Mongolian companies to raise capital in Hong Kong

UB Post

Why do Asian investors find Mongolian story attractive?
Growing demand for natural resources in Asia, primarily in fast growing China, and geographical proximity of resource-rich Mongolia to the world’s largest consumer of many industrial commodities is particularly an attractive destination for Asian investors, including from China (Hong Kong), Japan and South Korea. Mongolia is a home for world-class mineral resources. It holds the second-largest copper and the third-largest coal reserves in the world. It also has significant uranium and rare earth metal resources, as well as significant deposits of gold and zinc. Official estimates suggest that there are 6,000 known deposits of ore minerals and 15 of them are strategic deposits. It is estimated that 10 largest strategic deposits of Mongolia worth a staggering US$1.3trn against the currently modest GDP of US$4.2bn.

 Hong Kong is top choice for capital raising
The Mongolian government intends to establish three major state-owned holding companies and raise significant amounts of capital by floating them both domestically and internationally. Moreover, the government intends to privatize a number of existing state-owned companies, mostly likely through IPOs. Several major private sector groups in Mongolia also plan to make IPOs on international exchanges. 

Demand for natural resources in China and geographical proximity, makes resource-rich Mongolia particularly attractive market for Hong Kong based investors. This has been confirmed by Sukhbaatar Batbold, the Prime Minister of Mongolia, who said: “Hong Kong is a natural choice for us in terms of funding and expertise”. Hong Kong Stock Exchange (HKEx) appeal for investors is becoming more evident during the last few years. In 2009, it was the top stock exchange globally in IPO fund raising. Moreover, it was the fourth largest in capital fund raising and the seventh largest stock exchange by market capitalization.

The HKEx intends to become a major destination for mining IPOs through attracting miners from Russia, Central Asia and Mongolia. It is bidding to capitalize on the commodity boom and on the Chinese demand for natural resources. The market capitalization of natural resource companies in HKEx grew approximately 30 times from US$11bn in 1999 to US$339bn in May 2010.

Although Singapore, South Korea and Tokyo AIM stock exchanges are also to see Mongolia-related listings in coming years, but they will not be in same league as the HKEx, in our view. We believe that going forward the number of Mongolia-focused resource companies with HK IPO will grow and raise multibillion US$ capital to finance their operations in the resources-rich country.

US$3bn HK IPOs within Next Three Years
Hong Kong will become the largest market for raising capital, both IPO and additional offerings, for private and public resources companies with operations in Mongolia.  After the SouthGobi Energy Resources’ full-fledged IPO on the HKEx in January this year, the first among Mongolia-focused resource companies, we expect more IPOs will be launched in coming years.

We estimate that at least US$3bn will be raised on the Hong Kong market within the next three years through new IPOs by Mongolia focused private sector companies alone.  Please note that we do not include potential IPOs from Mongolian state-owned enterprises (SOEs) in these estimates. A number of private sector resource companies have already working or have stated their extention to seek listing on the HKEx, including the below companies:

Energy Resources (ER), a coal company with the largest mining license area in Mongolia, may seek HKEx IPO next year. ER that owns a mining license for Ukhaa Khudag’s coking coal deposit produced about 1.8 million tonnes of coking coal last year, and may increase the output to as much as 4 million tonnes this year.

Gobi Coal Energy (GCE), majority-internationally owned coal company with the second largest exploration area in Mongolia, is planning to launch HKEx IPO in 2011.

Iron Mining International (IMI), which owns and operates a Mongolian iron ore mine, intends to undertake about US$1bn IPO on the HKEx at end-2010 or in 2011.

Winsway Coking Coal (WCC), a Chinese coal logistics company that acquired a 50% stake in Peabody-Polo Resources B.V for US$35mn in May this year, announced its plan to go public with US$800mn IPO on the HKEx in Q42010. The JV operates the Erds Coal Project, which contains a JORC compliant resource of 807 million tonnes of thermal coal in Mongolia.

Major private business groups operating in Mongolia with a wide range of businesses are serious contenders for large size IPOs in Hong Kong in the next three years and beyond.

Alisher Ali, CEO, Eurasia Capital