Last week, Erdenes-Tavan Tolgoi, the state-owned mining company that owns the Tavan Tolgoi project, said it had stopped coal exports to China and threatened to cancel its coal-for-loan deal with Chinese resource company Aluminum Corp. of China, or Chalco.
The Tavan Tolgoi deposit, about 125 miles from the Chinese-Mongolian border, has a total estimated resource of 6.4 billion tons, one-quarter of which is high-quality coking coal.
The production under dispute is less than 1 percent of the Tavan Tolgoi, The Wall Street Journal reports.
The Mongolian government hasn't made a final decision on development rights to other parts of the deposit.
Erdenes-Tavan Tolgoi Chief Executive Officer Yachil Batsuuri told Business News Europe that Tavan Tolgoi has delivered $170 million worth of coal to Chalco but wants to pay the remaining $180 million of the contract in cash.
"The government has also said that it will have multiple buyers, not only a single buyer. It decided to sell its coal at the world market price," Batsuuri said.
The company "is facing ... financial difficulties," he said. "That's why we stopped our coal transportation and export."
Speaking Friday to The Wall Street Journal, Mongolian Ambassador to Beijing Tsedenjav Sukhbaatar said the pricing terms of the deal, which he said capped Mongolia's coal exports at $70 a metric ton, were "unacceptable in the sense of normal international trade."
Still, Erdenes-Tavan Tolgoi could face repercussions for canceling the contract.
A unilateral breach of the contract ... could mean unlimited monetary damages," Li Dongguang, president of Chalco subsidiary China Aluminum International Trading Co., told the Journal, adding that he hoped Mongolia "won't walk further and further away."
Li said the dispute was linked to what he considers the tendency of the new Mongolian government, elected in June, to revisit all of its global mining deals.
Tavan Tolgoi's decision to back out of the coal-trade agreement could put more strain on Mongolia's tense relationship with China.
"This move could potentially make things much more difficult for Mongolia in the long term," Vidur Jain, an analyst at Monet Capital Investment Bank told Business News Europe. "If Chalco does not want to renegotiate the existing agreement, it could sour the relationship with their biggest customer."
Meanwhile, the mining company's planned public listing has faced repeated delays. Furthermore, Bloomberg News, citing an unnamed source, reported Tuesday that Graeme Hancock, chief operating officer of Erdenes Tavan Tolgoi, had resigned.