Mongolia's government on Friday held an initial meeting with a private consortium, led by Shenhua, which is in talks to take over development of the Tavan Tolgoi mine from the Mongolian state-owned company Erdenes Tavan Tolgoi JSC (ETT).
ETT owns six mining licenses, including one in the Tsankhi section of the Tavan Tolgoi mine that has coking coal deposits, but the company has been saddled with outstanding debt to Chalco. In 2011, the company borrowed $350 million from Chalco and agreed to repay the debt in the form of coal deliveries, according to Reuters. Because ETT is the largest miner in the country, this deal has meant much of Mongolia's coal exports have been unable to benefit from a resurgence in coal prices.
Under the agreement with Chalco, Mongolia was selling coal at $33 a metric ton, significantly lower than international average selling prices, according to Nick Cousyn, chief operating officer BDSec Joint Stock Company, a Mongolian brokerage,
With ETT representing a majority of Mongolia's current coal production, private companies have to contend with these low coal prices. "They are effectively being crowded out by the government," Cousyn told CNBC by phone.
He said Mongolia was missing out $70 a metric ton, or about $2 billion, in potential revenue if it produced about 30 million tonnes of coal on the assumption coking coal sold for $100 a metric ton on average. For Mongolia's $12 billion economy, that is a significant amount.
A representative from ETT told CNBC by email the key focus of the negotiations between the Mongolian government and the Shenhua-led consortium was to come up with a holistic approach to fix current underlying issues.
"For ETT, it means to fix its heavily discounted unwashed coal export and to regain commercial freedom through the economics of washing the coal and mining at both East and West Tsankhi," the spokeswoman said. She added that ETT expected to pay off its remaining $96 million debt to Chalco by the end of fiscal 2016.
Commentators said the new operating model would unlock the mine's ability to increase its production level and sell at a higher price.
It would also lead to infrastructure investments in Mongolia, including the development of a railway that could link into the Chinese rail network and deliver coal to destinations throughout China.
The latter benefit, Cousyn said, could ensure the Chinese still bought Mongolian coal even if prices went up, by easing the route of supply.
Under the current agreement with ETT, Cousyn said only inner Mongolia - an autonomous, northern region in China - benefited from the lower coal prices because shipments arrived across the border on trucks and was unloaded there for industrial use.
"What China wants is a much (bigger) access to natural resources globally at the lowest possible price," he said.