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Mining The Resources
Minding the future

IPO preparations must be completed, says Kh.Narankhuu 

Erdenes Tavantolgoi Mining (ETM) was formed with the status of a daughter company of the state-owned Erdenes Tavantolgoi JSC with the specific purpose of facilitating the long-talked-about IPO. Kh.Narankhuu, Director General of Erdenet Mining  Corporation from 2000 to 2007 and a former Member of Parliament, was brought in as CEO to oversee the complex and multi-faceted work of preparing documents and material required by the stock exchange and also to woo investors. Now that the IPO has been put on hold and ETM itself is being wound up, Narankhuu opens up to G. Iderkhangai on what the past months were like. Given his status in the mining sector, his views command special respect and he does not disappoint in this long-ranging conversation.  

Following the government’s sudden announcement that it would not proceed with the Erdenes Tavantolgoi IPO came its decision to wind up Erdenes Tavantolgoi Mining. Are the two moves not against Resolution #296 of the Cabinet? 
Let me recall for you the sequence of events. On June 29, 2018, Parliament adopted Resolution #73 on Some Measures to Be Taken on Intensifying Operations at Tavantolgoi Coal Deposit.   Then, on July 9, the Cabinet passed its Resolution #296 which, among other things, called for setting up Erdenes Tavantolgoi Mining (ETM). This was done, though not immediately. Now, this company is going to lose its independent identity, but that is not all of Resolution #296, which continues to retain its significance as providing guidelines on not just only the one deposit at Tavantolgoi but on the country’s mining sector as a whole. These guidelines cover development of infrastructure -- power, auto and rail roads, water sources and supply – and also deposit operations. 

As for the last, there is no other way for Mongolia, as an underdeveloped country with inadequate financial capacity, to fulfill its development dreams, than to cooperate with foreign investors. One way of doing this is through an IPO, but no state-owned Mongolian company has ever done it. The resolution broke new ground by deciding on an IPO at an international stock exchange to raise funds for the proper development of a state-owned coal mine. That part of Resolution #296 and several others remain valid and relevant though a company that was chosen to facilitate the IPO is now being returned to its parent company. So there is nothing in this to justify the charge that the government has gone against a Cabinet decision. 

Now that Erdenes Tavantolgoi Mining (ETTM) is going to lose its individual identity, it may be the most short-lived company in Mongolia, no? 
The decision to establish Erdenes Tavantolgoi Mining was taken in August, 2019, but it was officially registered as a mining company only on November 20, 2019, as the State Register had first to record the transfer to it of the parent company’s mining licence, giving us the official permission to engage in mining.  So, yes, we have been running our operation for five months now.  

What have been your major activities in this period? 
The main task given to us was to prepare for the IPO and we have been focused on this, making it our main activity. Such preparation needs at least a year. Aramco, a Saudi Arabian company, issued its IPO in December, after taking almost three years to prepare all the material required by the Stock Exchange. 

The pace of our progress is now hampered because of the COVID-19 outbreak and though 70 percent of the work on preparation of documents and papers was completed in the last five months, the remaining work will take considerably longer. It is not easy work but we managed to produce an encouraging projection of our future mining operations, supported by mine plan, resource estimates etc. One problem was that we did not do any actual mining. There is nothing illegal or unethical in having an operator company do the extraction work but if we did even some mining on our own, we could claim to be taken as a world class professional mining company in terms of health, safety and environmental standards. 
We did everything from scratch. When I joined after my appointment, there was not even a table and no computer. Initially we took everything from the parent company on loan. We were allowed a staff strength of 80 and the hiring work was finished only in January. u
Luckily we made very good choices and our team would have done any company proud. 

Potential investors would carefully weigh the strategy the company plans to pursue. How did you prepare yours? 
Every investor wants to know how his money would be spent and we should present a long-term vision and the strategy to realise it over at least the next ten years. There is widespread concern among Mongolians about how the Tavantolgoi deposit is being exploited, such as the following. Is it good mining practice to take the coal only from the best parts? When will we start exporting value-added products? Selling only raw coking coal will limit the life of the deposit to around 20 years, so we have to wash the coal that is mined. Then, of course, we must find fresh export markets. 

Because of its heavy weight, it is not economical to transport coal a long distance. There are estimates that coal transport costs beyond 50 km equal production costs. If we coke it, its selling price goes up from $60-$70 per tonne to $200-$250, and there would be no worry about transport costs over a long distance. 

The money raised from the IPO would build the railway, the washing plant, and the coking plant. I hear people say we ourselves can and will build them. If it were so easy, why have we not done so as yet? I know that there has been no investment made by the state in Erdenet in the last 40 years, so why should I believe that the state will do so in Tavantolgoi? It is a habit among us to talk big and to see unrealistic goals as easy to reach. We are a poor country and cannot become highly developed overnight, no matter how often we tell the people how certain and easy it is to happen. It is clear our own resources are not there to be used to build these plants, so the company has to fend for itself, and the IPO is the way. 

How will infrastructure be developed? 
This is a particularly important issue. At present we use tens of thousands of trucks to transport our coal to China. This degrades the environment and there are also many questions about the capacity and competence of the truck operators to make the long haul in all seasons. Building the railway will put an end to the dust, and reduce transport costs. Proceeds from the IPO may pay for the railway and the two plants I talked about earlier but before that their feasibility studies, done by a reputable western company, would have to be submitted, along with many supportive documents, to the stock exchange. We have worked on all this for five months, The feasibility studies of the two plants will be ready in June. The feasibility study of the railway will also have to be submitted. We obtain information on the Tavantolgoi-Zuunbayan railway as it progresses and use it for our proposed project on the railway to Gashunsukhait. 
All this is painstaking and time-consuming work. All documents and papers are prepared in Mongolian and then translated into English and into Chinese as well, for they would be submitted to the Hong Kong Stock Exchange. Many of our departments are in daily touch with the stock exchange. Since we have almost no knowledge or experience of such relations we have foreign companies as consultants. That ETM was established just a few months ago was initially a problem, as no company less than three years old is eligible for an IPO at foreign stock exchanges, but since our parent company has been working for ten years, we have been allowed to submit its documents for the last three years as our own. These include audit reports and balance sheets, and our consultants extrapolate data and figures from there to prepare our own submissions. We have contracts to receive legal services also. Not all our consultants and advisors are foreign companies, some domestic companies are also there. It is mandatory to appoint 12 types of consultants and we did this. Our budget for all this came from our parent company.

It was a very pleasant revelation to me how talented and dedicated the young people we had hired proved to be. This is a great change from 10 years ago, when I left the corporate world. I noticed two things in particular. Unlike in the past, we now have many more young people who went to universities abroad, or in Mongolia, and then worked at projects small and large, thus combining theoretical knowledge with hands-on experience. Many also had good language skills. But not everything is better than before. There is much more bureaucracy now, many more rules and regulations at each step. 

Have you chosen your underwriters?   
We are in negotiation with several investment banks which are all among the world’s top ten. They have given us free tips and valuable information so far.     

How have they taken the news that ETM would be wound up?  
I found them both surprised and disappointed.  There are not many new and good coking coal deposits in the world, and they were all so excited that Mongolia, a country which is remote and has a small population, has a coking coal deposit with 7 billion tonnes of reserves.   
We are happy with what we have achieved. We have nothing to say about the Government’s decision not to have the IPO during its term, as scheduled, but we have to complete the preparations. This government gave us this task and maybe our work would be used by its successor.    

You mean the preparatory work for the IPO would continue even though Erdenes Tavantolgoi Mining is not there? 
Erdenes Tavantolgoi Mining will be merged into Erdenes Tavantolgoi, with no independent responsibility. Its mining licence will revert to ETT JSC, which would also repossess the East Tsankhi Mine. The likely choice then would be between an IPO for the area under one licence or for both the East and the West Tsankhi or for what is covered by all 8 licences. If it is for either of the last two, more preparatory work would be needed. 

Will you continue to be in charge of the work? 
I have nothing to say on this. I am a pensioner and do not have to look for work. All 80 employees of ETM would be absorbed in ETT JSC. I am satisfied that I was able to create a good team which can continue with the work wherever it is employed. 

This government came nearer an IPO than any of its predecessors in the last ten years. Why did it back out? 
In 2011 also, Erdenes Tavantolgoi made some specific progress on issuing an IPO at an international stock exchange but was stopped for political reasons. There is always politics that stops the IPO. 

Erdenes Tavantolgoi was making profits and coal price was stable. It was the proper time for the IPO, no? 
The government failed to seize the best time when coal prices were high, as it was hamstrung by politics and bureaucracy. A government has a four-year term but it gets only three years at most to really do something. It needs six months to get settle and then six months again to prepare for the election. The three years between these is when it must act. 

Erdenes Tavantolgoi is now back holding 8 licences, but is it not more difficult for such a big company to make an IPO? 
It will not be easy. The preparation will be difficult too. These 8 areas are in many ways different from one another, including in their method of extraction. One part is not yet touched. Maybe the deposit in its entirety would not be very attractive to investors. We do not really know how successful an IPO would be. All looked good but the optimism might have been belied. Even then, the present barrage of criticism seems overdone. Let us not expect the impossible from the IPO, then we shall not be disappointed. We must learn to temper our expectations. Foreign investors are not going to put money into Mongolia as the former Soviet Union did. We can only do our best to see that the IPO is successful and then watch the results. It was a good decision to offer to investors part of only one licence, keeping the rest of the whole Tavangolgoi deposit to be developed in stages, maybe over 50-60 years. That will give Mongolians the time to learn how best to manage their resources, and also the chance to foreigners to get acquainted with Mongolians, and decide on whether they would stay on or leave, selling off their shares in ways prescribed by the stock exchange. 

Some people were unhappy that the target from the IPO was reduced from the initial $6 billion to $1.5 billion by offering 30 percent of Erdenes Tavantolgoi Mining. Was it a good decision? 
Mineral resources prices move in a cycle, making a full turn usually in 5-6 years, but sometimes, it can take 10 years. 
We Mongolians prefer not to remember that what goes up must come down. When I was in Erdenet, copper price reached $6000-$7000 and Mongolians started to plan as if it would always be that high. I remember that during a discussion in parliament, some members said confidently that copper price would rise to $13000. Many were eager to believe them. Their naпvete was exposed when prices started to fall one year later. 

Aiming for $5 billion-$6 billion would have meant quicker depletion of the reserves in the whole deposit, which is not a good idea. The East Tsankhi mine has about 1 billion tonnes of coking coal and it is a realistic assumption that an IPO on the proposed terms would raise $1 billion. There is no way 30% of East Tsankhi could bring in anything like $6 billion. It is irresponsible and. wrong to feed people the “information” that so much can be raised. The general people are always gullible and so they start smelling a rat without any valid cause. Raising suspicion is a political game and much money is spent on spreading such disinformation through media, especially when an election is close.  

Not many mining companies, especially coal mining companies, choose the Hong Kong Stock Exchange for their IPO. Why did we do so? 
The days when coal was king are past and will never return. Awareness of global warming means use of renewable energy will spread, even though its costs are high.  And right now, with oil prices down, coal loses its competiveness.  So the times are not very favourable for us now. As to why we chose the HKEX, one main reason was that its requirements were much less stringent than those set by the London and New York exchanges. We would have been in serious trouble if the HKEX had not accepted that our parent company’s audited accounts and such documents for  the previous three years covered us also, as we did not have these separately for us.

Did you learn much from how Energy Resources had such a successful IPO? 
That was a Mongolian company’s debut at any international stock exchange and. of course, we carefully studied all that they had done to make it a success. Mongolia has so much but we sell our output almost exclusively to one country and that is our next door neighbour. The world does not take any notice of us and these international appearances alert other countries about our potential. It is imperative that our IPO is a success, for only that can counter the bad reputation that sticks to us these days. Developments around Oyutolgoi hit us negatively, and it is not just foreigners but domestic investors, too, who are leery. 

Former Prime Minister M. Enkhsaikhan used to say that everything to do with our mega projects should be transparent like a glass. Why, then, was all your work in these five months closed to everybody except perhaps a select few?  
I do not agree with your suggestion that we were secretive. We had nothing to contribute to the debate on whether it was right or wrong to have an IPO. We were given a specific assignment and we were focused on it. By its very nature our work was confidential for the world of international finance and trade is very competitive and nothing must be allowed to leak. That is also what a reputable and responsible stock exchange wants. What they ask of us, what we give them, how they accept it – all this is absolutely between the stock exchange and us, and strictly closed any third party. The price of shares at an IPO is known only when sales officially begin, and not a minute earlier. And complete secrecy about our work throughout the period leading to the morning of the IPO is essential to ensure that there is no underhand influence on this price. If we had to make any public statement on our work, we were required to take the written permission of the stock exchange. ETM being state-owned, it was not just me, but also the members of parliament and the government who were expected to say nothing at all to the public. The secrecy was in the job and we are proud we were so successful. 

Resolution #296 said an offshore company called Erdenes Tavantolgoi International would be set up which will own 100 percent shares of Erdenes Tavantolgoi Mining. Energy Resource also had an offshore registration when it made its IPO. Why this insistence on an offshore identity?  
This has nothing to do with the popular but uninformed perception that there is something shady or disreputable about having an offshore registration. It is nothing of the kind but is a perfectly legitimate way to save on taxes. The HKEX also prefers this. Since this is of advantage to everybody we decided to follow this common international practice. This is not the same as what you read about some Mongolian tax-dodger having an offshore account.  

In September, 2019, the Trade Union of Erdenes Tavantolgoi JSC disputed what it described as the “transfer” to ETM of employees who had a contract with the parent company. Later, there was a strike and the TU demanded that ETM be dismantled. How was the issue resolved? 
The dispute has roots in earlier events, such as if this union was legitimate. Under the law, a trade union can be formed only when at least 70 percent of the total employees meet and a majority of them support the move. Nothing like this had taken place and so the ETT JSC administration did not recognize the union as representing employees. In fact, the dispute was about just ten people, who finally resigned from their jobs. 

Similar disputes will arise if Erdenes Tavantolgoi does not do any mining but gets it done by subcontractors such as TTJVCO. Those who support the subcontracting system say it saves money and administrative bother and is common international practice. Others note that this is just a ploy to bypass certain mandatory regulations applicable to a state-owned company and encourages corruption.  

Why does Erdenes Tavantolgoi JSC not do its own mining? 
Mainly because it requires a large investment – say around $20 million to $30 million -- to buy at least 20 heavy duty trucks and five large excavators to get the coal out and then to carry it to the minehead. Unfortunately, the company has not been able to resolve these issues although it has been operating for ten years. Another surprise is that it saves money, but does not spend it on significant things. 

It seems that the company can do with some better management, no?
Yes, I agree. Both the Erdenet and the Tavantolgoi mines use the same mining technology.  Erdenet has huge immovable assets, such as the plant itself, workshops, equipment etc. But when ETT JSC transferred its licence on East Tsankhi to ETM, it handed over immovable assets of only MNT2 billion. It does not have a single heavy duty truck and an excavator, as its non-Mongolian subcontractor uses its own vehicles and equipment. I am clear in my mind that it is wrong to have a subcontractor to work in a mine in Mongolia. We have considerable unemployment and all the unskilled or semi-skilled people building the railway to the mine site should be trained and turned into professional miners. 

Was it right to build a railway with the profits earned by Erdenes Tavantolgoi in 2018 and 2019? 
Yes. The railroad is essential to make better use of the market. It is also the first time Mongolia is spending its own money to develop its infrastructure for export. This was a very brave decision. 

There is a lot of argument on whether the IPO is to be seen as privatisation. How do you see it?  
I do not see the IPO as privatization in any way. Unfortunately, there are people who are deliberately spreading this wrong interpretation among people, apparently for their political gain. Not merely is the IPO not privatization, in a way, it is a protection against it. IPO stands for Initial Public Offer, which means the first time a company offers to sell its shares to the public. It indicates that a private company is turning into a public one. This certainly is not privatization, rather the opposite in that members of the public are being given the chance to be shareholders. Another thing also has to be remembered. Erdenes Tavantolgoi Mining Company is at the moment fully owned by Erdenes Tavantolgoi and all Mongolians hold shares in that company, but after the constitutional amendments all natural resources are in any case owned by the people, so ETT is a company that is already 100 percent public property. 
Our goal is to offer 30 percent of this 100 percent state-owned company to a wider public that also includes Mongolians, at an international stock exchange. 

Our directors have shown documents on TV to give the lie to propaganda that the shares have been or are being sold to selected individuals. Surprisingly, black PR is invincible. People have been persuaded not to believe and so they do not wish to believe what they see. Erdenes Tavantolgoi Mining is not the property of an individual, nor can it be one. Details of its ownership are simple and transparent. They are also available to everyone. 

Do you agree with legal experts who feel our state property laws must be made clearer and brought up to date so that mega mining projects can safely go forward? They feel even an IPO cannot be made under the laws as they now stand, ambiguous and full of contradictions. 
This issue is too complex to be discussed like this. When we adopted the market economy, we thought there would be no state property and the private sector will do all, as in the west. We did not know or understand that it has taken the large private companies there decades and centuries to become what they are today. Stability or the ability to withstand crises does not come in a day. We in Mongolia thought that all we needed to do was to hang a sign saying “Private” on every factory door and we would be like the USA in no time. We did not realise that the legal system in the west has evolved over many hundreds of years. 
In our present situation, it is idle to think that fields like infrastructure, roads, power, mining etc can be in the hands of the private sector, simply and mainly because our private sector does not have anywhere near the required capital, or access to the sources of such capital. Behind most Chinese private sector companies are large state-owned companies, often unknown and unseen by outsiders. Also, nothing can be done there without permission or cooperation from local authorities. 

In Mongolia, the government must continue to play a big role, especially in the mining sector. It is misleading to look at some successful coal and gold miners. Both are easy to mine and both have a limited life span. In fact, the placer gold deposits will be depleted within two or three years. Energy Resource and MAK have become so big and successful, mainly because the exploration of the deposits they own were done with Soviet loans and aid. It is the same with Tavantolgoi. People acquired the licences of these deposits under a law under which anyone who came in first obtained a licence almost at no price. It was like queueing up to buy bread.  Many of those who got these licences have done well, but all the preparatory work -- difficult, expensive, and requiring time – had been done with state funds. At least for some time more, mining will be developed under state ownership. Therefore, legal issues of state-owned companies are very important.  

The National Security Council formally favoured the IPO but there has always been talk about division among its members. Is it not true that the Head of the President’s Office tried to stop the IPO? 
I think our political parties and leaders all have the country’s interest in their heart, no matter how they differ on the right ways to further those interests. Maybe the country will be better off if they agreed on these means also, and not just the end. 

How deep will the economic crisis caused by the COVID-19 pandemic be, especially in the mining sector? 
Even before the crisis, things were not going well, and worse was to be expected in the next two years. COVID-19 has accelerated the process, leaving no sector untouched. Air transport, tourism, entertainment, food -- all are in trouble. The fall in oil prices has coincided with all this.  Our next government will be in a very difficult situation. Maybe we shall look back at our present and say, “Oh, how well we lived.”
Mongolia has no savings, but has foreign debts of $20 billion and foreign currency reserves of only $4 billion. Some 100 countries are in line for obtaining loans and aid from the World Bank and the IMF.  

If the situation becomes normal in the second half of the year, maybe we shall end up exporting half the coal that we exported last year. The only good news for us that I can think of is that we shall pay much less than the usual $1 billion for import of petrol and other fuel from Russia.