Mongolia Coal Companies Targeted in M&A Deals2011-09-14...

Mongolia Coal Companies Targeted in M&A Deals
2011-09-14 02:12:46.729 GMT

Mongolian coal: attractive target for M&A deals. Mongolia, the holder one of the world's largest coal resources and located close to major Asian economies, has become an attractive acquisition destination for the global and regional coal mining groups. Abundant with high quality coal coupled with conducive business environment and proximity to China, South Korea, Japan and India, major consumers of the commodity, this resource rich country is offering lucrative business opportunities for international industry players. Banpu PLC, one of Asia's leading coal and coal energy providers and Thailand's biggest coal producer, making a takeover bid for Hunnu Coal, an Australia-listed company with coal assets in Mongolia, is a latest testimony for our earlier prediction of accelerated M&A activity in the Mongolian coal industry. According to our estimates, since 2007, the Mongolian coal industry has experienced 43 M&A deals with the total value of US$1.22bn (announced deals only). Here are some selected
transactions:
?Mongolian Mining Corp acquired 100% of QGX Holdings for US$464mn in May this year ?Banpu purchased 12% of Hunnu Coal for US$45mn in March 2011 ?Winsway Coking Coal Holdings acquired 50% in Peabody-Polo Resources B.V. for US$35mn in June last year ?Noble Group bought 3.4% of Aspire Mining for US15.9mn in March this year Potential targets. We believe Mongolian coal companies and assets are expected to generate strong interest from both global and Asian players. The country holds estimated 160 billion tonnes of coal resources with significant further exploration potential as only 17% of Mongolia's territory is explored to date.
In our view, a number of Mongolian coal companies, both publicly-listed and private, with coal assets in Mongolia will be the potential targets for acquisitions. Among such companies are SouthGobi Resources (SGQ:TSX), Winsway Coking Coal (1733:HK), Mongolia Energy Corp. (276:HK), Aspire Mining (AKM:ASX), Sharyn Gol (SHG:MO), Gobi Coal Energy (privately-held) and a number of others.
In various degrees, these companies would represent access to the Mongolian coal industry for larger, international players.

Potential strategic buyers. In our view, now it is the right time for the global and regional coal groups to expand to Mongolia in order to be earlier entrants in one of the world's largest untapped mining provinces. Such major players as ArcelorMittal, Vale, Xstrata, Glencore, Noble Group, KORES, JOGMEG, Teck Resources and others are already making strategic purchases globally and we expect these well capitalized groups to expand actively into Mongolia. For example, Glencore raised US$10bn in IPO earlier this year and already started to use the proceeds to acquire resource assets globally, including US$1bn acquisition of Optimum Coal of South Africa earlier this month.

We believe the Mongolian coal companies will remain one of the most attractive targets for the global and regional mining groups. Proximity to the major coal consumers in Asia, including China, South Korea, Japan and India, and strong outlook for coal international prices make Mongolia an ideal place to expand operations by major coal players. Therefore, we expect the global and regional major coal players, including energy, steel-making and commodities trading companies, to capitalize on attractive industry opportunities in Mongolia by acquiring both publicly listed and private-held coal companies.

We recommend portfolio investors to take positions in Mongolian coal companies as M&A activity would lead to higher valuations across the industry amid expected generous takeover premiums (as Banpu's takeover bid for Hunnu Coal illustrates).