Aspire Mining’s (ASX:AKM) Northern Railways has been given a momentous green light to build and operate the 547 kilometre railway to extend Mongolia’s national rail network from Erdenet to its Ovoot Coking Coal Project.
This first stage of a new rail connection linking Mongolia to Russia could be operational in 2017/18, providing Ovoot with a defined path to market by rail.
Northern Railways worked with Fortune 500 company China Railway Construction Corporation (HKG:1186, SHG:601186) – a 236.15 billion yuan (A$50 billion) market cap - and its subsidiaries to land the concession.
Northern Railways will have the exclusive right to build and operate for 30 years the 547 kilometre Erdenet-Ovoot railway.
The Concession will allow up to 5 years to construct the railway followed by 30 years of operation after which 100% of the base railway infrastructure will be transferred to the Government of Mongolia.
Northern Railways’ Erdenet-Ovoot railway represents the first stage of a new rail connection linking Mongolia to Russia.
A Pre-Feasibility Study has been completed on the Rail Project with an estimated capital cost to construct of US$1.2 billion.
The company is currently working exclusively with China Railway subsidiaries, China Railway 20 Bureau Group Corporation (CR20G) and China Railway First Survey & Design Institute (FSDI) to complete the Bankable Feasibility Study and negotiate the terms of the Engineering Procurement contract to be awarded to CR20G.
This will fulfil two of conditions that Northern Railways will need to satisfy over the next 18 months upon execution of the Concession Agreement. It will also be required to arrange financing.
Analysis
This has been a journey for Aspire Mining and today's granted concession provides a path to potential "black" gold for the company.
Partnering with China Railway, a Fortune 500 listed company, and China’s largest rail construction organisation provides a balance sheet with the financial clout to make it happen.
The BFS is expected to take about 9 months to complete while the concession enables Northern Railways to progress financing negotiations with Chinese financial institutions with assistance from CR20G.
It is worth noting that are numerous funds, some recently established such as the AIIB and Silk Road Fund, established specifically to support infrastructure build out in Asia in support of China’s new silk road strategy.
Next Steps
Following the execution of the Concession Agreement, Northern Railways will work with the CR20G and FSDI to raise funding for construction of the base rail structure.
They will also negotiate other key agreements and permits that are conditions precedent to commencing construction under the Concession Agreement.
Granting of this concession is also further evidence that the Government of Mongolia is working vigorously to address falling Foreign Direct Investment (FDI).
It follows the agreement with Rio Tinto (ASX:RIO) and Turquoise Hill Resources (TSX:TRQ) to progress the second stage of the Oyu Tolgoi Copper Gold Mine in May 2015, and the recent granting of a Concession to build CHPP5, a new US$1.3 billion heating and power Plant.
Erdenet-Ovoot rail line
The 547 kilometre Erdenet-Ovoot rail line represents the first stage of a new rail connection linking Mongolia to Russia that is key to establishment of an Economic Corridor through Mongolia.
This Economic Corridor, which is the subject of a trilateral agreement between China, Russia and Mongolia, seeks to improve trade by reducing regulation, improving capacity at borders and improve road and rail infrastructure to meet increased demand for transport services.
Erdenet-Ovoot Rail is also central to unlocking the value of the Ovoot Project and future earnings from mining and production from the project for Aspire.
Ovoot has a JORC Resource of 255 million tonnes and is the country’s second largest coking coal reserve behind the government-owned Tavan Tolgoi project.
Initial production is estimated to commence in 2018, producing 5 million tonnes per annum of saleable coking coal and increasing in subsequent years to achieve full scale production of up to 10Mtpa from both the open pit and underground operations.
Once built, there are multiple other Mongolian resource projects in the area that would also be provided with a path to market.
The open access railway could also be used by local agricultural and manufacturing industries and passenger freight, and in time potentially Russian and/or Chinese transit freight.
Notably, China Railways is involved through its various subsidiary companies in the development of a number of rail projects along the planned Economic Corridor spanning between Russia, Mongolia and China.
This includes construction of the Kuragino to Kyzyl railway which will eventually connect with the Erdenet to Ovoot railway.
Northern Railways is on track to complete in the September 2015 Quarter, a Scoping Study over the planned railway extending from Ovoot to the Russian border approximately 180 kilometres north of Ovoot and further to the Russian town of Kyzyl to complete this connection.
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