MONGOLIA'S COAL VS. AUSTRALIA'S

According to major Mongolian daily “ Unen” on September 28, 2011
• Experts forecast that Mongolian coal exports for 2011 will be 22.5 mtpa and 90 mtns by 2025
• Chinese coal imports of 177M tns consisted of 129M tns of thermal and 48M tns of coking coal(15M tns from Mongolia)
• Experts forecast that by 2013 China will import 65M tns of coking coal, 30 m tns of which would be from Mongolia
• Mongolia occupied 10% of all China coal imports in 2010, in 2011 it would be 12%
• Mongolian coal is the cheapest coal supplied to China. In 2010 average price of Mongolian coal was 52.7USD per ton, while Chinese domestic price was 83-166USD per ton
• According to National Statistics Office of Mongolia data, average price this year is 100USD per ton, yet according to National Statistics Bureau of China average price of China’s import coal is 115USD.
• Mongolian coal is similar to Australia’s yet cheaper 2.22-2.28 times.

Prices of imported to PRC coking coal

According to Golomt bank morning report on September 28, 2011,

Commodity

Last/USD/

1D % Chg

YTD % Chg

Crude oil

83.38

-1.27

-8.92

Gold

1,645.43

-0.28

16.30

Copper

7,578.50

4.52

-21.06

IronOre/Shandon/

238.84

-0.35

6.27

IronOre/Beijing/

166.01

0.00

2.91

Wheat/Brazil/

16.61

0.00

5.26

Coal/Tianjin/

285.04

0.00

-1.62

Coal/Australia/

122.50

0.00

-2.85

According to Mark Latham Commodity Equity Intelligence Service,

Xstrata Plc and Tohoku Electric Power Co have settled the first Japanese annual coal import contract for the year beginning Oct. 1 at $126.50 a tonne, sources told Reuters on Thursday, a level which could be followed by other utilities. The settlement price came in lower than the record of $129.85 per tonne for the 2011 benchmark annual contract starting April 1. Previously, trade sources said Anglo Swiss miner Xstrata's last offer was $127.50 per tonne, with Tohoku countering with $125.00 a tonne. "This is the first case of settlement for the contract starting in October... other utilities are likely to settle at the same level," a Japan-based trade source said. Demand for coal from Japanese utilities has fallen since March, when an earthquake and tsunami damaged some coal-fired power plants and infrastructure, cutting demand sharply. The lower demand in Japan, the world's largest thermal coal importer, caused Pacific prices to dip. Australian benchmark prices fell to $123.62 per tonne at the end of Wednesday, from $130.00 a tonne before the quake.

The price of power-station coal at Qinhuangdao port, a domestic benchmark, rose for the first time in 12 weeks to as much as 840 yuan a ton as of Sept. 18, data from the China Coal Transport and Distribution Association show. That's 17 percent higher than a year earlier. About 70 percent of China's power stations use coal as fuel.

According to coalword.net,

China's Thermal-Coal Prices Fall for First Time in 5 Months

China's benchmark thermal-coal price fell for the first time in almost five months after power stations built up inventories of the fuel for the summer.

Coal with an energy value of 5,500 kilocalories per kilogram at Qinhuangdao port declined 0.9 percent to 840 yuan ($130) to 850 yuan a metric ton as of today compared with a week earlier, according to data published on the website of Beijing- based China Coal Transport and Distribution Association. That's the first decline since Feb. 28.

China's power plants typically complete fuel stockpiling before peak summer demand in July through September. Inventories at major power plants increased 7.6 million tons from a year earlier to 65.4 million tons at the end of June, equivalent to 18 days of consumption, the National Development and Reform Commission said in a statement on its website today.

Industrial production in June exceeded forecasts by economists, helping support coal prices because of electricity demand from factories.

Coal stockpiles at Qinhuangdao, which ships half the nation's seaborne coal, fell 2.6 percent to 7.08 million tons, the second straight week of decline, according to today's data.

China Aug coal imports slip 5 pct to 16.6 mln T

China imported 16.59 million tonnes of coal in August, down 5.4 percent from the previous month, data supplied by the China Customs Statistics (CCS) Information Center showed on Wednesday.

China's coal imports drop in H1

China's coal imports dropped 11.8 percent in the first half of the year to 70.49 million tons while exports also fell 13.7 percent to 8.75 million tons.

During the period, the nation recorded a net import of 61.74 million tons of coal. The figure fell 11.5 percent year-on-year amid surging international coal prices, according to figures released Friday by the China National Coal Association.

Jiang Zhimin, vice president of the association, predicted net coal imports this year will still remain above 100 million tons.

The data provided by the association shows in the first half, the nation's coal output rose 12.7 percent to 1.77 billion tons; sales hit 1.71 billion tons, up 13.8 percent.

With the increase of hydro-electric power during rainy seasons and the rise in coal imports, Jiang said the nation's power shortages, which struck some parts of the country in April and May, has begun easing since June.


China's 2011 coal imports seen off 2010 record

China's coal imports this year are expected to pull back from the record level in 2010 despite strong domestic demand, as growth in local production and transportation capacity help meet overall demand, an industry official said on Tuesday.

Dong Yueying, secretary-general of China Coal Transport and Distribution Association (CCTD), told a coal conference in Beijing that he expected about 150 million tonnes of coal will be imported this year.

The volume would be lower than the record 164.8 million tonnes China imported in 2010.

In the first seven months, Chinese coal imports totaled 87.9 million tonnes, 5.3 percent less than a year earlier, data from the customs department showed.

"Chinese coal demand is expected to grow at a robust rate, but domestic production and transport capabilities would continue to expand, which would help to meet overall demand," Dong said.

Zhu Yuenian, a coal official with China's National Development and Reform Commission (NDRC), also told the conference that he was not aware of any government plan to cut value-added taxes for coal imports.

The NDRC, the country's top economic planner, said in May it would encourage coal imports and urge miners to boost output to increase supplies to power plants, when the world's largest energy consumer faced the prospect of the worst summer power shortages in seven years.

China media reported later that the government was considering to cut value-added tax and port charges on imported coal to encourage more overseas purchases.

But power shortages in summer were less severe than expected due to reasons including power price hikes and favourable weather, even though droughts and power shortages continued to plague some southwestern Chinese provinces.

According to MMC interim results in 2011,

Mongolian coal exports and Chinese coal imports dynamics

In the first six months of 2011, according to the data issued by the National Statistical Office of Mongolia, Mongolia exported around 7.7 million tonnes of coal, approximately 22% more than the 6.3 million tonnes exported in the same period in 2010. Virtually all of Mongolia’s coal exports went to China. Based on historical figures from 2009 and 2010, coal export volume in the first half of the year represents around 38% of annual Mongolian coal export; therefore, this year’s coal export from Mongolia to China is estimated to potentially reach 20.0 million tonnes.
China imported approximately 19.2 million tonnes of coking coal during the six months ended 30 June 2011, representing a decrease of approximately 14% from approximately 22.4 million tonnes in the same period in 2010. This is in line with total coal import numbers – in the first six months of 2011, China imported approximately 70.5 million tonnes of coal, which represents decrease of approximately 13% compared to approximately 81.1 million tonnes in the same period in 2010.
As shown in the table below, Mongolian imports are counting for more than 41% of total Chinese coking coal imports.
For the six months ended 30 June 2011, the Group grew its revenue by approximately 55.3% to approximately USD136.2 million from USD87.7 million for the same period in the previous year. The increase was primarily attributable to the increase in average selling price (“ASP”) and the relation of points of sale from pre-dominantly mine-gate to the Mongolian-Chinese border, which allows the Group to expand its customer base, to sell directly to end-users and to prepare for washed hard coking coal export.

Marketing and Sales

The Group sold to its customers in China 1.42 and 1.46 million tonnes of unwashed hard coking coal in the first half of 2011 and 2010 respectively.
As at 30 June 2011, the Company’s ASP for coking coal was approximately USD95.6 per tonne, compared to approximately USD59.9 per tonne in the first half of 2010, representing approximately 59.6% increase. (first half of 2010: USD59.9 per tonne).With the Company starting to sell washed hard coking coal product, the Company achieved ASP of approximately USD155 per tonne for first batch shipped to its customer in China, providing approximately 62.1% increase from unwashed hard coking coal ASP.
The Company established cooperation with Shenhua Bayanuur Energy company and agreed to supply its washed hard coking coal products to Shenhua Wuhai Energy’s coke plant operating in Wuhai. In addition, a sales contract has been signed with ThyssenKrupp MinEnergy GmbH for initial trial shipment of the Company’s washed hard coking coal to European market.

According to Southgobi,


For the three months ended June 30, 2011, the Company sold 1.05 million tonnes of coal at an average realized selling price of approximately $54 per tonne. This compares to 0.45 million tonnes of coal sold for the three months ended March 31, 2011 at an average realized selling price of approximately $50 per tonne and 0.45 million tonnes of coal sold for the three months ended June 30, 2010 at an average realized selling price of approximately $43 per tonne. The average realized selling price for both of the Company’s individual coal types increased in the second quarter of 2011. The average realized selling price for the raw semi-soft coking coal increased by 17% compared to the first quarter of 2011 and by 50% compared to the second quarter of 2010. The average realized selling price for the raw higher-ash coal increased by 21% compared to the first quarter of 2011 and by 104% compared to the second quarter of 2010. The overall increase in the average realized selling price for the second quarter of 2011 was partially offset by the mix of product sold.

For the six months ended June 30, 2011, the Company sold approximately 1.5 million tonnes of coal at an average realized selling price of approximately $53 per tonne. This compares to 0.87 million tonnes of coal at an average realized selling price of approximately $39 per tonne for the six months ended June 30, 2010. The average realized selling price has increased due to increased prices of individual customer contracts in 2011.

OUTLOOK

SouthGobi substantially proliferated its customer base during the first half of 2011 and raised prices for individual products. To date the Company has signed seven major customers to purchase coal in the third quarter of 2011. Pricing for the raw semi-soft coking coal product and raw higher-ash coal product should be similar to those prices of the second quarter of 2011 at approximately $65 per tonne and $40 per tonne respectively because SouthGobi has pursued a strategy to substantially expand volume for the third quarter. A new product will also be introduced being a raw medium-ash coal. Initial contracts have been signed reflecting pricing of approximately $47 per tonne for that product. With the three products, SouthGobi anticipates the overall average realized sales price in the third quarter of 2011 should be similar to that achieved in the second quarter and in the range of $50 per tonne to $55 per tonne. Assuming various contracts are performed and the Mongolia-China border remains efficient, the Company anticipates sales volumes for the third quarter of 2011 to be in the range of 1.2 million tonnes to 1.6 million tonnes.


Frontier Securities conclusion

• Mathematical average customs price of Mongolian coal in 2011YTD is 100.20USD compared to 96.85USD per ton in August 15,2010 and compared to 95.89USD a month ago and compared yoy to 50.03 USD per ton yoy. Math average customs price for Mongolian coal for 2010 was 52.75USD, in crisis 2009 it was 43.05USD, in pre-crisis 2008 it was 44.29USD, in 2007 it was 35.55USD.

• The uptrend in coal price is in line with Frontier Securities forecast in early 2011 that this up trend will be supported throughout 2011.

• Most gain is coming from favourable price growth. Mongolia is on its way to become one of the price setters in the region


• Investors take advantage of this trend by being early movers into Mongolian coal companies with valuation upside.

Frontier Securities has identified one such example with a Mongolian coal company which could become an attractive potential target based on its coal composition, geographic location, and the fact that companies in lesser developed stages have received tremendous attention lately.

According to Gobi Coal, Gobi Coal & Energy Limited (“Gobi Coal” or the “Company”) is an emerging coking coal producer based in Mongolia. Gobi Coal has three key open cut coal development projects located in south western Mongolia on the planned Mongolian east-west railway line. The Company’s first mine, Shinejinst, is scheduled to go into production in Q4 2011. At full production, Shinejinst will produce approximately 5 million tonnes per annum of high quality semi-soft coking coal for the northern Chinese coal market. Gobi Coal is planning an Initial Public Offering on the Toronto Stock Exchange in early 2012.

PROJECT HIGHLIGHTS
Shinejinst

• 100% semi-soft coking coal product
• 95 mt JORC Reserve
• 229 mt JORC Resource
• All permits in place for production
• Final feasibility study completed
• Initial production scheduled for Q4 2011
• Significant upside with continuation of coal to depth and coal occurrences identified in Shinejinst extension
• Approximately 350km from Chinese border


Zeegt

• 100% semi-soft coking coal product
• 93 mt JORC Resource delineated along 3 km str
• Significant upside identified by airborne magne
• Mining license in place
• Production targeted for 2015

Khurren Gol
• Tenement area of over 196,000 hectares
• High quality coking coal region

Frontier Securities welcomes inquiries regarding early mover investments into Mongolian coal companies.

CHIEF INVESTMENT STRATEGIST

Dale Choi

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Frontier Securities
Ulaanbaatar, MONGOLIA

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(T) 976-7011-9999
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