Mongolia To Hire Investment Bank To Sell Coal Reserves

Mongolia's government are to appoint an investment bank to sell part of a massive coal mine valued at around $2 billion.

Tavan Tolgoi, often called the world's biggest untapped coking coal deposit, holds a coal reserve of 6.5 billion tonnes in the country's Gobi desert.

The country's government, which is aiming to pull Mongolia out of poverty with its uranium, lead, zinc, copper, gold, and coal deposits, will own not less than 51 percent of Tavan Tolgoi. It aims to offload up to 49 percent to a global mining giant.

JPMorgan and Citigroup are among the banks in the running for the mandate, two sources with direct knowledge of the process told Reuters though the government may choose multiple banks to run the auction.

"They'll choose somebody in the next few weeks," an investment banker with direct knowledge of the situation told Reuters. The source declined to be identified due to the sensitive nature of the negotiations.

Citigroup and JP Morgan both declined to comment.

China's Shenhua Energy, Japan's Itochu Corporation, the US's Peabody and world No.1 miner BHP Billiton have all been touted as potential bidders, but a deal for the asset is not without its hurdles. Analysts say uncertainties cloud what could be good timing and strong prospects for mining firms on the hunt for Mongolia's untapped assets.

"The prospectivity of the geology relative to the amount of exploration work that the country has undergone make it a hugely exciting prospect as a new frontier for global mining companies" said Andrew Driscoll, head of resources research at CLSA.
"It's really the lack of stability in the government and in the mineral laws which detract fairly significantly from that natural prospectivity."

Fitch Ratings on Monday lowered Mongolia's sovereign rating to B from B-plus blaming its external finances, diminished ability of its central bank to manage the exchange rate and weaknesses in the banking system.

Mining accounted for 33 percent of the country's GDP in 2007, according to the Mongolia National Mining Association.

Mongolia now faces a 2009 budget deficit as the global financial crisis hits commodity prices after several years of rising prices brought unprecedented revenues to the government.

BHP originally won the right to develop Tavan Tolgoi in the 1990s, but found it to be uneconomical at the time and returned the license to the Mongolian government. The successful sale of Tavan Tolgoi could hand Mongolia between $1-$2 billion, plus ongoing revenues from its majority stake in the mine.

"It's a fairly shallow deposit and therefore the costs and the profitability are very good, so what appears to be a large scale and quality coking and thermal coal asset is something that a wide range of suitors would want to acquire," Driscoll said.

But since the discovery of copper and gold deposit at Oyu Tolgoi - a joint project between Canada's Ivanhoe Mines and Rio Tinto - in 2001, Mongolia's laws have gone from among the most attractive in the world for foreign miners to increasingly protectionist.

The 2006 version of the law allowed the state a share of up to 34 percent of deposits found with private funds and up to 50 percent of those discovered with state funds. Mongolia has since delayed revising its contentious minerals law.
Ivanhoe and Rio say Oyu Tolgoi could raise Mongolia's GDP -- roughly $8.5 billion -- by more than a third, and a mining boom could create huge wealth for a country of less than 3 million people, many of whom are nomadic herders.

Doubts however still remain about whether the partnership between Mongolia's government and a strategic investor into Tavan Tolgoi will pay dividends.
"The recent unexpected resignations of the president of the Bank of Mongolia and the head of the Financial Regulatory Committee have escalated uncertainty, with respect to banking and financial supervision and policy implementation," Fitch said.

Source: The Guardian