Australian miners on hunt for Mongolia's riches but lack of rail access pose a challenge

THE plains and mountains around the town of Moron in northern Mongolia have not changed much over the past few millennia.

The town itself, now Mongolia's third largest, popped up in the last century after a Russian military base was set up there, but in the plains surrounding the town Mongolian herders continue to tend to their flocks of sheep, goats and horses as they have done for thousands of years.

In the hills bordering the plain, however, are drilling rigs that could signal the biggest change to this area since the communists came and went.

It is here that Sydney-based junior resources company Xanadu Mines is carrying out exploration on its Nuurstei coal project, an early-stage prospect but one that could ultimately become part of a new resources province taking shape across northern Mongolia.

Nuurstei was only identified earlier this year after Xanadu's exploration team visited the site, which had previously been mapped by Russian geologists as hosting only lower-value thermal coal reserves.

A prison on the lease had dug a small open pit to access coal for its heating needs.

Xanadu's reconnaissance team noticed that a burning pile of garbage in the pit had reacted with the exposed coal to form coke - an immediate indication the coal was in fact the much sought-after, higher-value coking coal. A hole drilled soon after Xanadu acquired the project intersected 42m of coal seams, with subsequent testing identifying very good characteristics.

The potential of Mongolia's rapidly expanding resources sector came into focus last week when Thailand coalminer Banpu launched a $477 million takeover for another Mongolian coal explorer, Perth-based play Hunnu Coal. Many Australians are familiar with the Rio Tinto-managed Oyu Tolgoi mine, which will be one of the world's largest copper and gold mines when it comes into production in 2014, and the vast deposit has inspired another generation of Australian explorers into the country.

Xanadu and Hunnu are but two of the Australian companies hunting for resources in Mongolia, with Aspire Mining, Haranga Resources and Voyager Resources also active in the country. Aspire is the largest outside Hunnu, courtesy of its Ovoot coking coal project, also in Mongolia's north, some 300km west of Xanadu's Nuurstei.

Aspire has defined at Ovoot a large deposit of hard coking coal that appears to be of superior quality to much of the coal found in other parts of Mongolia.

Aspire managing director David Paull is confident Ovoot can help underpin the development of the critical rail infrastructure that his company and Xanadu need to bring their projects to fruition.

Looking north from Nuurstei across the plain to the mountain range in the distance, it is possible to make out the stark white mountain that is the Burenhaan phosphate project. Burenhaan, run by a private Mongolian company, is a world-class phosphate deposit that has stayed undeveloped due to the lack of rail infrastructure. Between Ovoot and Nuurstei are a number of iron ore deposits that are waiting for infrastructure before they can be developed.

Aspire and Xanadu appear to have suffered from perceptions about the infrastructure challenge facing them. Hunnu, with projects in other parts of the country where the infrastructure issue is not as apparent, was valued at $477m. It has 150 million tonnes of what is said to be lower-quality coking coal, 540 million tonnes of thermal coal and a coking coal exploration project purchased from Rio Tinto in May for $40m.

In contrast, Aspire, capitalised at just under $300m, has 330 million tonnes of high-quality coking coal, while Xanadu, worth $88m, has the Nuurstei prospect, the 327 million tonne Khar Tarvaga thermal coal project and the Galshar project, with a thermal coal resource target of about 200 million tonnes.

A number of major companies have already taken an early bet on the potential of Aspire and Xanadu. South Gobi Resources, which runs a number of mines in southern Mongolia, owns a 20.1 per cent stake in Aspire. Noble bought a 9.5 per cent interest in Aspire on-market to go with its 9.9 per cent interest in Xanadu, while Thai company PTT, the larger rival of Hunnu bidder Banpu, is Xanadu's largest shareholder, with a 19.9 per cent interest.

It was clear when The Australian visited Nuurstei last week that there is coal at the project. The only questions are how much coal is there and whether it will eventually be able to access infrastructure.

The project is a 50-50 joint venture between Xanadu and major global commodities trader Noble, which has anointed Xanadu as its de facto coking coal exploration arm in Mongolia.

Xanadu has not released formal results from its subsequent drilling efforts and its hope of acquiring nearby licences may have something to do with that, but each of the seven holes drilled at the project since that initial hole have intersected coal. The distance between the project's easternmost and westernmost drill holes now stretches to 6km.

Xanadu plans to keep drilling until winter forces it to stop, by which time it should have enough data to pull together a maiden resource next year.

The trouble for Xanadu and Aspire is convincing the market they can overcome the infrastructure challenges in the region. Aspire's Ovoot is 500km from the nearest rail at Erdenet, Mongolia's second-largest city, and one with all the charm you'd expect from a mining town built from scratch by communist Russia in the 1970s. Nuurstei is about 180km from Erdenet.

Connecting Ovoot and Nuurstei to Erdenet would be just the start. If and when that rail link is built, the coal would then face an option of turning right towards China, almost 1000km south, or turn left and up into Russia and into the lucrative international seaborne coal market.

The miners in southern Mongolia have so far not been able to direct their coal into Russia, forcing them to accept low-ball prices from Chinese customers well aware of their bargaining power.

From Naushki, on the Russian-Mongolian border, there is a rail network linking to markets in the east and west.

Most of the activity in Mongolia's coalmining industry has occurred through the Gobi Desert along the Mongolia-China border, but those active there have wound up paying the price for their proximity to China.

At present, coal from the South Gobi is put onto trucks, mostly Chinese-owned, and driven hundreds of kilometres into China's Inner Mongolia province.

At a financial level, the companies behind the mining have been forced to accept heavily discounted prices from Chinese buyers.. In some instances, miners are selling their coal at a third of the price it would fetch if it were sold on the open market.

If companies like Aspire and Xanadu can establish a feasible path to the seaborne markets, they will break the market advantage being so shrewdly leveraged by the Chinese.

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