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TheStreet Open House

For Mongolia, China's Too Close For Comfort

Stocks in this article: ACH

The government has kept foreign companies bidding to mine off-balance, drawing in U.S., Japanese, British as well as Chinese and other firms so that no one dominates. A $500 million low-interest loan from China for development projects sits untouched, because the government worries Beijing wants to use it to force mining concessions.

When the government-run Aluminum Corporation of China Ltd., known as Chalco, tried to take a controlling stake in a South Gobi coal mine near the Chinese border by buying shares from other foreign investors, parliament hurriedly passed a law this summer to stop it. Chalco dropped its bid.

By requiring Mongolia Mining, a private company listed in Hong Kong, to use a different railway gauge than China, the government is adding $2 to $4 in costs to every ton of coal, or about $120 million each year.

The railroad was debated for more than two years in parliament. A transport minister and other powerful politicians argued the railway should first connect with existing tracks to Russia.

In a compromise both are being built, though Russia doesn't need the coal and its nearest port is 4,000 kilometers (2,500 miles) away. The coal could be shipped via the port to Japan or South Korea, but the trip would add $100 to every ton.

"Mongolia's mining fever is driven by Chinese consumption," said mining company CEO Battsengel. On the wall of his 16th story corner office in the center of Mongolia's capital hangs a map of the northeastern China cities, railways and ports his company wants to tap into. "We have two big superpowers as neighbors. Virtually, we have one customer."

Even in the coal belt where the prosperity of the China boom is most evident, the China trade is unpopular.

Myadagmaagiin Zolzaya, a retired carpenter and herder, left the pasturelands to live in a traditional round tent known as a "ger" in one of the neighborhoods springing up on the fringes of Dalanzadgad.

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