ITOCY Itochu Corp (PK)

Mongolia's state-owned Erdenes Tavan Tolgoi LLC signed its first-ever term contract to sell coal from the giant Tavan Tolgoi coking coal deposits, possibly using the income to fund costs of an initial public offering.

Erdenes TT will supply up to 15 million metric tons of coking coal a year from the East Tsankhi deposit to a group of Chinese, Japanese and South Korean companies. Erdenes will receive a signing bonus of $250 million, that may be used for mine development and a human development fund, said a person who did not wish to be named.

Erdenes signed the agreement Tuesday with Aluminum Corp. of China Ltd. (601600.SH), or Chalco, and an unidentified Chinese steel firm, which will jointly receive 70% of the mine's output. The remaining 30% will be shared by Korea Resources Corp, Japan's Itochu Corp., and Mitsui Corp.

"Erdenes Tavan Tolgoi started the operation last August (at East Tsankhi), but until yesterday [they had] not [signed] any sales contracts," the person said.

Tavan Tolgoi contains the world's largest untapped coal reserves, with about 6.4 billion tons. The Tsankhi deposits contain much of its 1.8 billion tons of highly-prized coking coal.

Under the terms of Tuesday's agreement, Erdenes will supply 300,000 tons of coal to the group this year, increasing production to 1-1.5 million tons next year and 15 million tons per year within three to four years. The deal will likely require Parliamentary approval.

The government plans to develop the East Tsankhi on its own while it earlier named Peabody Energy Corp. (BTU), Shenhua International Ltd. (SHU.AU) and a Russian-Mongolian group as the winning bidders to develop the estimated $7.3-billion West Tsankhi project.

Industry executives familiar with developments said that Erdenes TT may be raising money to fund the costs of a multi-billion-dollar IPO.

A Mongolia-based banker said Erdenes needs to raise IPO costs as the government appears to have shelved earlier plans to arrange financing. "It would make sense because they need the money to list," said the banker, who did not wish to be named.

The government received interest from several large financial institutions to arrange pre-IPO financing, but did not go through with it since it would have sparked political opposition, he said.

The government plans to sell a 30% stake in Erdenes TT to international investors, 10% to local investors and give away 10% to Mongolian citizens.

-By Gurdeep Singh, Dow Jones Newswires; 65-6415 4064; gurdeep.singh@dowjones.com

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