Peabody Energy Could Reap Profits in "Minegolia"

He who hesitates is lost, goes the saying, and the government of Mongolia might be finding that out the hard way.

Two years ago the country, which wags once called "Minegolia" because of the rich resources it sits on and the billions companies were willing to spend to extract them, was also atop the economic growth charts, expanding at a 17.5% clip.

Mining giant Rio Tinto (NYSE: RIO  ) , through its ownership of Turquoise Hill Resources (NYSE: TRQ  ) , was a majority owner of a huge copper project, Oyu Tolgoi, and wanted to get in and begin work to start shipping ore to China. The massive government-owned Tavan Tolgoi mine, containing the world's largest deposit of coking, or metallurgical, coal -- the stuff used in steelmaking -- was ready to launch a three-country IPO to take advantage of coal prices that were were heading north of $130 per ton. Iron ore mining was a third leg of development in the country.

Commodity prices in general were soaring and it seems the government got greedy. Negotiations with Rio Tinto and Turquoise Hill bogged down over details regarding payment for mine expansion and how much the government should contribute to and take out of the project. While shipments of copper concentrates finally started in July, the miner has said it is delaying the $5 billion planned expansion at Oyu Tolgoi because an agreement still hasn't been reached with the government.

The IPO also got shelved. Despite selling almost all of its coal output from Tavan Tolgoi to Aluminum Corp. of China (NYSE: ACH  ) , or Chalco as it's known, apparently Hong Kong doesn't recognize Mongolia as a viable market because the nation doesn't have the legal framework in place for stock listings.

Equally problematic has been the government's ineptitude in the bidding process. It first agreed on which investment banks would be the lead underwriters of the Tavan Tolgoi IPO, then reneged and opened the process to others. Then South Korea complained the process wasn't fair, and the mining companies that were originally part of the consortium permitted to work the project -- including China's Shenhua Group and Peabody Energy  (NYSE: BTU  ) -- fell apart after the government canceled the agreement two months later. The process has been on hold ever since.

Of course, thermal and coking coal prices have plunged over the past two years, and the Mongolian government is viewed more as an impediment to business investment than a partner. Economic growth has slowed to slightly more than 11% and foreign direct investment in the country dropped 42% in the first six months of 2013.

The country is now looking at 2015 as a possible date for its coal mine's IPO and is hoping Shenhua and Peabody will still be interested in being "strategic partners." The parliament passed a securities law that will become effective in 2014, and in addition to Tavan Tolgoi, it's also considering a $6.6 billion IPO of its 34% stake in the Oyu Tolgoi copper project.

Major hurdles must still be surmounted, such as building out the necessary infrastructure to handle production. Being landlocked between China and Russia -- dependent on the former for sales of its output and the latter for its fuel -- it has to walk a geopolitical tightrope that doesn't squeeze out U.S. investments while placating both Japan and South Korea.

Peabody Energy believes it may be able to secure a larger piece of the coal project than the 24% it was originally assigned, which would enable further expansion of its presence in China. Right now the miner's hopes rest on the seaborne trade, but analysts can't agree how that will play out. But with expansion under way in Australia, a two-pronged approach could pay big dividends.

In short, because "Minegolia" looked before leaping, it may have missed out on the full potential of its resource-rich portfolio, However, that could provide a profitable opportunity for Peabody to finally get ahead of the coal crunch.

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