Mongolia shortlists 4 banks in step toward massive coal IPO

ULAN BATOR Thu Feb 24, 2011 5:58am EST

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ULAN BATOR (Reuters) - Mongolia took a step closer to the initial public offering of the world's largest untapped coking coal deposit on Thursday, shortlisting four global banks to manage the country's biggest ever share sale.

The development and sale of shares in the Tavan Tolgoi coal field is a major project for impoverished Mongolia and timely for global miners desperate for new supplies as coking coal prices are close to record levels.

Some 30 percent of shares in state-owned company Erdenes-Tavan Tolgoi will be sold no later than the first half of 2012, Mongolia's mining Minister Dashdorj Zorigt told Reuters on the sidelines of a conference where business people clamored for information about the project.

BNP Paribas (BNPP.PA), Deutsche Bank (DBKGn.DE), Goldman Sachs (GS.N) and Macquarie Group (MQG.AX) have been shortlisted to manage the IPO, Erdenes-Tavan Tolgoi said.

Bankers estimate the IPO will be in the range of $1.5-$5 billion and that the shares will be listed in Hong Kong, London or both.

Showing the huge interest in the project, some 150 bankers converged on the frozen capital of Ulan Bator earlier this month to pitch for the coveted mandate.

And on Thursday, around 400 people packed into a small hall in the city to hear Zorigt give a briefing on the project as part of the conference. Companies from across the globe were peddling mining equipment, mine management services and training at the conference.

"I think it shows the project is quite competitive and that Mongolia as a mining destination is becoming more and more attractive," said Zorigt.

15 MILLION ADDITIONAL TONNES

Tavan Tolgoi has estimated reserves of 6 billion tons of coal, including the world's largest untapped deposit of coking coal, used by steelmakers. Demand for coking coal from big Asian buyers including China, Japan and South Korea has pushed prices to near record highs this year.

Mongolia's vast quantities of mineral deposits could help it become one of the world's fastest growing economies in the next decade.

However, the government has remained wary of developing its mining sector too quickly.

It dallied for five years on the contract for the massive Oyu Tolgoi copper-gold project before finally agreeing a deal with Canada's Ivanhoe Mines (IVN.TO) in 2009, and it does not expect Tavan Tolgoi to reach full capacity for at least three years.

But some are calling for greater speed as demand for coking coal outside Mongolia begins to surge.

"As you know, the coal price is now very high and if we don't use this opportunity, what will happen next year when prices begin to fall? This is a golden opportunity that we have to use -- fast is good," Baasanjav Enkhbaatar, the chairman of the Mongolian Mining Club, told Reuters.

Erdenes, the state-owned company in charge of the eastern block of Tavan Tolgoi, plans to keep 50 percent of the project, and will distribute 10 percent of shares to local people, 10 percent to local enterprises and 30 percent in the form of the IPO.

"Clearly, mining companies have enjoyed good success on the Hong Kong exchange and the strong demand for coal is likely to attract global investor interest," said David Lai, a fund manager with CITIC Securities International. "But it's important to have a primary listing in Hong Kong to retain strong investor interest. Some of the dual-listed companies in Hong Kong have been plagued by thin liquidity," he added.

The separate western section is subject to contract bids and 15 global companies having bid for the right to mine the coal, Zorigt said.

Companies including top steelmaker ArcelorMittal (ISPA.AS), Japanese trading firm Itochu Corp (8001.T), India's International Coal Ventures Ltd and U.S. coal firm Peabody Energy (BTU.N) are eyeing the development project, companies and sources have said over the past month.

No timeframe was given for making a decision on the western section development but Zorigt said willingness to invest in infrastructure would be a crucial point in accepting any bids.

The government said earlier this week it will hold a tender in April to construct a 1,000 km (620 mile) railway line connecting Tavan Tolgoi to Russia's east coast to avoid a reliance on selling to China, the world's biggest consumer, which is just 250 km away.

Resource-rich Mongolia lingered in isolation for 70 years as a Soviet satellite state, serving as a sleepy buffer zone between its giant neighbors, Russia and China.

Now the democratic government, in power since the early 1990s, is trying to pull its 3 million citizens out of poverty by exploiting its largely untapped mineral wealth.

Prime Minister Sukhbaatar Batbold has said development of the mine could boost the economy by 15 percent by 2015 and double per capita income.

The first phase of Tavan Tolgoi will add 15 million tons of coal per year to Mongolia's total production, eventually rising to 30 million tons, said Zorigt.

The country, expected by some analysts to be one of the fastest growing economies of the next decade, is poised to overtake Australia to become China's largest coking coal supplier this year.

It exported 16.6 million tons of coal to China in 2010, up nearly three-fold from the preceding year and just 2.5 million tons in 2005.

" will take Mongolia to the next level as a coal producer," said Zorigt. "We will become one of the price setting producers in the region."

(Additional reporting by Denny Thomas; Writing by Don Durfee; Editing by Lincoln Feast and Neil Fullick)

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