Source: The Business Insider                       Date: 03 June, 2011

Mr. Oleg Deripaska has been losing ground to Russian rivals in Mongolia, and is facing unprecedented administrative sanctions in Ukraine and Russia. The commercial effect is to force upwards the cost line on his balance-sheets, squeezing the earnings from which he must pay his debts and shareholder dividends. The political effect is to undercut the perception that Mr. Deripaska and his allies are too tough to resist.

In Mongolia, the Mongolian tale of Tavan Tolgoi has been running for several years now. In the Gobi Desert, and with at least 6 billion tons of coking coal yet to be extracted, it is one of the largest deposits in the world. A year ago, the Mongolian Government halted the sale of a 49% share in the project on terms devised by JP Morgan and Deutsche Bank. Since then, the idea was adopted instead of retaining 70% of the project equity in government and domestic hands, and licensing the project operating rights in a two-stage tender.

Fifteen international bidders have been recognized this year by the Mongolian mine owner, Erdenes Tavan Tolgoi. These include Chinese companies, Peabody of the US, Arcelor Mittal, Xstrata, Vale of Brazil and two Indian companies. Mr. Deripaska’s bid was submitted by his En+ holding, which holds Deripaska’s shares in Rusal, and owns outright Eurosibenergo, the group’s electricity producer and Strikeforce Mining and Resources (SMR), a molybdenum miner. These two have failed in bids to attract Chinese investors and a Hong Kong share listing.

Mr. Deripaska’s appearance in the Tavan Tolgoi bidding without a Chinese partner is significant, because without Chinese commitments to buy the coal and finance the several-billion dollar cost of the project, EN+ lacks the credit to match the competition. The closest Mr. Deripaska comes to a railway – required to cover the ground between Tavan Tolgoi and the nearest Chinese coal-consuming steel mill – is RCTM, a plant producing railcars for a variety of bulk cargoes.

Last September, EN+ and Eurosibenergo made this announcement of a no-money memorandum of understanding with the Mongolians. A link to the Tavan Tolgoi mine project is mentioned, but no source for the financing needed. A miner already established in Mongolia says the government in Ulaanbaatar is anxious not to allow China to dominate the terms of extraction and sale of Tavan Tolgoi’s coal, nor the Russians either. If Mr. Deripaska is hoping that the EN+ bid will cover for the Chinese, he is likely to lose, the source notes.

The traditional Mongolian tradeoff between the powerful neighbors to south and north (and Japan to the west) explains why Mr. Deripaska’s Russian rivals in the Tavan Tolgoi contest are part of a geographically and politically more diverse lineup. Cash and railways are also the key to the Tavan Tolgoi tender, so state-owned Russian Railways has submitted a bid of its own, with more of both than EN+ has so far been able to muster. In this rival Russian bid, Russian Railways (RZD), run by Mr. Vladimir Yakunin, is partnered by Siberian Coal and Energy Company (SUEK), owned by oligarch-sized figures, Mr. Andrei Melnichenko and Mr. Sergei Popov. SUEK is Russia’s largest coal-miner, specializing in steam coal, not coking coal. RZD and SUEK are consortium members of a syndicate led by Korea Resources Corporation, and including Japanese coal buyers and traders – Marubeni, Sumitomo, Sojitz, and Itochu.

In February, SUEK chief executive Vladimir Rashevsky publicly confirmed SUEK’s keenness to win the tender, and Mr. Yakunin followed suit a few days later. RZD has long-established relations with Mongolia in the railway sector, and in 2009 prepared a survey of the country’s railways and future rail needs. RZD will not say it for the record, but sources make clear that Mr. Yakunin, Mr. Melnichenko and Mr. Popov do not want Mr. Deripasaka in their syndicate, and do not believe he adds to the Mongolian favor they already enjoy.