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Mongolia

Mergers and Acquisitions

Metals & Mining Research 13 September, 2011

Mongolia Coal Companies Targeted in M&A Deals


Mongolian coal: attractive target for M&A deals. Mongolia, the holder one of the worlds 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 Asias leading coal and coal energy providers and Thailands 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$1.2bn (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
Akmal Aminov Associate, Metals & Mining akmal.aminov@eurasiac.com

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 Mongolias 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 worlds 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 Banpus takeover bid for Hunnu Coal illustrates).

Mongolia Coal Companies Targeted in M&A Deals

Metals & Mining Research


13 September 2011

Major Focus on Coal


Since 2007 there were over 80 mining M&A deals in Mongolia and approximately half of the deals for over US$1.2bn were related with coal (see Table below). The largest M&A deal to date is the acquisition of QGX Holdings by Mongolian Mining Corp. for US$464.5mn in May this year. Yesterday Banpu Plc, Thailands biggest coal producer, made a friendly takeover bid for Hunnu Coal to acquire all shares of the company for A$477mn (US$493mn). If all shareholders accept the offer, which was recommended unanimously by the Board of Hunnu Coal, the deal makes another record in terms of value. The recent deals with involvement of big names such as Peabody, Banpu and Noble Group show the conviction in the Mongolian coal story. Moreover, recent global coal M&A deals with Rio Tinto acquiring an emerging coking coal player in Mozambique, Anglo Americans and BHPs bid for Walter Energy, Alpha Natural Resourcess acquisition of Massey Energy and many others indicate that coal sector M&A activity is growing, and such acquisition activities have also expanded to Mongolia.

Coal M&A Deals in Mongolia 2007-2011


Buyer Buyer Country Target Company (TC) Buyer Company MktCap, $mn (as of September 13, 2011 3,832.79 TC Resources Stake, % Deal Terms, US$mn 464.47 244.1 Date

1 2

Mongolian Mining Corp Kerry Holdings and MCS Holding Mongolia Energy Co Ltd Banpu Minerals Plc Hunnu Coal

MGL HK/MGL

QGX Holdings QGXLtd

Approximately 150Mt 252.9 Mt contained in M&I category 149.2Mt Exploration Target of between 250Mt and 500Mt. -

100 100

31.05.2011 22.07.2008

3 4 5

HK TH AUS

Khushuut Coal Mine Hunnu Coal Rio Tinto Minerals Development Ltd Peabody-Polo Resources B.V. Peabody-Polo Resources B.V. Mongolian based company

609.76 5,634.78 437.34

100 12.4 70

154.1 45 40

08.02.2007 08.03.2011 23.05.2011

6 7 8

9 10 11 12

Winsway Coking Coal Holdings Peabody Energy Corp Guildford Coal Ltd (through its subsidiary Terra Energy LLC) SouthGobi Resources Gulfside Minerals Ltd Noble Group Origo Partners PLC

HK US AUS

940 12,484.99 479.53

50 50 100

35 25.8 25

30.06.2010 27.01.2009 08.07.2011

CN CN HK UK

Aspire Mining Ltd Onjuul Coal Property Aspire Mining Gobi Coal and Energy Ltd

80.89 3.82 7,780.49 173.29

330Mt 159 - 178Mt -

19.9 100 3.36 21.3

20.1 19 15.95 15

25.10.2010 30.04.2009 22.03.2011 27.11.2009

Mongolia Coal Companies Targeted in M&A Deals


13 Guildford Coal Ltd (through its subsidiary Terra Energy LLC) Marubeni Corp South Koreas staterun Korea Coal Corp. (KOCOAL) AUS Deliin Shand Project 479.53 Exploration Target up to 420Mt 109Mt 100

Metals & Mining Research


13 September 2011 15 08.07.2011

14 15

JP SK

16 17 18

DeTeam Co Ltd Aspire Mining Ltd CEO

HK AU AUS

19 20

Guildford Coal Ltd Lucky Strike Resources Ltd

AUS CN

21

22 23 24 25

Windy Knob Resources (named to Aspire Mining) Blina Diamonds Polo Resources Ltd Mangreat Ltd Prophecy Coal

AU

Winsway Coking Coal The open-pit Nuurst Khotgor mine, located in Bukhmurun sum, Uvs aimag Shine Shivee LLC Khurgatai Khaikang LLC 8 coal licences located in SouthGobi Region Terra Energy LLC 6 Mining Exploration Licenses and coal propertis with 5 Private Mongolian Companies Ovoot Coking Coal Project Mongolian BML LLC Mongolian Companies Erdenetsogt project Private Mongolian Company Nuurst Thermal Coal Deposit Mongolian Company Private Mongolian Company Berkh Uul JSC Mining Assets "Monster" Coal Property Keen Business Ltd Buyan Coal Project Tsohio Coal Project Well Delight Holdings

10,662.49 N/A

10 51

12 10

06.12.2010 29.12.2010

39.09 328.58 43.21

2.14Bt -

100 100 100

10 7.73 7.7

20.07.2010 25.11.2009 17.07.2011

479.53 13.72

20 80

7 5.8

31.03.2011 11.07.2011

328.58

100

3.5

26.11.2009

AUS VG VG CN

8.26 202.35 N/A 125.96

250Mt 125Mt -

100 100 5 100

2.2 2 2 2

30.09.2010 19.11.2007 01.11.2010 04.05.2011

26 27 28

TVN Corporation Ltd Xanadu Mines Lucky Strike Resources Ltd Local Mongolian Companies Mongolia Energy Co Ltd Gulfside Minerals Ltd China Grand Forestry Green Resources Group Hunnu Coal Hunnu Coal

AUS AUS CN

39.20 94.39 13.72

200Mt -

100 100 up to 75% in JV Company 3.1 100 100

1.5 1 0.9

24.06.2011 01.06.2010 27.04.2011

29 30 31

MGL/US HK CN

N/A 609.76 3.82

3.4-4.4Bt up to 550Mt of coal in "C" category -

0.3 -

05.04.2011 16.05.2007 21.06.2007

32

HK

178.56

100

03.08.2010

33 34

AUS AUS

437.34 437.34

Exploration Target 50Mt to 75Mt -

60 60

08.06.2010 02.06.2010

35

Ming Hing Waterworks

HK

100

30.05.2010

Mongolia Coal Companies Targeted in M&A Deals


Holdings Ltd 36 Hunnu Coal AUS Ltd/Tugrugnuur iin Energy LLC Tsant Uul Coal Project The Unst Khudag Coal Mine First Dean Holdings Ltd The Erdenes Thermal Coal Project Red Hill Energy Javhlant Coking Coal Exploration Project Nuurstei coking coal project Unst Khudag Coal Mine

Metals & Mining Research


13 September 2011

437.34

37

Hunnu Coal

AUS

437.34

Exploration Target 50Mt to 100Mt -

90

26.05.2010

80

12.04.2010

38 39

Kiu Hung Energy Holdings Ltd* Hunnu Coal

HK AUS

437.34

100 80

17.03.2010 11.03.2010

40 41

Prophecy Resource Corp Xanadu Mines

CAN AUS

125.96 94.39

1.5Bt -

100 100

21.01.2010 22.07.2011

42 43

Xanadu-Noble JV Hunnu Coal Total

AUS/HK AUS

437.34

80 15

1,194

15.06.2011 25.01.2011

Source: Company data, Eurasia Capital estimates, *deal was cancelled

Mongolia Coal Companies Targeted in M&A Deals

Metals & Mining Research


13 September 2011

Contacts
Research Sardor Koshnazarov Dosbergen Musaev Akmal Aminov Rentsendorj Yondon Sales and Trading Zhyldyz Sadyralieva Hoosniddin Hakimov Bolor Ulziisaikhan Narantsatsral Batgerel Head of Research, Oil & Gas Chief economist Associate, Metals & Mining Associate, Mongolian Equities Associate Associate Associate Broker sardor.koshnazarov@eurasiac.com dosbergen.musaev@eurasiac.com akmal.aminov@eurasiac.com rentsendorj.yondon@eurasiac.com zhyldyz.sadyralieva@eurasiac.com hoosniddin.hakimov@eurasiac.com bolor.ulziisaikhan@eurasiac.com narantsatsral.batgerel@eurasiac.com

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Eurasia Capital is a pan-regional investment bank with a focus on Mongolia and Central Asia. Headquartered in Ulaanbaatar, the Firm offers cross border M&A and advisory, capital raising, sales & trading and research services to its international and regional clients including government agencies, major energy and resource companies, sovereign wealth funds, private equity groups and global portfolio investors. For more info, please visit our website: www.eurasiac.com

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