A recent programme on the Development TV channel, produced by the Mongolian Mining Journal, was devoted to the Erdenes Tavan Tolgoi IPO. The participants were B. Enebish, Executive director of Erdenes Tavan Tolgoi LLC; B. Bold, a member of the board of directors of the Mongolian Stock Exchange; and D.Achit-Erdene, President of the MICC Investment Bank. We give below a selection of the questions and answers on this important topic.Thank you all very much for accepting our invitation and coming to the Mongolian Mining Journal’s “Development” studio. Our first question is for Mr. Enebish.
How is the preparation going on for Erdenes Tavan Tolgoi’s IPO on the international stock market? Would you please share with us the latest news?B. Enebish: Overall, our mining operation is going smoothly. We have started exporting the coal. We received USD250 million as advance payment for the sale of coal and deposited it in the Human Development Fund. All preparation for selling stocks on international and domestic markets is being made. Since April, we have been collaborating with four banks, namely Goldman Sachs, Deutsche Bank, BNP Paribas and Macquarie. And we are also getting help from several advisers on taxation, auditing and legal issues. In November, the Government took decisions on where to sell and on the structure of the stock exchange. We have been instructed by the Government to offer 10-20% of the total stock of Erdenes Tavan Tolgoi on the Mongolian Stock Exchange and the remaining 80-90% on the London and Hong Kong stock exchanges by registering a new company in England. We are now quite busy preparing the new company’s documents that will be presented to investors and the stock exchange authorities. Some of these have already been sent to Hong Kong. Our target date at the moment is April, 2012.
There is talk that from February 1 the Government will monetize the par value of 10% or 20% of the stock to MNT1 million per citizen. Is this the way Erdenes Tavan Tolgoi is entering the Mongolian stock market? Would you please explain the term “par value”?
B. Bold: Let me clarify a few things first. Accountants and tax assessors make a difference between par value and market value. The par value can be one tugrug or even one cent. This is decided only on accounting technicalities. If I remember correctly, Energy Resources LLC or Mongolian Mining Corporation had an initial target of USD70 million when they had their IPO at the Hong Kong Stock Exchange. But their market value eventually went up to USD4 billion and they raised USD650 million. Therefore, before we make any final decision on the par value, I expect professionals from the Government and the Ministry of Finance will give us some ideas. This is part of a regular process. It is obvious that we shall have to modify certain conditions that are present today. There should be no misunderstanding on the basic issues. We cannot assume that Erdenes Tavan Tolgoi will have its IPO on the Mongolian Stock Exchange just because people say so. It may very well be that shares of the company registered in England will first be offered on the London and Hong Kong Stock Exchanges, and only then would Mongolians be given their shares, at a price determined at those markets. This is the first time that one of our own strategic mines is going to be valued on the global market, and we should not be rushed on anything.
It has been almost a year since talk of the Erdenes Tavan Tolgoi IPO began and people have been hearing how much the price per share would be, raising their expectations. Parliament has been saying that the shares for each citizen would be worth MNT1 million. Doesn’t this suggest that the share price is already determined? It looks as if Parliament is doing the job of the investment banks and IPO advisers.
B.Bold: In a democratic society, individuals have a right to have their own opinion on matters. But there can be a huge difference between personal and professional opinion. If our 76 MPs take on the role of advisers to the IPO and determine the stock price, they are not doing the right thing. Banks and professional advisers are the ones who should be doing this estimation. The price depends on current market risks. There will be an approximate preliminary evaluation but expectations have to be tempered by our awareness of the current global economic condition. Metal prices are dropping in China. This means the price of coking coal is going to drop as well. Annually, China produces 600 million tons of metal which uses approximately 900 million tons of iron ore and 700 million tons of coking coal. If metal prices fall, it will be the same for material used in making metals. There are other factors also, such as the financial position of investments, the situation in European stock markets etc. Therefore it is very difficult to come up with an accurate price today. There can only be an approximate estimation.
I would like to say one more thing. There is something called the normative in the world stock market practices that is to be followed when offering public shares. This is meant to prevent creation of stock price bubbles and discourages banks from saying anything about the share price. Anything they may say will create an expectation. If they predict a lower or higher price than the actual, they get in trouble. For me, it is a little bit early to discuss the stock price. Wait a while, and international investors on the London Stock Exchange will define the price anyway.
D. Achit-Erdene: There are two kinds of price being discussed. One is the par value which is estimated by accountants. This is usually the lowest price. It can be anywhere between one tugrug and one cent. The other one is market value, which is defined by interaction between the seller on one side and the buyer or the investors on the other. Investment banks help in this process by making valuation models and promoting them to investors. The final price is determined after agreement with major investors.
Distributing MNT1 million worth of stock to each of 2.7 million people almost sets a price beforehand. I cannot say precisely because I do not have the exact estimation, but giving 2.7 million people each a share that is worth MNT1 million, which is 10% of the whole company, means giving away USD2 billion worth of stock. This sets the company’s entire value at USD10-20 billion. It is doubtful whether it will fetch this price on the market. We have to careful that this does not affect the IPO process.
B. Enebish: There will be disadvantages if the stock is priced according to the par value and given to citizens. If the Government values 20% of the company and decides to distribute it to citizens, it can do so as the Government now is the sole owner of the company. However, as B.Bold and D.Achit-Erdene explained, international stock market requirements, valuation norms and the investment scenario are to be considered. Going ahead with the par value will not be the right thing to do.
How will Government decisions affect the IPO?
B.Enebish: Instead of using the term par value, the Government should say that it is giving a certain part of the company to the people, and that they are making the stock monetary. If they make the announcement in this way, the impact will not be as severe. Telling people how much the par value is or how much cash they will be receiving might cause some serious problems. The shareholding details of the company and its daughter company must be settled four weeks before submitting the formal request to the Hong Kong Stock Exchange for registration of the IPO. Our adviser banks are concerned that failure to do so would delay the IPO.
B.Bold: The thrust of your question is whether politicizing the issue before beginning the regulatory IPO process would adversely affect its success. Definitely, it will, and more so as there is something called the “quiet period” before a company makes an IPO. The issuer should be very careful during this period, which usually covers six to nine months. During this period we need to be careful that nothing we do may be seen as price speculation as that impacts the effectiveness of the IPO. This also includes any modification by the Government on what has already been done. Foreign investors are very careful. They keep themselves well informed of local developments and follow the news from here in Mongolia. B.Enebish was asked some hard questions when meeting with foreign investors.
We need to take note of the possible consequences of any action and show some patience during this six to nine months before the IPO registration is formalised. This issue has special importance and requirements and is not the same as those which we discuss in the media without basis. We need to be a little more cautious about kite flying.
D.Achit-Erdene: I don’t know much about the decisions made by Parliament. But it will certainly matter whether 536 or 1072 shares are offered for MNT1million. In any case, the IPO price and the company price should not be lower than that. Investment banks may make things difficult for the company’s operations if that happens.
Please subscribe to our journal to read more.