Mining in Mongolia

By bne IntelliNews May 30, 2011

Oliver Belfitt-Nash in Ulaanbaatar -

Ten years ago, the average Mongolian herder looked at coal as just a convenient, ubiquitous fuel used to heat the tent and brew tea. Today, however, noorse (the Mongolian word for coal) is heard on the lips of hairdressers, students and investment bankers alike. Coal is now big business in Mongolia.

The Minerals Authority estimates the country's coal reserves at a staggering 163.3bn tonnes spread over 300 proven deposits, split into 172 mining licenses in the hands of 123 companies. This would rank the country second in terms of reserves, behind the US with 237bn tonnes; in per-capita terms, Mongolia is far out in front.

The development of the Tavan Tolgoi coal deposit, one of the world's biggest untapped coal deposits, exemplifies this. Claiming 6bn tonnes of reserves, the area was split into 12 licenses, of which half remain in government hands. The bidding for the remaining 3bn tonnes has again been divided. The western block will be sold to a strategic investor, short listed as one or more of six mining giants: ArcelorMittal, Vale, Xstrats, Peabody, a consortium of Chinese energy firm Shenhua and Japan's Mitsui, or a consortium of Japanese, South Korean and Russian firms. The eastern half, however, will be held by state-owned Erdenes Tavan Tolgoi and the plan for this block is to sell a 30% stake on an international stock exchange, 10% to Mongolian companies, and dish out another 10% between each and every citizen. "The company will produce 1m-2m tonnes of coal in 2011 and not less than 10m tonnes in the long term," says Jalbasuren Batzandan, who sits on the board of Erdenes Tavan Tolgoi. "We will improve infrastructure and build a power plant, a coal-washing plant and a chemical coking plant."

Shared hopes

If you are Mongolian, getting your hands on a piece of this asset is easy - and free of charge. A quick registration with any broker or notary office entitles a Mongolian to 538 shares of their coal giant, roughly calculated at $0.33 per share from the state's expectations, or $175 total. This hasn't stopped rumours on the street about the value of the stake, ranging from $0.10 to $2.00, and Goldman Sachs and Deutsche Bank, lead managers of the IPO, may want to re-look at the valuation of the company if the government will let them.

To some, the plan is a throwback to the government-issued "coloured tickets" in 1991 that entitled owners to buy newly privatised assets. Others see it as the government's latest "bribe" to buy votes - a repetition of last year's $1,000 "gift" promised to each citizen for successfully signing the investment agreement for Oyu Tolgoi, the world's largest untapped copper and gold resource, but one that no-one received. Despite the government's efforts to placate voters, an ongoing protest in the city centre demands the impossible: the disbandment of the government and annulment of the Oyu Tolgoi investment agreement.

The share distribution plan has sparked a heated debate over the country's natural resource wealth and the government decisions over it that are crucial to a newly developing economy like Mongolia's. Optimistic investors tell this story as a sign of a healthy democracy with citizens airing their grievances now rather than later in an uprising. With each citizen a shareholder, it's hoped Tavan Tolgoi will be a flagship project that helps the country safely navigate through the treacherous waters of development. "Tavan Tolgoi will open a new chapter for the lives of Mongolians," argues Batzandan. "8,000-10,000 new jobs will be created. If Mongolia successfully capitalises on the strategic deposits of the country, the GDP will reach $100bn in 10-15 years. Poverty and unemployment will be left written only in history books."

Judging from the performance of listed coalmining companies already operating in Mongolia, hopes are high for Erdenes Tavan Tolgoi. The share prices of Australian-listed Guildford Coal and Hunnu Coal, Hong Kong-listed Mongolian Mining, and local-listed Sharyn Gol have all shot up over the past year. On April 20, C @ Limited announced the acquisition of a Mongolian coal asset and over the following two days its share price on the Australian Securities Exchange spiked 100%. "The average Mongolian will be a millionaire by 2014," says Chris Devonshire-Ellis, a business consultant in the region. "Reform is happening at a frantic pace."

That said, many caution that coal mining is not an unalloyed good. "We need to learn how to offset ramifications of mining on the economy and society. We cannot forget that mining is the most harmful sector in the business world. Mongolians love the motherland, and mining operations will be on a whole different level when the paved roads and railways are built," says Batzandan.

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