In Sale of Coal Deposits, Mongolia Balances Need for Development with Control of State Assets

Sources:

FT: Banks in Mongolia Coal ‘Gold Rush’

Mining Weekly: Vale, ArcelorMittal Among 15 Bidding for Mongolia Coal Mine

WSJ: Mongolia Pushes Forward on Coal Deal

WSJ Blog: Morgan Stanley Puts Mongolian Princeling to Work

Mongolia sits atop some of the world’s largest deposits of coal, uranium, gold, copper, silver, and molybdenum. Mining experts estimate that the state-owned company Erdenes-Tavan Tolgoi holds deposits of more than 6 billion metric tons of coking coal, the largest undeveloped deposits in the world. This month, the Mongolian government announced its intention to distribute roughly half of the shares of Tavan Tolgoi through an initial public offering. The offering may bring between $2 to $5 billion of foreign investment to a country that the World Bank lists as one of Asia's poorest.

The Mongolian government is attempting to condition the sale of shares on features it hopes will balance foreign investment, state ownership, and citizen participation. The Mongolian government plans to sell roughly 30 percent of Tavan Tolgoi’s shares to international investors. Meanwhile, the government has stipulated that an additional 10 percent of shares be distributed equally among the citizens of Mongolia and another 10 percent to Mongolian businesses. The government will retain at least 50 percent of Tavan Tolgoi’s shares.

The Mongolian government is currently interviewing eighteen investment banks to manage the share sale. Once the parties finalize the details, an initial public offering is expected to be held in London or Hong Kong in 2012. Bankers say that Mongolia's insistence that each citizen receives shares would be a logistical hurdle for investment banks because much of the country’s population is nomadic and the country's financial infrastructure is still in the early stages of development.

Investment banks have worked for years to develop relationships with Mongolian officials over mineral projects, but have been unsuccessful until recently. Late last year, JPMorgan and Citigroup arranged an initial public offering that raised almost $750 million for Mongolia Mining Group. Some financial newspapers have speculated that Morgan Stanley may have an advantage in becoming lead banker on the Tavan Tolgoi offering. Mongolian Prime Minister Sukhbaatar Batbold's son works for Morgan Stanley and has recently been seen in meetings in Mongolia.

Many of the world's leading mining and steelmakers are expected to bid for Tavan Tolgoi shares. Among the expected bidders are steelmaker ArcelorMittal, mining companies Vale, Xstrata, Peabody, and consortia led by South Korea, China, Japan, and India. The inclusion of state-backed bidders may complicate the sale as Mongolia attempts to retain economic independence from its neighbors.

Discussion Questions:

1. The Mongolian government has not announced how it will invest the billions of dollars that will flow into its treasury if the initial public offering succeeds. What development plans do you expect Mongolia to invest in?

2. What steps can an economically weak country take to maintain its economic independence from wealthier neighbors without scaring away foreign investors? Is economic independence linked to political independence?