Source: The Financial Times                           Date: 17 February, 2011

Dealmakers from the world’s top investment banks jetted into Ulaanbaatar last week to fight for a role in an extraordinary deal that is set to turbocharge the Mongolian economy and enrich its population. The initial public offering of Erdenes Tavan Tolgoi, a state company that owns a vast untapped coal deposit in the Gobi Desert, is one of the hottest prizes in investment banking in Asia this year.

The deal is contributing to a modern-day gold rush in smog-ridden Ulaanbaatar. “There is a great deal of excitement, every bank was in town,” said Mr. Howard Lambert of ING, which has an office in Ulaanbaatar. Last Thursday the Mongolian government started formal interviews with most of the 18 banks – including Goldman Sachs, UBS and Deutsche Bank – that submitted proposals for a role in the offering. Already tempers were running high. “I have never seen this much testosterone in [Ulaanbaatar],” says one dealmaker, who says he witnessed a brawl last month between rival investment bankers at the Grand Khaan Irish Pub, a popular nightspot.

Bankers are desperate to get involved in the IPO of Erdenes TT partly because they want to position themselves for other big deals in Mongolia, which has extensive deposits of minerals including uranium, gold, copper, molybdenum, zinc, silver and lead. The listing is the first to be directly orchestrated by the Mongolian government, following the recent Hong Kong listings of private miners such as SouthGobi Resources and Mongolian Mining. “This is viewed as a must-win deal by many banks,” says one banker.

With an estimated 6.5bn tons of reserves, mostly coking coal, Tavan Tolgoi is the second-largest coal field in the world after Shengli in China, according to Raw Materials Group, a data provider based in Stockholm. Yet while the prize is big, much of the process is still up in the air – the timing and size of the IPO, and even exactly what assets will be included are still being decided. Another question is how the mine’s infrastructure, including a railway to move the coal to Russia or China, will be financed.

With all these uncertainties, one banker estimates that the IPO could raise between USD2 billion and USD5 billion for the 30 per cent of Erdenes TT that will be sold to international investors, valuing the whole company between USD6.7 billion and USD16.7 billion. “The valuation range is so wide because so many details are unknown,” he said.

A key challenge facing the banks is how to fulfill the government’s wish that 10 per cent of shares be distributed among the people of Mongolia, a logistical difficulty in a country with nascent financial infrastructure. Given Mongolia’s per capita gross domestic product of about $1,500, the share allotment is likely to amount to a huge windfall for the average citizen. Mongolian companies stand to gain too – they will be able to buy 10 per cent of the shares at a big discount.

Shares distributed to the Mongolian people will be listed on the Mongolia Stock Exchange, a tiny bourse that recently entered into a strategic partnership with the London Stock Exchange. The shares sold to international investors are likely to be listed in London, Hong Kong, or both.

Dealmakers expect the listing will happen in the first quarter of 2012, before Mongolian parliamentary elections in June that year. Some skeptics say that winning the deal could be a poisoned chalice. The Mongolian government has repeatedly changed its plans in recent years over how best to develop the Tavan Tolgoi coal deposit – perhaps understandably, given that for the Mongolian people the stakes are so high.