Chalco provides $350 million loan to Erdenes Tavan Tolgoi LLC to facilitate coal exports

📋 Staff Comments

1. The proceeds of the $350 million Chalco loan were to be used by the borrower as prepayment for coking coal mined from Tavan Tolgoi. As such, the loan that was issued likely came in the form of a pre-export finance (PXF) facility. A PXF facility is an arrangement in which a commodity producer gets up-front cash from a customer in return for a promise to repay the customer with that commodity (possibly at a discount) in the future. PXF funds may be advanced by a lender or syndicate of lenders to a commodity producer to assist the company in meeting either its working capital needs (for example, to cover the purchase of raw materials and costs associated with processing, storage and transport) or its capital investment needs (for example, investment in plant and machinery and other elements of infrastructure). PXF facilities are usually secured by (1) an assignment of rights by the producer under an ‘offtake contract’ (i.e., a sale and purchase contract between the producer and a buyer of that producer of goods or commodities), and (2) a collection account charge over a bank account into which proceeds due to the producer from the buyer of the goods or commodities under the offtake contract are credited. There are two key documents in prepayment finance transactions: a contract providing for the advance payment by the offtaker to the producer for the purchase of goods/commodities (the 'Prepayment Contract'), and a loan agreement between a lender and the offtaker (the 'Offtaker Loan Agreement') under which the advance payment is financed.
2. The maturity field is set to 5.5-years based on the loan signature date and the final loan repayment date. The interest rate field is set to 12% because, in 2015, Mongolia Government Minister M.Enkhsaikhan disclosed that the borrower was repaying its debt to Chalco at a 12% interest rate in 2015.
3. Erdenes Tavan Tolgoi JSC was founded on August 27, 2010. According to the Resolutions of Mongolian Parliament and Government, Erdenes Tavan Tolgoi JSC started to operate since December 23, 2010 as a subsidiary of Erdenes Mongol LLC to mine the Tavan Tolgoi coal deposit. The main operation of Erdenes Tavan Tolgoi JSC focuses on putting strategic mine deposits into economic activities, carrying out exploitation on the deposits and implementing infrastructure projects. Erdenes Tavan Tolgoi JSC has 588 employees, all of whom are Mongolians.
4. Some sources indicate that the borrower received a $250 million ‘advance payment’ rather than a $350 million ‘advance payment’ from the lender. This issue warrants further investigation.

📚 Sources & References

• Offering Memorandum
• Mongolian Coal's Long Road to Market: China
• Russia and Mongolia
• Mongolia Taps Shenhua to Break China Coal Impasse - Ambassador
• UPDATE 3-Giant Mongolian coal mine puts $3 bln IPO on ice
• ERDENES TAVAN TOLGOI ANNOUNCES COMPLETE REPAYMENT OF DEBT TO CHALCO
• PROPOSED PROJECT RESTRUCTURING OF MINING SECTOR INSTITUTIONAL STRENGTHENING TECHNICAL ASSISTANCE PROJECT CREDIT/GRANT
• Market-based swap deals work best
• Tavan Tolgoi Pays Chalco Higher Rate on Loan as Coal Resumes
• Mongolia Loan May Help Tavan Tolgoi Exit Chalco Deal
• CEO Says
• ERDENES TAVAN TOLGOI BECOMES DEBT FREE
• Erdenes Tavan Tolgoi announces complete repayment of debt to CHALCO
• MONGOLIA TENTH EITI REPORT 2015, “ЭРДЭНЭС ТАВАН ТОЛГОЙ” ХК ба БНХАУ-ын ЧАЛКО
• Chalco 2011 Interim Report
• Tavan Tolgoi stalled by Erdenes Tavan Togloi’s Chalco debt Loan applications and disbursements are still being received and processed as the projects continue to evolve. Ongoing monitoring and evaluation are in place to ensure project continuity.