Deal-making Mongolia Energy defies sceptics

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By Eric Ng

If Mongolia Energy Corp is any indi-cation of how volatile share trading in back-door-listed companies can be, Hong Kong Exchanges and Clearing’s reluctance in allowing such deals is understandable.
Mongolia Energy, a little-known coal and metal resource exploration company that has yet to start production, has seen its share price rocket as much as 65 times since its exploration assets were listed early last year.

Shares of the firm last traded this week at an incredible 2,435 times last year’s earnings. Its market capitalisation of HK$93.92 billion of Yanzhou Coal Mining, the listed unit of the mainland’s fourth-largest coal producer, Yankuang Group.

The shares have soared 48.04 per cent year to date, compared with declines of between 6.21 per cent and 44.33 per cent for Yanzhou. China Shenhua Energy and China Coal Energy. Yet no major brokerage provides current coverage of the stock

How did such an also-ran firm become such a hot stock?

The traditional road toalistingfor Mongolia Energy was out. The local exchange does not allow mining companies in the exploration stage and without economically proven production prospects to apply for listings. Such firms can only sell themselves to companies that are already listed to obtain listing status and raise funds to finance exploration.

Mongolia Energy has come along way from its former incarnation as New World CyberBase, the e-commerce flagship of conglomerate New World Development. The latter sold its 18.5 per cent stake in New World CyberBase for HK$49.28 million in October2001 to supply chain consul-tants Asia Logistics Technologies, which was controlled by Simon Lo Lin-shing.

Mr Lo is also a director of some New World Development subsidiaries. New World CyberBase was renamed Mongolia Energy on May 18 last year.

Mongolia Energy announced in February last year it would pay the current controlling shareholder Liu ChengJin HK$1.2 billion for explora-tion rights over 32,000 hectares -about one-third the size of Hong Kong- in western Mongolia.

Mr Liu obtained the shares in Mongolia Energy by selling his coal-mining rights in Mongolia to the company in exchange for new shares. Mr Liu had a 26.87 per cent stake in May, according to a stock exchange filing.

Mongolia Energy said the exploration area could have 1 billion to 2 billion tonnes of coal resources. Sub-sequent exploration work done over 600 hectares of the land by the China Coal Geology Bureau found the area has 306.1 million tonnes of coal resources, according to the company.
Mongolia Energy has since expanded its exploration to 329,008 hectares by paying Mr Liu the nominal sum of US$2 for more mining rights.

It said it had so far signed at least eight letters of intent and memoranda of understanding with potential partners. They included a “leading Chinese state-owned company deal-ing with petroleum and natural gas and allocations”, a “leading Chinese state-owned company dealing with power-related investments and allocations in China” and “a leading Chinese state-owned company dealing with ferrous and non-ferrous metal and other resources and allocations in China”.
However, only their Chinese names were provided in public an-nouncements by the company and while their names resemble some major state companies, their websites could not be found on the internet.

A preliminary co-operation agreement was also entered into with CNPCDaqing Petroleum, a unit of PetroChina’s parent China National Petroleum Corp, on oil exploration in Mongolia. Another was signed with shipping giant China Cosco on the transport of coal and other resources, while a separate one ~wars reach-errwirrrCntria Railway No 1 Engineering Group to study the feasibility of building a railway from rn Mongolia to the border with Xinjiang.

So far, no firm agreements have been signed with any of these parties.
The announcement of the acquisitions and the co-operation pacts saw the company’s share price rocket from 27 HK cents in February last year to HKS12.80 by late November.

Called a “weird stock” by the mainland media, the story of ho wMr Liu was able to amass the mining rights in Mongolia and the viability of the company’s business plan have been questioned.
In January this year, Mr Liu was reported by MingPao to be a former suspect in a major bribery scandal in the late 1990s that saw the jailing of a former Liaoning province governor and the execution of a former Shen-yang mayor.

After being detained and investigated, Mr Liu in 2000 reportedly fled to Hong Kong where he set up various mining companies and in the process changed his name twice. The report set off a 20 per cent correction of the company’s share price, although it has since continued its surge.
Mongolia Energy subsequently confirmed Mr Liu had been drawn into the investigation and provided assistance as required, adding he changed his name in 2006 “simply because of an acquaintance who suggested the new name was auspicious”.

Mr Liu, who has property investments in Liaoning, has never made himself available to the media.
Mongolia Energy in September last year said it was doing a feasibility study on building two 600-megawatt power plants in western Mongolia by the second quarter of 2010 with an investment of 6.5 billion yuan (HK$7.41 billion).

Despite questions about demand for Mongolian coal and electricity from neighbouring Xinjiang, which has some of the mainland’s biggest coal reserves and a population of only 20 million, it said it had secured “certain” letters of intent to sell 3.2 million tonnes of coal to power stations in Xinjiang. Mongolia has an even smaller population at 3 million.

It is also studying the feasibility of buildingfacilities in Mongolia to turn coking coal into coke, an ingredient used in the steel smelting process, and is examining the viability of selling coking coal to global customers.

The mainland is the world’s largest coke exporter. Most of its exports are sold by Shanxi province, which is well-linked by railway to Qinhuang-dao port some 500km to its east.

By contrast, Mongolia is a landlocked nation thousands of kilo-metres from any significant sea port or major consumption centre. Transport costs could render coal stranded in far away places commer-cially unviable.

Mongolia Energy has also diversified into copper and tin mining in Xinjiang. It signed agreements on March 5 to pay Mr Liu HK$1.1 billion for a 20 per cent interest in an exploration projectpreviouslyoperated by Xinjiang Yinye Mineral Products De-velopment.
The only description provided about Xinjiang Yinye is that it is in-corporated on the mainland and is independent of Mongolia Energy.

MongoliaEnergywillpayHK$200 million to Mr Liu as a “service fee”. It will also reimburse him the 100 million yuan paid by him to Xinjiang Yinye for development of resources, and repay him the 100 million Mongolia Energy shares he handed to Xinjiang Yinye in exchange for the mining right.

Mongolia Energy said the service fee was fair, given Mr Liu was able to clinch the deal only after he had a seven-hour meeting on March 3 with Xinjiang Yinye, in which “difficultne-gotiations” took place.
Mongolia Energy said the Jilin Institute of Geological Survey had confirmed that the mining area involved contained 235,600 tonnes of tungsten trioxide and 49,400 tonnes of tin resources, which were worth a total of HK$33 billion based on prevailing market prices, of which Mongolia Energy’s share amounted to HK$6.6 billion.

The figures are “subject to recov-ery under commercial exploitation”. No estimate of the investment and time required to bring the resource into production was provided.
A request for an interview on the progress of Mongolia Energy’s busi-ness plan on June 19 was declined. The firm cited proximity to its results announcement on July 9 and the risk of selective disclosure of share price sensitive information.

“Based onMongoliaEnergy’s disclosures so far, the deals it got could either be too good to be true, or they are getting some of the cheapest deals in town,” said an analyst who has met with its management. “It has so many projects but each of them has so many unknowns, which make it hard to digest the story.”

New World Development chairman Cheng Yu-tung and his son, Cheng Kar-shun, in late January last year bought 400 million Mongolia Energy shares at 24 HK cents each, raising their combined stake to 9.35 per cent.

Mongolia Energy chairman Mr Lo at the same time bought 780 mil-lion new shares at 28.5 HK cents each, raising his stake to 19.37 per cent. He is the deputy chairman of Taifook Securities Group, a broker-age ultimately controlled by the Cheng family.

According to stock exchange filings, Mr Lo in May held a 19.54 per cent stake in Mongolia Energy, while the two Mr Chengs together had 14.54 per cent.

Mongolia Energy closed at HK$15.10 on Monday.

Source: Wednesday, July 2, 2008. SOUTH CHINA MORNING POST

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