Mongolia Mine Auction: High Risks, High Rewards

HONG KONG (Reuters) – Mongolia’s government will soon hire an investment bank to sell part of a massive coal mine valued at around $2 billion in a historic deal that could bring a windfall to the sleepy country of windswept grasslands.

While some mining companies may be starving for access to such a large deposit, several obstacles remain, including lack of transparency and stability in Mongolia’s mining laws.

Tavan Tolgoi, often called the world’s biggest untapped coking coal deposit, holds a coal reserve of 6.5 billion tonnes in the landlocked country’s Gobi desert.

The government, which is aiming to pull Mongolia out of poverty with its uranium, lead, zinc, copper, gold, and coal deposits, will own not less than 51 percent of Tavan Tolgoi. It aims to offload up to 49 percent to a global mining giant.

JPMorgan (JPM.N) and Citigroup (C.N) are among the banks in the running for the mandate, two sources with direct knowledge of the process told Reuters. The government may choose multiple banks to run the auction, one source said.

“They’ll choose somebody in the next few weeks,” an investment banker with direct knowledge of the situation told Reuters. The source declined to be identified due to the sensitive nature of the negotiations.

Citigroup and JP Morgan declined comment.

Media reports have named a range of potential bidders such as Chinese coal giant China Shenhua Energy (1088.HK) (601088.SS), Japan’s Itochu Corporation (8001.T), Peabody (BTU.N) and world No.1 miner BHP Billiton (BHP.AX) (BLT.L).

But a deal for the asset is not without its hurdles.

Analysts say uncertainties cloud what could be good timing and strong prospects for mining firms on the hunt for Mongolia’s untapped assets.

“The prospectivity of the geology relative to the amount of exploration work that the country has undergone make it a hugely exciting prospect as a new frontier for global mining companies” said Andrew Driscoll, head of resources research at CLSA.

“It’s really the lack of stability in the government and in the mineral laws which detract fairly significantly from that natural prospectivity.”

Fitch Ratings on Monday lowered Mongolia’s sovereign rating to B from B-plus blaming its external finances, diminished ability of its central bank to manage the exchange rate and weaknesses in the banking system.

Mining accounted for 33 percent of the country’s gross domestic product in 2007, according to Mongolia National Mining Association.

Mongolia now faces a 2009 budget deficit as the global financial crisis roils markets and hits commodity prices after several years of rising prices brought unprecedented revenues to the government.

Prices of power-station coal from Australia, a benchmark for Asia, were unchanged at above $81 a tonne in the latest week amid sluggish demand on the spot market, according to the globalCOAL Newcastle index. Prices are recovering after plunging from a record high of about $200 a tonne in July.


BHP originally won the right to develop Tavan Tolgoi in the 1990s, but found it to be uneconomical at the time and returned the license to Mongolia — where annual per-capita income is about $1,200.

The successful sale of Tavan Tolgoi — which means “five heads” because of the contours of the site’s hilly landscape — could hand Mongolia between $1-$2 billion, plus ongoing revenues from its majority stake in the mine.

“It’s a fairly shallow deposit and therefore the costs and the profitability are very good, so what appears to be a large scale and quality coking and thermal coal asset is something that a wide range of suitors would want to acquire,” Driscoll said.

But since the discovery of copper and gold deposit Oyu Tolgoi — a joint project between Canada’s Ivanhoe Mines (IVN.TO) and Rio Tinto (RIO.L)(RIO.AX) — in 2001, Mongolia’s laws have gone from among the most attractive in the world for foreign miners to increasingly protectionist.

The 2006 version of the law allowed the state a share of up to 34 percent of deposits found with private funds and up to 50 percent of those discovered with state funds. Mongolia has since delayed revising its contentious minerals law.

Ivanhoe and Rio say Oyu Tolgoi could raise Mongolia’s GDP — roughly $8.5 billion — by more than a third, and a mining boom could create huge wealth for a country of less than 3 million people, many of whom are nomadic herders.

Doubts however still remain about whether the partnership between Mongolia’s government and a strategic investor into Tavan Tolgoi will pay dividends.

“The recent unexpected resignations of the president of the Bank of Mongolia and the head of the Financial Regulatory Committee have escalated uncertainty, with respect to banking and financial supervision and policy implementation,” Fitch said.

By Joseph Chaney and Michael Flaherty
(Additional reporting by Lucy Hornby in Beijing and Fayen Wong in Perth; Editing by Anshuman Daga)