Coal In Mongolia: Investing, Part II

|
Includes: ASPXF, BHP, BTUUQ, LKYSF, MOGLF, PRPCF, RIO, SGQRF, TRQ
by: Jon Springer

<< Back to Part I

During a two week visit to Mongolia in September, I met with six different local brokerage houses. The views expressed below are taken in part from a composite picture of coal companies mining in Mongolia that are publicly traded in the U.S. from analysts, traders, and strategists of Mongolian brokerage houses, although not all these companies were discussed in every conversation. Data is also based on opinions formed from keeping abreast of Mongolia's news and from the expertise of others, such as Peter Epstein, an expert on coal and a consultant to one of the companies below. For another overview of the data, I recommend pages 78 to 82 of ResCap's Mongolia 101 report from which the following two illustrations came.

Click to enlarge.
Click to enlarge
Click to enlarge.
Click to enlarge
Source: Mongolia 101 by ResCap.

Other coal operations not covered by this article

According to ResCap's Mongolia 101, total coal reserves for the country are "estimated to be 152 billion tonnes." It should be noted many of the largest deposits in Mongolia are not publicly traded in the U.S. In conjunction with the Mongolia 101 report, Eurasia Capital's January 2011 Mongolia Outlook report was used in this section, particularly the company reports from pages 45 to 74.

  • Erdenes MGL Tavan Tolgoi is a stated-owned company with a planned international IPO next year and has 6.4 billion tonnes of coal on site. Expectations of peak production are 15 to 30 million tonnes of coal per year. Erdenes MGL Tavan Tolgoi plans to IPO 30% of its shares next year. State ownership will continue alongside a distribution of shares in the company to every citizen of Mongolia.
  • The West Tsankhi Deposit of Tavan Tolgoi - a 1.2 billion tonnes western chunk of Erdenes MGL Tavan Tolgoi is to be sold to a consortium to be determined.
  • "Little" tavan tolgoi, publicly traded on the Mongolia Stock Exchange produces 3 million tonnes of coal in a year.
  • Bagaanuur JSC, publicly traded on the Mongolia Stock Exchange produces 3 million tonnes of coal per year. Estimated reserve of 1.3 billion tonnes. (Source: Mongolia Outlook .pdf)
  • Mongolyn Alt Corporation, also known as MAK, owns the Nariin Sukhait coal deposit. 3 million tonnes per year without railways. 5 to 8 million tonnes per year with railways when built. 134 million tonnes of coal in reserve. 50 km from China. Also has a joint venture with China's Qinhua Corporation.
  • Shivee Ovoo JSC, listed on the Mongolia Stock Exchange, capacity to produce 2 million tonnes of coal per year.
  • Sharyn Gol, listed on the Mongolia Stock Exchange, .5 million tonnes of coal per year.
  • Gobi Coal and Energy, privately held, 322 million tonnes of JORC resources, 95 million tonnes of JORC reserves, estimates full production will be 8 million tonnes per year. Sources have told me that an international IPO may be in the works in the coming year for this company.


Earlier in 2011, Mongolia overtook Australia as the biggest exporter of coking coal to China. It now looks like Australia will pass a bill placing a special tax of 30% on coal and iron-ore profits that will encourage this trend, and encourage the long list of Australian companies engaging in coal operations in Mongolia to increase both in number and motivation.

While Seeking Alpha articles are limited to companies with a ticker that can be traded in the U.S., it is worth mentioning Australia alone has many companies engaged in coal mining and exploration in Mongolia not listed in the U.S. - C@ Limited, Cougar Energy Limited, Guildford Coal, TPL Corporation, TVN Corporation, Xanadu Mines - not to mention notable companies that are listed in the U.S. such as Aspire Mining (OTC:ASPXF), BHP Billiton (NYSE:BHP), and Rio Tinto (NYSE:RIO).

Companies Traded In The U.S.

Peabody (BTU)

As Seeking Alpha author Insider Monkey pointed out on November 3, 2011, Peabody "is the world's largest private sector coal company." As a major multinational coal company, Peabody is not a pure play on Mongolia.

However, Peabody has also been involved in the bidding on the 1.2 billion tonnes of the West Tsankhi deposit of Tavan Tolgoi. The company was originally awarded a 24% interest in this deposit before that deal was annulled and the bidding process started back all over again, as I wrote about this past September. Peter Epstein followed up that Peabody should be grateful and run away from any future interest in this deal.

Peabody has other business dealings in Mongolia. Peabody and Winsway Coking Coal Holdings announced a 50/50 joint venture in Mongolia on July 1, 2010, which created Peabody-Winsway. Peabody's website has a special section on Peabody in Mongolia.

The rest of the companies below are pure plays on Mongolian coal.

Mongolian Mining Corporation (OTCPK:MOGLF)


I have written previously about Mongolian Mining Corporation in Monogolia: Why And How To Invest In Stocks. Mongolian Mining Corporation (also known as Energy Resources in Mongolia) had an IPO in Hong Kong in October 2010 that raised $748 million. The biggest shareholder is Mongolian conglomerate MCS. MCS ranks #2 and Energy Resources (aka Mongolian Mining Corporation) ranks #4 on the 2011 list of the top 100 Mongolian companies.

Monogolia Mining Corporation is currently Mongolia's leading exporter of (coking) coal and its Ukhaa Khudag deposit, located within the massive Tavan Tolgoi coal formation, has 497 million tonnes of measured and indicated JORC coal resources. Mongolian Mining Corporation additionally acquired another 281.7 million tonnes at Baruun Naraan (per the company August 2011 corporate presentation); also see the company's 3 1/2 minute video presentation). The company began by producing 1.8 million tonnes of coal in 2009, and is targeting bringing production steadily up to 15.2 million tonnes of coal per year by 2014.

Click to enlarge.
Click to enlarge

Ukhaa Khudag semi-annual production. Source: Mongolian Mining Corporation August 2011 presentation.

The video really should be watched to understand the coal handling and processing plant the company is developing, as profitability should improve with Mongolian Mining Corporation's ability to sell washed coal.

Click to enlarge.
Click to enlarge
Source: Mongolian Mining Corporation August 2011 presentation.

Mongolia Mining Corporation has recently added a paved road and increased truck capacity to sell its coal to China 245 kilometers away. With the mine's proximate location to Erdenes MGL Tavan Tolgoi, there will eventually be railway line infrastructure put in place that will increase the mine's capacity for transporting coal to China.

Prophecy Coal (OTCPK:PRPCF)


I have written previously about Prophecy Coal in 'Monogolia: Why And How To Invest In Stocks'. Prophecy subsidiary East Energy Development is building a 600 megawatt power plant that will use Prophecy's coal. There are well-detailed plans in the November 2011 investor presentation to add another 3,600 megawatts to the power plant for energy domestically in Mongolia and for export to China.


Click to enlarge.
Click to enlarge
Source: Prophecy Coal November 2011 Fact Sheet.

Prophecy Coal has two properties it describes in its fact sheet:

  • "Ulaan Ovoo: 174 million tonnes of measured and 34 million tonnes of indicated. Ulaan Ovoo’s resource numbers are from the Dec 2010, 43‐101 Prefeasibility Study by Wardrop Engineering."
  • "Chandgana: 665 million tonnes of measured and 545 million tonnes of indicated coal. Chandgana’s resource numbers are from the September 2007, 43‐101 Technical Report by Behre Dolbear & Company (NYSE:USA), Inc. for Chandgana Tal and from the September 2010, 43‐101 Technical Report by Kravits Geological Services, LLC for Chandgana Khavtgai."

Chandanga is 400 kilometers from the Chinese border while Ulaan Ovoo is near the Russian border and has led Prophecy to have successful test shipments of coal to Russia this year.

Click to enlarge.
Click to enlarge
Source: Prophecy Coal November 2011 Presentation.

South Gobi Resources (OTC:SGQRF)


SouthGobi Resources, also known as South Gobi Sands, is closer to China. The company's flagship Ovoot Tolgoi mine is 42 kilometers from the Chinese border. According to ResCap's Mongolia 101 report in January 2011 SouthGobi had "114.1 million tonnes of thermal and coking coal." SouthGobi Resources is 57% owned by Ivanhoe (IVN) and Ivanhoe is in turn 49% owned by Rio Tinto (RIO). Additionally, SouthGobi owns 19.8% of Aspire Mining (company description below).

The brokerage community in Mongolia has speculated that the quality of the coking coal in Ovoot Tolgoi's neighboring Soumber deposit may be better than that of Ovoot Tolgoi.

Click to enlarge.
Click to enlarge
Source: SouthGobi Resources October 2011 presentation.

Some other thoughts from local brokerages in Mongolia:

  • SouthGobi's relationship with the Mongolian government is good.
  • The issue with their large deposit that has hurt their stock price over the past year is that there was a high content of sulphur in their coking coal in 2010 which caused them to have to renegotiate their sale price with the Chinese to a lower price.


It should be noted that the problem of lower grade coal produced in 2010 has been acknowledged by SouthGobi, and the company assesses the fact that the coal was “near-surface [and should improve as] the open-pit deepens”; and is planning a secondary coal processing unit as mentioned in this November 2010 announcement. This recent excellent interview of SouthGobi CEO Alex Molyneux by consultant Peter Epstein touches on these issues as well. Mr. Epstein has written an extensive number of blogs and articles about SouthGobi providing a wealth of information about the company to readers.

SouthGobi anticipates a four-lane paved road to China to be completed in 2012, which will allow for increased production and export efficiency. SouthGobi also has an agreement with Ejin Jinda to toll wet wash its coal in Ceke, 10 kilometers across the border in China.

Two snapshots of SouthGobi's progress from its October 2011 presentation (click to enlarge):
Click to enlarge

Click to enlarge

Aspire Mining (OTC:ASPXF)

Aspire Mining, based in Australia, is also discussed in the interview with SouthGobi’s CEO Alex Molyneux. This is because SouthGobi has a 19.8% stake in Aspire. Some thoughts on Aspire I gleaned from meeting with six Mongolian brokerages:

  • Aspire has good management.
  • Aspire’s coal is rated as top quality coal.
  • Aspire’s Ovoot Coking Coal Project has been confirmed to be a JORC Compliant Resource of 330.7 million tonnes by Wood Mackenzie.
  • In the Peter Epstein interview with SouthGobi CEO Alex Molyneux, he calls for a $700 million project to create rail transport for this coal to go to China. Some brokerages agree while some believe Aspire will export its coal to Asia via Russia.
  • Aspire is speculative as it needs to put a lot of infrastructure in place, but the value in the company's coal is without question.


You can listen to Aspire's 20 minute corporate presentation from March 2011 while you view its corporate slide show to understand the company better (at about the 18 minute mark Mongolian Mining Corporation is discussed). In the presentation there is talk about exporting coal to not only China, but also Korea and Japan. It is worth listening to the presentation by Managing Director David Paull as he points out why he believes Aspire Mining to be undervalued-- although, as the below chart details, Aspire Mining's share price has significantly outperformed SouthGobi Resources and Prophecy Coal over the past two years.
Click to enlarge

Click to enlarge. Source Yahoo! Finance.
Click to enlarge

Click to enlarge. Source: Aspire Mining March 2011 corporate presentation.

Conclusion

There is some speculation involved in any investment in mining. However, the case for the development of the coal industry in Mongolia, with China next door, is clear. There are more speculative coal companies in Mongolia than these, many are Australian, Canadian, privately held, and so on; and like early stage coal company Lucky Strike Resources (OTCPK:LKYSF), it too makes a compelling case for coal in Mongolia in its corporate presentation. Each of the five companies above in their own way have a clear path to streaming profits from coal in Mongolia.


Disclosures:
I am long Ivanhoe Mines (IVN) and long Origo Parnters (OPP.L).

Additional Disclosure: Origo Partners owns a portion of Gobi Coal and Energy. Origo owns a portion of ResCap, the Mongolian brokerage that wrote the Mongolia 101 report I referenced in this article. Local conglomerate Monnis also owns a portion of ResCap. The CEO of Monnis is on the board of Prophecy Coal and Monnis is an investor in SouthGobi Resources. SouthGobi Resources, Oyu Tolgoi (Ivanhoe and Rio Tinto), and Peabody-Winsway are among the companies who have their main Mongolian offices in the Monnis Tower in Ulan Bator. I met with management of Origo Partners, ResCap, and Monnis, during my September visit to Mongolia. I have not traded in any companies mentioned in the 72 hours prior to the publication of this article. I will make no purchases of any company mentioned in this article in the next 72 hours.