Mongolia may pick banks for $3 bln coal IPO by next week

* IPO could reach $5 billion depending on timing - sources
* London and Hong Kong listings being discussed - sources
* Frenzy for deal includes bar brawl, nepotism claims
* Govt to distribute 10 pct of shares to citizens - official

(Adds detail on development plans, edits)

By Denny Thomas and Terril Yue Jones

HONG KONG/BEIJING, Feb 16 (Reuters) - Mongolia is expected to appoint banks by next week to manage an IPO worth up to $5 billion for the world's largest untapped coking coal deposit, sources with knowledge of the matter told Reuters.

More than 150 bankers from a dozen Wall Street, European and Asia-Pacific investment banks made pitches to the Mongolian government over the past few days to win the coveted underwriting mandate for the Tavan Tolgoi coal mine.

"It was bloody cold," said one banker who attended, citing temperatures of minus 25 degrees Celsius. "Ten or 12 government officials were there. They listened and asked good questions, which isn't always what you get with a government pitch."

Investment bankers who took part in the pitching process said the size of the offering could range from $1.5 billion to $5 billion, depending on timing. They declined to be named because they were not authorized to talk to the media.

Mongolia sits on vast quantities of untapped mineral wealth. Analysts say it could be one of the fastest growing economies of the next decade, as well as a key investment target for global mining giants. Mining has accounted for over 60 percent of total foreign direct investment received so far.

Hard coking coal is in great demand in neighbouring China, the world's biggest steel producer, which needs coke to fuel blast furnaces. Other big Asian buyers are Japan, South Korea and Taiwan.

Bankers completed their pitches in the Mongolian capital Ulan Bator on Tuesday and while a decision is expected by next week, sources said the timing could change. Listings on both the London and Hong Kong stock exchanges were being discussed, they added.

Banks who flew representatives in included Morgan Stanley , Macquarie Group Ltd , Citigroup Inc , JP Morgan Chase & Co , Deutsche Bank AG , Credit Suisse Group AG and UBS AG , the sources said. The banks declined to comment.

The IPO coincides with a battle between resource-hungry Asian governments and global steelmakers to develop the mine, which has estimated reserves of 6.0-6.5 billion tonnes.

Landlocked Mongolia lingered in isolation for 70 years as a Soviet satellite state, serving as a sleepy buffer zone between its giant neighbours, Russia and China.

Now the democratic government, in power since the early 1990s, is trying to pull its 3 million citizens out of poverty by exploiting its untapped mineral wealth.

FREE SHARES FOR CITIZENS

The Mongolian government plans to distribute shares in the company free to all citizens and another chunk to Mongolian corporations, according to officials, bankers and analysts working on the transaction.

"Ten percent of the shares will be given to every citizen of Mongolia," Algar Namgar, executive director of the Mongolian National Mining Association, told Reuters. "And 10 percent of the shares will be traded to every Mongolian enterprise."

About 30 percent of the asset is being sold to global investors through the IPO, sources say.

Mongolia plans to keep 51 percent of state-owned holding company Erdenes-Tavan Tolgoi, which controls the deposit, located in the South Gobi desert near China's northern border.

BIG DEAL

At up to $5 billion, the deal is not only fairly big in terms of fees, but also has a lot of prestige riding on it. It would be the largest such offering to come from a hot frontier market where similar deals are expected to follow.

BIG DEAL

At roughly $3 billion, the deal is not only fairly big in terms of fees, but also has a lot of clout hanging on it. It will be the largest such offering to come from this hot frontier market, where similar deals are expected to follow.

Tavan Tolgoi, billed as the world's largest untapped coking coal resource, has estimated reserves of 6.0-6.5 billion tonnes. It is located about 400 km from the nearest railway line and lacks infrastructure and power, which has held up development and allowed only very limited production.

Tavan Tolgoi's hard coking coal is in great demand in China, the world's biggest steel producer, which needs imported coke to fuel its blast furnaces. The vast majority of imported coking coal in China, Japan and Korea comes by ship from Australia, but Mongolian imports will reduce freight costs.

Global coal prices have shot up in recent months due to disruptions in several coal-producing countries, including Australia, Indonesia, and South Africa, while demand in Asia, particularly China and India, continues to grow.

In recent months, prices have also galloped as massive floods in Australia slashed supplies. The price of Australian thermal coal, a benchmark for Asia, has risen 34 percent from a year ago to around $127 a tonne while spot prices for coking coal used by steelmakers have shot up more than 50 percent from a year ago to hover around $370 a tonne.

Stories of bankers fighting in an Irish bar in Ulan Bator made the rounds in Hong Kong in the days prior to the formal pitching sessions.

Another hot topic amongst the bankers involved concerns Morgan Stanley analyst Battushig Batbold, son of Mongolia's prime minister. Batbold is a metals and mining analyst for Morgan Stanley in London, according to his LinkedIn profile.

Rival bankers have been quick to point out that the analyst, believed to be in his twenties, is involved in the IPO pitch, although local media said Battushig was not attending. Morgan Stanley declined to comment. (Additional reporting by Rebekah Kebede in Perth and Fayen Wong in Shanghai; Editing by Chris Lewis and Muralikumar Anantharaman)