Economic Considerations

Coal in Mongolia

Mongolia is a developing country, and currently has minimal levels of industrialization and electrification. Total energy consumption is approximately 2.2 million tonnes of oil equivalent (Mtoe) per year (Barlow Jonker – unpublished report, 2006).

Total energy consumption is much higher to the south where China consumes approximately 1,200 Mtoe per year, and to the north where Russia consumes approximately 650 Mtoe per year (Barlow Jonker – unpublished report, 2006).

In 2005 coal accounted for approximately 78% of Mongolia’s industrial energy requirements, with the remaining 22% mainly from oil (Barlow Jonker – unpublished report, 2006).

Hence the logical market for any large coal mine project in the South Gobi is the voracious Chinese market, specifically the iron/steel and power generation markets.

China Coal Market

The Chinese coal market is the worlds largest, both in terms of production and consumption.
In 2005 China produced in more than 2,100 million tonnes (Mt) of coal, doubling coal production from the USA, and almost 10 times total coal production from Australia (China Statistical Bureau).

China is also the world’s largest coal consumer, with coal accounting for ~70% of its total energy requirement. Total coal consumption in 2005 was about 2,100 Mt of which nearly half or 1,000 Mt was used for power generation, 340 Mt for coke making (mainly consumed in the metallurgical industries), and the remainder in other industry and residential use (China Statistical Bureau; Barlow Jonker – unpublished report, 2006).

In 2005 China’s coal exports totaled 71.6 Mt, with coal imports at 26.1 Mt, of which 2.5 Mt or nearly 10% came from Mongolia (China Customs Data).

Source: Chinese Customs Data click image to download pdf   Source: Chinese Customs Data click image to download pdf

The outlook for future coal demand is very robust as China’s GDP continues to grow and electricity, metals, and other industrial intensity levels move up to the higher levels of developed countries. There is currently about 380 GW of coal-fired power generation capacity in China, which is forecast to increase to around 580GW by 2015, requiring over 400 Mt of additional coal (Barlow Jonker – unpublished report, 2006).

The recent phenomenal growth in pig iron production is also anticipated to continue, growing from 330 Mt in 2005 to an estimated 480 Mt by 2015, which could require approximately 60 Mt of new coke blend coal and as much as 20 Mt of coal for Pulverized Coal Injection (PCI) application (Barlow Jonker – unpublished report, 2006).

Thermal Coal Market in Northern China

There is currently around 150 GW of coal-fired power generation capacity in the northern part of China, which includes Inner Mongolia, Heilongjiang, Jilin, Liaoning, Beijing, Tianjin, Shandong, northern Henan, Hebei, Shanxi, Shaanxi, Ningxia, and Gansu provinces. Their combined coal burn is estimated at over 350 Mtpa (Barlow Jonker – unpublished report, 2006). This market will also grow very quickly, conservatively by as much as 42 GW by 2010, representing new thermal coal demand of about 120 Mt (Barlow Jonker – unpublished report, 2006).

Metallurgical coal market in Northern China

China’s coal and iron ore resources are mainly concentrated in the northern part of the country. Most of China’s iron and steel production capacity is also located in this region. Given the greater scarcity and higher price of metallurgical coals in China, particularly for high-quality coking coals, most of the northern China market will be economically accessible to Baruun Naran.

The South Gobi shallow open-cut resources lend themselves to cheap production, and are cost competitive compared to the deep underground mines of central China, where nearly all of the higher quality coking coal is produced.

CTL potential for Baruun Naran

There is a growing awareness of the economic potential for coal-to-liquids (CTL) projects in Asia and globally. With soaring oil prices, recent focus has been on technology transfer from current CTL producers, and investigations into large coal deposits of central and eastern Asia, and the benefit of converting this coal to useable liquid fuels. China is now importing one third of its oil, meaning, CTL offers a potential strategic market option for Baruun Naran.

QGX has commissioned Nexant Inc. (San Francisco) to investigate options for applying coal-conversion technologies at Baruun Naran. Recently QGX instigated a three-month study to assess the Mongolian and Chinese market demand for CTL products, and to investigate preliminary plant designs, cost estimates, and other financial/economic analysis for CTL applications for the Baruun Naran Coal Project.

Market Access

The logical market for the Baruun Naran coals (both metallurgical and thermal) is the neighboring northern Chinese market. The Chinese border is located approximately 200 km to the south of the project area, and is currently connected only by road.

Mongolian coal is currently being mined at the small nearby Tavan Tolgoi coalmine, and transported ~200 km by truck across the border into China. The nearest existing railway line to Baruun Naran is the Trans-Mongolian Railway, located approximately 400 km to the east. This railway connects Ulaanbaatar to Beijing. Baruun Naran’s development will be greatly facilitated by the development of railway line infrastructure closer to the mine. Fortunately, there are several plans under development to provide for this. The best progressed and most relevant to Baruun Naran is a line that will connect the South Gobi area from Tavan Tolgoi, to the border town of Ganqimaodao, and onward south to Baotou where access to the entire Chinese network will be possible.

A rail spur of approximately 20 km would be built from Tavan Tolgoi to Baruun Naran to give the mine seamless rail access to the Chinese market.

Current Coal Transport Infrastructure

Approximately 3.0 Mt of Mongolian coal will be exported to China in 2006, all of which is being used in northern China, mainly in the Chinese province of Inner Mongolia. Most of the coal is being transported by road, but this is now set to change with completion of the Ceke to Jiayuguan rail line on which coal from the Nariin Sukhait mine west of Baruun Naran is being sold into China (Barlow Jonker – unpublished report, 2006).

The proximity of the Baruun Naran Project to the large coal market in China and the location of the closest coal handling ports on the Northeast Chinese coast means that transport options to and within China are important to the success of the Project.

As transport distances are large there is a substantial benefit to rail transport over road transport.

Current Mongolian Export Coal Routes

Source: Barlow Jonker – unpublished report, 2006 click image to download pdf

Future coal transport infrastructure

Expected future infrastructure projects have been identified and marked on these maps.

The key new coal transport infrastructure to facilitate rapid expansion of Baruun Naran’s accessibility to the Chinese market is the building of a railway corridor between Baotou on the Chinese side, via Ganqimaodao, to Tavan Tolgoi and Baruun Naran.

There are plans for extremely large capacity expansions in the rail and port system of north central China, into which Baruun Naran coal will be transported.

Future coal transport routes – China’s northern power stations

Source: Barlow Jonker – unpublished report, 2006 click image to download pdf   Future coal transport routes – China’s northern coke stations Source: Barlow Jonker – unpublished report, 2006 click image to download pdf

Future Competitiveness of Mongolian coal in China

Demand

There is huge existing coal demand in the northern China area for both thermal and metallurgical coal. The thermal market is anticipated to grow by over 100 Mt by 2010, and the metallurgical market nation-wide by about 80 Mt over the next 10 years (Barlow Jonker – unpublished report, 2006).

Current coals exported from Tavan Tolgoi and Nariin Sukhait are able to compete with Chinese coking coals both on price and quality.

Quality

Currently Mongolian exported coke blend coal is sold on a raw basis in China, with quality expected to improve once large mechanised operations are developed at the mines, and sophisticated coal handling and processing plants are utilised to lower product coal Ash.

On a quality basis, it is expected Baruun Naran’s coals will face little-to-no quality-based barriers in breaking into the Chinese market for coke blend coal. Quality results to date indicate the good potential of coke blend coals from Baruun Naran.

Price

It is expected that production costs for the shallow Baruun Naran coal resources will be in the lowest quartile of comparable coal mines globally. With low stripping ratios, expansive surrounds, and good infrastructure sites, the mine is expected to attain world’s best practice in all facets of mining and coal processing.

The low production costs will counter-balance the anticipated relatively high transport costs. With a 200 km trucking route to the border already established, sales shipments from BN will possibly be able to begin as early as 2008. Completion of the railway from Baotou to Baruun Naran will significantly lower the cost of delivered Baruun Naran coal to customers in northern China (e.g. Baotou Iron and Steel).