ETT IPO in MarchApril 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 TT LLC being delayed for almost a year?

Erdenes TT 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. For six months, we prepared for IPO and the prospectus or the main document to be submitted to a stock exchange was almost ready. However, 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. In order to release IPO on the international stock exchange, the documents we prepare and submit have to be clear and precise.

This is the first reason for the delay. Now I come to the second. As you know, the Tavan Tolgoi mine’s reserve is . Tsankhi, the main part of the coking coal reserve, is ready for mining. The area has been divided into two parts and Erdenes TT is currently exporting the output from Zuun Tsankhi coal block. 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 coal field. This arrangement is within the consideration of the geopolitical policy of Mongolia. With such a reserve, two separate mines are able to operate in Tavan Tolgoi, each with a capacity to produce 20 million tons of coal a year.

To release IPO, a company should give a clear idea to prospective investors about the market value 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 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 coal field, where the profit Erdenes TT hopes to make will depend very much on the terms of the agreement with the international companies that are to be selected.

Erdenes TT is the owner of the mining 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, earn most of the profits and pay a fixed royalty to Erdenes TT. There can be other options. It may even be that the new Parliament will decide to keep foreign investors out and ask Erdenes TT to operate Baruun Tsankhi in the same way as it does the work in Zuun Tsankhi. Erdenes TT is hundred per cent State owned company for now and shall follow the Government’s policy guidelines. So this matter is above the company’s level of decision.

All this means that until we are able to make a fair estimate of the economic benefit from the planned Baruun Tsankhi coal field mine, we cannot put a figure on the company’s market value, an essential prerequisite when floating an IPO. If foreign companies form a consortium, so as to put a high value on Erdenes TT, the royalty amount for Mongolia should not be low. If, however, citizens of Mongolia, as shareholders of the company, demand that Erdenes TT itself operates Baruun Tsankhi, too, the company’s value can grow more.

That, as you said, is not for the company to decide. Is there any other factor to delay the IPO?

Tavan Tolgoi project is not only a mining project; it is a complex project that involves infrastructure and industrial development such as railway, road, power plant, water supply and coal washing and handling 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, which is a local private company, is ahead of us because they started all this two years earlier. Tavan Tolgoi project has a ger scope. They are working on a 16-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 10- and 15-million-ton capacity, but we shall need plants with 20-million-ton capacity on both Zuun and Baruun Tsankhis. By beginning the 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. Most of the companies that were planning to release IPO realised that this was an inopportune time and postponed 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 Markets 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 TT 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?

Erdenes TT’s strategy and plan is to register the stocks on three Stock Exchanges: Mongolia, London and Hong Kong. Registering a company in a foreign country and then trading shares on international stock exchanges is impossible for us now and we cannot be sure if we can at all do it. Registering Erdenes TT 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 TT will be able to trade stocks on the HKSE while being registered in Mongolia. This is not only about Erdenes TT. 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.

From the company side we plan to make the following suggestion to the new Government. 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 Great Britain, 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 Great Britain?

No such final decision was taken. The Government merely suggested it might be better to establish a company in England. Erdenes TT 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 TT 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 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 tasked us to arrange for not small amount of advance payment for contribution for the Human Development Fund. 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 company which would pay a lot in advance. We are now in talks with companies in Japan, Korea and India. The company extracted 1.5 million tons of coal in the first five 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 coal field?

As I said before, any decision on Baruun Tsankhi will be made in the Government level. If an international consortium gets the job and pays royalty to us as the mining licence holder, it will work all right. But the company is also ready to work on Baruun Tsankhi by itself. We are finished with the work on Baruun Tsankhi’s coal reserve estimates and feasibility studies. Actually we cannot wait endlessly for the negotiations to end. It will be better to start the mining operation in Baruun Tsankhi coal field without losing time. We are prepared in our own way to start the work.