MICC Equity Research
Kharachin
EQUITY RESEARCH
Xanadu Mines (ASX:XAM)
SPECULATIVE BUY
A Diversified Explorer in Mongolia
January 23, 2012
Stock Information (AUD)
Stock Code
Price
Target Price
Upside Potential
Shares Outstanding (m)
XAM
0.33
0.9
181%
187
Key Financials
Market Cap (m USD)
EV (m USD)
EV/Resource
Long Term Debt (m USD)
Cash (m USD)
Analyst
Dotno Dashdorj
+976 70112023
[email protected]
64
40
0.08
0
23.6
We initiate our coverage of Xanadu Mines with a speculative
buy recommendation, and a target price of 0.9 aud.
»» Junior mining company with several promising projects in
Mongolia at strategically useful locations. Xanadu’s management selects its projects based on its proximity to infrastructure in addition to the quality of the potential resource. It holds
several thermal coal, coking coal, copper and gold projects, of
which the thermal coal projects are at advanced exploration
stages.
»» Market price undervalued compared to its peers. Our analysis
shows that XAM is trading at an EV/Resource ratio much lower
than its peers. The price is also lower than the prices paid at recent acquisitions in Mongolia—Hunnu Coal and QGX’s Baruun
Naran.
»» A portfolio of high-quality assets that gives the stock significant upside potential. These include promising coking coal,
porphyry copper, and epithermal gold projects which we have
not attributed value, such as the Nuurstei coking coal project for
which a JORC exploration target is expected to be published by
the end of 2012, a porphyry copper project next to the famous
Erdenet copper mine, and other projects at earlier stages with
good assay and survey results.
»» Strategic alliance with the raw materials supply chain giant
Noble Group. The Xanadu–Noble joint venture vehicle Ekhgoviin Chuluu holds several promising early stage projects that
could eventually lead to an acquisition of Xanadu by Noble
Group. This gives an upside potential to Xanadu shares.
»» Structured to easily spin off separate projects. Xanadu’s projects are organized to make the buyout of one or more of its projects by a senior mining company easy, as different subsidiary
LLC’s hold different projects. The company’s assets are well prepared for acquisitions, hence reinforcing the upside potential.
»» Experienced management team. Xanadu’s management team
includes individuals with background in mining, geology, as well
as mining-specific finance. We believe the extensive combined
experience of the management team is a reason to be confident
in Xanadu’s potentials.
MICC Equity Research
Xanadu Mines
Company Overview
Xanadu Mines was formed in 2005 as it began its operations in Mongolia as a mineral resources exploration company. Xanadu launched
its stock on the Australian Securities Exchange (ASX) in December
2010, and the funds raised through this IPO were used to expand
its operations in Mongolia. It holds two thermal coal licenses with
significant amount of JORC compliant resources, three coking coal
projects with highly prospective footprints, and several other coal
and metals projects at earlier exploration stages. The projects in the
Xanadu portfolio are either very close to existing railroads, or along
the route of planned railroad constructions.
Table 1. Ownership of Xanadu Mines
Shareholder
Directors
Sakari Resources
Interest Description
17.0%
13.1%
Noble Energy (Ravenca Ltd.,)
9.9%
Eagle Securities
Talbot Group
Others
Source: Xanadu Mines
7.8%
1.8%
50.4%
Large coal miner and exporter based in Singapore
Major global supply chain, commodities mining and transportation company
Investment fund
Investment fund
Investment funds, individuals and public float
Two senior mining companies, Sakari Resources and Noble Energy,
have significant equity shares in Xanadu. The presence of these potential buyers in Xanadu’s structure means that a strategic acquisition is possible.
Sakari Resources (formerly Straits Asia Resources) is a coal producer
listed on the Singapore Exchange (Ticker: AJ1), which operates two
thermal coal mines in Indonesia. Sakari has a market cap of about
1.8 billion USD, and is currently exclusively focused on mining and
exporting high-quality thermal coal. 45.4% of Sakari Resources is
owned by The Petroleum Authority of Thailand (PTT), which is a
mostly-state-owned energy company with a goal of ensuring the energy security of Thailand.
In addition to Sakari, Noble Energy Group also has a stake in
Xanadu. Noble is headquartered in Hong Kong, and is listed on the
Singapore Exchange (Ticker: N21). The company manages a global
supply chain of agricultural and energy products, metals and minerals (they source, market, process, finance and transport these products). It sources essential raw materials from low-cost producers
such as Brazil, Argentina, Australia and Indonesia to supply growing
economies such as China.
Projects
Xanadu has numerous project sites in Mongolia, but is actively working on four coal and three metals projects in Mongolia. The comJanuary 23, 2012
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pany has moved forward relatively quickly to assess its resources,
and two projects already have JORC compliant resource estimates.
Xanadu has formed a joint-venture company named Ekhgoviin
Chuluu (EC) with Noble Group, in which each partner owns 50% of
the assets. The following table shows the organization of Xanadu’s
projects and the subsidiaries formed to help facilitate any buy-out
Figure 1. Location of Xanadu Projects.
Table 2. Major Projects of Xanadu Mines
Xanadu Projects
Khar Tarvaga
Galshar
Nuurstei
Javkhlant
Khavtsgait
Sharchuluut Uul
Hutag Uul
Elgen Uul
Zost Uul and Suuj Uul
Amgalant and Argalant Uul
Name of Xanadu Subsidiary or JV
Xanadu Share
Xanadu Coal Mongolia
Xanadu Energy Resources Mongolia
Ekhgoviin Chuluu
Ekhgoviin Chuluu
Ekhgoviin Chuluu
Xanadu Copper Mongolia
Xanadu Metals Mongolia
Altan Xanadu
Altan Xanadu
100%
100%
30% (Up to 40%)
30% (Up to 40%)
50%
100%
100%
80%
80%
Xanadu Exploration Mongolia
Up to 80%
Coal
Khar Tarvaga
One of Xanadu’s flagship thermal coal projects, Khar Tarvaga, was
discovered in 2007 with the inadvertent help from a marmot, whose
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fur was coated in coal (hence its name—Black Marmot). Xanadu
received a 30-year mining license for this project site in October of
2011, which is 100% owned by the company. Khar Tarvaga’s has 327
million tonnes of JORC compliant resources; this was estimated by
the consulting firm SRK. The air dried calorific values for various
seams at this deposit range from 2434 to 3828 Kcal/kg, where 217mt
of the resources have 3592-3828 Kcal/kg.
The Khar Tarvaga project is located 45km east of the Trans-Mongolian railway in the Tuv province. Xanadu has considered two different uses for its coal: mine-mouth power generation and conversion
to other forms of fuel.
Although the project site is about 150km south from Ulaanbaatar,
the company management indicates that there are opportunities to
supply power to the Chinese grid in addition to the Mongolian grid.
Coal to Liquids technology, although expensive, has been one of the
major discussion topics in the Mongolian energy sector. As Mongolia has no large oil fields, the country imports almost all of its diesel
and gasoline fuels for consumption.
Xanadu Mines hired the consulting firm Nexant Inc., to assess the
suitability of the coal at Khar Tarvaga for coal gasification and liquefaction. Nexant concluded that the thermal coal at Khar Tarvaga is
suited to both types of processing, which means the synthetic natural gas (SNG) or petroleum substitute based on the Coal to Liquids
(CTL) technology can be produced.
Galshar
This thermal coal project is located in Dornogovi province in southeastern Mongolia, 120km from China’s border. It’s also 65km from
an existing railroad spur for the Bor Undor fluorite mine.
Galshar is 100% owned by Xanadu, and it consists of six exploration
licenses totalling over 340km2. Over 170mt of inferred and indicated JORC compliant resource has been identified here in November,
2011. Xanadu drilled 74 holes in 2011, and extracted 8,707 meters of
cores to define the resource. The air dried calorific values of various
seams range from 2750 to 4290 Kcal/kg, mostly between 3300 and
4000 Kcal/kg.
Xanadu is preparing to apply for a mining license here, but expects
further drilling at Galshar to increase the resource estimate to over
200mt.
Similar to the other thermal coal properties that Xanadu owns, the
management is interested in both mine-mouth power generation
and CTL technologies at Galshar. In addition, the management is
considering exporting its high quality thermal coal after upgrading
through moisture extraction processes.
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Nuurstei
Nuurstei is Xanadu’s flagship coking coal project, for which the
company will look to have a JORC exploration target before the end
of the year. The size of the property is about 40km2.
It is located in Khuvsgul province, which is over 300km west from
the nearest rail-road in Erdenet. Nuurstei is close to the provincial
capital Mörön, and Xanadu is one of several companies and local
groups that created the North Mongolian Railroad Association,
whose purpose is to promote the building of a railroad from Erdenet
to Mörön.
By the end of 2011, Xanadu had drilled over 3,500 meters in a 10hole program. The coal seams discovered were 6-12 meters thick
and moderately dipping. A preliminary washability test confirmed
that the finished product would have less than 12% ash, low sulphur
content and crucible swell numbers (CSN) of 8 to 9. The raw coal air
dried calorific values range from 5000 to 6800 Kcal/kg.
The Xanadu-Noble joint venture vehicle Ekhgoviin Chuluu owns
60% of Nuurstei, with the right to acquire another 20%. The rest is
owned by Blackrock, a Mongolian company.
Figure 2. A trench at Nuurstei
Source: Xanadu Mines
Javkhlant
Located adjacent to the Chinese border in Gobi-Altai province, the
Javkhlant coking coal project is 22km from the nearest border crossing at Burgastai. This project is in its early reconnaissance phase, but
the area is large—about 1000km2. It is also located next to MoEnCo’s
licences in the area.
The joint venture vehicle Ekhgoviin Chuluu owns 60% of Javkhlant,
and has an option to increase the interest to 80%.
Khavtsgait
Newly acquired in November 2011, Khavtsgait is a coking coal project in its early reconnaissance phase, located in Khuvsgul province,
60km east from Mörön. It is 230km west from the railroad spur
at Erdenet. The size of the property is about 29km2, and it’s 100%
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owned by the JV Ekhgoviin Chuluu. Xanadu plans to begin the bulk
of the detailed exploration in 2012.
Copper
Amgalant and Argalant Uul
These projects are the newest acquisitions, whereby Xanadu gained
a farm-in interest to earn up to 80% upon fulfilling its spending
commitments. Located in the middle of the South Gobi porphyry
belt, the projects are 110 km northeast from the Oyu Tolgoi deposit
and next to the Tsagaan Suvarga copper-molybdenum deposit. The
licenses were first granted in 2008 for 9 years, thus leaving at least
five years for Xanadu to conduct its exploration program. The size
of Amgalant is about 109km2 and Argalant Uul 895km2. This area
is relatively under-explored, but Xanadu has identified “numerous,
large geophysical anomalies similar to the footprints recognised at
Oyu Tolgoi and could indicate the presence of porphyry mineralisation at depth”.
Sharchuluut Uul
Xanadu management considers this porphyry copper and gold project highly prospective as it is adjacent to the Erdenet copper-molybdenum deposit—the large copper mine that has been historically
responsible for much of Mongolia’s GDP. Sharchuluut Uul is about
40km northwest of the Erdenet mine, and thus has access to existing
railroad and other infrastructure.
Figure 3. Sharchuluut Uul near the Erdenet Copper Mine
Source: Xanadu Mines
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The exploration license spans 488km2, and is yet to be explored in
detail. Surface level surveys show that the area is a large (more than
7km) alteration zone with porphyry advanced argillic lithocap. Geochemistry studies conducted on the lithocap shows up to 0.42% of
anomalous copper associated with high-sulphidation mineralization, and elevated levels of molybdenum, gold, silver and barium,
indicating mineralization.
Hutag Uul
Wholly-owned by Xanadu, Hutag Uul project is large: spanning
more than 1,100km2. It is located in the Dornogovi province, only
40km from the Chinese border.
Although the site is relatively unexplored, previous surveys led to
some drilling at Nogtot, where drill results revealed potentially economic as well as sub-economic grade copper mineralization over a
strike length of 3km. Thus a surface-level geochemical survey was
completed in 2011, which yielded 9,537 soil samples. The survey
yielded promising results for porphyry copper-gold mineralization.
Gold
Xanadu’s gold projects are located in close proximity with each other—they are all part of the Solenker epithermal gold district in the
Dornogovi province. The company has four exploration licenses in
this area covering over 401km2 in total, which includes significant
regional Landsat and geochemical anomalies.
Figure 4. Hutag Uul Copper and the Gold Projects
Source: Xanadu Mines
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The region is considered part of a Mesozoic continental extension,
which is associated with upper Jurassic to lower Cretaceous bimodal
volcanism. Xanadu plans on drilling at the targets within these projects in 2012, as the surface-level results show signs of low sulphidation epithermal gold mineralization.
Elgen Uul
Altan Xanadu LLC, a wholly-owned subsidiary of Xanadu Mines,
owns 80% of Elgen Uul, which sits adjacent to the Hutag Uul copper
project.
Xanadu geologists have found outcropping, sub-cropping and buried mineralised low-sulphidation epithermal style veins in surface
level surveys over a strike distance of more than 3km.
Six holes were drilled at Elgen Uul, and all show that a gold-rich
zone is below a shallow (100-200m) level of erosion. Rocks associated with gold, such as stibnite and arsenic minerals, were found in
these drilled cores as well.
Zos Uul and Suuj Uul
Xanadu has an 80% share. These projects are at a similar stage as
the Elgen Uul project in terms of surface-level surveys, but Xanadu
focused more on these two projects. In early September, Xanadu
began an exploration drilling program focused on Zos Uul and Suuj
Uul.
Xanadu geologists are classifying these projects as low-sulphidation
epithermal type, related to hot springs of the Mesozoic age, where
signs of boiling were observed. It is likely for mineralization to occur
in this type of system.
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Key Risks
Commodity Price
As for all junior mining companies, the main source of risk to Xanadu
is fluctuations incommodity prices. Xanadu is involved with coking
coal, thermal coal, as well as gold and copper metals. Although the
commodities market moves together in general, each of these exposures presents separate sources of risk.
In terms of coking coal, the main driving factor for the feasibility
of the Nuurstei project is China’s steel production, on which the
price of Mongolian coking coal depends. Although Xanadu (as well
as other companies with coking coal projects in Khuvsgul) sees the
potential access to the higher-priced seaborne market through the
ports in the Russian Far East as an alternative to shipping to China,
the financing of the proposed railway from Mörön to Erdenet depends on coking coal price projections. Thus the state of the Chinese
economy has an important role in determining whether these projects are worthwhile. Please see the Industry Review section for our
analysis of the broad drivers of commodity prices.
Political and Legal
The Mongolian government has the right to change the tax and licensing environment for mining companies, and it’s possible that
the politics in the country may change to become unfavourable for
mining companies in the future due to the relatively nationalistic
public opinion. In particular, 2012 is an election year, and it’s highly
probable for the government to pander to nationalism and populism
during election years.
Many in the Mongolian press consider the recent efforts by the government of Mongolia to renegotiate the Oyu Tolgoi contract as an
attempt at populism. However, such events tend to push down the
prices of Mongolian mining stocks, which still is a source of downside risk for investing in Xanadu.
The government of Mongolia is attempting to reform its legal framework and the bureaucratic system in order to catch up on the rapid
development of foreign-investment based growth. The government
officially announces that it supports developing the mining sector.
However, there were precedents of trouble with licensing rights, including the revocation of Khan Resources’ uranium mining license.
Cost Overrun
Xanadu proposes that its thermal coal resources will be most likely
used for electricity generation, or alternative fuel production. Since
thermal coal is plentiful in China, and hence the prices are low, we
find that it is difficult to export thermal coal from Mongolia profitably. Therefore, the coal fired power plant or CTL/SNG (Coal-toJanuary 23, 2012
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Liquid and Synthetic Natural Gas) projects seem to be the more
profitable uses of the thermal coal at Khar Tarvaga and Galshar.
Since Xanadu seeks to sell these projects to a senior miner that can
develop the mines, it is important to consider the risk of cost overruns faced by the suggested usage of these resources. Therefore, we
will elaborate further on the potential costs of these projects.
The amount of capital expenditure needed to build a new electricity
grid either for domestic consumption or for export is unclear, as no
such grid projects were attempted in Mongolia in recent decades.
In terms of capital cost, the first of three 6MW power plants to be
built at MMC’s Ukhaa Khudag mine cost about 57 million USD, but
these plants with relatively small capacity “will principally be used
to power [the] coal handling and washing plant and also provide
excess power to areas around the mine” according to MMC. In comparison, the largest power plant in Mongolia, TEC-4, has a capacity
of 540MW (which supplies 70% of Ulaanbaatar’s electricity). If we
assume the capital expenditure for a new power plant to cost the
same amount per MW of capacity as MMC’s plants, a 600MW plant
would cost 570 million USD.
Given the consensus expectation for oil prices to increase due to the
depleting supplies, CTL and LNG are getting more attention than
before. In addition to coal, CTL plants require catalysts, other chemicals, and vast amounts of water. In the US, a 50,000b/d CTL plant
requires 40-50 thousand cubic meters of water a day. Therefore, the
availability of water is another question that must be addressed in
order to determine the feasibility of having CTL in Mongolia.
Estimates for the break-even crude prices for CTL plants range anywhere between 25 - 75 USD/barrel, depending on the extent of environmental measures taken (such as CO2 capture). The following
table shows some estimates of the capital cost required to build a
CTL plant.
Table 3. Estimated capital costs and examples of some CTL plants
Location
China, Inner Mongolia
China, Shaanxi
China, Ningxia
US (average)
US (average)
Capacity
80,000 b/d
80,000 b/d
80,000 b/d
20,000 b/d
80,000 b/d
Cost
4 billion
5 billion
5 billion
1.5-4 billion
6-24 billion
Status
Operating
Planned
Cancelled
Source: Mikael Hook and Kjell Aleklett, “A review on coal to liquid fuels and its coal
consumption.” International Jounal of Energy Research 34.10 (2010): 9.
Since a CTL plant is expensive, the feasibility of such a project depends on the price of gasoline and diesel in Mongolia. Mongolia
imports fuel from Russia, and have experienced fuel shortages in the
recent past due to supply pauses from Russia. This means that the
government of Mongolia has an incentive to create an independent
source of gasoline and its equivalents.
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Natural Gas, on the other hand, is currently not widely used in Mon-
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golia. However, this does not rule out the potential proliferation of
this form of fuel. In a 2009 study by the Climate Change Policy Partnership at Duke University, the capital cost of coal-to-SNG projects
in the US at various stages of development ranged from 250 million to 2 billion USD. This study also estimated that the processing
cost for converting sub-bituminous coal would be about 9.53 USD/
MMBtu without carbon sequestration, and 10.55 USD/MMBtu
with. (Munish Chandel and Eric Williams. “Synthetic Natural Gas
(SNG): Technology, Environmental Implications, and Economics.”
Climate Change Policy Partnership. Duke University. 2009)
Since large amounts of capital expenditures and other natural resources (such as water) are needed for these types of projects, we
consider the cost overrun to be a significant source of risk.
Country and Industry Overview
Strong Growth in the Mining Industry
In the recent years, coal has become increasingly important to the
Mongolian economy. The share of coal exports in the GDP of Mongolia steadily rose with the development of several large-scale mining projects mostly in the South of the country.
Currently, China is the only buyer of Mongolian coal, as it is expensive to ship coal to the Russian Far Eastern ports, where the
seaborne market can be accessed. Coal prices are much lower at
the Mongolia-China border than in the seaborne market because
the transportation cost is lower and Mongolia has little leverage to
negotiate prices with the only buyer. Therefore, the Mongolian government is making explicit plans to diversify the buyers of Mongolian commodities. The plans include building railroads from the
southern Gobi region to the north-eastern Russian border. If Mongolian coal is able to access the seaborne market in the near future,
the mining industry in Mongolia would benefit from the higher sale
prices in the international market.
Figure 5: Mongolian Coal Industry Statistics
160%
140%
Quantity of Coal (millions of tons)
35
120%
30
100%
25
80%
20
60%
15
40%
10
20%
5
Y-O-Y Rate of Change (%)
40
Production
Export
Domestic Consumption
% Y-O-Y Change in Production
% Y-O-Y Change in Export
% Y-O-Y Change in Dom. Consumption
0%
0
-20%
2006
2007
2008
2009
2010
2011*
Year
Source: Mongolian Statistical Yearbook (2005-2010, 2011 bulletins)
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Figure 6: Coal Export as a Share of Mongolia’s GDP
35%
30%
25%
20%
15%
10%
5%
0%
2006
2007
2008
2009
2010
2011*
Source: Mongolian Statistical Yearbook (2005-2010, 2011 bulletins)
* The 2011 numbers in figures 5 and 6 are MICC projections based
on the actual numbers for the first 11 months of 2011.
Patterns of Mergers and Acquisition
As junior mining companies discover economically feasible deposits in Mongolia, there has been an increase in Mongolia-related
mergers and acquisitions. The capital and expertise of senior mining companies are necessary to develop any mining project. Some
recent examples include the MMC acquisition of QGX’s Baruun
Naran, and Banpu of Hunnu Coals. If this pattern is to continue
in the Mongolian mining industry, Xanadu as a junior exploration
company will become a target for acquisition, which creates an upside potential for the XAM price.
Tax Policy
In the Mongolian Mineral Tax code, a base royalty tax of 5% is levied on profits from all mine products. In addition to this base rate, a
tiered royalty is collected depending on the type of product, level of
processing and the reference sales price. The following is the royalty
tax scheme for coal:
Figure 7: Mongolia’s Coal Mining Royalty Tax Schedule
Coal Mining Royalty Tax Schedule
Royalty Tax Rate
12.0%
10.0%
8.0%
6.0%
Raw Coal
4.0%
Processessed Coal
2.0%
0.0%
0
50
100
150
200
250
Reference Price (USD/ton)
Source: Mongolian Tax Authority
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In order to promote industrialization, the government is charging
no VAT for processed products. Otherwise, the VAT is 10% for all
mine products. These taxes are applied simultaneously; thus, the
minimum amount of tax paid for washed coal would be 5%, whereas
the total tax for unprocessed coal starts at 15%.
Licensing in Mongolia
The Mineral Resources Authority of Mongolia (MRAM) has banned
the issuance of new licenses because, according to official sources,
there were several ambiguities in the licensing process that needed
clarification.
Acquiring exploration licenses in Mongolia was easy, although
sometimes legally contentious. Any company can file for an exploration license with the MRAM through the provincial or district governor. If the governor and/or the department cannot present a valid
reason for denial, the license is automatically granted. Furthermore,
if the decision isn’t made within 30 days, the license is automatically
granted as well. The government (through the MRAM), of coures,
has the right to revoke the licenses if the licensee violates Mongolian
laws.
Industrialization and Mongolia
Much of the developing world, especially China, has been industrializing rapidly in the last decade, and their demand for steel and
energy has followed suit. The main buyer of Mongolian commodities, naturally, is China, due to the proximity and lower transportation costs. However, the Chinese government’s efforts to decrease
inflation and curb property prices have been dampening the growth
in China.
As commodity-based exports increase its share in Mongolia’s GDP,
Mongolia becomes more connected and more sensitive to financial
booms and busts in the industrializing nations. As long as China
and the rest of the developing world continue their high pace of
growth, the commodity prices will most likely stay high. However,
since China, India and Brazil are somewhat dependent on their exports to the West for their growth, any large-scale economic crisis
in the West will affect Mongolia.
In addition to the fundamentals, large amounts of investment from
Western intitutional investors, who seek diversification, is also going into commodities and pushing up their prices. As returns for
stocks and bonds in the West continue to decrease, many investors are also betting on the rise of commodity prices due to increasing demand. Thus, any shocks to this source of upward pressure on
commodities prices may adversely affect the revenues of the entire
mining sector in Mongolia.
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Valuations
We used industry comparable and recent transactions to value
Xanadu Mines at a target price of aud 0.9.
Industry Comparable
We compared Xanadu’s EV/Resource ratio with to the average adjusted EV/Resource ratio of three different groups of coal mining
companies operating in Mongolia. We adjusted the ratio based on
the stage of development and the type of assets. In particular, coking
coal is very different from thermal coal. We conclude that Xanadu’s
EV/Resource ratio is much lower than its peers.
Based on the industry comparable method, the our calculated value
of XAM shares would be 0.67 aud. Xanadu’s shares are currently
trading at almost the same EV/Resource ratio as Prophecy, which
has two thermal coal projects, albeit with larger resources. However
Xanadu has a much more diversified portfolio of various projects of
high potential, including potential coking coal deposits.
We used the JORC compliant resources for the EV/Resource ratio
because it is the only standardized measurement available across all
companies compared.
There is only one other foreign listed thermal coal mining company
in Mongolia—Prophecy Coal, but there are several on the Mongolian Stock Exchange (MSE).
Table 4: Comparables to Xanadu
Market Cap
(USD millions)
Enterprise Value
(USD millions)
EV/ Resource
(USD/ton)
63.92
40.34
0.08
Thermal Coal Exploration Company
Prophecy Coals
86.08
94.58
0.07
Coking Coal Exploration Company
Aspire Mining
225.01
213.01
0.64
Coking Coal Mining and Exploration Companies
Mongolian Mining Corp
2866.14
Mongolia Energy Corp
603.76
Tavan Tolgoi
393.43
SouthGobi Energy Resources
1094.03
Average
2602.47
509.95
*406.81
1132.50
5.24
3.60
6.80
3.46
4.77
Mongolian Listed Thermal Coal Mining Companies
Shivee Ovoo
146.33
Baganuur
170.79
Sharyn Gol
82.23
Average
*208.74
*225.79
82.02
0.32
0.38
1.80
0.83
Xanadu Mines
*Estimated EVs were estimated due to the lack of updated information available about these
Mongolian Stock Exchange listed companies
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Recent Transaction
We also compared Xanadu’s market valuation with two recent acquisitions in the Mongolian mining scene. MMC acquired QGX’s
Baruun Naran project in May, and Thailand’s Banpu Minerals acquired Hunnu Coal in September of 2011.
Xanadu’s thermal coal projects are close to the Trans-Mongolian
railroad, even closer than QGX’s Baruun Naran and Hunnu’s Unst
Hudag. But we conservatively did not add a premium for the proximity of Xanadu projects to railroad.
Table 5: MICC Estimate of Xanadu’s EV/Resource Ratio Based On
Recent Transactions
JORC Resource
Acquisition EV/Resource Ratio
Implied Price per Share (Xanadu)
QGX
Baruun
Naran
Hunnu Coal’s
446
1.5
414
1.2
aud 1.22
aud 2.69
Estimated TP (average)
aud 1.96
*This is the average price to be paid by MMC to QGX depending
upon how much of the resources are indeed mineable.
Target Price - A Weighted Average
We used a weighted average of the industry comparables and transaction comparisons to approximate the target price of XAM as 0.9
aud.
Table 6: MICC Estimate of XAM’s Target Price
Method
Weight
Comparables
Transaction
Weighted Average
80%
20%
Price
aud 0.67
aud 1.96
aud 0.93
Assumptions
To consistently discount the EV/Resource ratios of our industry
comparable in our valuation, we adjusted the ratios to quantify the
difference between coal mining companies based on the coal type
and development stage.
Recommendation
Based on an assessment of the size of Xanadu’s jorc compliant resources in relation to its peers and recent transactions, we believe
XAM is undervalued, and recommend it as a speculative buy.
January 23, 2012
15
MICC Equity Research
Xanadu Mines
ABOUT MICC
Mongolia International Capital Corporation (MICC) was established in 2005 as the first investmentbanking firm in Mongolia. Mongolia’s rapid economic development and favorable financial environment
present unique prospects for investment opportunities and growth potential for companies. In order to
enable our clients and investors to take full advantage of these opportunities, MICC offers investment
banking, asset management, securities underwriting and brokerage services. In addition, we conduct periodic macroeconomic research, develop analyses of domestic industries and review equities listed on the
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DISCLOSURE
This material was prepared independently of the Company by the research analyst(s) named at the beginning of this document, for informational purposes only, and is not intended to address the needs of any
specific person or entity. Any forecasts or recommendations made in this report are certified to accurately
reflect the exclusive views of the aforementioned research analyst(s), based on all available information,
as of the date of publication. The research analyst(s) will not be held responsible for the accuracy or completeness of the information provided in this document. The opinions expressed herein are not intended to
be the sole basis upon which investment decisions are made, and neither Mongolia International Capital
Corporation nor the Company will assume liability for any losses that may arise from investment activity
relating to securities profiled in this report.
While no part of the compensation of the research analyst(s) is dependent upon the contents of this
report, Mongolia International Capital Corporation is not prohibited from transacting with companies
profiled in research reports, and may at the present time or at any time subsequent to the writing of this
report be involved in conducting business with the Company.
January 23, 2012
16