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Mongolia revokes mining licences

IPO

The Mongolian government stunned the mining industry around the world with an announcement that it will revoke at least 254 mining licences across the country on environmental grounds.

The statement raises concerns over the future of the Mongolian mining sector which has become a hot investment story in Hong Kong due to the landlocked country's vast amount of untapped resources and its proximity to China.

It has also highlighted the risks of investing in the immature democracy, which was part of the Soviet Union until 1991, said analysts.

Mongolia's Minister of Minerals and Energy, Dashdorj Zorigt, told domestic media on Thursday: 'To start with, 254 licences for gold mining will be cancelled.'

A spokesman for the government's foreign affairs department yesterday confirmed the reported comment was accurate. But he said the government would be unable to announce which miners were affected 'until probably next week as the papers are only in draft form at the moment'.

Asian investors have been keen to buy stakes in Mongolian miners. There are nine companies on the Hong Kong Stock Exchange with major exposure to Mongolian assets and eight of these are in the mining industry.

Hong Kong-based Iron Mining International, which owns Mongolia's biggest iron ore exporter and whose private equity backers include mainland sovereign wealth fund CIC and former Goldman Sachs investment banking supremo Fang Fenglei's Hopu Fund, is seeking to raise US$1 billion in a Hong Kong IPO.

Graeme Hancock, the World Bank's senior mining specialist in Mongolia, said: 'I think these [government] announcements demonstrate that despite all the hype about Mongolia's mineral potential and possible future as a major mining producer, there is significant risk.

'Mongolia has a regulatory framework which is rapidly evolving and which has not yet matured. The evolutionary changes are causing disruption to exploration and mining and creating risks for investors.'

Coal miner Mongolia Mining Corp raised HK$5 billion in a Hong Kong IPO last month. SouthGobi Resources, formerly called SouthGobi Energy Resources, another coal miner, raised HK$2.7 billion in January.

SouthGobi chief executive Alexander Molyneux said his company's licences would not be revoked. A spokesperson for Mongolia Mining said that company's licences were also safe. Both companies' shares were unaffected by the news.

But the announcement caused havoc for Mongolian miners listed outside Hong Kong.

Toronto-listed Centerra Gold, which owns two deposits in Mongolia, plunged 7.3pc to C$16. 04 (HK$112.15) on Thursday. Yesterday it was down a further 1 per cent in early trading. Centerra said it could potentially lose four mining permits. But, it said, the deposits these permits covered were 'not material' to earnings.

Prophecy Resources, another Toronto-traded miner that owns coal deposits in Mongolia, fell 5.7 per cent by market close on Thursday. In early trading yesterday it was down further 6.9 per cent. Prophecy chairman John Lee said in an e-mailed response that his company was not affected by the ban.

The Mongolian government spokesman added miners stripped of their licences would receive government compensation. He said licences were being revoked under a law passed in 2009 to protect Mongolia's forests and river basins.

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