Source: The Wall Street Journal Asia                           Date: 11 February, 2011

Mongolian officials are sitting down with bankers in the coming days to discuss the multibillion-dollar sale of shares in the world's largest coking coal deposit, said people familiar with the matter. Mongolia plans to sell about half of state-owned holding company Erdenes-Tavan Tolgoi Co., which controls the massive deposit, located in the South Gobi desert near China's northern border.

The initial public offering would value the holding company between USD10 billion and USD15 billion, said one of the people familiar with the matter. The bankers meeting with Mongolian officials this weekend and early next week are hoping the complicated deal doesn't get mired in a political quagmire. The sale of Mongolia's resources is fraught with tension, as the impoverished nation struggles to balance selling its resources while staying independent of its larger, more powerful neighbors, China and Russia.

China's voracious appetite for commodities gives neighboring Mongolia a ready-made, nearby market for its exports, though other countries in the region also are eager to gain access to its natural resources. Coking coal from Tavan Tolgoi is particularly sought after because it is considered of high quality for use in making steel.

The IPO of Erdenes-TT, as it is known, is inextricably linked with the sale of a concession to develop half of the deposit for a set period. Competing bidders for the license come from China, Russia, Japan, India, South Korea and elsewhere. The holding company is likely to receive royalties from the concession operator.

The bankers, who are officially mandated to sell the shares, plan to sell 30% of Erdenes TT to international investors, 10% to domestic professional investors and give 10% free to Mongolian citizens. The domestic share sale could take place later this year, followed by the international share sale early in 2012, the person said.

But many details of the deal remain uncertain, which makes bankers nervous. Mongolia still has to award the license to develop roughly half the deposit. A preferred bidder may be named in the coming weeks and finalized over the next six months, the person said. China's Shenhua Group and Peabody Energy Corp. of the U.S. are among the leading contenders said another person familiar with the matter.

It's unclear how the coking coal, from the estimated 6.4 billion metric tons of reserves, will be exported from the land-locked nation, as railroad links directly from the mines into Russia and China have yet to be completed. Bankers also find the prospect of distributing shares in the world's most sparsely populated nation a daunting prospect. A large percentage of Mongolia's 2.7 million population is nomadic.

It's also unclear on which exchange the 30% of shares will be sold. Coking-coal producer Mongolia Mining Corp. chose to go public in Hong Kong in October and raised USD745.2 million. That deal was managed by Citigroup Inc. and J.P. Morgan Chase & Co. One banker said news that the stock markets of London and Toronto are in advanced talks to merge would give them an edge over Hong Kong as a destination. The London-Toronto combination would produce a mining- and resource-exchange giant that would rank No. 2 globally in terms of the value of the companies traded.

Also, London also has a strategic partnership with the tiny Mongolian stock exchange.