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Standard Bank closed a US$30mn pre-export facility in favour of Energy Resources, a privately-owned mining company based in Mongolia, in late October last year.

The transaction sets a trend for a strong pipeline of Mongolian deals in 2010 and beyond, with this transaction being the very first pre-export facility made available to the country’s private sector.

The investment will support the production of high-quality coking coal from the Ukhaa Hudag deposit in southern Mongolia, north of the Chinese border.

Despite the ground-breaking nature of this deal, Standard Bank’s team still managed to close this transaction within just eight weeks of winning the mandate. This timeline is even more remarkable given the then pre-feasibility status of the mine and level of technical due diligence that was required. Mine production had commenced just six months before disbursement of funds.

“This first structured pre-export facility within the private sector of Mongolia further demonstrates Standard Bank’s continued strong commitment to the Mongolian market,” comments Martin Huxley, director – sales and structuring, Standard Bank Asia in Hong Kong.
He adds: “The transaction was possible on the back of active relationships with each of the individual Mongolian shareholders and understanding of the quality of the Ukhaa Khudag coal asset.

“Nevertheless, the early stage of the mine operation meant extensive due diligence was required; making the time period to complete, structure and document, within a period of eight weeks all the more remarkable.”

The facility is secured by the assignment of future coking coal receivables from China, where a large supply deficit in coking coal is forecast over the coming years. In addition, Standard Bank has also been established as an approved offtaker of the mine.

Energy Resources is becoming a major player in the Mongolian mining market, setting a high benchmark for future private operations.
Given its potential, the firm also secured additional support via the European Bank for Reconstruction and Development (EBRD), with the development bank having made a prior equity investment to also support the development of the Ukhaa Hudag deposit.

From a broader perspective, Mongolia has enjoyed relatively strong economic development in recent years, with an average of 9% growth per year. Yet, this slowed dramatically in the second half of 2008, and GDP dropped by 4.2% in the first quarter of 2009. Lower export revenues as a result of the slump in commodity prices and a reduction in investment fuelled this decline.

In response to this, in March 2009, the government set up a special committee to deal with the financial crisis, and in the same month the parliament approved a US$1bn economic stimulus plan to support the country’s banking system.

Deal information

Borrower: Energy Resources
Amount: US$30mn
Mandated lead arranger: Standard Bank (sole arranger)
Tenor: 18 months (with six-month grace period)
Law firms: Denton Wilde Sapte (Standard Bank International legal counsel); Lynch & Mahoney (Mongolian legal counsel)
Date signed: October 27, 2009