TOKYO/BEIJING Resource-hungry Asian states are locking horns with steelmaker ArcelorMittal and miner Vale to develop the world's largest untapped coking coal deposit in Mongolia, as they scramble for raw materials to make steel.
Asian private and state-linked firms are among more than a dozen bidders vying for the Tavan Tolgoi coking coal project, along with the world's top steelmaker ArcelorMittal SA (ISPA.AS) and the top iron ore miner Vale (VALE5.SA) of Brazil, according to a source with direct knowledge of the matter.
At the same time, investment bankers are making a beeline to Ulan Bator, pitching for the country's biggest ever public offering of shares, estimated at around $1.5 billion, for some Tavan Tolgoi assets. Tavan Tolgoi is controlled by Mongolian government entity Erdenes MGL.
"There's a lot going on in Ulan Bator right now. All the flights are full and everyone is rallying around this project trying to find a way in," said a banker from the capital, where temperatures are hovering around minus 20 degree centigrade.
"Erdenes, which has been tasked with running the eastern bloc (for the IPO), has been absolutely inundated by investment banks over the past two or three weeks," said the banker, who did not want to be named because of the sensitivities surrounding the deal.
China, Japan and South Korea are scouring the world and snapping up iron ore and coking coal assets to diversify from heavyweight suppliers such as BHP Billiton (BLT.L) and Rio Tinto (RIO.L) (RIO.AX).
Their eyes are falling on Mongolia, which while poor and undeveloped, sits on vast quantities of untapped mineral wealth and which, analysts say, could be one of the fastest growing economies of the next decade.
Mongolia's tiny stock index jumped about 45 percent last week alone as investors scrambled to get exposure to the frontier market.
The country's fledgling democratic government plans to give strategic investors a chance to develop the western block of the Tavan Tolgoi mine, estimated to house a total 6 billion tonnes of coal reserves, on a contract basis and cut its stake in the eastern block through an initial public offering.
Over 20 investment banks were planning to submit written proposals for the stake sale, The Independent on Sunday reported this week.
"It is the biggest undeveloped coking coal mine in the world, it is strategically important and that's why you see so many interested parties," said Carol Cao, an analyst with Macquarie in Hong Kong.
Mongolia has drawn serious attention from global investors after the deal sealed in 2009 between Ivanhoe Mines Ltd (IVN.TO) and Rio Tinto to develop the $6 billion Oyu Tolgoi mine, one of the world's biggest untapped copper and gold deposits.
Last year, Mongolian Mining Corp (0975.HK), the country's largest privately held domestic producer and exporter of coking coal, listed in Hong Kong after a $650 million IPO.
South Korea, one of the bidders, said there were six bidders in the race, including Xstrata XTA.L, U.S. coal miner Peabody (BTU.N) and consortia led by South Korea, China, Japan and India.
State-run Korea Resources Corp is leading the Korean consortium, which is formed of nine Korean firms, two Russian firms and four Japanese companies, to develop the Tsankhi block, which is estimated to have 1.2 billion tonnes of coal reserves.
"Mongolia has rich untapped reserves and the block in the auction is very attractive, as it is one of the few large-sized coal mines in the world left undeveloped," Korea Resources Corp said in a statement.
The Mongolian government is likely to decide the preferred bidders in mid-February, after the Lunar New Year holiday starting this week, Korea Resources said.
Tavan Tolgoi's hard coking coal is in great demand in China, the world's biggest steel producer, which needs imported coke to keep its blast furnaces busy.
The vast majority of imported coking coal in China, Japan and Korea comes by ship from Australia, but Mongolian imports will reduce freight costs.
"There are a lot of forces at play here: There are the Russians in the north that would like to get their hands on it, there are the Chinese in the south that would like to get their hands on it," said Glyn Lawcock, an analyst at UBS.
"There are no ports in Mongolia where you can get it out. It makes more sense for the coal to end up in China, given its proximity and the demand there."
But the auction for the mining license, which closed on Monday after two weeks of delay, faces uncertainty, as Mongolia, dubbed "Minegolia" by analysts, has struggled to develop a consistent strategy when it comes to overseas companies buying into national assets.
It has long frustrated the global resources industry by dragging its feet on investment decisions. The government, hobbled by indecision and bureaucratic infighting, took years to conclude the agreement to develop the Oyu Tolgoi copper and gold project.
An initial 2009 bidding auction for the Tavan Tolgoi coal project attracted consortia from South Korea, Japan and Russia as well as mining giants such as BHP, Vale, India's Jindal, and China Shenhua Energy (601088.SS).
But the government abruptly announced the auction would be canceled early last year and said the state would maintain control and foreign firms could bid for licenses to develop and run the mine.
A top executive at a Japanese trading firm said BHP, which previously expressed interest in the project, had pulled out. Fortescue Metals (FMG.AX) was one of bidders now, said a source, who did not want to be named because the process was not public yet.
Members of the South Korean bidding group include steelmaker POSCO (005490.KS), utility firm KEPCO (015760.KS), trading firms LG Corp (003550.KS) and Daewoo International Corp (047050.KS), Russian Railways and Japanese trading houses Itochu Corp (8001.T), Sumitomo Corp (8053.T), Marubeni Corp (8002.T) and Sojitz Corp (2768.T).
Sources told Reuters on Monday Mitsui is leading a competing Japanese consortium, which has partnered with Shenhua.
(Additional reporting by Rebekah Kebede in PERTH, Ju-min Park and Miyoung Kim in SEOUL; Editing by Muralikumar Anantharaman)