Mongolia confident IPO will ease doubts

Mongolia confident IPO will ease doubts

Mongolia’s pitch to become the new frontier for metals and mining is facing renewed scrutiny from investors around the world as a Mongolian coal miner completes a landmark listing in Hong Kong. Mongolian Mining Corp (MMC) is set to raise at least $650m after pricing its shares on Tuesday in Hong Kong in the middle of a target range set by advisers JPMorgan and Citi.

The initial public offering, representing 20 per cent of the company’s equity, creates the first homegrown, multibillion-dollar miner in a country that possesses little capital or infrastructure, but vast deposits of coal, copper and gold.

The arrival of this young “state champion”, as Zorigt Dashdorj, Mongolia’s mining minister calls MMC, comes as the country’s prime minister and top officials complete a global tour intended to raise the country’s investment profile.

Referring to MMC’s deposits of coking coal, which is used to make steel and which lie close to the border with China, a banker involved in MMC’s IPO said: “Here you have high-quality mineralisation sitting next to the biggest consumer of those minerals.”

But the statement applies to all large mineral projects in Mongolia, including Oyu Tolgoi, the copper-gold mine that defines the country for international investors.

The proximity to China created investor euphoria about Mongolia a year ago. Last October, a long-awaited agreement between the government and Ivanhoe Mines, the developer of Oyu Tolgoi, signalled that the country was open for business just as China was becoming a net importer of commodities such as coal.

But the momentum slackened as investors looked more closely at the country’s dire lack of infrastructure, in spite of the government’s promises of a big building programme of roads, railways and power plants.

Investors need the confidence of a successful IPO because Mongolia is still a high-risk frontier with little track record,” says Chris Rynning, chief executive of Origo, a Beijing-based private equity company that has invested in Mongolia.

MMC is an important test case for outbound IPOs from Mongolia, where a success will form precedent for many more IPOs to come,” he added.

The retail part of MMC’s share offering was 10 times oversubscribed, according to bankers. The investor interest in MMC is one sign that Mongolia’s minerals-led development is regaining momentum.

The government has clarified plans for Tavan Tolgoi, the enormous coking coal deposit that ranks with Oyu Tolgoi as one of the best undeveloped mineral areas in the world.

Tavan Tolgoi will be half-owned by the government, Mr Zorigt told the Financial Times in an interview.

The half earmarked for privatisation will be split 20:30 between Mongolian and international investors respectively. The concession, however, will be split into two blocks. Erdenes, the state-owned mining group, is considering international applications to operate one of these blocks.

MMC has been dubbed “mini-TT”, after Tavan Tolgoi. The company’s principal mine – which aims to produce 15m tonnes of coking coal by 2013 – comprises one-sixth of the original Tavan Tolgoi licence area.

As part of the development programme, MMC is building a road to China and is expecting a rail line to follow as part of the government’s plans for an east-west arterial railway to intersect the Soviet-era trans-Mongolian line.

It is also building its own coal-washing plant and claims that there is enough water in the bleak south Gobi desert to do so.

Worries about the country’s basic water and rail infrastructure, as well as its lack of equipment, have weighed on the shares of a Mongolian company that pioneered a Hong Kong listing earlier this year.

SouthGobi Energy, a thermal coal miner, has seen its shares fall 36 per cent since its debut in January.

Meanwhile, a second Mongolia-related IPO has completed in Hong Kong. Last week, Winsway, a coking coal trader and logistics company handling shipments from Mongolia to China, raised HK$3.7bn (US$477m). It priced its shares just below the middle of the range.

Bankers involved in the Winsway and MMC IPOs were nervous of both companies coming to the market at the same time. But in spite of the Winsway IPO, SouthGobi remains investors’ main focal point.

Mr Zorigt is confident that MMC, which is expected to debut in Hong Kong in mid-October, will help dispel investor doubts about the future of Mongolia and he promises that other national champions will be emerging over the next decade.

“We are strong believers in national champions,” he says. “In our experience, in our part of the world, Japan and Korea have succeeded in part because of these large corporations. The next step of our industrialisation requires this more sophisticated type of business.”

Copyright The Financial Times Limited