million tons and 6 million tons respectively. That makes 11 million tons and this can be increased in the coming years. But we must have buyers for all this coal and we should also have the capacity to transport the coal from the mine to the buyers. Until and unless these two issues are sorted out, there is no point in increasing output.
Who is buying Baruun Tsankhi coal and at what price?At the time we started extraction last year at the Baruun Tsankhi the pithead price of coal was $40. This would have given us a profit of 20%-30% per ton. But we have not really sold any coal from Baruun Tsankhi because the market has come to almost a standstill. We are talking to buyer companies about sales contracts and hope to see movement before long.
Your feasibility study for a coal handling and washing plant at Erdenes Tavan Tolgoi has recently been approved. Where will you find the money?Selling raw coal after paying high transport costs makes little commercial sense. We must have a washing plant but in the current market situation building one will not be practicable. Until such time as we have one, we shall wash our coal at Energy Resources’ plant. This can be seen as a significant agreement between the two major companies operating in Tavan Tolgoi. Instead of undercutting each other to book a customer, we are cooperating.
This year or 2015 should see the Tavan Tolgoi-Gashuunsukhait railway operational, bringing down coal transport costs. How will this improve your finances?Considerably. Road transport is twice or three times as expensive as using the railway.
Following talks Prime Minister N.Altankhuyag held in China, Shenhua has already laid the tracks on the Chinese side, starting a few km beyond the border, and this will be connected to the railway in Mongolia once work on that is completed.Three mining companies -- State-owned Erdenes Tavan Tolgoi, the joint venture Tavan Tolgoi JSC, and the wholly privately owned Energy Resources LLC– will collaborate with Mongolian Railway to build the rail route to the border.
The Mongolian and Chinese Prime Ministers signed an MoU for supply of one billion tons of coal supply. When will the follow-up agreement with Shenhua be signed?Soon. In a sort of trial run, last year, we sold 50,000 tons coal to Shenhua. Such a pilot project could be continued.
What are the main issues under discussion?The amount of coal and its grade. We hope to have a final agreement before long.
How much profit did Erdenes Tavan Tolgoi make last year?The coal market was bad; our balance sheet shows a net profit of MNT17 billion. Our financial report will be ready soon.
How long will people have to wait to receive the 1072 shares in Erdenes Tavan Tolgoi that have been allocated to every Mongolian?We want to sell these to the people as soon as possible but nothing can be done until an international IPO. The shares can be priced higher only when the market conditions are better and investors are interested. We, and the people, have to wait until the time is more propitious.
I don’t think the recovery will come this year. It is more likely to get better in 2015. We shall be carefully making all the necessary preparatory work until the time comes to sell well-priced shares in the London and Hong Kong stock markets.
What steps will you take to ensure ETT shares sell at a high price at the IPO?First, we have to improve the company’s efficiency and increase its worth. For both, it is essential to sell washed coal. Our collaboration with Energy Resources will take care of this.
Second, we have to cut costs to make more profit. The best way to do this is to transport coal by rail. If the railway is completed in 2015, our transport disadvantage will be resolved, and export capacity increased.
How much will be the price of washed coal?This will depend on where it is sold. We cannot expect a high price if we sell just across Gashuunsukhait. For that, we have to find customers among the large factories in Bugat (Bao Tou) in Inner Mongolia,or, better still, if we can sell directly to the steel mills in Shanxi, Hebei, Shanghai etc. But we also have to make our product high-value.
When do we start selling to Japan and South Korea?Talks are on, but there can be no concrete basis for negotiations unless we have a better transit transport agreement with China, so that our exports to these markets through China are not taxed. Second, we have to upgrade facilities at Gashuunsukhait and Gantsmod to international levels.
Wasn’t a revised transit agreement discussed during the PM’s visit to China?The two Governments are in regular touch but the question of revising the transit transport agreement is yet to be taken up.
There are reports that Tavan Tolgoi JSC has placed soil and built a stockpile in what is your company’s land. Is it true that they have been mining coal in areas that are actually yours?Tavan Tolgoi JSC was established 30 years ago, while our company is in its third year only. In these 30 years Tavan Tolgoi may well have done some extraction in a site that is legally ours. But this is no deal and should not be an issue between the two companies. The legal position is also not clear, because before our company came into existence the land that we now own under licence had no designated owner.
We have taken up the issue with them and are sure two State-owned companies can resolve this issue amicably.
Preparations for setting up the Tavan Tolgoi power plant seem to be making very quick progress. Will your company share in the financing of the project?This plant is of crucial importance to us as it will use thermal coal from our mine.
After we had done the feasibility study of the power plant,a special entity under the Ministry of Energy was entrusted with implementation of the project. We are cooperating with it. We are both State-owned so reaching long-term agreements on major issues will be easy. We shall be supplying coal to the plant and shall be assured of uninterrupted power supply for our own operation.
How is Erdenes Tavan Tolgoi planning to restructure its management as part of the “From Big Government to Smart Government” programme?We have to alter the presently held belief that State-owned companies can’t make a profit. We are focused on correcting some faulty practices and on improving efficiency.
The issue of foreign investment in the Tavan Tolgoi project has been in the air from the time of the previous government. Many companies are still interested. We always give them a careful hearing. We can take a decision only when there is a change in the present circumstances.
The Mongolian coal market is still dependent on only one economy – China’s. But the Chinese coking coal market is not . In the past few years, it has consumed over 600 million tons of coking coal, but 90% of this was produced in China.
Three Mongolian companies hope to together export 30 million tons of coal annually in the near future. But we cannot expand our market without resolution of certain issues with the Chinese. The Tavan Tolgoi project will be optimally profitable only when we find new export markets and are able to offer the right level of products. Raising the mine’s output and then failing to sell the production is a commercial disaster.
We need cooperation from companies,foreign or domestic, in increasing sales. Our choice of investor will be based on that.