Mongolia’s government has chosen US miner Peabody Energy, a venture between China’s Shenhua and Japan’s Mitsui & Co, and a Russian-led consortium as preliminary winners to jointly develop the western part of the Tavan Tolgoi coal deposit.

The Russian-led consortium includes South Korea’s POSCO, utility firm KEPCO, trading firm LG Corp and Daewoo International, state-owned Russian Railways and Japanese trading houses Itochu Corp, Sumitomo Corp, Marubeni Corp and Sojitz Corp.

The Tavan Tolgoi deposit in the south Gobi region has estimated reserves of more than 6 billion tonnes of coal, including the world’s largest untapped deposit of steelmaking coking coal. The western Tsankhi block holds around 1.2 billion tonnes of reserves, 65% of which is coking coal. It has an estimated production life of more than 30 years at 15 million tonnes a year.

Although the government is yet to publicly announce details of how the joint development will occur, it is believed that the intention is to have all three parties jointly develop Tavan Tolgoi. There has been speculation that the Shenhua/Mitsui consortium is to own 40%, Peabody 24% and the Russian-led consortium 36%.

As part of the western development, the companies will make a $1 billion payment to the Mongolian government, including $500 million that is non-refundable.

The project, which may require initial investment of more than $7 billion, is seen as vital to kick-start the land-locked nation's economy. It will also generate billions of dollars in revenue for the companies involved and add tens of millions of tonnes of increasingly rare coking coal used by steel makers.

Separately, the eastern coal block will be developed by state-owned Erdenes-Tavan Tolgoi. The government plans an initial public offering that could raise as much as $10 billion in funds to develop the field.

Mongolia-based Frontier Securities’ chief investment strategist Dale Choi says that it appears the government is making a geopolitical decision. “The government is trying to involve all three and have cooperation between all three groups. It will be complicated, since there are so many companies.”

Some analysts say the combination makes sense as both consortiums lack experience in developing coking coal deposits while Peabody can help fill the gap.

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