‘Minegolia’ Struggles With IPOs

Mongolia is finding it far harder to get its biggest mining companies listed overseas than to dig the raw materials out of the ground.

Nicknamed ‘Minegolia’ for a resources boom and the billions of dollars that overseas companies are investing to pull out vast deposits of copper and coal, the country had been expected to account for several major initial public offerings this year.

But many of the share-sale timetables are slipping as commodity and stocks sink around the world, and partly because lawmakers won’t consider vital legislation needed for some of the biggest shares sales ahead of next month’s general election.

The long-awaited US$3 billion listing of state-owned miner Erdenes-Tavan Tolgoi Co., which controls one of the world’s largest coking-coal deposit, was expected in the fourth quarter of this year, with trading in Hong Kong, London and Ulan Bator. But earlier this month the timetable was pushed back by at least three months, to early 2013.

The delays haven’t stopped investment banks from lining up more candidates for public markets.

In the latest move, units of Australia’s Macquarie Group Ltd. and Bank of America Corp. have been appointed joint global coordinators for a Hong Kong listing of Altain Khuder, according to a person familiar with the matter. Altain Khuder is one of Mongolia’s biggest iron-ore miners, and the share sale is targeted for the fourth quarter of this year.

At the same time, Mongolia’s government is taking a closer look at foreign ownership of its resources, particularly acquisitions by state-backed Chinese firms, as it worries that its resource-hungry neighbor could gain too much control of its valuable commodity assets. Should Mongolia show signs of being less welcome to foreign investment, it could make IPOs tough sells to overseas buyers.

However, iron-ore mining may attract less scrutiny by the government than copper and coal, because production is smaller and deposits are of a lower quality than Australia’s Pilbara region, which dominates international export markets.

Mongolia’s iron-ore exports in the first quarter of 2009 totaled less than 200,000 tons, but have increased more than eight-fold since then to above 1.6 million tons in the fourth quarter of 2011, according to Mongolian government data cited by Australia-listed miner Haranga Resources. Still, that is a fraction of the 279 million tons of iron ore that Australia exported to China in the 12 months that ended June 30, 2011.

Mongolia has one big advantage over Australia: its proximity to China, which accounts for roughly 60% of the world’s imports of iron ore used in making steel.

The Trans-Mongolian Railway, used to transport the commodity crosses the border in northern China, meaning its natural customers are steel mills in regions like Inner Mongolia and Xinjiang that are already set up to take magnetite ore rather than better quality hematite.

Haranga Resources, which owns the Selenge iron-ore project in Mongolia’s far north, says that freight costs per U.S. dollar-denominated ton of iron ore concentrate delivered from Mongolia to the city of Baotou in China’s Inner Mongolia region are less than half the shipping costs from Australia.

These advantages led China Investment Corp., China’s sovereign wealth fund, to invest US$300 million in Hong Kong Lung Ming Investment Holdings—the owner of Eruu Gol iron ore project near Mongolia’s border with Russia—in 2009. The Eruu Gol mine has the ability to produce around 3 million tons of iron ore annually from an overall resource totaling more than 300 million tons.

However, investors willing to place bets on Mongolia’s growth as an iron-ore-producing region will need convincing the country has the infrastructure in place to move growing volumes of commodities. Should delays in IPOs be compounded by a later roll out of critical infrastructure, such as new railway capacity, interest could wither just as quickly as it bloomed.