Hong Kong’s Mongolian IPO Outlook

Hong Kong attracted its first Mongolian stock listing in 2010. Could a bigger, state-backed company be coming in the new year?

Only a few days ago, Mongolia’s government formed a holding vehicle for its stake in the massive Tavan  Tolgoi coal deposit located near the southern border with China. That company, Erdenes-Tavan Tolgoi Co., will develop roughly half of the deposit located in the east Tsankhi area of the Gobi desert using contract miners. It will also negotiate with foreign investors on investing in and developing the west Tsankhi region while maintaining ownership of the entire deposit.

Tavan Tolgoi contains about 6.4 billion metric tons of coal reserves, making it the second-largest known coal deposit by reserves globally, according to Raw Materials Group of Stockholm.

Hong Kong’s stock exchange is considered a natural listing venue for Erdenes-Tavan Tolgoi because of its liquidity and attraction for investors with an interest in China plays. China is Mongolia’s biggest trading partner, and the region’s most voracious consumer of its iron ore, coal and other mineral resources.

How big could it be? A person familiar with the matter cites one investment bank’s estimate that the IPO could raise between $2.4 billion and $3 billion for 30% of the company, given the size of the reserves, the stage of development and a comparable valuation for Mongolia Mining Corp., a privately-held Mongolian miner that listed in Hong Kong in October. That would have made Erdenes-Tavan Tolgoi the third or fourth-largest listing on the Hong Kong stock exchange in 2010.

The Ulaanbaatar government is likely keen to push forward with a listing to raise money, and bankers are no doubt eager to earn the fees. The problem is, there’s a lot that needs to be done first. To start with, there’s the appointment of a contract miner to operate the mine. And it will take roughly $200 million to $300 million just in start-up costs to get the mine up and running, excluding the infrastructure. In Mongolia, that’s not small change. The government would probably need to raise those funds through an international bond issue. In April, Prime Minister Sukhbaatar Batbold said Mongolia would raise up to $1 billion in a sovereign bond offering this quarter but it hasn’t happened so far.

That could easily push a stock listing off into the first half of 2012 or beyond. Ulaanbaatar will be hoping global enthusiasm for China and frontier markets like Mongolia hasn’t run its course by then.