Mongolia’s Coal Sector Roars Back To Life

As many exasperated miners and investors had hoped, the early October signing of the long-delayed Oyu Tolgoi copper-gold development agreement between Ivanhoe Mines and the Mongolian government has led to a wider reopening of the country’s mining sector to foreign companies.

• Ivanhoe’s 80%-owned subsidiary SouthGobi Energy Resources has been next to trumpet good Mongolian news, with upbeat new development plans for its high-quality coal assets in Mongolia’s South Gobi region. Over the next several years, it has ambitious plans to: jack up annual production from its flagship Ovoot Tolgoi open-pit coal mine to 8 million from 1.5 million tonnes; develop a mine at the Soumber coal deposit 20 km away; greatly improve regional infrastructure; and build a large coal-washing facility.

And the funds to pay for all this have just been secured in the form of a new US$500-million, 8% convertible debenture from China Investment Corp., the US$200-billion Chinese sovereign wealth fund.

But this dramatic ramping up of coal output from the South Gobi desert is only a taste of what’s to come in the region, with recent media reports that the Mongolian government is lining up some of the world’s biggest miners to bid for access to its gigantic Tavan Tolgoi coking coal deposits, which boast reserves of 6.5 billion tonnes.

Any winning bidders will undoubtedly have to commit to major infrastructure upgrades in the desolate and impoverished region, which is nevertheless geographically in an ideal position for exporting product into the hungry Chinese coal markets.

Meanwhile, speculation continues as to the fate of Mongolia’s substantial uranium assets, and whether they’ll be treated in the future as a national-security treasure that’s mostly off limits to foreigners, or just another mineral commodity.

• While the latest deals are setting new benchmarks for East-West co-operation in and around Mongolia, a new precedent was made Down Under as China’s NYSE-listed coal major Yanzhou Coal was forced to accept fairly stringent restrictions before its bid for Aussie coal miner Felix Resources was accepted by federal Australian regulators.

While small by the super-size-me standards of recent global M&A deals, Yanzhou’s US$3.2-billion bid for Felix nevertheless ranks as the biggest-ever takeover of an Australian firm by a Chinese one.

After two previous bids for Felix were returned by Aussie regulators and negotiations dragged on for a year, Yanzhou has gone to the unusual lengths of agreeing to obtain a partial listing in Australia and open a major head office in Australia for its mining assets there. It’ll be the first ASX listing of a Chinese state-owned company operating in Australia.

• Uranium’s one of those funny metals that is often easier to find than to mine — or at least that’s the case for two of the world’s biggest and most experienced uranium miners.

Owing to a shaft accident, BHP Billiton declared force majeure on Oct. 20 on deliveries from its behemoth Olympic Dam uranium-copper-gold mine in Australia. While the mine normally produces 8-9% of the world’s uranium supply, it may be constrained to 25% capacity for as long as half a year. This has caused uranium oxide spot prices to rally a few dollars to US$47.75 per lb.

Meanwhile, Canada’s Cameco resumed dewatering its soggy nightmare, the underground Cigar Lake high-grade uranium mine project in Saskatchewan, following a suspension of dewatering efforts on Aug. 12 caused by new inflow on the 420-metre level.

Cameco says it may take six to 12 months to dewater and secure the mine. It had its original catastrophic flooding event in 2006, which scuppered a planned mine opening in 2007.

Rescuing Cigar Lake is well worth the effort and expense, though: When it does open, it will easily be one of the world’s highest-grade uranium mines.

• Another determined Canadian gold junior, Detour Gold, officially hit the big time this week, as it nailed down a $250-million bought deal comprised of 17.5 million shares priced at $14.25 per share. There’s also a similarly priced $25-million overallotment option that will likely be exercised.

The money will be ploughed into the company’s wholly owned Detour Lake gold project in northeastern Ontario — a past-producing Placer Dome castoff that now boasts an impressive open-pit reserve of 8.8 million oz. gold averaging 1.15 grams gold per tonne.

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