Statement of “Chalco”
Following response from Aluminum Corporation of China (“Chalco”) to Bloomberg’s inquiries on January 22, we have noticed various reports posted by Mongolian and international press regarding the coal offtake agreement between Chalco and Erdenes Tavan Tolgoi JSC (“ETT”) and would like to clarify as follows:
China Aluminum International Trading Co., Ltd, the wholly owned subsidiary of Chalco, signed the coal offtake agreement with ETT in Ulan Bator in July 2011. The Agreement was reached after friendly negotiation for nearly one year and was approved by Chinese central government and Mongolian grand coalition government. The offtake agreement is a mutually beneficial commercial contract.
As widely reported by the press, Chalco paid a significant amount of prepayment to ETT at interest rate as lower as 3%. The prepayment solved ETT’s financial difficulties, kick started its operations and made the long-awaited development of TT mine possible. The guaranteed long-term off-take promise from Chalco, one of China’s largest enterprises owned by the central government, provides a stable and guaranteed long-term sales and marketing channel for ETT’s products in China. The offtake agreement, together with the BBB rating of Chalco as the offtaker, provides ETT not only with access to large amount of capital at low cost, but also crucial support for ETT’s IPO and international fund raising. Chalco’s commitment to export part of the coal to other countries such as Japan and Korea also has a historical significance to Mongolia, who has been seeking to establish an export channel to third countries for years.
Chalco has been strictly honoring its obligations under the Agreement. We made great efforts and successfully secured various regulatory support and approvals in China. In the past year, Chalco invested significant capital expenditure and created the long-distance logistics system in China with multiple modes of transportation, including trucking teams, stockyards, loading stations, washing plant, port facilities and so on. We have established sales distribution channels to various large steel mills and coking plants and, through our efforts, TT coal already gradually gained recognition from some important customers in China. Chalco has also received strong supports from Chinese government regarding Mongolian coal export to other countries. We have paved a solid foundation for Mongolian TT coal to enter into Chinese market on a large scale and also made export to third countries possible.
We noticed press attention on our price. The pricing mechanism in the Agreement can reflect the fluctuation trend of Chinese and international coal market. This mechanism ensures transparency, fairness and long-term stability of the Agreement. When the Agreement was signed, our price was much higher than the prevailing market price for similar coal at the border. Coal market took a sharp downturn not long after the agreement was signed. Since the beginning of 2012, due to persistent sharp declines of the international and Chinese coal markets, China’s import of Mongolian coal has drastically dropped and as such prices also came down greatly. For example, Mongolia coal export to China decreased from 2.52 million tons in June 2012 to 0.82 million tons in August 2012. The annualized price for 2012 through our pricing mechanism is comparable to similar coal at border. We believe our pricing mechanism will continue to produce comparable prices in the future. Once the market goes up, our price will follow and increase.
We noticed various calls for Australian seaborne prices in the press. The FOB export price of Australia’s premium coking coal to Japanese market is an important index of international seaborne coking coal price. It declined drastically from US$235/ton in 1st quarter 2012 to US$170/ton in 4th quarter 2012. It costs around US$14/ton to get Australian coal to customers in Japan or China via ocean vessel. However, the long-distance logistics cost from Gants Mod to Chinese east seaport amounts to nearly US$100/ton. After considering logistics and other associated cost, the Australian premium hard coking coal, at US$165/ton in the 1st quarter 2013 at seaport, would be priced as raw coal at Gants Mod at approximately US$ 40/ton. To respect the solemnity of the contract is the foundation of any cooperation. We sincerely hope ETT can look at long term and honor its obligations. We believe the current market difficulties are temporary. As long-term partner, Chalco is committed to work with ETT to overcome temporary difficulties. Chalco is committed to continue the long-term cooperation with ETT to bring tangible benefits to Mongolian people from the development of TT mine.
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