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ETT IPO in March/April next year: B.Enebish


B.Enebish, Chief Executive Officer of Erdenes Tavan Tolgoi LLC, tells S.Bold-Erdene why the company’s much-anticipated IPO has been delayed and how it may all turn out to be more beneficial.

What has led to the IPO of Erdenes Tavan Tolgoi LLC being delayed for almost a year?
Our company was founded to operate the Tavan Tolgoi coal mine after Parliament had decreed the general guidelines. Now the mine is operating actively and the volume of coal both extracted and exported has increased. Apart from the regular operation of the mine, we have government instructions to trade the company’s stocks on national and international stock exchanges. To that end, we started preparatory work for the IPO in cooperation with advisers of the project and investment banks in June, 2011. We accomplished a great deal of work in six months. The prospectus or the main document to be submitted to a stock exchange was 80 per cent ready, but by the end of December, several developments forced us to delay the IPO.
First of all, the shareholding structure of the company was changed. This has to be clear and open when an IPO is issued. Shares can be sold only when investors know for certain who else owns how many shares. In our case, Parliament changed its previous decision to give 10 per cent ownership of the company to citizens and made this 20 per cent. The next few months will see many citizens sell their stock to the Government, which will then offer them to domestic companies. Nothing can be done before this process is concluded. Parliament passed a decree in January, 2012, setting at 20 per cent the amount of stock to be offered on national and international exchanges. We had explained to the politicians that this 20 per cent had to be the minimum on offer on the national or the London and the Hong Kong exchanges. MPs felt the percentage could be increased when citizens sell their shares to the government. All this uncertainty has to be resolved and we have to be sure of the exact amount of stock we shall offer at the IPO. No international exchange will consider our request for an IPO without such information.
This is the first reason for the delay. Now I come to the second. As you know, the Tavan Tolgoi reserve is very big. Tsankhi, the main part of the coking coal reserve, is ready for mining. The area has been divided into two parts and Erdenes Tavan Tolgoi is currently exporting the output from Zuun Tsankhi. At the same time, in accordance with Parliament’s decree, a working group led by the Minister has been holding negotiations with international investors on the other part. In other words, we have decided to work on Zuun Tsankhi by ourselves and cooperate with international companies on Baruun Tsankhi. This arrangement is within the boundaries of the geological policy of Mongolia. With such a big reserve, two separate mines are able to operate in Tavan Tolgoi, each with a capacity to produce 20 million tons of coal a year.
An IPO must give a clear idea to prospective investors about the financial worth and economic viability of the company. It should be indicated, with support from reliable data, what kind of product, in this case coal, the company plans to sell in how many years, at what likely price, and what profit it expects to make. All these details are easy to give as far as Zuun Tsankhi is concerned. However, that is not the case with Baruun Tsankhi, where the profit Erdenes Tavan Tolgoi hopes to make will depend very much on the terms of the agreement made with the chosen international companies.
Erdenes Tavan Tolgoi is the owner of the licence over the entire mine area, covering both Zuun Tsankhi and Baruun Tsankhi, but we cannot tell at the moment what terms will be agreed upon with any or all of the foreign companies working on the latter. It could be that they will do all the exploration and extraction, find markets and do the selling, keep most of the profits and pay a fixed royalty to Erdenes Tavan Tolgoi. There may be other options. It may even be that the new Parliament will decide to keep foreign investors out and ask Erdenes Tavan Tolgoi to operate Baruun Tsankhi in the same way as it does the work in Zuun Tsankhi. We are a State owned company, and shall work at Parliament’s and Government’s bidding. Policy matters are beyond our authority.
All this means that until we are able to make a fair estimate of the economic benefit from Baruun Tsankhi, we cannot put a figure on the company’s commercial worth, an essential prerequisite when floating an IPO. If foreign companies form a consortium, so as to put a high value on Erdenes Tavan Tolgoi, the royalty amount for Mongolia should not be low. If, however, citizens of Mongolia, as shareholders of the company, demand that Erdenes Tavan Tolgoi itself operates Baruun Tsankhi, too, its valuation will rise dramatically. 

That, as you said, is not for the company to decide. Is there any other factor to delay the IPO?
The third reason for the delay is inherent in the nature and sheer size of the project. Tavan Tolgoi is no ordinary mining enterprise. It is a huge project that involves infrastructure and other industries, such as railway, auto-road, power plant, water supply and coal processing and washing plant. Technical and economic feasibility studies on some of these are ready and construction of some could begin soon. Tavan Tolgoi will be the hub of an industrial complex one and its economic efficiency will be high. Energy Resources LLC is ahead of us because they started all this two years earlier. But Tavan Tolgoi has a much bigger scope. They are working on a 10-MW power plant while our plan is to build one to generate 300 MW. They are talking about processing and washing plants in Ukhaakhudag with 5- and 10-million-ton capacity, but we shall need plants with 20-million-ton capacity on both Zuun and Baruun Tsankhis. By beginning work on these infrastructure and industrial projects before floating the IPO, we shall convince investors that we are on course for a long-term plan. That raises the company’s appeal on a stock exchange.
Another reason for the delay is the continuing instability in the international financial market for the last year and a half. Investors are wary of committing funds in such volatile situations. Several companies realised that this was an inopportune time to have an IPO and deferred theirs. This was one of the reasons that we also decided against an IPO this year. The situation is likely to improve next year.
Other contributory factors deserve a mention. In many countries, this year is or was election year when political power changes hands. Russia and France have already had their election and the USA will have its in a few months. Mongolia itself awaits its parliamentary election. Investors tend to be more careful in election years and prefer to wait until they are sure of what any new dispensation means. Also, Mongolia will soon adopt a revised Securities Law, which is of considerable interest for investors. All these factors taken together led us to decide on the IPO in March or April, 2013. There is no reason to doubt if Erdenes Tavan Tolgoi will have an IPO at all. I have explained why we have had to defer it but there is no question we shall have it. 

Do you foresee any legal obstacles to a successful IPO?
Parliament decided to register Erdenes Tavan Tolgoi in Mongolia, London and Hong Kong before trading on the stock exchanges there. Registering a company in a foreign country and then trading shares on international exchanges is impossible for us now and we cannot be sure if we can at all do it. Registering Erdenes Tavan Tolgoi in Mongolia and selling the stocks on Hong Kong SE is a better option but is not without problems. One of them is that Mongolian laws and regulatory practices have to be acceptable at the Hong Kong exchange. Talks with the Hong Kong Securities and Futures Commission have so far been promising and I believe that the Hong Kong authorities have said they would be content with a new Law on Securities. If this indeed works out that way, Erdenes Tavan Tolgoi will be able to trade stocks on the HKSE while being registered in Mongolia. This is not only about Erdenes Tavan Tolgoi. Other Mongolian companies will also have an opportunity to issue an IPO and raise money at Hong Kong. A revised draft of the Law on Securities awaits approval by the State Great Khural, and one hopes the new Parliament will treat it as priority.
The new Government will have another issue to settle quickly. As there is no double taxation agreement between Mongolia and Hong Kong, foreign companies will have to pay an additional 20 per cent capital gains tax on trade in ETT shares on HKSE. This tends to put investors off. The Tax rate is 5% in countries such as England, with which Mongolia has an agreement. A broadly similar arrangement with Hong Kong will mean more value for our stock, and act as incentive to investors, and the government will have to move before the IPO. 

Did the Government not decide to establish a company in London?
No such final decision was taken. The Government merely suggested it might be better to establish a company in England. Erdenes Tavan Tolgoi was set up less than two years ago, and English law makes it difficult to register such a young company there. Also, some other requirements for the step are impossible for Erdenes Tavan Tolgoi to meet at the moment. For example, more than half of the board members have to be independent. That is why we plan to sell shares on the London Stock Exchange in the form of GDR, an accepted practice. Several major companies of Russia and most of the mining companies in Kazakhstan have chosen this way to trade on LSE, and we could follow suit. It could be that after the mine reaches its full capacity and the infrastructure is in place, we shall register the company in England and sell more stock, but all this can come only after several years. 

Granted it makes economic sense to delay the IPO, but how are you going to raise funds for developing infrastructure? Will you release convertible bonds?
We do need a huge amount of money for infrastructure construction and also mining operations, and we are reviewing several options now that our initial plan to raise it through the IPO is gone. One way is to cooperate with foreign companies and international banks and we are holding discussions with some of them who have shown interest.  We could also accept advance payment for future coal sales. We can look for loans from international commercial banks. Issuing convertible bonds is another option we have.  

How are you going to arrange the sale of such a great amount of coal? 
Tavan Tolgoi’s main market now is China. We can reach our targeted markets of Japan and South Korea only after the issue of transporting coal through our two neighboring countries is resolved. Last year, when we were just beginning operations, the Government asked us to arrange for a big amount of advance payment to meet our expenses. Accordingly, we made an agreement with a Chinese State owned company and we are supplying coal to them against money they have already paid. It can be understood that an economic partnership has been established between a Mongolian State owned company and China’s major mining company, also State owned. We were required to find a big company which would pay a lot in advance. We are now in talks with companies in Japan, Korea and India. We extracted 1.3 million tons of coal in the first four months this year, and our target for the year is 4 million tons. 

Now that technical and economic feasibility studies have been completed, will there be a ceremonial start to operations in Baruun Tsankhi?
As I said before, any decision on Baruun Tsankhi will be made by the Government. If an international consortium gets the job and pays royalty to us as the licence holder, well and good. But we are also ready to work on Baruun Tsankhi by ourselves, now that work on its coal reserve estimates and feasibility studies is over. Actually we cannot wait endlessly for the negotiations to end. It will be better to operate Tavan Tolgoi as one mine, and we are prepared in our own way to start the work.

The Mongolian Mining Journal.  June 2012 № 006 /044/


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