Are we seriously ready for the ETT IPO?

By G. Iderkhangai

In a few months, Erdenes Tavan Tolgoi will issue its IPO, marking a first for a Mongolian state-owned company. The chosen stock exchange is Hong Kong and the weather there is usually sunny in September – the likely date -- and we all hope the enthusiasm of international investors in one of the world’s largest coking coal deposits will match the autumn brightness. Nine years ago, on October 13, the first shares in the Mongolian coal sector were offered at an international stock exchange by Energy Resources under the name Mongolian Mining Corporation. Much snow has fallen and melted over Mongolia since that historic day, many development projects have been implemented and Tsogttsetsii, a remote soum in the Gobi, has started to prosper, but the Gashuunsukhait Railway is still an unrealized dream and a source of endless disputes. 

Seeing the work that has been done, people have begun to refer to the railway as “piled earth”. All coal to China is transported along the road which was initially under the control of Energy Resources. Five governments led by as many prime ministers have tried and failed to take meaningful decisions to put the Tavantolgoi deposit into economic circulation. Actually, all such efforts effectively stopped after 2015, when Parliament, with Z.Enkhbold occupying the Speaker’s chair,voted against the decision to let a consortium of Energy Resources from Mongolia, Shenhua Energy from China and Sumitomo from Japan to develop the deposit. Our MPs said they did not favour “Mongolian wealth to be handed over to a Chinese state-owned company”.

Political control has seen to it that ErdenesTavan Tolgoi is not run as a business, but some sensible management, helped by external factors, has freed the company from the in famous debts to Chalco and the Development Bank.It made a net profit of about MNT800 billion in 2018, and B. Gankhuyag, Executive Director of the company, has asserted that “there are no political risks in taking the project to an international stock exchange and raise equity capital there”. Mining Minister D.Sumiyabazar declared at the PDAC convention earlier this month that the Tavantolgoi project would demonstrate that “the Government is a good manager”. Such enthusiasm and confidence are good as sales pitch for the IPO, but one problem with a mega project is that it offers too many targets for stones to be thrown at it. Ownership of ErdenesTavan Tolgoi has been transferred from Erdenes Mongol to the Ministry of Mining and Heavy Industry and if the IPO is successful, the team headed by the minister will be seen as national heroes. If it is not, all talk of developing the deposit will be in limbo for several years and Mongolians will find that the 1072 shares each of them owns have little or no value. 

On June 22, 2018, Parliament adopted a resolution on Some Actions on Intensification of Tavantolgoi Coal Deposit Operation. 
The government set up a working group and gave it 180 days to implement a list of tasks. The working group has done good work. It added 340 million tonnes to the previously estimated reserves of 6.4 billion tonnes, and going by JORC standards, the deposit now has 7.6 billion to 8 billion tonnes of coking coal. Buyers are now, and for the first time, chosen after open bidding and all information on all sales agreements are in the public domain. An advisory council has been formed, with independent experts and public representatives. A consultancy to help determine the right strategy for the IPO and the bankers to the issue are expected to be chosen soon. 

All these are positive moves but there has been little informed discussion on how prepared we are for the IPO and if we are going about it in the right way. For one, there has been a sharp increase in the Government’s involvement and authority in the mining sector, with several recent decisions seen as threats to the private sector and private investors. This bodes ill for the IPO. With both parliamentary and presidential elections coming closer, potential investors would prefer to wait and see how the wind blows before opening their purse strings. After all, Mongolian politics is known for its volatility and unpredictability.

Generally, preparatory work on an IPO takes around two years. It is imperative that during this period there is no radical change in State policy, as upsetting investors’ calculations would surely scare them away. It would be even better if the government backtracked on certain populist policies already announced. It is not enough to be reassured that corporate governance at ETT will improve after more capital comes in; there should be more information on how this will be effected. How exactly is it proposed to develop infrastructure, when the money is in hand? The law on tenders must be changed to allow the company to select strategic partners, in construction, and in banking and financial areas.Even after the IPO, the state will continue to own 70% of the company, much more than enough to interfere in policy making and governance. Who will be on the Board of Directors and how much independence will they be allowed to have? According to the Centre for Corporate Governance, the recent appointment of the Chairman and members of the Board of Directors by the Ministry was in clear breach of provisions in the Company Law. How will investors be convinced that pre-IPO ETT and post-IPO ETT would be radically different? Much can be learnt from how Energy Resources had made its IPO so successful, but there is no indication that its experience is being studied. Similarly, local consultants might not have the experience and exposure of their more sought-after international counterparts, but they are far better aware of the situation on the ground. 

A small detail can be of great importance. Choosing the Hong Kong Stock Exchange means ETT, like Energy Resources before it, is to be registered in a region where the Anglo-Saxon juridical system protects the interests of shareholders. If for nothing other than historical reasons, will the 70% owners of ETT accept that primacy in practice?

With not too much time left, we still have no information on what is to be offered as the total value of Erdenes Tavan Tolgoi, which will include the worth of the company’s business and deposit reserves, nor do we know about the progress in updating the feasibility study, or about development plans, or if risk analyses have been made, or about the status of a fund for reclamation work. Overall, there is no clear understanding of how the anticipated IPO funds will be used. 

There are reports, though nothing has been given out officially, that work on updating the feasibility study, and preparing the deposit estimate in accordance with JORC standards has been finished. It has also been indicated that technical assessment or auditing work will soon be entrusted to a qualified international organization, and international banks will conduct a financial audit. All this is good, but not wholly reassuring as the time remaining is not long. 

These are things that can be planned but one imponderable in the whole exercise is the state of the coal market at the relevant time. Coking coal prices have been comparatively stable since mid-2018, but many observers see them going down in the coming days, particularly if the Chinese economy slows down more. Also, several financial institutions and nations in the European Union and elsewhere in the west have decided not to make any new investment in coal. 

As of now, $7.1 billion is required to optimize extraction at Tavantolgoi and to develop infrastructure, including two railroads and four paved roads. The sectoral minister has said everything “will be resolved in the near future” according to the directives of the National Security Council, and maybe that is why Z. Enkhbold, Chief of Staff at the President’s Office, has stated that 85 percent of the MNT800-billion profit ETT made last year would be spent on completing the Sainshand-Zuunbayan railroad. If this really happens, it will be possible to carry Mongolian coal to Vladivostock, under the transit agreement between Presidents Kh.Battulga and Vladimr Putin. The money earned by Erdenes Tavan Tolgoi will be spent on fulfilling the dream of our president, though neither he nor the country knows where the coal will go from Vladivostock. 

The NSC has also issued a directive to complete the 267-km TT-GS railroad. Financing issues are not yet settled. The first step has to be an agreement between Erdenes Tavan Tolgoi and Mongolian Railway, which will together own 51% of the project. The government has said the $279 million Mongolian Railway has already spent on earthwork for the railroad is to be taken as its contribution, and Erdenes Tavan Tolgoi might raise funds to pay for its share by entering into pre-sale agreements. Nothing is near a final solution, and it is not clear how or when work on the TT-GS railway would or could begin, given that $790 million is needed to continue construction from where it has been left off. It was once believed that the remaining 49% would be held by Shenhua Group but it now seems that China Energy is going to replace it. Altogether China is poised to become the main investor in the Tavantolgoi Project and the major, if not sole, buyer of its coal, raising questions of national security and, of course, of putting all our eggs in one basket.

One issue which has been resolved is that of the power plant. The Government and Oyu Tolgoi have signed an agreement on this and though some details are still to be worked out, a 300-mw plant should be commissioned by June 2023. 

Resolution 73, which sets out the binding guidelines for the ETT IPO, calls for conducting negotiations and signing agreements with our two neighbours “on transit transportation, prepayment, use of areas at the border, development of infrastructure, investment and sales”. There has been no official information on what, if any, progress has been made on these. With such wide spread lack of transparency on almost everything to with both Tavantolgoi the deposit and Erdenet Tavan Tolgoi the company, Mongolians can be forgiven for wondering how serious those in charge are about making a success of the IPO.