Finance Minister S.Bayartsogt answers questions on the proposed international sale of bonds and on an IPO for the planned Erdenes Tavan Tolgoi.
What is the Government doing to start mining in Tavan Tolgoi this year?
We first have to establish Erdenes Tavan Tolgoi as the company to hold the licence on the territories under the project. It will then be its job to hire an operator to run the operation in its territory. A tender will be announced to invite bids from foreign operators to work in certain territories. The bid winner will have to make an advance payment of mining fees, advance tax payment and a product advance payment. We shall use these advance payments to finance the most urgent social and economic projects. These advance payments will be guaranteed by Erdenes Tavan Tolgoi, and will be paid into the State budget, with a certain part allocated to the Human Development Fund. Some of them will also be used as capital for the newly established Development Bank and lent to start big projects.
These projects include building a railway; infrastructure in Oyu Tolgoi and Tavan Tolgoi, such as roads, railways, power generation and transmission; and development of the Sainshand industrial complex, where the raw material from the mines will be processed to add value, and jobs created. Another big opportunity for investors is the Infrastructure Development project, which was previously titled Smoke-free Ulaanbaatar.
The Government decided on August 19 to speed up implementation of the Parliament resolution on Tavan Tolgoi. We shall be discussing proposals made by foreign countries on infrastructure projects, and on feasibility studies of other major projects, including a time frame and phases of funding. We have to coordinate two priorities. The first relates to exploitation of resources and the other to use of the revenue from these resources to set up other major projects. D.Zorigt, Minister of Mineral Resources and Energy and Kh.Battulga, Minister of Road, Transportation, Construction and Urban Development, have been given responsibility for speedy implementation of this job.
The Spring session of Parliament ratified some major concepts. The railway policy and the concession law were approved and so was the list of over 90 projects to be implemented under concession agreements. Major infrastructure projects in Ulaanbaatar will be taken up, with the money received against future revenue from mineral products. If financing is to be kept independent of the State budget, so that projects may proceed quickly and match the development policy that we are talking about, there must be careful planning. The policy has been finalized and now is the time for implementing it.
Laws have to be amended to allow this financing mechanism to operate smoothly. The Government will need be given the legal authority to pledge future revenue against present loans for certain infrastructure projects. Also, the proper conditions and regulations governing the operation of the Development Bank have to be enacted. At the moment there are certain restrictions on how we can use our revenues but once the stand-by program approved jointly with the IMF expires on October 1, we shall have total independence to formulate and pursue our own economic policy. We shall then go ahead with plans to issue Government bonds in international markets to raise money for certain projects. Of course bond prices can fluctuate with changes in the international financial climate, so we have to proceed carefully. Many reputable investment banks have offered their services to help us with the bonds.
Given the inherent uncertainties, how can you be sure that the sale of bonds will be profitable for Mongolia?
We have to carefully study the course we plan to take. This will be uncharted seas for us. We did once sell USD76 million of bonds to finance gold mining but this was in a restricted market and we have repaid investors on time. It goes without saying that our market research should be thorough and the planning perfect. Our timing also has to be good. Prior to the crisis in Greece, the bond market was favourable and we have to be on the lookout for another such advantageous time.
Interest on the bonds is calculated from the day they are sold. Therefore, the projects to be financed by the bond issue should be fully ready beforehand, so that the sales proceeds can be used immediately. Otherwise, the Government pays interest on funds lying idle. We are working on all this and I guess the end of this year or the beginning of the next year will be the best time for a bond issue.
How have foreign operator companies reacted to the Parliament resolution on Tavan Tolgoi?
There has been no reason for them to lose interest as the Parliament resolution ratified the previously announced Government policy and objectives, without incorporating any change. The Ministry of Mineral Resources and Energy is holding talks with the prospective operators. I am not involved in these so I don’t have any details but my impression is that the talks are going well. The only change in the Mongolian stand has been that we now want the work to be done by one company or consortium. The foreign companies who continue to be interested in the project will have to decide on how they can cooperate and consolidate.
So we shall be able to hire the operator company as soon as Erdenes Tavan Tolgoi is established?
Yes. The Parliament resolution says that ownership of the entire deposit will rest with Erdenes Tavan Tolgoi. It may choose to work by itself in a certain part of the territory, or enter into a contract with a foreign or domestic operator. In other parts, it will announce an open tender and invite international companies to bid. The two may appear to be the same as far as the method of working is concerned, but the difference lies in the economic aspects of the agreements, such as advance payment different.
When would be the best time for Erdenes Tavan Tolgoi to go for an IPO in an international stock exchange?
A company is likely to get a higher price for its shares only after it has worked for, say, two years. A minerals company IPO can be successful only when the reserve is clearly defined, with expectations of increasing with further exploration. Investors also need to be convinced that the operator is competent and reliable and that the mining is sustainable. They can also estimate actual returns only when both mining and selling have started. The infrastructure should be in place for this. Only when all these criteria are met, does the value of a company become apparent and attractive. There is no need to rush. Better results will be achieved if Erdenes Tavan Tolgoi takes time to do its home work and has something concrete to show before the IPO gets under way.
The railway is very important for optimal use of Tavan Tolgoi coal. Is there any clear indication as yet on where the money will come from and how long it will take to build it?
An open bid will be announced and the builder company will have to initially pay for the work, with guarantee of reimbursement from mineral revenues. The railway is a pre-requisite for the Sainshand complex to be viable. It is thus of the utmost importance to get it built in the shortest possible time. The Ministry of Roads has been holding talks with prospective investors and railway construction companies.
An international management consultancy will be hired for the Sainshand project, and concrete proposals will be submitted to investors only when the design is ready and the feasibility study complete. There are things that we know but there are also things that we don’t. A German offer of 3 million Euros will be used to work on feasibility studies for major projects in the complex. Some loan agreements with the World Bank are also due for review and these moneys may also be used by the Ministry of Mineral Resources and Energy and the Ministry of Road, Transport, Construction and Urban Development for these studies.
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