“Being in business is like running a marathon race”

Erdenes Mongol CEO B.Byambasaikhan tells S. Bold-Erdene why State-owned companies should be kept free of political interference, and why corporate success comes from vision, planning, and preparedness.

There is talk that MTZ or Mongolian Railway will be brought under Erdenes Mongol ownership. Is this true?
Such talk stems from speculation over the many proposed changes to the law on State property. There are plans to set up a State-owned company like Singapore’s Temasek. In that model, ownership of individual State companies will be with a holding company–in this case Erdenes Mongol – but the management of every company will be independent and run on purely commercial principles.The emphasis on making a profit will, I understand, apply not only to mining companies, but also to all other state companies, be they in the energy, infrastructure, or any other sector, and will be made legally mandatory. A government meeting discussed such proposed changes at the end of September, and these will now be debated in Parliament. I have not yet seen them, but it is quite likely that the talk related to the MTZ has its origin here. We shall soon know what changes will be made in the law.

Adoption of the Temasek model has been under discussion for long, but now it is likely to be given legal shape, right?
Yes, the discussion did start a long time ago, but last year, a lot of urgency marked the discussions. There was a strong feeling that State companies should be operated on purely commercial lines. We cannot, under extraneous considerations, keep their hands and feet tied, and then expect them to compete with others that are not so shackled. There is a perception that State-owned companies have huge privileges and advantages, but, actually, they operate under more restrictions than private companies. For example, it takes many months to choose the winner of a tender. Of course, public money has to be correctly spent, but you cannot be competitive if you have to take all decisions following state budget law regulations. Market conditions change in the long time it now takes our company to finalise decisions. It is often five months, and just think how much coal prices can change in that time. I do hope the proposed changes will make life easier for companies like ours.

Anticipating such changes, we are getting ready for the new situation, to raise capital on our own and to expand our operations. It is a challenge. Market conditions are bad, and State companies cannot totally abandon their social responsibilities, such as providing jobs. It will take time for State companies to embrace the primacy of profit making, but we are gearing for the change.

Being in business is like running a marathon race. You have to start early to prepare yourself, both mentally and physically. Right now, you see us as a bunch of fat guys about to run in a marathon. Actually we State-owned companies live from winter to winter. Once we survive one winter, some maintenance work is done for the next, but our sights do not go much farther. We pursue leaders and ministers to get money for essential repairs or maintenance. This must change and I am sure it is 100 percent possible to change it. For example, look at our coal mines. It may seem everything is working well for them, as they have captive customers in the power plants, and do not need to find new markets. The fact, however, is that they never manage to make a profit, as the price they can charge is fixed by the state. The chain does not end there. Even after getting their coal cheap, the power plants cannot make a profit as power prices, too, are set by the state. All this means a debt cycle. The power plants do not make a profit, so cannot pay their coal suppliers. Coal companies do not make money, so cannot pay their suppliers and subcontractors.

Did your company not take the lead in suggesting concrete changes?
Yes, we have been working on state-owned companies’ investment law. Successful countries have legal provisions giving state-owned companies operational independence, insulating them from political interference. This is easier said than done, though. Given their pre-eminent role, state leaders can often do what they want. With no compulsion to declare dividends to keep shareholders happy, state companies could well be working to serve some certain groups’ interests. The legal safeguards have to be put in place early and enforced consistently.

Your predecessors at Erdenes Mongol – for example, Ya.Dolgorjav and O.Sainbuyan – had also talked about operational independence for State-owned companies. Now that the demand is gaining strength, how can this be ensured and do you have a plan of action to achieve the goal?
We should have a clear goal. We did not come to Erdenes Mongol to waste our time or play games. Our ultimate goal is to make this company one that will compete at the international level, and at the same time earn handsome profits so that it can contribute to the welfare of Mongolian citizens. Once it achieves international reputation and starts making money, domestic political interference will become automatically less. But none of these will come just like that, without preparation. The initial period of the necessarily intensive preparation will be difficult, but we cannot afford to lose faith or feel discouraged. Careful and patient planning will overcome all difficulties. Balance sheets would be prepared and a thorough audit undertaken according to international best practice, so that our company’s real worth is clear to all. We shall raise money at the international market, and spend it in a properly planned manner. The performance of Baganuur and Shivee-Ovoo will reach new heights. We have a road map and would not deviate from it. To be an international player, our operational quality should be of global standards. If we can do that, we will attract foreign investment and go for expansion. If we cannot expand, there will be nothing for me to do here.

Both Baganuur and Shivee-Ovoo JSC are slated to be privatised. When will their shares be offered at the stock exchange?
The decision to keep at least 51% ownership of both with the state, and allowing a maximum of 49% to be in private hands is not a good one. Big investors will be interested only when they know they can control a company’s operations, and you cannot do this if you remain a minority shareholder. If the idea is to draw in small shareholders by issuing more shares, I confess that does not appeal to me. There might be people who would buy some shares as a long-term investment in a mine that is likely to have regular buyers of its coal, but this will have little impact on the company’s growth.

What about de-regulating coal prices?
Nothing has been done as yet, and I doubt if the companies will be seen as worth more than now if there is no de-regulation.

So the government’s privatisation decision might not be implemented?
How can we possibly break the law? We will try to implement the Government resolution. Both companies are free to issue additional shares and whether there would be buyers for them would depend on the market.

You basically want to change the traditional mindset that even when it is privatised, a State-owned company cannot let the state become a minority shareholder, right?
As I said at the very beginning, the ownership is irrelevant if a company is allowed to operate professionally. I have seen this practice successfully followed in a few countries. The concept of State property privatization moves like a pendulum. At times it is the rage, and at others, it has no takers. Public-private partnerships occupy the middle ground.
To come back to Baganuur and Shivee-Ovoo, both are undoubtedly valuable assets but only a proper balance sheet and audit would reveal how much exactly the actual value is.

Has the audit started?
Yes, it is being done by one of the gest four audit companies in the world. Once the audit is finished, we shall have a clear picture of the true health of our two companies. We shall also know what financial mistakes were made, as also their true achievements seen against international standards. Maybe everything will be found all right, but if they are not, we shall know how to rectify them. These audits are not just of accounts, but they also evaluate use of technology and quality of operations. Maybe the audit will reveal that the two companies were run in the most efficient way in their given situation.

What comes next?
It is too early to give you any details now. The audit should be over in about six months and once everything is clear, the actual work of attracting international financing etc. will begin. New systems of financial management will be put in place, human resources and such issues dealt with, and a comprehensive work plan prepared. We shall also have a clear idea of how much money will be required, and shall start approaching identified investment sources.
I am confident that things will be significantly better after approximately five years, with a marked rise in profit-after-tax and obvious increase in operational efficiency.

Erdenes Mongol was established to own strategically important mineral deposits. Now its portfolio has diversified into infrastructure projects. Does this add value to your company?
Every Mongolian now understands that mining is not just extracting underground resources. Issues like transport, pricing, choice of trading partners are as important. Marketing assumes special importance as we seek to enter the international market. Accessing investment with favourable conditions is a great bonus.

Our goal is to extract and refine minerals– at OyuTolgoi, TavanTolgoi or wherever --according to best global standards and then reach the product to the international market to be sold at a fair and competitive price. Today we are satisfied with selling minerals at the mine mouth, but this merely allows foreign buyers to pay a very low price for them before carrying them beyond the border where they add value and sell for a higher price. We have never produced value added products, and took mining to be no more than extraction and spot sale. Now we have better understanding, and we have to make the best use of our much too delayed coming of age. This is why Erdenes Mongol gives priority to develop infrastructure to help get better prices for our mine output.

What steps should we take to sell at international rates, especially coal? How will a proposed mineral exchange open up opportunities?
A mineral exchange would be of great help in accessing up-to-date and immediate information, but it is as important to make long-term business plans, formulate strategy and identify possible risks. The general principle is for a company to prepare different possible market scenarios for five years and business plans that fit into the conditions for the first three of them. Long-term vision is essential to a company’s success. The minerals market has its own special character and the world mining giants make their mine plans against 5 to 10 years’ projection of demand, supply and price. It is not good business sense to begin work on a mine and see what comes. Every move has to be planned, every step charted, and all on the basis of the amount of resource. All details have to be worked out in advance --extraction cost per ton, washing plant cost, transportation cost etc. The gest mine is not necessarily the most profitable. That is achieved by the most efficient use of capacity, and by astute pricing and marketing.

It all depends on how far ahead we are able to see, and how well we understand our competitors and buyers. Plans prepared accordingly will interest international lenders and funds would flow. At the moment our companies are only focused on avoiding bankruptcy. With 30 years’ experience, Erdenet understands market fluctuations but our government estimates Erdenet’s revenue to be unrealistically high when preparing the state budget, and then struggles to fit the reality into the prediction.

More sensible countries like China, Australia, and Japan have learnt from experience to see beyond the here and now, and, even when going through difficult market conditions, they plan and strategise for the future because they know the market will recover, say, five years later. In Mongolia, we see how coal mines are being closed down, with even the ger companies unable to read the market. It is in such difficult times that we realise the need to have an overall understanding of infrastructure, finance etc.to survive the bad days. Mines cannot be closed down because of railway problems, nor should a railway go bankrupt because of problems at mines.

True, if an eastward railway had been built three years ago, it could be bankrupt today for lack of freight.
If you have your own money, you can invest in any project you wish to take up, otherwise the market will finance only the most viable ones. Unprofitable projects cannot attract investment, and the market has no time for projects which promise profits after 30 years.

This question is for you as a member of the OT Board. Just as it started to appear that with no politician on the board, OT affairs would be free of politics, we hear how some politicians want the Dubai agreement to be scrapped. Are we again heading for uncertainty?
OT is a bankable project. Investors and lending institutions believe in its viability and see how the mine is being developed according to international standards. Some in Mongolia choose to be blind, however, and ignore how it is shaping to be one of the best copper mines in the world. It is a first rate project that will succeed no matter who is on its board. If the project attracts investment from the international market, that is the clearest sign that it is good, even by international standards.

But it is very important to keep it free from politics. There were many reasons why the project had got stuck, particularly in regard to the underground mine development, but Mongolians are seeing the results of the $7-billion investment: some 6,000 workplaces, hundreds of billions of MNT paid in tax, and massive local purchases. Once finances for the second phase are arranged, all will be well. We need many other projects of this kind.

It took many years to start the OT project, and many issues had to be tackled. This should be remembered when we talk about similar projects, of which we should have many. Mongolians are realizing that apart from its direct impact, OT has much indirect impact on our future. The Tavan Tolgoi power plant needs $1 billion of investment, and the guarantee of its viability is OT. Since the Oyu Tolgoi project follows international standards, our domestic companies are also shifting to the internationally standardized systems of operation. If a company supplying some product or service to OT can meet its standards, it could do so anywhere around the world.Working with OT has taught local companies to be punctual, to negotiate for the best terms, to calculate costs correctly, to be more competitive and much more. To give you just one example, previously our companies used to make 3-page business agreements, but now they produce 100 pages covering even the smallest aspect of the deal. This is an invaluable lesson.

Once finance is found for the underground phase of OT, do you expect the national economy to come out of the present crisis, just as it did in 2009?
I expect financing issues to be resolved in November, and $4 billion will be spent. It is a lot of money and will, of course, have a positive impact on our economy. Our economy has, however, expanded a lot since 2010, so the impact of $4 billion will not be so strong as it was then.

Allow me to digress a little. Some 20 banks and financial organizations will together give $4 billion to OT. Lenders never want to make a borrower bankrupt, so they will all, in their own interest, provide constant support to Mongolia, and Mongolian companies. The country’s ratings will also benefit in the same way. Moody’s will think twice before it lowers Mongolia’s ratings, as it would not want to jeopardise the interests of companies in Mongolia. Higher ratings will make our bonds, both the government’s and companies’, stronger.

On the other hand, the financing imposes an obligation on us. A lender gives us money only when he believes in us. This trust will stop him from ever tripping us, and will urge him to run faster and better. It is for us to take advantage of this, and not to squabble and stumble.