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Mongolia to Choose Underwriters for Erdenes Tavan Tolgoi IPO

Mongolian state-run Erdenes Tavan Tolgoi is expected to appoint banks to manage an IPO worth up to US$5 billion for the world’s largest unexploited coking coal deposit, a source close to the matter told reporters.

More than 150 investment banks from Wall Street, Europe and Asia-Pacific made pitches to the Mongolian government over the past few days to win the coveted underwriting mandate for the Tavan Tolgoi coal mine. Sources said a decision is expected within two weeks.

According to the pitching process participants, the size of the offering could vary from US$1.5 billion to US$5 billion, depending on timing.

Tavan Tolgoi is located in the South Gobi desert 400 kilometers from the nearest railway line and lacks infrastructure and power, its estimated reserves amount to 6-6.5 billion tons.

No one can be considered in prime position to win the mandate yet. Citigroup, JPMorgan, Morgan Stanley, Merrill Lynch, BNP Paribas, and ING as well as Goldman Sachs, UBS and Deutsche Bank are among the groups in the running.

Dealmakers reckon the government may end up mandating as many as five or six banks for the IPO, The Financial Times speculates.

Some suggest that JPMorgan and Deutsche Bank are in a good position, since both banks were hired by the Mongolian government for its original plan – now scrapped – to sell 49 percent of the Tavan Tolgoi coal deposit to a foreign bidder. JPMorgan and Citigroup can also tout the fact that they arranged the Hong Kong IPO of Mongolia Mining Corp. last October.

MMC, Mongolia’s largest privately held producer of coking coal, rose about US$700 million in the deal.

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 accounted for over 60 percent of total FDI in the country last year.

Coking coal is in great demand in neighboring China, as well as other big Asian buyers such as Japan, South Korea and Taiwan.

The government plans to keep 51 percent of Erdenes Tavan Tolgoi stake.

“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.”

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.

The price of Australian thermal coal, a benchmark for Asia, has risen 34 percent from a year ago to around US$127 a ton while spot prices for coking coal used by steelmakers have shot up more than 50 percent from a year ago to hover around US$370 a ton.

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