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The Mongolian government has selected a consortium comprising U.S. company Peabody Energy Corp. (BTU), China's Shenhua International Ltd. (SHU.AU), as well as a Russian grouping to develop the Tavan Tolgoi coal mine, one of the world's largest unexplored coking coal reserves.

The allocation of the hotly contested development rights to Shenhua, Peabody and the Russian grouping allows land-locked Mongolia to balance its interests and internationalize the project, while also appeasing immediate neighbors China and Russia, both big markets.

By bringing in investors to help develop the mine, the government would reduce the amount of money it needs to fork out upfront, a major consideration given Mongolia's limited financial resources.

Peabody, the largest U.S. coal producer by output, will hold a 24% share in the consortium, while Shenhua, China's largest coal producer by revenue, will have 40%. The Russian-led grouping will have the remaining 36%, with the Russian parties holding 18% and the Mongolian side the other 18%, according to a government statement.

The Tavan Tolgoi project involves mining coking coal as well as taking out gasoline from coal, the statement said.

The massive Tavan Tolgoi project has an estimated reserve of 6.4 billion metric tons of coking coal, an essential ingredient in steel making. It is also the world's second-largest coal deposit, after the Shengli field in China, according to data provider Raw Materials Group.

The Mongolian government is giving strategic investors a chance to develop roughly half the deposit, in the western Tsankhi area of Tavan.

Although, no official figures on investment costs have been released, analysts have estimated that investments to the tune of $7.3 billion would be required to develop Tavan's western block. The eastern block will be developed by the government itself, possibly funded through an initial public offering.

The race to secure rights to operate the resource-rich Tavan Tolgoi underscores the rapid industrialization of Asia, especially China and India, which has prompted miners and other investors to seek coking-coal supplies.

Brazil's Vale SA, Xstrata PLC, ArcelorMittal and a consortium of Mitsui & Co. were the other companies short-listed to bid for the project.

A Korea-Japan-Russia consortium that also made the shortlist was made up of multiple Korean companies including state-run Korea Resources Corp. or Kores, state utility Korea Electric Power Corp. (015760.SE), steel giant Posco (005490.SE), Daewoo International Corp. (047050.SE) and LG International Corp. (001120.SE). On the Japanese side, the consortium included Itochu Corp., Sumitomo Corp., Marubeni Corp., Sojitz Corp. OAO Russian Railways, was the Russian partner.

Kores, Posco and LG International said they have yet to receive official notice that their bids have been rejected. Kepco and Daewoo International couldn't immediately be reached.

It wasn't immediately clear whether the Russian grouping picked to develop Tavan Tolgoi included any of the Korean or Japanese companies.

Mongolia is planning to build a 1,000-kilometer rail road from its vast, untapped Tavan Tolgoi coal deposit to Choibalsan in the country's east to connect it with Russia. That's despite Tavan Tolgoi, which contains over 6 billion tons of coal, being much closer to the Chinese border.

The statement from the Mongolian government said that Shenhua, Peabody and the Russian consortium picked have agreed to make a payment of $500 million in the first phase of the project, and another $500 million later.

Last month, Mongolian Prime Minister Sukhbaatar Batbold said that the government will retain the ownership of the project and that his government was keen to create an infrastructure to link the project to Russia and China.

People familiar with the situation have said that the Mongolian government had already started some work on the development of railway links to the project in a bid to tap exports markets other than China.

-By P.R. Venkat and Gurdeep Singh, Dow Jones Newswires; +65 64154 152; venkat.pr@dowjones.com

--Lin Min Jeong in Seoul contributed to this article.

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