Mongolia Energy eyes August coal deliveries

HONG KONG Thu Mar 11, 2010 3:24am EST

HONG KONG (Reuters) - Mongolia Energy Corp (MEC) (0276.HK), a former technology company that remade itself into a natural resources developer in 2007, will deliver its first coking coal cargo this August and is also looking at projects beyond Mongolia, a senior executive said.

Mineral rich Mongolia is attracting more attention from global investors after a deal in October with Ivanhoe Mines (IVN.TO) and Rio Tinto (RIO.AX) (RIO.L) to develop the $3 billion Oyu Tolgoi mine, one of the world's biggest untapped copper and gold deposits.

MEC, which is still in the money-losing, ramp-up phase of developing its Khushuut site in western Mongolia, aims to supply quality coal to China's steel industry, like Hong Kong-listed peer SouthGobi Energy (1878.HK).

Because of Khushuut's location, MEC plans to serve the steel industry in China's Xinjiang Province with Bayi Steel (600581.SS), a unit of China's largest steelmaker Baosteel Group, as its first designated customer.

MEC would see cash flow kick in after it started delivery of coking coal to Bayi, Chief Executive James Schaeffer said in an interview during the Reuters Global Mining and Steel Summit on Wednesday.

"To get this mine online in a three-year period, in a remote location, especially with the adverse weather we've had -- it's a significant achievement," Schaeffer said. "We can get the first coal moving out of the mine in August."

Khushuut is an open-pit mine in Khovd province. MEC has appointed Leighton Holdings (LEI.AX), the world's biggest contract miner, as its contractor for the development.

The miner has also been building a 340 kilometer road linking the Khushuut mining area to the Mongolia-China border, which is about 550 km to Urumqi, the provincial capital of Xinjiang. However, weather problems could periodically cause hiccups in the delivery schedule, Schaeffer said.

MEC aims to sell its coking coal at an FOB price of $120 per metric ton versus a production cost of about $35 per metric ton. Including transportation, its coal may sell at roughly $165 per metric ton.

MEC's path from a technology firm to a coal miner has worried some analysts, however.

After the firm announced the move to invest into Mongolia's coal industry, its shares climbed more than 65 times in less than 18 months to a high of HK$18.06 in June 2008. But the lack of an earnings track record in the past few years pushed the stock back to HK$3.81 on Wednesday, down 4.3 percent this year versus a 3 percent loss in the broader market .HSI.

Analysts warned of execution risks to bringing the Khushuut mine, which is about 800 km away from its target customers, to production in time and within budget.

RAMP UP

MEC planned to produce about half a million metric tons of raw coal in the first year of production from August 2010 to July 2011, 3 million metric tons in the second year, and rising to 8 million metric tons per year from the fourth year, Schaeffer said.

The figures are more conservative than previous estimates for 3 million metric tons by the end of 2010.

"Probably at that time, we were looking at production at late second quarter, we're now looking at later in the third quarter," Schaeffer said. "There's always some slippage. It's just the nature of a mining operation, and the intricacies that are involved."

The Hong Kong-listed miner has no plans to tap the market for more funds, despite its immediate capex needs to develop Khushuut and other mines.

"We've got very strong shareholder support," Mohan Datwani, General Counsel and Chairman's assistant said. "The issue really is: 'Does this reflect our value?' And also the dilution factor. I think being in production is a good place to be, and that's our focus right now."

For the near-term Mongolia will be the company's base, but MEC is also looking at growth opportunities across Asia.

"As far as looking into China, I've got stuff that comes across my desk all the time," Schaeffer said.

"On the surface, we've looked at projects in Australia, Indonesia, the Philippines, but nothing that at this point that would appear to have significant interest that we'd want to chase it for the benefit of our shareholders."