All eyes now on the port railway

1th of 5, 2014


It is doubtful if the 267-km-long railway between Tavan Tolgoi and Gashuunsukhait will be commissioned in 2015 as planned, even if Parliament takes an early decision on what its gauge would be. At the moment, the priority is to complete construction of the narrow-gauge tracks to connect Gashuunsukhait to the Gantsmod border port. The Government is keen to make this railway operational by October this year. The Shenhua Group, which laid 360 km of tracks between Bugat (Bao Tou) and Gantsmod in 2013, agreed last autumnto extend the port railway by 15 km.

The present cost of carrying coal from the loading facility at Tsagaankhad to Gantsmod is $8 per ton. This will come down to less than $3 once the coal is moved by rail. According to an MoU signed by the Prime Ministers of China and Mongolia, 50 million tons of coal will be transported on this railway to China.

Given its importance as our export lifeline, it is important to know just what has been agreed upon between Shenhua, a Chinese state-owned company, on the one hand and Erdenes Tavan Tolgoi JSC, Energy Resources LLC, and local government–owned Tavan Tolgoi JSC on the other. Shenhua has prepared a pre-feasibility plan of construction, and will bear 70% of the costs, with the three Mongolian companies responsible for the remaining 30%. These three have since formed a consortium. Called Gashuunsukhait Railway LLC – already GR in conversation – this consortium is at the moment exclusively for participation in the railway construction Shenhua’s 70% contribution to the cost is actually a loan, and it wants repayment to be covered by a Mongolian Government  guarantee.S.Tsevegjav, Deputy Director, Erdenes Tavan Tolgoi, has said the loan terms are yet to be finalised. The Mongolian Government wanted to wait for negotiations on the loan to be concluded before setting up GR, but the matter was deemed too important to be kept pending and so the Cabinet Secretariat of the Government of Mongolia pressed for and ultimately got the consortium formally established on April 7.

Shenhua wants an early decision, but Erdenes Tavan Tolgoi says what it has so far received is a pre-feasibility report and is waiting for a final feasibility study prepared by the Chinese group for the narrow-gauge railway. A decision on the loan guarantee becomes easier to take once it is clear what the railway transport costs for coal will actually be.

The Government announced its decision to build this railway in August last year after it had transferred to Erdenes MGL the responsibility for the 247-km railway, which was initially an Energy Resources project. People were getting restive atthe lack of progress in setting up the consortium, with Erdenes Tavan Tolgoi the major partner, but now there is an air of optimism that things will move fast from this point.
Now that GR is formally in existence, it is expected that its first task will be to evaluate the feasibility study by Shenhua, expected before long, but before that the Erdenes Tavan Tolgoi board has to approve the general terms of the agreement negotiated with Shenhua.Shenhua has already studied and accepted the charter of how GR will operate.

The board of Gashuunsukhait Railway LLC will have eleven members, six of them representing Shenhua and five from the three Mongolian companies. Of these five, again, two each will be from Erdenes Tavan Tolgoi and Energy Resources, and one from Tavan Tolgoi JSC.Shenhua will own 49% of the port railway and the remaining 51% will be equally distributed between its three Mongolian owners, meaning Erdenes Tavan Tolgoi, Energy Resources, and Tavan Tolgoi will all have 17% share.

Loan term same as in the Chalco case

In principle it has been agreed that loan repayment to Shenhua will start as soon as coal starts moving on the port railway, but this payment will be adjusted against the price of the coal sold. This is similar to the terms of the agreement between Erdenes Tavan Tolgoi and Chalco but details like how much of the coal will be sold in China and for how long will be taken up only after the final feasibility study is approved.

Incidentally, this final study, which should be ready in May, is being prepared by another large Chinese state-owned company, and not Shenhua. Whatever the final costs mentioned in the study, the resolution authorising establishment of Gashuunsukhait Railway calls upon its four shareholders to deposit an equal amount of $500,000 each to the company’s statutory fund. This will take care of the initial construction costs, until such time as more details are worked out on source and share of financing. However, the three Mongolian companies will have to contribute a total of $10 million to the completion of the railway.

When the railway is operational, Shenhua will sell its stakes to Mongolian Railway, under the terms of the MoU signed by the two Prime Ministers. It is not clear what happens if Mongolian Railway does not have the money at that point of time. Right now, its financial situation is bad. It was allotted $200 million to construct the railway from Tavan Tolgoi to Gashuunsukhait but most of this has been spent.In the event that Mongolian Railway does not buy the stock, the three coal companies will have to run the railway.

The precise route of the 15-km-long railroad has been approved by the Ministry of Road and Transport, according to the pre-feasibility study, but there are some points of conflict regarding the track bed. According to one official of the project, the Chinese company which had held talks with Energy Resources in 2008 then went back on the understanding and ended its track bed at Gantsmod a little distance away from where the GR plans to end its bed.Since the Chinese party wanted to set the railroad bed on the eastern side of the Ganstmod port, Energy Resources selected the western. The former has already built its track bed, close to the border, and cannot be asked to move.

Apart of Gantsmod falls in an environmentally protected area in Mongolia, and Energy Resources kept that in mind, but there are reports that the Chinese party had encroached into the area. The Mongolian side has always been sure its bed route does not breach any environmental restriction, and after a study of the matter, the General Authority for Border Protection, the Ministry of Environment and Green Development, and also the Ministry of Road and Transportation have given the green light to the present track bed map. There is no similar problem at Gashuunsukhait port.

The reform government is pledged to supporting coal export, at a time when falling prices are decreasing the value of the Tavan Tolgoi deposit and coal export is stuck. Its officials have met their Chinese counterparts several times to expedite the expansion of facilities at the border ports and urgently deal with infrastructure-related issues.

The law on border ports, approved by Parliament late last year and coming into force from April 1,gives each port its own administrative authority. This authority will enforce a single-window policy to facilitate the increasing volume of mining product export and to ease bureaucratic control. At Gashuunsukhait as well as at Gantsmod, the first task of the new authority will be to change their status to ‘state-owned’ from ‘local-owned’. The Chinese will have to be kept informed and made part of the change-over. Granting international status to Gantsmod and Gashuunsukhait will mean that on the other side of the border, it will be the Chinese Government in charge, and not the government of Bayannuur, Inner Mongolia.

These are not just symbolisms. They will encourage the coal export recovery and Mongolian coal miners will be ready once the port rail is open for business.

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