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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