Mongolia's state-owned mining firm Erdenes Tavan Tolgoi (ETT) said Wednesday it had agreed to supply coal to a consortium of firms from energy-hungry China for $250 million.

ETT owns the eastern part of the huge Tavan Tolgoi coal deposit in southern Mongolia, which as the world's largest has attracted the interest of mining giants from around the globe.

The western part of the deposit is currently being auctioned off to international miners in a move authorities in the mineral-rich but undeveloped country hope can help pull thousands out of poverty.

Under the agreement signed with China's state-run aluminium company Chalco, Jinan Iron and Steel and another firm, the Chinese consortium will pay ETT $250 million in advance, B. Enebish, head of ETT's parent firm, told AFP.

"Mongolia will repay the advance payment in coal, and the coal price will be agreed by all parties based on market prices," he said.

The deal says that once ETT finishes repaying the advance money, the Chinese consortium will then have to start reselling 30 percent of the coal supplied by ETT to South Korea's Korea Resources Corp and Japan's Mitsui and Itochu, media reports said.

Once the agreement expires in five years time, ETT will no longer have to sell its coal to the Chinese consortium and will be able to export it to any market it chooses, a report in the private Undesnii Shuudan newspaper said.

Sandwiched between China and Russia, Mongolia has sought to follow policies that do not alienate either of its giant neighbours, but is also seeking closer ties with the United States.

China is the world's largest producer and consumer of coal, upon which it relies for 70 percent of its fast-growing energy needs.

The Tavan Tolgoi field is located 270 kilometres (165 miles) from the border with China and contains 6.4 billion tonnes of coal -- about a quarter of which is high-grade coking coal, a key ingredient for steel production.

Foreign mining giants have been competing fiercely for the right to mine the western section of the deposit.

Mongolia's government announced earlier this month it had picked US firm Peabody Energy, China's Shenhua and a Russian-led consortium, but uncertainty still remains over whether this is a definite agreement.

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