Mongolian Mining Corp (MMC) has agreed to pay US$464 million for a coking coal project owned by Hong Kong’s Kerry Group. Mongolia’s biggest coking coal exporter signed the deal to buy QGX Coal and could end up paying as much as US$950 million if the mine hits certain targets. 1

QGX Coal owns the Baruun Naran project within the Tavan Tolgoi coal fields in the South Gobi region. The mine contains 185 million tonnes of confirmed reserves and 282 million tonnes of additional resources, adding to MMC’s existing 286 million tonnes of reserves and 500 million tonnes of resources.

Kerry Group is owned by Hong Kong’s Kuok family, which has business interest spread across property, media and hotel industries. The family owns the Shangri-La hotel chain and Kerry Properties.

MMC will make an upfront cash payment of US$100 million and has raised US$85 million through a convertible loan with an 18-month maturity, 20% premium and a 2% coupon. The price is subject to adjustment based on the confirmed reserves position in 18 months, when MMC will also pay a royalty based on the mine’s production exceeding certain thresholds.

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.

MMC became the first Mongolian-owned company to trade on the Hong Kong stock exchange in October last year. 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.

Meantime, MMC aims to boost annual revenue to about US$700 million by doubling production and launching a washed coal business. The miner this year is set to produce 7 million tonnes of coal - 1.5 million-2 million tonnes of raw coal, 3.5 million-4 million tonnes of washed coal, and the rest thermal coal for self-use. Last year, it produced 3.9 million tonnes of just raw coal only.

MMC plans to invest US$1.2 billion between 2011 and 2013 on expanding its coal washing plant and infrastructure construction. The first phase will start this month. All three phases are expected to have an annual production capacity of 15 million tonnes. It is now building a paved road that can help save transportation costs and plans to build its own railway.

The coal washing plant will have three phases each with an annual capacity of 5 million tonnes.