The Mongolian government is calling for international investors to fund a $500 million coal-fired power station to supply the giant Oyu Tolgoi copper-gold mine in the country’s southern Gobi Desert.

The massive $6.6 billion project is at the centre of a dispute between 66%-shareholder Rio Tinto and the state-owned Erdenes MGL regarding cost overruns, financing and taxes.

The target construction date for the power plant is 2016, which would allow Mongolia to adhere to the terms of its investment agreement struck with Rio, including that Oyu Tolgoi must source all its power from Mongolia within four years of first commercial production, which is expected this June. The mine currently imports its power needs from China.

The government is expected to announce a tender to find a company to build the 300 megawatt plant at the Tavan Tolgoi coal deposit. It’s believed Germany’s Siemens AG, as well as unnamed companies from China, have expressed interest in the project.

Erdenes MGL executive director Odon Sainbuyan says, “Mongolia will fund 30% of the power station through its $1.5 billion Chinggis Bond fund, raised on international markets in November. The rest will come from private investors and loans.” A $50 million allocation from the Chinggis Bond for initial start-up costs will be used to hire consultants and to set up the project unit.

The Oyu Tolgoi mine is 130km southeast of Tavan Tolgoi and is the primary driver of Mongolia’s $10 billion economy. By 2020, it is expected to make up one-third of Mongolia’s gross domestic product.

The government says building the plant at Tavan Tolgoi makes economic sense. “If the power station is at Oyu Tolgoi then the coal will need to be transported to the project site. If it’s at Tavan Tolgoi, there will be no need to ship any coal. It’s more economical, logical and efficient,” says Odon Sainbuyan.

The 300 megawatt power plant is only a first stage facility that will expand to a total capacity of 1200 megawatts in future years.

Meantime, Mongolian officials have denied the disagreement with Rio Tinto will delay the planned start of commercial production in June. Rio Tinto subsidiary Turquoise Hill Resources is ramping up output under a temporary budget and continuing negotiations to secure $4 billion for the next stage of development.

Senior Mines Ministry official Dorjsuren Javkhlanbold says, “The Mongolian government and the investor both highlight the importance that the production should start on time. We have a joint understanding of what we are going to do. We need to make several clarifications (to) our investment agreement and we are confident the revision will soon be successful.”

Rio Tinto and Oyu Tolgoi owner Ivanhoe Mines - now called Turquoise Hill Resources - signed an agreement in 2009 which gave Mongolia a 34% stake in the project which can increase to 50% after the first 30 years of operation. It also provided for the state to receive a 5% royalty on sales.

The government has since raised concerns about delays to receiving its share of profits from the mine and is looking for ways to increase the benefits for the country’s largely impoverished population.

In other news, Turquoise Hill has appointed new chief executives for its copper and iron ore businesses after the resignation of director Andrew Harding. Jean-Sebastien Jacques will take charge of the copper division, while Andrew Harding is the new chief executive for the iron ore division.

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