Mongolian contract hangs on size of upfront payment

PUBLISHED : Tuesday, 28 December, 2010, 12:00am
UPDATED : Tuesday, 28 December, 2010, 12:00am

International miners competing to develop a vast, untapped coal deposit in Mongolia are being selected based on how much money they will pay the poor nation's cash-strapped government to clinch the contract.

Bidders vying to operate the massive Tavan Tolgoi resource in the Gobi desert will not get a stake in the project, which is government owned, but will build mines and infrastructure and sell coal in a revenue sharing arrangement with the state.

Even though the winner may not see a return on its investment for years, Mongolia has told companies bidding for the contract to 'submit a proposal for upfront payment', a tender document reviewed by this newspaper says. Miners and lawyers said it was highly unusual for a government to award a contract on a pay-to-win basis.

Mongolia, where over a third of people live on less than US$1 a day, is keen to bolster fiscal income by collecting cash from global miners vying to unlock the nation's vast mineral wealth.

Resources firms, including Hong Kong-listed Shenhua Energy, are intensely interested in Tavan Tolgoi, which could become one of the world's largest coal mines. The deposit contains an estimated 5.1 billion tonnes of thermal and coking coal and could be mined continuously for 200 years, according to Eurasia Capital.

As well as Shenhua, America's Peabody Energy, Japan's Mitsui Anglo-American, Rio Tinto and Brazil's Vale have all publicly expressed their interest.

Bids for the Tavan Tolgoi contract are due on January 17, Ch. Baatbayer, a senior official at Erdenes MGL, the government entity that owns the deposit, said. He confirmed the amount of upfront payment was a factor in winning the contract.

'Being selected on how much we can pay feels uncomfortably like being asked to hand over a big brown bag full of cash,' a representative of one of the miners bidding for the Tavan Tolgoi contract complained.

It is not illegal, under US, British or Australian legislation, to pay foreign governments to win contracts. But if the winner of the Tavan Tolgoi tender has securities listed in the US, it will have to tell shareholders how much it paid for the concession.

Mongolia is known for political corruption - it ranks 120th of out 180 nations in Transparency International's Corruption Perceptions Index. Tavan Tolgoi bidders would have to be sure the upfront payments were going to the government, rather than individuals, and what the cash would be used for, lawyers said.

Miners should 'review the pre-payment requirements to make sure they are appropriate', James Tillen, who leads the anti-corruption group at US law firm Miller & Chevalier, said.

'Alarm bells should ring if companies feel unsure whether the payment is going to the state or to an individual member of government,' Andrew Legg, a partner at London law firm Mayer Brown said.

Mongolia has redrawn its plans for Tavan Tolgoi several times. It first decided to sell 49 per cent of the deposit, but cancelled an auction in February this year after politicians worried this would cede too much of the nation's wealth to foreign miners.

The government then said it would retain 100 per cent of Tavan Tolgoi and employ a contractor to develop the mine, before realising it could not afford this.

This latest permutation of the deal went out to tender on December 8.

Graeme Hancock, the World Bank's senior mining specialist in Mongolia, said the government would probably use the Tavan Tolgoi winner's upfront payments to fund social welfare projects.

'It does appear that this is mainly an attempt to get upfront funds to support the budget,' Hancock said.

He argued it was not unusual for developing countries to require upfront payments from winners of mining deals.

But he added it was rare for governments to select contract winners based on how much they were willing to pay.

Erdenes MGL's Baatbayer declined to comment on what the Tavan Tolgoi upfront payments would be used for.

Hitting pay dirt

Contains an estimated 5.1 billion tonnes of thermal and coking coal

Could be mined continuously for 200 years

Potential to become one of the world's largest coal mines

Already attracted the interest of industry giants Peabody Energy, Japan's Mitsui, Rio Tinto and Brazil's Vale

Bidders vying to operate the massive resource will build mines and infrastructure and sell coal in a revenue sharing arrangement with the state




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