SouthGobi May Spend $800 Million on Mongolian Output

By John Duce

Dec. 21 (Bloomberg) -- SouthGobi Energy Resources Ltd., a Canada-based coal producer operating in the southern deserts of Mongolia, plans to spend as much as $800 million in the next three years to increase output and supply customers in China.

The Toronto-listed company aims to boost its coal production in the Gobi desert by more than sixfold to 8 million metric tons by 2012, Chief Executive Officer Alexander Molyneux said at a media briefing on Dec. 10 at the Ovoot Tolgoi mine, about 950 kilometers (590 miles) south of the capital Ulan Bator. SouthGobi, 79 percent-owned by Ivanhoe Mines Ltd., embargoed the release of information at the press conference until today.


Ovoot Tolgoi is about the size of Paris and lies in one of the most sparsely populated areas in the world. The mine started production this year to supply power producers and steelmakers in the fastest-growing major economy. At least $500 million is needed for SouthGobi’s development, which includes building a 40-kilometer railway track to the Chinese border, Molyneux said.

“The increases in production talked about by the company are executable and achievable,” said Alisher Djumanov, managing partner of Singapore-based Eurasia Capital Management, which has about $100 million in investments in Central Asia and Mongolia, mainly in natural resources. “Developing a rail link to the border is a good way to reduce overheads. One of the key issues they have is how to get their products to customers in China.”

This year Ovoot Tolgoi produced 1.2 million tons of coal, currently carried by truck across arid dirt tracks to rail links in the Chinese province of Inner Mongolia, Molyneux said. The mine has 114.1 million tons of reserves, according to SouthGobi.

Coal Reserves

The mine is an 18-hour drive from Ulan Bator in South Gobi province, a desert region with a population of about 45,000 in an area larger than Greece. Ovoot Tolgoi operates seven days a week and winter temperatures can fall as low as minus 40 degrees Celsius (minus 40 degrees Fahrenheit).

“Mongolia is a new frontier for coal,” said Djumanov of Eurasia Capital, which owns SouthGobi stock. “I have not seen other figures, but the government estimates the country may have 100 billion tons of coal.”

Ivanhoe Mines Chairman Robert Friedland said on Oct. 23 that the Vancouver-based company, through SouthGobi, wants to supply 1 percent of China’s coal supply within 10 years and is targeting long-term production of 20 million tons annually from Mongolia. Rio Tinto Group has a 19.68 percent stake in Ivanhoe.

Seeks Funding

Excavators have started extracting coal from a 53-meter thick seam at an open pit at Ovoot Tolgoi, one of the thickest in the world, according to SouthGobi. The mine covers an area of 9,308 hectares (93 square kilometers or 36 square miles) and employs 278 workers. Paris spans 10,539 hectares, according to data from the office of the French city’s mayor.

“This is our first year of production at the mine and we are now planning to increase this rapidly,” Molyneux said.

The company, which has licenses to explore for coal in 800,000 hectares in Mongolia, will develop reserves at the nearby Soumber deposit in the next three years, he said.

SouthGobi is seeking additional institutional investors to fund its operations in Mongolia, Molyneux said, adding that the spending estimate for the next three years is still preliminary. The company said on Oct. 26 it secured $500 million of financing from China’s sovereign wealth fund.

“We have said we have an intention to list on an Asian stock exchange, and I guess the logical deduction is most regional energy companies are listed in Hong Kong and we have an office in Hong Kong, but I can’t say any more about it,” he said.

SouthGobi plans to raise $300 million in an initial share sale in Hong Kong, the Standard newspaper reported today, citing unidentified people in the market.

Rival Developments

Rivals including BHP Billiton Ltd., Vale SA and Xstrata Plc, are interested in developing coal mines in southern Mongolia, the nation’s Minister of Mineral Resources and Energy, Dashdorj Zorigt, said on Dec. 3. The government is planning “more intense discussions” with the companies over development rights, he said.

Mongolia is seeking $25 billion of overseas investments in mining in the next five years to develop some of the world’s largest untapped resources, including gold and copper, former Prime Minister Sanjaa Bayar said in a July interview.

Ivanhoe Mines is developing a $4 billion copper and gold mine at Oyu Tolgoi in Mongolia with Rio Tinto. Commercial production at the mine, which Rio has described as the world’s largest copper and gold resource, may begin in 2013, said Ivanhoe Mines in a statement on Dec. 7.

The Oyu Tolgoi project is about 80 kilometers north of the Mongolian border with China and may have copper resources of 78.9 billion pounds and 45.2 million ounces of gold resources, the company said last year.

To contact the reporter on this story: John Duce in Hong Kong at Jduce1@bloomberg.net

Last Updated: December 20, 2009 20:42 EST

Source:Bloomberg News Service
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