Deep Diving into Aspire’s Northern Railways and Erdenet to Ovoot Rail Project

The Pure-play metallurgical coal project developer, Aspire Mining Limited (ASX: AKM) on 26 March announces the Northern railway eighteen-month extension to Erdenet to Ovoot rail concession.

Good Read: AKM’s Northern Railways Obtains Extension of Rail Project.

Erdenet To Ovoot Rail: Concession Agreement

On 12 August 2015, the Mongolian Government resolves to grant 30 years concession to the Northern Railways LLC for Erdenet to Ovoot rail. In which Northern Railways received all rights to build and operate the 547km railway line for 30 years and after which the whole infrastructure will be transferred to the Government of Mongolia.

Upon execution of the Concession Agreement, the Northern Railways need to satisfy different conditions such as bankable feasibility study, contract negotiation for EPC and arranging finance to mention few, within 18 months the day of execution. After which the Company will have five years to construct the project and take benefit of it for the next 30 years.

The Concession Agreement is developed keeping Ovoot Project future development in mind such that the project is expected to start initially at 5Mtpa and then to increase to 10Mtpa in its total life of mine of 21 years. In the milieu of which AKM in its recent announcement urge for the Mongolian rail network extension to Ovoot to keep in focus the Ovoot coal mine full-scale production capacity of 10 Mtpa.

The Economic Corridor - Trilateral Agreement Between China, Russia And Mongolia

It is notable to mention that the Erdenet to Ovoot railway and Kuragino to Kyzyl railway (eventually connecting with the Erdenet to Ovoot railways) forms the Economic Corridor spanning between Russia, Mongolia and China. On July 2015, the Presidents of China, Russia and Mongolia signed a trilateral agreement for the Economic Corridor through Mongolia.

The Rail Project is likely to enhance trade, reduce regulatory jargon, improve borders relation along with meeting the future need of the transport services. Also, this Economic Corridor falls in Chinese policies to set up a New Silk Road to enrich Euro-Asian trade and Russia's policy of establishing a Euro-Asian economic zone.

Trilateral Economic Corridor Between Russia, Mongolia And China

Source: Company’s ASX Announcement, 12 August 2015

Okay! Aspire Mining Will Use BOOT PPP Model to Construct the Railway Project. Will It Generate AdequateIncome?

On 4 June 2018, the Company announced the Feasibility study of the Erdenet to Ovoot Railway Project. In which the total construction cost of the project remains US$1.25 billion (same as pre-feasibility study) excluding 10% of contingency cost.

The 547.7 km of railway line includes 36 kms of culverts, 9.8 km of tunnels, 30.2 kms in bridges and 1 bypass loops. The design capacity of freight is taken as 16 Mtpa, where additional capacity can be added to deliver a total capacity of 30Mtpa by using extra bypass loops.

The assumption used in modeling the profitability of the project are: -

• The Construction period of 48 months
• The rail freight demand starts with 5Mtpa, sourcing coal from both Ovoot Coking Coal Project and Mogin mine.
• The capacity is assumed to increasing to 16Mtpa after 12 years of operations.
• Coal from the Ovoot Project and Nuurstei Project make up over ten mtpa demand in future.

The Project IRR pretax is 9.65%, Equity IRR is 14.9% with Equity NPV at 8% is US$435 million. The net cash flow from concession is predicted to be around US$3.6 billion at a competitive tariff of US3.4c\t\km.

Also, it is worth mentioning that the rail connection in Economic Corridor, i.e. Tuvan Republic capital of Kyzyl and Ovoot is expected to open significant demand for rail freight.

Concession Agreement Condition

In line with Concession Agreement conditions, the Companyin March 2018 completed a bankable feasibility study of OEDP (Ovoot Early Development Plan) whereas in April 2019, Northern Railways, 80% owned subsidiary, announceda conditional EPC Contract to China Gezhouba International Engineering Co Ltd and China Railway 20 Bureau Group Corporation (CRB20G) to build Erdenet to Ovoot Railway.

China Gezhouba Group (CGGC) has shown interest to fund pre-development activities for worth US$5 million for Definitive Environmental Impact Assessment (DEIA) and land access permit to mention few. China Gezhouba has shown aim to support 75% of the total road building cost via a range of identified a Chinese commercial and policy banks.

CGGC also intend to fully fund the rail project in exchange of 50% interest subject to the Government of Mongolia approval related to freight capacity increment of an additional 10Mtpa in Northern Rail Line and Definitive Feasibility Study (DFS) and DEIA.

Must Read: Aspire Mining Advancing Well on Special Purpose Road and DEIA.

Therefore, the Concession Agreement extension was required as all the stakeholders are in discussion with the Mongolian Government regarding the preferred rail alignment. Hence securing the extension of 18 months to 18 September 2021 will aid in settling the discussion before the construction of Rail Project, i.e. Erdenet to Ovoot Rail Line.

Stock Information

The stock of AKM closed at A$0.060 on 3 April 2020 and has a market cap of A$30.46 million.

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