Mining Mongolia

Timothy Kwai

Monday, February 01, 2010

Now that UC Rusal has become the first Russian enterprise to be listed in Hong Kong, investors have begun looking into another interesting energy firm, this one based in Mongolia.
Toronto-listed SouthGobi (1878) has attracted global attention after claiming to be a strategically located premium coal producer.

This may not be reflected in the stock's 11 percent slide on its first trading day in Hong Kong on Friday. But the future holds much promise for this Canadian company, which raised US$439 million (HK$3.42 billion) from its latest initial public offering.

Big names like the mainland's sovereign wealth fund, China Investment Corp, has invested in the firm that holds coal reserves in the region bordering China and aims to sell thermal coal to mainland end users.

SouthGobi says after CIC became an investor, its treatment by state- owned enterprises and mainland officials have changed for the better.

The CIC connection has allowed the firm to cut through a lot of red tape, enabling direct negotiations with potential end users, namely several state-owned steel enterprises.
It also got access to power plants, national grids and various ministries in order to expand its customer list. CIC, as a cornerstone investor, has agreed to invest up to US$500 million in SouthGobi and so far has put up US$30 million.

SouthGobi's largest shareholder Ivanhoe Mines also has an interesting background.

Ivanhoe is a Canadian mining developer listed in Toronto and the New York Stock Exchange and its key asset is the world's largest copper-gold development project located in Mongolia.

Ovoot Tolgoi is SouthGobi's flagship coal mine while Tavan Tolgoi is the world's largest undeveloped coal field.

Both are to be connected with road and railway links to China's steel hubs such as Jiayuguan in Gansu and Baotou in Inner Mongolia.

Beijing has also approved huge coal-fired plants for Jiuquan near Jiayuguan.

SouthGobi's coal quality is higher than that of Chinese coal producers.

In terms of the heating value (kcal/ kg), its product is 6,054 on average, while China Coal's (1898) is 6,042 according to independent technical experts.

The forecast target volume in 2009 and 2010 is around 2 to 3 million tonnes as SouthGobi negotiates to boost sales.

But the firm is aiming for a production surge of 15 million tonnes in 2015.

Transport of the coal will be made easier after both the Chinese and Mongolian governments approved three coal corridors across their common border.

Transportation has not been a problem yet since clients have been sending their own trucks to the coal mines to collect supplies daily.

One of SouthGobi's strengths is its versatile management team.

Alex Molyneux, a former senior metals and mining executive at Citigroup is a reputed investment banker with wide experience in minerals.

The fact that SouthGobi is regarded as a star is because of its strong management line-up.

Turning to Mongolia Energy (0276), the management is banking on large scale exports from western Mongolia to the Xinjiang Autonomous Region whose transport infrastructure is to be upgraded. Mongolia Energy has built a 310-kilometer highway to access the Chinese market from its mines and also aims to develop copper mines connected to the coal reserve.

Mongolia Energy appears to be transforming itself from a single-project coal company to a multi-mineral resources developer.

Simon Lo Lin-shing, MEC's largest shareholder, is pushing the company to become a fully fledged resource developer. MEC's main asset is the 34,000 hectares of coal concessions it acquired in 2007.

It has also carried out eight drilling projects involving oil and gas, iron and other minerals.

Generating revenue is one issue, but turning a profit can be an entirely different matter.

Unless the company can identify more profit-generating projects within two years, it is unlikely that MEC's profit and loss statements will be stunning until at least 2014 or 2015.

But one advantage is that MEC faces weak competition from other firms seeking resources in western Mongolia.

Unlike, MEC South Gobi's management has confirmed it has no gold reserves or copper in its mining areas.

This makes it a single-resource developer, enabling it to concentrate on coal mining and trading.

From a mining perspective, Australia can be regarded as an elderly person and Indonesia an adult.

But Mongolia is just baby which has yet to grow up to reveal its real potential.

*Timothy Kwai is an investment strategist at Quam Securities.

E-mail: timothy.tkkwai@quamgroup.com

Source:The Standard newspaper of Hongkong (www.thestandard.com.hk)