D.Achit-Erdene, President of the MICC investment bank, believes growth of the capital market promises a host of opportunities to Mongolians, and explains in the conversation below why he thinks so.
What have you seen since 2005, when MICC started producing an index of foreign companies operating Mongolia but listed in foreign stock exchanges?We started with around ten companies with a total market worth of $3 billion. Now we have 20. In this period of time, several companies have changed their business focus and become more concentrated on Mongolia. The valuation increased much more than the number, showing how rapid their growth has been. The Mongolian Stock Exchange has also grown in this period, but while the companies listed there have a total value of $2 billion, foreign companies operating in Mongolia but listed in foreign stock exchanges are valued at $38 billion.
In 2005, there was almost no Mongolian participation in foreign miners’ work. They came, drilled, and went home to raise capital. But now companies listed in the Australia and Hong Kong Stock Exchanges have shares owned by Mongolian companies, and more and more Mongolians are in their management team. Indeed, 10 percent of the $38 billion capital is in Mongolian hands. It’s a good sign.
Which are these companies with shares held by Mongolians? Aspire Mining, Hunnu Coal, Petro Matad, Haranga Resource, Xanadu Mines, Voyager Resources… and many others. Mongolians profiting from their shares will offer a very good example to encourage more people here to invest similarly.
How has mining growth been reflected on MSE activity?Most MSE-listed companies have no clear accounting system, unreliable corporate governance, and their owners usually keep control in their hands, without raising more capital by expanding the shareholding base. The MSE is thus not an interesting place to invest. Now with the London Stock Exchange restructuring it, all this should change.
Some foreign companies operating in Mongolia, such as Ivanhoe Mines, SouthGobi Resource and Red Hill, want to offer shares to Mongolians through an IPO in MSE. They calculate that more Mongolian shareholding would help protect and further business interests here. A similar effort was made five years ago when we were managers of a sale of Ivanhoe Mines shares at the MSE. But MSE’s and Mongolian laws are different from those in most other countries and following one meant contravening the other. This has to change if MSE is to attract IPOs or just listing by foreign companies. Double listing will mean foreign companies have to release their financial and other information in Mongolian. Local investors will surely benefit from this.
MSE can be stronger only if the companies listed there change their ways. Now 80-90 percent of shares in most good companies are held by a few individuals or families. There is no real public participation. This is disappointing as MSE should be where Mongolians make money by investing in Mongolian companies. International investors will be attracted to MSE only when it becomes locally popular.
How do Mongolians stand to profit from the mining growth?
We are here to help them. With the economy getting stronger, the last two years have seen a increase in the number of Mongolian companies and individuals investing in shares. The very successful Hong Kong IPO of the Mongolian Mining Corporation was a catalyst in inspiring Mongolians. We have helped some Mongolian investors buy shares of MMC, Hunnu Coal and Haranga Resource. Mongolians being part of the management team of these companies makes them more trustworthy for Mongolians looking to buy shares. Their investment has been profitable. Hunnu Coal’s shares rose 8 times from the initial price and MMC shares are 40 percent more than at the IPO.
How will people know when is the best time to buy or sell shares?
There are a few rules of thumb. Prices rise when estimated reserves raise hopes. For example, Ivanhoe Mines’ shares were $2 when it first came here, and rose to $15 when its reserve estimates were confirmed. Hunnu Coal listed when they were just drilling, before there could be any question of reserve. After one year they are assured of 400 million tons of reserve, and this has raised their share prices 800%. Similarly Aspire Mining’s shares have risen 10 times as their estimated reserve has been confirmed. The $2 million they raised during their first drillings are now worth $500 million. They’ve found 330 million tons of coking coal and Mongolians own some share in it.
Share prices also rise rapidly when the feasibility study is approved and mining starts. This you will see this year in the case of Hunnu Coal and Petro Matad, both companies where Mongolians own 30-40 percent of shares. MMC shares are sure to rise when it increases output this year. MonEnCo will also start production this year. There will be many such instances. Only 20-30 percent of our territory have been explored and companies can raise money to finance more exploration and find resources, proven to be JORC or 43-101 compliant.
What about the risk from falling shares? Can we predict this?
Shares of mining companies rise and fall following an economic growth cycle. The recession at the end of 2008 saw Ivanhoe Mines’ shares fall from $15 to $1.65. The same was true of BHP and Rio Tinto shares. But the world economy has recovered much faster than expected thanks to China’s consistent growth. Mongolia’s geographical location close to commodity- starved gives us a great advantage. We, and Australia for similar reasons, have managed to survive the recession better than others. So if you want to invest in shares, keep yourself informed, carefully study the management and prospects of companies doing an IPO, and follow the situation in the mining industry, and continuously monitor the commercial production figures of companies.
Just two of the companies in MICC’s index, MMC and SouthGobi Resource, have already began production. This means mining is only beginning in Mongolia.
Why have you been researching Winsway?
Mongolian companies’ inability to process coal gives advantage to trading companies like Winsway. It is one of China’s leading suppliers of imported coking coal, and purchases 70 percent of the Mongolian coal output, which it processes in China. As Mongolian companies build their own coal processing plant, Winsway’s revenue will fall. Similarly, Chinese transport companies profit from Mongolia’s lack of infrastructure. A rail network will give us direct access to customers, without help from offtakers or brokers. Winsway will continue to be extremely profitable for the next 3-5 years, and that is why our analysts have been studying it. We want to show Mongolians what kind of margin is possible under helpful circumstances. Winsway began working with miners in Mongolia in 2005, and now has business worth $2 billion, which is set to rise.
Your indexes are mostly optimistic. What about companies at risk?
People won’t trust an investment banks that is always advising to buy. We track a company’s performance for one month, and advise ‘buy’ if we think its shares will rise by 20 percent or more. We say ‘keep, but don’t buy’ if the rise is estimated to be around 10 percent. If it is below 10 percent, we say ‘sell’. We are certain shares of Hunnu Coal and MMC will rise this year.
Some companies are covered by foreign banks. Standard Chartered has advised to sell shares of MonEnCo. Some ten banks search indexes of SouthGobi Resource. We don’t need to be the 11th, and prefer to report on the unsearched companies to serve Mongolians’ interests.
Tell us about your experience with Mongolian investors?
Mongolians prefer shares listed in foreign stock exchanges as the information on them is more detailed and reliable and trading is quicker and easier. The total value of mining companies listed in the MSE is $1.6 billion. Of them, only Tavan Tolgoi earns a profit. The others do not because the sale price of their coal to power plants is regulated by the Government. Once this changes, they will be profitable. In anticipation of the day when the Government will lift this price control, some foreign investment funds have begun buying their shares.
Do you offer information on local companies trading in MSE?
We did study APU and Gobi but then shifted to companies listed abroad, to meet client requirements. Local companies do not value research and suspect our motives when we ask for information. It is very different with foreign companies which are always open and willing to provide all information we seek. We cannot offer reliable advice about MSE-listed companies because of lack of information. We studied APU and Gobi after ascertaining that their financial accounting met international standards we got all help from their management. We’ve just updated information on Gobi and will do so soon on APU. We planned to work on Tavan Tolgoi LLC as it would interest investors, but cannot proceed as there is no clear idea of its resource reserves. This is the problem with most MSE companies.
What about upcoming IPOs?
Two coal companies are to be listed in Toronto Stock Exchange soon, and we shall be ready to serve our clients.