Itochu Targets Mongolian Coal to Expand Trade as Prices Surge

May 17, 2010, 12:37 AM EDT
By Masumi Suga and Ichiro Suzuki

May 17 (Bloomberg) -- Itochu Corp., Japan’s fourth-largest trading company, invested in Winsway Coking Coal Holdings Ltd. to secure coal from Mongolia, stepping up competition with China and Russia for the steelmaking ingredient as prices jump.

Itochu joined a group led by Hopu Investment Management Co., the $2.5 billion fund run by Goldman Sachs Group Inc. partner Fang Fenglei, in investing in Winsway with the purchase of $10 million of convertible debt last month, Ken Tezuka, manager of the company’s coking coal section, said in an interview in Tokyo. Winsway, based in the British Virgin Islands, transports coal from Mongolia to China.

China Shenhua Energy Co. and Russia’s government-run ARMZ Uranium Holding are seeking access to coal and energy assets in Mongolia, the home of some of the largest undeveloped mineral resources in the world. Itochu wants to add Mongolian assets to its operations in Australia, Indonesia and North America as prices climbed to a near record this year.

“The current levels enable Mongolian coal to sufficiently compete against coal produced in other regions,” Tezuka said May 14. “Mongolian coal wasn’t viable to export when prices were around $30 and $40” a metric ton.

Coking coal for immediate delivery traded at $1,610 yuan ($236) a ton as of April 30, according to McCloskey/Xinhua Infolink prices. That’s 18 percent more than the April quarter contract price of $200 a ton. BHP Billiton Ltd., the world’s largest exporter, won a 55 percent price increase from Japanese mills for the three months started April 1.

Itochu, which ranks behind Japanese trading companies Mitsubishi Corp., Mitsui & Co. and Sumitomo Corp. in market value, fell 3.1 percent to 781 yen at the 11 a.m. trading break on the Tokyo Stock Exchange. The stock has gained 15 percent this year.

Initial Offering

Winsway may raise as much as $800 million through an initial public offering in Hong Kong, two people familiar with the plan said this month.

Itochu invested $10 million in Winsway through bonds convertible into equity within three years, according to Tezuka. That follows the Hopu-led group’s $110 million acquisition of a 23 percent stake. The Hopu group includes Silver Grant International Industries Ltd. and state-owned China Minmetals Corp., the country’s largest metals trader.

Winsway has expanded sales recently by investing in trucks to carry coal from mines in Mongolia, including one close to the $2 billion Tavan Tolgoi coal deposit, Tezuka said.

Mongolia’s coal exports to China may climb to about 12 million tons this year from 8.5 million tons in 2009, Alexander Molyneux, the chief executive officer of SouthGobi Energy Resources Ltd., said last month.

China Sales

China bought about 4 million tons of coal in total from Mongolia in 2008 out of national production of 10 million tons, according to a March 18 statement released by Japan’s Ministry of Economy, Trade and Industry.

Itochu’s stakes in mines in Australia and Indonesia produce the equivalent of 8 million tons of coking coal a year, according to a May 11 presentation released by the company. The company plans to nearly double the level to 15 million tons by 2015. The company also trades coking coal produced in North America and Russia.

Mongolia will develop its biggest untapped uranium field in a venture with Russia. State-owned KOO MonAtom will hold at least 51 percent in a venture with ARMZ Uranium and possible partners from Japan or China, Bayarbayasgalan Tudevbazar, nuclear materials chief of Mongolia’s Nuclear Energy Agency, said last month.

--Editors: Andrew Hobbs, Tan Hwee Ann
To contact the reporter on this story: Masumi Suga in Tokyo at msuga@bloomberg.net
To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net