Interview
“Easy for ETT to raise funds on its own, but it is too early for an IPO”
2018-04-30
A mega project cannot be developed without mega investment, so where is the money going to come from if Mongolia is to present Tavan Tolgoi as one of the major mineral deposits of the world? The obvious answer is an international IPO, but this has been talked about for so long, with so little actual progress, that some are beginning to lose faith it will ever happen and some others wonder if the optimal time to tap the global market has gone. D.Achit-Erdene, President of Mongolia International Capital Corporation, is not among the pessimists, and in this interview he tells MMJ why.
Erdenes Tavan Tolgoi has finally paid off almost all its debt and it made a handsome profit in 2017, raising spirits all around. However, comprehensive development of the deposit will require much more money than the company has, so there is fresh talk about raising funds in foreign and domestic stock exchanges. Is the time right for a successful IPO?
No. It is still too early for an IPO. The company is not ready to face international investors who evaluate a company’s merits by, among other things, its corporate governance record and good financial reporting. The criteria for mining companies are even more stringent, and Erdenes Tavan Tolgoi will require a lot of time to finish the preparatory work, including getting ready a feasibility study.
ETT is a Mongolian company and to become an international company, it must have external directors on its board, and the more qualified and experienced these foreigners are, the better. Also, if ETT is to be listed on a foreign stock exchange, it will need a registered offshore account which Mongolians despise. Besides, Mongolian law is different from the common law and foreign investors usually prefer companies governed by common law.
The cases closest to us would be from Kazakhstan and Russia. They first registered in their domestic market and then traded stocks internationally, as depository receipts, the requirements for which are fairly straightforward. For ETT, too, issuing depository receipts would be more rewarding. Therefore, it is best to start trading on the Mongolian Stock Exchange, and maybe 6 to 12 months later, go to international exchanges. Strangely, ETT is yet to be listed on the MSE even.
What other ways are there to raise funds, if ETT does not go for an IPO? Will investors be interested in a specific project if the financial indicators of the company are improving?
It should be easy for Erdenes Tavan Tolgoi to raise funds on its own. However, as a state-owned company, it sees things from a different perspective and its practices are also different from those of private companies. Its debt problem arose because the Government messed up its finances, making it borrow $300 million from Chalco and then distributing it among the public. As a state-owned enterprise, it could not protest, but such action would never be allowed elsewhere. Now that the loan has been repaid, ETT is free to use two things to its best advantage – its huge reserves and being close to the market.
Now that it has very little pending liability, looking for project financing seems to be a better option for ETT than an IPO. There should be no problem in signing a long-term sales contract with any party, and with such a contract, it can easily get a loan to develop infrastructure.
For instance, to finance the railroad construction?
Yes. Once you have this long-term sales agreement, and are ready with a feasibility study, you have to select a very reliable company for construction of the railroad. This last is very important. Armed with these three, ETT can negotiate with international banks for funding the railroad, with the coal supply agreement as collateral.
It is also possible to retain part of the proceeds from the coal sales and use it to repay the railroad loan. There are specialised international banks that support such a scheme. It works like this. Depending on which company is building the railroad, that service can be shown as export. For example, if a German or a Russian company is selected, that country would be seen as “exporting” its labour force and services. Apart from commercial banks, ETT can always approach institutions like the Asian Development Bank which finance infrastructure projects in developing countries. All these financing institutions are likely to give long-term loans. Japanese banks are known to lend money repayable over 40 years.
In 2010, we received a proposal from a German bank, which was willing to lend at 2% interest if we had a 20-30-year contract with a German steel plant to supply coal.
How can Erdenes Tavan Tolgoi grow and more successful?
Both will require a lot of human resources and good management. But it is not impossible. It can hire consultants. Maybe Erdenes Mongol can get funds from ADB or somewhere else to hire consultants and proper personnel.
More important is that as it is a state-owned company, there has to be the political will to make it into a world class company and for this the right decisions have to be taken, uninfluenced by political consideration.
The company should be run by a board of directors who will work as independent professionals, with no partisan political agenda to advance. The company’s money will not be used for any political purpose. It would be a good idea to have qualified foreigners on the board, with no domestic political allegiance, as this boosts investors’ confidence.
How long does it take to finalise a loan request? And how much risk is it for Erdenes Tavan Tolgoi to take a real loan?
It normally takes about a year for a funding institution to decide on a loan request.
There would be little risk. If ETT borrows $2 billion for 20 years, it would have to pay $100-$200 million per year including the interest. That is what it would earn by selling 20 million tonnes of coal, keeping a margin of $15 or $20 per tonne.
Your studies have found that the market rating of Erdenes Tavan Tolgoi and similar Mongolian coking coal companies is almost 50% lower than most other such companies in the world. Why is this so?
Obviously, there are many reasons but the main one would be our overdependence on only one market. Australian and Canadian companies export to several markets. Australia’s geographical location allows it to carry coal by sea to steel plants in the eastern coastal areas of China and it is also easy for it to ship coal to India, Japan or South Korea. You must remember that sea transport is much cheaper.
How good or bad our reliance on one market is depends on how the demand is there. There can be no question that having a choice is always good, and Mongolia needs to discover another market soon. The dominant enterprises in China may be state-owned, but they adhere to the market mechanism. They will buy at the cheapest price, which they will get by letting different sellers undercut one another.
How do ETT and MMC compare in terms of management?
As for management, MMC is way ahead, but ETT has a lighter debt burden, its only outstanding loan being $50 million from the Development Bank of Mongolia.
Much more profitable would be to compare them with international companies. We sought to work out what their share prices would be in the international market. We compared their reserves, operations, and profits to those of companies listed on foreign stock exchanges, and concluded that their market price would be lower than the nominal value set by parliament, but this may very well change in the future. Stocks for both companies would rise with improved infrastructure and getting listed on different markets.