Macquarie is the latest investment
bank to unearth a rich seam of potential fees in Mongolia’s resources sector
after securing a lead role in the proposed initial public offering of one of
the country’s biggest iron ore producers.

Macquarie and Bank of
America-Merrill Lynch have been appointed joint global coordinators and
bookrunners for the proposed listing of Altain Khuder, which owns the Tayan
Nuur iron ore mine in the southwest of Mongolia, a person familiar with the
matter told Deal Journal Australia.

The IPO, which could be worth US$1
billion, is targeted to take place in Hong Kong in the fourth quarter of this
year, the person said.

Altain Khuder produces iron ore from
the Tayan Nuur mine around 168 kilometers from Mongolia’s border with China and
has been exporting to customers including a unit of China’s Baosteel since
October 2009.

Following years of minimal
investment in resources exploration and development, Mongolia is seeing
billions of U.S. dollars spent on finding commercial quantities of copper, coal
and iron ore as well as building vital infrastructure such as roads and new
railways to accelerate exports to China. The resources boom has led some market
participants to give the landlocked country the nickname ‘Minegolia’.

Iron ore exports have risen from
virtually a standing start. Exports in the first quarter of 2009 totaled less
than 200,000 tons, but have increased more than eight-fold since then to above
1.6 million tons in the fourth quarter of 2011, according to Mongolian
government data cited by Australia-listed mining company Haranga Resources.

This prospectivity led China
Investment Corp., China’s sovereign wealth fund, to invest US$300 million in
Hong Kong Lung Ming Investment Holdings—the owner of Eruu Gol iron ore project
near Mongolia’s border with Russia—in 2009. The Eruu Gol mine has the ability
to produce around 3 million tons of iron ore annually from an overall resource
totaling more than 300 million tons.

ASX-listed companies are also
exploring for iron ore in Mongolia, including 51 million Australian
dollar-valued Haranga Resources, which owns a deposit close to Eruu Gol. FeOre,
a smaller competitor worth A$46 million, owns the Ereeny and Dartsagt projects
in central Mongolia.

Mongolia’s iron ore is mostly of a
lower quality to deposits in Australia’s Pilbara, but interest is being kindled
by its proximity to China, which accounts for roughly 60% of the world’s
imports of the key steelmaking material.

The Trans-Mongolian Railway crosses
the border in northern China, meaning its natural customers are steel mills in
regions like Inner Mongolia and Xinjiang that are already set up to take
magnetite ore rather than better quality hematite.

A presentation by Haranga Resources
in April signaled that freight costs per US dollar-denominated ton of iron ore
concentrate delivered from Mongolia to the city of Baotou in Inner Mongolia
region are less than half those of shipping magnetite from Australia.

However, shares in Altain Khuder
could be a tough sell to investors amid signs that political risk in Mongolia
may be rising.

The Mongolian parliament is
discussing a law that will cap investment by foreign state-owned firms in
strategic assets, a move that could potentially derail the bid by Aluminum
Corp. of China, known as Chalco, to buy a controlling stake in SouthGobi
Resources. If passed, the law could prompt HK-listed shares in Mongolian mining
companies to be discounted relative to the market due to restricted potential
for takeover activity, as Chinese companies are widely seen as the most
aggressive buyers due to their hunger for raw materials.

Source: http://blogs.wsj.com