Bloomberg News

Mongolia Consider Pre-IPO Convertible Bond Sale for Erdenes

March 05, 2012

Erdenes Tavan Tolgoi, the Mongolian coal miner planning an initial public offering this year, may sell convertible bonds before listing, Minerals and Energy Minister Dashdorj Zorigt said.

The bonds may be sold to a “long-term, strategic investor,” Zorigt said today in an interview while attending the Mongolia Economic Forum in Ulan Bator, the capital. The government won’t press Erdenes TT, as the company is known, to complete the IPO before a parliamentary election in June, allowing the timing and place of sale to be decided on a “commercial” basis, he said.

The IPO will mark Mongolia’s first listing of a state-run miner overseas as the country seeks to use its mineral riches to support an economy that grew a record 17.3 percent last year. The government has considered London, Mongolia and Hong Kong for the share sale, seeking to raise more than $3 billion.

The 6 billion-metric-ton Tavan Tolgoi coal deposit is one of the world’s biggest untapped sources of the resource and one of two projects transforming the mostly rural economy into China’s biggest supplier of coking coal, a steel-making material. The Rio Tinto Group-led Oyu Tolgoi copper and gold field, set to be the third-largest globally by 2018, is due to start output within six months, according to the mining company.

The mining industry accounts for 30 percent of Mongolia’s gross domestic product and 32 percent of government revenue, the Oxford Business Group said in a Mongolia 2012 report, which was distributed at the forum.

Rising Production

Erdenes TT produced about 1 million tons in its first year of mining at the East Tsankhi area of the Tavan Tolgoi field. Output will increase to at least 3 million tons this year, Chief Operating Officer Graeme Hancock said in January.

Aluminum Corp. of China is Erdenes TT’s main buyer after signing a six-year accord that also stipulates that 30 percent of its purchases must be delivered to ports for resale to Japanese trading companies Itochu Corp. (8001) and Mitsui & Co. (8031), and Korea Resources Corp. (RESCOZ)

The expansion of Erdenes TT to a planned production of 15 million tons, or 40 percent of Mongolia’s total coal output in 2010, depends on construction of a rail road to China and the resolution of a tender for the West Tsankhi area of the Tavan Tolgoi site, for which the company also owns the license.

Spring Start

Rail construction is due to start this spring with the routes south to China and northeast to Russia being “very important” for Mongolia’s development, Zorigt said. China buys about 80 percent of Mongolia’s exports, while Russia has touted a route via its Far East territories as an alternative way to reach commodity buyers in Japan and South Korea.

Discussions over who will develop the West Tsankhi area, which could produce 15 million tons of coal a year, the same as Erdenes TT’s east site, are still on and Mongolia expects a deal can be reached “very soon,” Zorigt said, without giving more details.

Mongolia in March 2011 shortlisted six groups, including Vale SA (VALE), ArcelorMital, and Peabody Energy Corp. (BTU), to develop the West Tsankhi site. In June, China’s Shenhua Group (SHGCLZ), a consortium led by OAO Russian Railways (RZHD) and Peabody, the largest U.S. coal miner, was announced as the winner before the government said it would review the results.

“They are all still being considered,” Zorigt said.

The infrastructure development of southern Mongolia has been boosted by the Tavan Tolgoi and Oyu Tolgoi projects and the government is interested in promoting “quite a few” other projects in resources that could do the same for other parts of the country, Zorigt said.

Still, Mongolia won’t restart issuing new mining licenses this year to weed out speculators, Zorigt said.

“We want more government control over this to make sure people with the licenses truly invest in the mining and exploration,” Zorigt said. “In December we will decide” when new license issues can begin, he said.

To contact the reporter on this story: Yuriy Humber in Ulan Bator at yhumber@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net


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