Huge coking-coal mine to change the landscape
IT is a company with its foot on more than 7 billion tonnes of coal, enough to make a dent in even China's enormous appetite. It will have about 3 million shareholders when it goes public, a process that will involve at least four investment banks and up to three separate stock exchanges.
It is Erdenes Tavan Tolgoi, a currently state-owned group charged with turning one of the world's largest undeveloped coking-coal deposits into the biggest achievement yet from Mongolia's fledgling, but potentially rich, mining industry.
Every chief executive in the global coalmining business, from BHP Billiton's Marius Kloppers and Rio Tinto's Tom Albanese down, will be keeping a tight watching brief on Tavan Tolgoi given its rare capacity to influence coking-coal markets.
The project is initially targeting 15 million tonnes of production each year, most of which will be coking coal, with the potential to expand that substantially. To put that number in context, that equates to around a third of China's annual coking-coal imports, all of which will come from a deposit just on the other side of the Chinese border in southern Mongolia.
High-cost, marginal producers will find themselves out of business if the coking-coal market doesn't grow enough to absorb Tavan Tolgoi, while Australia's established miners will find themselves up against a significant new player.
The logistics of turning such a monster resource into a fully fledged mine is hard enough, doing it against a complicated commercial and political backdrop is another thing.
New Zealand-born, Australian-trained Graeme Hancock is only a month into his job as chief operating officer of Tavan Tolgoi, but he appears to have a thorough understanding of the challenges facing the company and its project.
Tavan Tolgoi is a behemoth, it hosts 7.4 billion tonnes of resources so far, the bulk of which is coking coal and understandably the Mongolian government wants to ensure it gets the development right.
Hancock's employer owns the whole project, but a western portion has been earmarked for development by a consortium of international players all negotiating for the right to dig it up on behalf of Erdenes and the Mongolian government.
On top of that, Erdenes is pushing towards its own multi-billion-dollar IPO, a huge offer that would be tricky enough even without the current market volatility and a government instruction to put 10 per cent of stock in the hands of Mongolian citizens -- free of charge.
It meant there were plenty of questions for Hancock as he took to the stage at the recent Mongolia Investment Summit in Hong Kong in his first public engagement since starting the job last month.
Hancock, who has spent much of his career in Papua New Guinea, showed a good grasp of the issues facing the company and the country. The five years he spent working as a senior mining specialist with The World Bank based out of Ulaanbaatar has helped on that front.
The proposed timetable for the group's mammoth listing remains a prime concern for many following the Tavan Tolgoi project and, speaking to reporters after his address, Hancock said there were a number of "uncertainties" holding up the IPO, beyond just the weak market conditions.
Given that the low operating costs forecast for Tavan Tolgoi effectively guarantee its profitability, favourable market conditions for the IPO would be nice but are not essential.
"We'd like to see conditions improve, but the project has very significant inherent value so, to a degree, we're probably less sensitive to market conditions than others might be," Hancock said.
Tavan Tolgoi will have to list on at least two exchanges, given the fact the 10 per cent allocated to Mongolians will have to be traded on the tiny Mongolian stock exchange. The company is toying with a dual-listing on the London or Hong Kong exchanges, or a listing across all three. Each option has its own pros and cons and complexities.
The company has signed up four banks to help with its listing: Goldman Sachs and Deutsche Bank as joint co-ordinators, as well as BNP Paribas and Australia's Macquarie Group. Given the rarity of IPOs of such scale in a market like this one and the fees it stands to generate for the banks, the process is getting a lot of attention from the banks involved.
The listing process is complicated by the talks taking place with the consortium proposing to develop Tavan Tolgoi's western arm.
The consortium includes US coalminer Peabody Energy, a venture between China's Shenhua and Japan's Mitsui, and a Russian-led venture including the state-owned Russian Railways and a bevy of Korean and Japanese entities.
It's not quite a UN of companies but more of a Security Council, and the talks to date seem just as complicated and inefficient as anything to pass through either of those bodies.
"It's very challenging putting together a combination of American, Russian, Chinese, Mongolian, Korean and Japanese companies. It's very challenging and potentially an uncomfortable marriage," Hancock said.
Not only do all three have to agree on the structure of the consortium, they also have to negotiate a suitable royalty payment to Tavan Tolgoi.
"We're anticipating that the consortium gets bedded down but there will be some sort of royalty payment per tonne of coal produced," he said.
"Any consortium which develops is going to be paying a royalty to us, plus a royalty to government and taxes and whatever else."
Hopefully, the development of the Tavan Tolgoi deposit can be less complicated. Having billions of tonnes of high-quality coking coal spread across numerous fat seams close to the surface certainly makes one aspect of Hancock's life that much easier.
Still, it faces many of the challenges of its smaller peers elsewhere in the country, namely securing access to infrastructure and fetching a full-value price for its product.
At least Tavan Tolgoi has the scale to warrant the construction of a sealed highway from its mine to the Chinese border. Rail would be cheaper, but that is in the hands of the government and Hancock says Tavan Tolgoi isn't interested in stepping in as an equity partner on any rail network development.
It is Erdenes Tavan Tolgoi, a currently state-owned group charged with turning one of the world's largest undeveloped coking-coal deposits into the biggest achievement yet from Mongolia's fledgling, but potentially rich, mining industry.
Every chief executive in the global coalmining business, from BHP Billiton's Marius Kloppers and Rio Tinto's Tom Albanese down, will be keeping a tight watching brief on Tavan Tolgoi given its rare capacity to influence coking-coal markets.
The project is initially targeting 15 million tonnes of production each year, most of which will be coking coal, with the potential to expand that substantially. To put that number in context, that equates to around a third of China's annual coking-coal imports, all of which will come from a deposit just on the other side of the Chinese border in southern Mongolia.
High-cost, marginal producers will find themselves out of business if the coking-coal market doesn't grow enough to absorb Tavan Tolgoi, while Australia's established miners will find themselves up against a significant new player.
The logistics of turning such a monster resource into a fully fledged mine is hard enough, doing it against a complicated commercial and political backdrop is another thing.
New Zealand-born, Australian-trained Graeme Hancock is only a month into his job as chief operating officer of Tavan Tolgoi, but he appears to have a thorough understanding of the challenges facing the company and its project.
Tavan Tolgoi is a behemoth, it hosts 7.4 billion tonnes of resources so far, the bulk of which is coking coal and understandably the Mongolian government wants to ensure it gets the development right.
Hancock's employer owns the whole project, but a western portion has been earmarked for development by a consortium of international players all negotiating for the right to dig it up on behalf of Erdenes and the Mongolian government.
On top of that, Erdenes is pushing towards its own multi-billion-dollar IPO, a huge offer that would be tricky enough even without the current market volatility and a government instruction to put 10 per cent of stock in the hands of Mongolian citizens -- free of charge.
It meant there were plenty of questions for Hancock as he took to the stage at the recent Mongolia Investment Summit in Hong Kong in his first public engagement since starting the job last month.
Hancock, who has spent much of his career in Papua New Guinea, showed a good grasp of the issues facing the company and the country. The five years he spent working as a senior mining specialist with The World Bank based out of Ulaanbaatar has helped on that front.
The proposed timetable for the group's mammoth listing remains a prime concern for many following the Tavan Tolgoi project and, speaking to reporters after his address, Hancock said there were a number of "uncertainties" holding up the IPO, beyond just the weak market conditions.
Given that the low operating costs forecast for Tavan Tolgoi effectively guarantee its profitability, favourable market conditions for the IPO would be nice but are not essential.
"We'd like to see conditions improve, but the project has very significant inherent value so, to a degree, we're probably less sensitive to market conditions than others might be," Hancock said.
Tavan Tolgoi will have to list on at least two exchanges, given the fact the 10 per cent allocated to Mongolians will have to be traded on the tiny Mongolian stock exchange. The company is toying with a dual-listing on the London or Hong Kong exchanges, or a listing across all three. Each option has its own pros and cons and complexities.
The company has signed up four banks to help with its listing: Goldman Sachs and Deutsche Bank as joint co-ordinators, as well as BNP Paribas and Australia's Macquarie Group. Given the rarity of IPOs of such scale in a market like this one and the fees it stands to generate for the banks, the process is getting a lot of attention from the banks involved.
The listing process is complicated by the talks taking place with the consortium proposing to develop Tavan Tolgoi's western arm.
The consortium includes US coalminer Peabody Energy, a venture between China's Shenhua and Japan's Mitsui, and a Russian-led venture including the state-owned Russian Railways and a bevy of Korean and Japanese entities.
It's not quite a UN of companies but more of a Security Council, and the talks to date seem just as complicated and inefficient as anything to pass through either of those bodies.
"It's very challenging putting together a combination of American, Russian, Chinese, Mongolian, Korean and Japanese companies. It's very challenging and potentially an uncomfortable marriage," Hancock said.
Not only do all three have to agree on the structure of the consortium, they also have to negotiate a suitable royalty payment to Tavan Tolgoi.
"We're anticipating that the consortium gets bedded down but there will be some sort of royalty payment per tonne of coal produced," he said.
"Any consortium which develops is going to be paying a royalty to us, plus a royalty to government and taxes and whatever else."
Hopefully, the development of the Tavan Tolgoi deposit can be less complicated. Having billions of tonnes of high-quality coking coal spread across numerous fat seams close to the surface certainly makes one aspect of Hancock's life that much easier.
Still, it faces many of the challenges of its smaller peers elsewhere in the country, namely securing access to infrastructure and fetching a full-value price for its product.
At least Tavan Tolgoi has the scale to warrant the construction of a sealed highway from its mine to the Chinese border. Rail would be cheaper, but that is in the hands of the government and Hancock says Tavan Tolgoi isn't interested in stepping in as an equity partner on any rail network development.
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