Terrence Edwards in Ulaanbaatar -
While many commodity investors believe the future of the global coal industry is looking increasingly bleak, one of Mongolia's biggest foreign investors is determined to expand a coalmine in the country.
James Passin of US investment firm Firebird Management, which is famous for making huge bets on Mongolia, is planning to produce coal at one of Mongolia's oldest mines and transport it to the shores of resource-poor South Korea, as well as open up investment opportunities with a possible stock market listing in Singapore.
The Sharyn Gol mine is located at a former hub for industry located in the northern district Darkhaan-Uul, which grew up when Mongolia was a Soviet satellite that acted as a buffer between Russia and China. The thermal coal mined there is typically used to power coal-fired power plants, although many countries are now trying to replace such plants with more environmentally friendly energy sources such as wind or solar power.
However, Passin sees a price rebound in the global coal market, which has collapsed over the last few years due to a perfect storm of factors. His expectation is that today's surplus will eventually wear thin as coal production dwindles and demand grows. “I'm quite bullish on the coal market in the next three to five years,” says Passin, adding that if prices return to previous levels, he'll be well placed to export his mine’s output given its access to the Trans Mongolian Railway that runs north and south between Mongolia's two giant neighbours.
Sharyn Gol and its 337mn tonnes of coal reserves suffered from a decade of neglect before Passin added it to the New York-based Firebird Mongolia Fund portfolio. The withdrawal of Soviet support after Mongolia's transition to democracy in 1990 resulted in a decade of economic struggle, and like many of Mongolia's aging industrial facilities from the Soviet era, the mine fell into disuse. But when the mine was fully privatized in 2003, Passin saw an opportunity to capitalize on the economic growth in China, the world's largest consumer of coal, and has so far invested $16mn into the mine.
Black is back?
Coal in recent years has taken a back seat to other mining commodities because of oversupply. Also, governments have become more sensitive to the impact that burning coal has on the environment. Even China, which grew to be the world's largest polluter of carbon in 2007, is focused on developing alternative sources of energy to power its rapidly growing cities and industry. Beijing is cleaning up its act in the face of international pressure and complaints from citizens about the heavy smog that smothers its cities.
In addition to slower economic growth in China, which is set to see its lowest growth in a quarter of a century at around 7% this year, in 2014 introduced a tax of between 3% and 6% on imported coal, depending on type of coal.
The softer demand for Mongolia's second largest commodity by earnings has been a harsh blow. The price of coal fell 8% at the end of last May, according to data from Ulaanbaatar-based Khan Bank. That contributed to a 33% decline in sector earnings that month from the same period in 2014.
Despite the gloom, Passin believes some investors are premature in writing off coal. “What's happening on the supply side is Indonesian coal collapsed, and Australia has basically abandoned all these large thermal coal export plans,” says Passin, referring to two of Mongolia's biggest competitors for coal exports to China.
As for Chinese demand, he says, many of the older coal-fired power plants will be replaced with newer, more efficient and cleaner-burning plants. ”Effectively, China is expanding its power generation from coal, but it's shutting down the old ones,” says Passin.
Meanwhile, Mongolia's domestic demand for coal is expected to rise as it builds its own new power plants to keep up with rising energy demand.
Bridge from North Korea
Beyond Mongolia and China, Passin is also looking towards the shores of regional neighbours South Korea and Japan. Japan, like South Korea, has very little in the way of natural resources and has traditionally relied on nuclear power, though is now looking at other sources to generate power such as gas and coal since the Fukushima nuclear disaster in 2011.
However, Sharyn Gol's coal in landlocked Mongolia is taking an unexpected route via Russia to the Rason seaport in North Korea. Firebird turned heads in 2013 when it announced that its part-owned refined petroleum products recycling and processing company HBOil had gained oil exploration and production rights in North Korea. One asset included in the deal was an oil refinery located in the Rason special economic zone, which is also where there is seaport from which it could begin shipping coal to South Korea. Sharyn Gol and HBOil are two of four Mongolian stock market-listed companies that Firebird controls.
Although he could not yet reveal details about sales to South Korea or transportation costs, Passin says that coal from Sharyn Gol would be more accessible than the coal from regions of Russia that he saw being shipped from Rason. “We're going to begin trial shipping and expand,” says Passin.
“It's possible because of our washed coal,” he says about how the mine will compensate for the costs of the journey. Sharyn Gol opened its coal washing plant in June, and it also has plans to begin producing coal briquettes that it says when burned will emit less carbon into the atmosphere.
Meanwhile, Sharyn Gol is mulling a possible public offering on the Singapore Stock Exchange. Trade is slow on the Mongolian exchange, which has a total market capitalisation of around $700mn, and there is very little liquidity. Listing a holding company with Firebird's 72% shareholding in Sharyn Gol in Singapore gives much better capital-raising potential.
Although Mongolia already has mining outfits listed in Hong Kong, being the first to list in Singapore opens the door to a whole new market of Asian investors who might be looking to take advantage of a second mining boom in Mongolia.
However, Passin's predictions hinge on whether his theories on coal pan out, and if this commodity heading toward extinction proves to be a phoenix rather than a dodo.
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