Valuation of Company Assets: South Gobi Energy Resources Ltd.

Topics: Coal, Coal mining, Mining Pages: 16 (5154 words) Published: November 21, 2010

Valuation of company assets. South Gobi Energy Resources Ltd.

Written by:

Assessed by:

Ulaanbaatar, 2010

Investment Summary3
Attractive Portfolio3
Key Advantages4
Key Risks5
DCF Valuation6
Resources-based valuation8
Corporate Governance10
Mongolian Coal Assets11
Ovoot Tolgoi Surface Mine11
Ovoot Tolgoi Underground12
Tsagaan Tolgoi Coal Deposit13
Tavan Tolgoi Extensions13
Mamahak Coal Project (Indonesia)13
Production and Sales14
Strategic Priorities14
Rail Infrastructure15
Listing in Hong Kong15

Investment Summary
Attractive Portfolio
SouthGobi Energy Resources (SGQ) offers exposure to high-quality coal resources in Mongolia, with company’s flagship mine Ovoot Tolgoi situated just 45km from Mongolia’s border with China. SGQ is in position to fully benefit from increase in Chinese coal import with expected coal production from Mongolian properties reaching 15mn in 2013 from 3mn in 2009 (CAGR 50%). SGQ is developing three coal properties in Mongolia and one coal deposit in Indonesia. Specifically, we note the following: •Ovoot Tolgoi deposit hosts over 190mt of coal resources, with coal quality higher than that of its Chinese peers. SGQ received 30-year mining licence for Ovoot Tolgoi in October 2007 for open-pit mining. Coal production is expected to reach 3mt in 2009 and ramp-up to 8mt in 2014. • Ongoing exploration program at Soumber property, located 16km from Ovoot Tolgoi mine, may prove substantial coal resources. The apparent seam thickness ranges from from 2 to 51.5 meters along a strike distance of 18km. The quality of the coal is believed to be similar to that at Ovoot Tolgoi. We believe that the Soumber project will share the existing infrastructure of Ovoot Tolgoi mine and capital expenditures will be substantially reduced. Provided the drilling results are positive, development of the mine may start in 2010. We assume coal production to start in 2011 and reach 5mt in 2013. • With Oyu Tolgoi investment agreement in the offing, Tsagan Tolgoi development will accelerate. SGQ received a mining license for the deposit on August 12, 2009. Tsagan Tolgoi has 36.4mt of measured and indicated coal resources and 9mt of inferred resources. • Mamahak property in Indonesia is about to start trial coal production of 30,000 tonnes that will be sold through a two-year agency contract with Glencore International AG. The coal production is expected to increase to 2.4mt in 2013. Mahamak property hosts high-volatile, high-fluidity coking coal that can be mixed with either thermal coal blends or coke mixes. The coal is attractive for steel plants with large coking ovens. We expect the company to charge premium for its coal. With most of the infrastructure built, there is only about US$5mn up-front CapEx remains to develop the mine. • SGQ offers further exploration upside through its 43 exploration licences in Mongolia, covering about 1.7mn hectares. This includes 8 exploration licences (Tavan Tolgoi extension) to the north, east and south of the giant Tavan Tolgoi coking coal deposit. Tavan Tolgoi is arguably one of the largest undeveloped coking coal and high-quality thermal coal deposits in the world with estimated resources of 6.2bt. The exploration work on these properties started in 3Q 2008. Key Advantages

Low-cost operation: On its properties in Mongolia, SGQ has one of the lowest cost-per-tonne operations among its peers owing to the naturally lower strip ratio and efficient mine stripping technique. With current cash cost per tonne of US$14 at Ovoot Tolgoi, which may decrease further, SGQ will be able to maintain higher margins even if coal prices plunge. Low-cost operations give more flexibility to the Company in its pricing strategy and developing long-term relationship with customers. • Strategic Location: SGQ’s flagship mine...
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