Mongolian Mining Corp (MMC) has agreed to pay $464 million for a coking project owned by Hong Kong’s Kerry Group, according to a source.
MMC, which is Mongolia’s biggest coking coal exporter, signed a deal on Tuesday to buy QGX Coal from Kerry Mining and could end up paying as much as $950 million if the mine hits certain targets, making it the biggest acquisition by a Mongolian mining company ever.
QGX Coal owns the Baruun Naran project within the Tavan Tolgoi coal formation in South Gobi, close to MMC’s existing operations. The mine contains 185 million tonnes of confirmed reserves and 282 million tonnes of resources, adding to MMC’s existing 286 million tonnes of reserves and 500 million tonnes of resources.
MMC will make an upfront cash payment of $100 million and has raised $85 million through a convertible loan with an 18-month maturity, 20% premium and a 2% coupon. Kerry is providing a vendor loan of $279 million that is due to be settled with a few months of the closing.
The price is subject to adjustment based on the confirmed reserves position of the company in 18 months time, when MMC will also pay a royalty based on the mines’ production exceeding certain thresholds. The aggregate amount for all forms of consideration is capped at $950 million.
The sale looks like a good deal for Kerry, which paid $259 million for the mine in 2008. Tavan Tolgoi is one of the few remaining largely unexploited sources of high-quality coking coal in the world and the closest coking coal formation to China. Mine development started in 2010 and it is now ready for coal production.
Coke prices have risen in tandem with demand for steel, which uses coking coal in its manufacture, but supply constraints have also helped to drive the price higher. Indeed, coke prices reached a peak of $350 a tonne in the first quarter after the floods in Queensland, Australia.
MMC became the first Mongolian-owned company to trade on the Hong Kong stock exchange in October last year, in a deal led by Citi and J.P. Morgan. Citi also advised MMC on this deal. The company is controlled by the MSC Group, a Mongolian conglomerate that is the largest taxpayer in the country and a market leader in numerous businesses.
Kerry Mining is a subsidiary of the Kuok Group, one of the largest diversified conglomerates in Asia, known for its ownership of Shangri-La Hotels & Resorts. Kerry Mining was established on November 2007 to take advantage of rising commodity prices and strong investment opportunities in natural resources. It bought QGX via tender offer and subsequently delisted it from the Toronto Stock Exchange. UBS advised Kerry on the sale of QGX