Interview
“We are doing all that we can to get more for our coal”
2016-07-20
The Mongolian Mining Journal /may 2016. 091/
S.Bold-Erdene asks T.Bilgee, Executive Director of Erdenes Tavan Tolgoi JSC, for updated information on the company and also to get his views on current issues.
I understand quite some progress has been made in several areas since you took over as Executive Director. What are the major ones of these?
I was appointed to the position in November 2015. There were a number of pending legal issues related to agreements and debts, as also decisions to be taken to ensure continuous production. I have been focused on resolving these, as well as issues related to receivables and payables.
How is work going on now, in extraction and sales?
Our extraction target for this year is 10 million tons. Between 500 and 700 truckloads of coal are taken away for export every day, and so far this year, our exports have accounted for more than 80% of the total 3.3 million tons of coal exported through the Gashuunsukhait border. Operation of west Tsankhi was temporarily closed because of market conditions, but extraction is planned to be resumed in the near future.
Total extraction from west Tsankhi and east Tsankhi, taken together since mining was started, will reach 20 million tons by the end of June. We are trying everything to reduce costs and make a profit in these times of economic difficulties. Since the time we started operating or, I could say in the past five years, we have put into the State budget MNT243.8 billion in tax payments and spent MNT1.05 trillion on purchases from domestic companies.
When the agreement with Chalco was made almost four years ago, there was criticism that the per ton price of $70 was too low. Some felt the later revision of the terms of the agreement made things more difficult for us. What is the current sale price? And is this determined by the revised pricing formula or do you still go by the method in the original agreement?
People have different views on the Chalco agreement. Currently we are selling one ton of coal at $24.4 based on the second quarter price formula. We see some signs of prices rising, and are hoping we can sell for more in the third quarter. We hope prices thereafter will keep going up.
We have been working in several ways to secure a higher price in gradual steps, keeping within the terms of the agreement, which allow us to suggest changes in the pricing formula. We and Chalco both are committed to compliance with the agreement, and on repayment of the loan amount. However, we are doing all that we can under the agreement to get more for our coal, even if it is by a small amount.
The pricing formula agreed upon basically refers only to coking coal from Layer 4 at east Tsankhi. We shall soon move to extraction from Layer 3 and shall try for a new formula. We are also sounding Chalco on selling them thermal coal.
How much loan has Erdenes Tavan Tolgoi taken from Chalco, the Development Bank and commercial banks?
Following repayment of a $5-million loan to Khan Bank, we have no outstanding loans from any commercial bank. We have also settled most of the more than MNT60 billion we owed to domestic companies.
Our debt to Chalco stood at $121.2 million on January 1, 2016. Today it is $111 million. We expect to be able to pay back altogether around $50 million this year. At a little above 10%, our monthly interest payment is around $900,000. That is why we need to repay as much of the principal amount as soon as possible, and should be able to do this by next year. We owe $200 million to the Development Bank, and are working on a time-frame to settle the loan.
Why is it taking so long to repay the Chalco loan?
I can think of a number of reasons. First of all, market conditions became very bad. Secondly, there was a dispute over the quality of the coal which led to some delay in supply. Third, the agreement does not specify the amount to be either sold or bought.
Fourth, extraction work was totally stopped as the agreement with the operator company had to be reviewed, as their costs were too high.
Why does extraction not resume in the west Tsankhi mine?
Output from this mine would be the main contributor to the company’s increased capital flow, but we have to resolve a number of issues before resuming operations there. First, we have to dispose of the stockpile; second, we should wait for coal prices to rise; third, we must find a reliable customer. Anyway, extraction in the west Tsankhi will resume soon. Our plans are to extract only what we know we shall sell.
What happened to the Government decision to adjust the dues of SouthGobi Sands by asking them to work for you and clean up the strip mine dump?
According to the Government decision, SouthGobi would work in the Tavan Tolgoi mine at rates lower than in the market and a specified part of its earning will go to the State budget towards settlement of the MNT20.3 billion it owes the Government. The Government expects this will fully clear the outstanding tax dues in a short period of time.
Our advantage is that our operating costs will come down. SouthGobi has offered to do one cubic metre of mining (both soil removal and coal extraction) for MNT 5900, which is lower than the market rate. This will allow our company to save some money. That way, I think the Government decision is good. I also hope the lower rates will become the standard.
Would SouthGobi continue as your operator after its dues to the Government are settled?
The Government has said the repayment will be over by the end of the third quarter. The strip mine work will also be completed by then. Thereafter, we shall work with a company that charges the least for doing the work properly.
It is still not clear where the money for the Tavan Tolgoi-Gashuunsukhait railway will come from. What are the views of Erdenes Tavan Tolgoi on this?
I believe Mongolian Railway is working on raising the money for the railway. We have created a working group to coordinate with the railway development project. It is important for us that the railway is able to transport 20-30 million tons of coal.
There has been some criticism that Erdenes Tavan Tolgoi is extracting only high-grade coal, leaving the rest of the deposit untouched. But now you will be moving to layers with lower quality coal. How do you intend to add value to such coal?
It is wrong to charge us with high-grade mining, as we extract according to the feasibility study. It is true we have been extracting less than envisioned in the feasibility study but that is because of lack of demand and infrastructure issues. Erdenes Tavan Tolgoi JSC has prepared its operation plan for the next 5-10 years and will do its extraction work based on it.
We do want to add value to our coal so that it can command a higher price, and this is not something that we have thought of only recently. Since its establishment, the company has undertaken several studies and trials. We tried coal processing at the processing plant of Energy Resources. A feasibility study was completed by an international company on processing 20 million tons of coal and it was approved by the Minerals Council. The work has had to be put aside for the time being because of its high cost. We are actively seeking less expensive alternatives and will certainly come up with something.
Our company has done several studies on processing coal in the dry concentration method. We are working with Nagata Engineering of Japan to build a pilot plant that will dry the coal with minimal damage to the environment. We also plan to start a project, with the cooperation of the Korean company Hanbit, to process 1.2 million tons of coal per year in the dry concentration method.
What happened after your trials at the Energy Resources plant? A washing plant with a capacity of 15 million tons is standing almost idle there. I believe you read what Battsengel said in an interview with our journal. Is there really an issue in your company with using it?
The washing and processing activity has to be economically viable. When we mixed coal from Layer 4 of the Tsankhi part with the coal from the Ukhaakhudag part and washed it we got 72.3% of concentrate. That is too little, and we were better off selling raw coal, at least for the time being.
But both the State Policy on the Minerals Sector and the Minerals Law call for exporting value added products.
There is no legal obligation to concentrate the coal. Still, coal concentration is a priority objective of Erdenes Tavan Tolgoi, and that’s why we have undertaken all the trial projects I mentioned. Currently, raw coal is more in demand in the Chinese market than washed coal. It will be difficult to sell concentrated coal at a high price. Together with our operator companies, we are paying more than MNT150 billion in taxes to the State budget. If we could not sell our coal and the mine did not work, the tax revenue will be lost and thousands of workplaces will disappear. We cannot overlook the potential risks of going for value addition.
What do you think of the Government offer to buy 30% of the 1,072 shares of Erdenes Tavan Tolgoi owned by individual citizens?
That is Government policy. It underscores the need for Erdenes Tavan Tolgoi to be listed on the stock exchange without delay. We have already done some preparatory work on security trading and are still at it.