Page 2 of
2 Mongolian coal's long road to
market By Peter
Lee
Mongolia has ambitious plans to list
the IPO on three stock exchanges simultaneously:
Ulan Bator, Hong Kong, and London. The overseas
exchanges are panting for the offering, which is
expected to raise $3 billion. Underwriters are all
clamoring for the business, leading to a fistfight
between pinstriped antagonists in an Ulan Bator
watering hole in 2010 and the generous decision of
the Mongolian government to expand the number of
underwriters to six in 2012.
However, the
IPO has been delayed several times - and the most
recent prediction for the share sale is early
2013.
Obstacles include uncertainty
involving the award of West Tsankhi and the
royalty revenue Erdennes TT would enjoy as a
result. The biggest problem, however, is the
sweeping decision to allocate 10% of the total
stock of Erdennes TT to every one of Mongolia's
citizens - a noble gesture - and another 10% to Mongolian
corporate entities - a
rather eyebrow-raising arrangement.
The
government has also decided to give Mongolian
citizens the opportunity to sell their Erdennes TT
shares to the state, though it is unclear if this
will simplify the process or further complicate
it. [2]
Mongolia is still somewhat
deficient in the conceptual, legal, record-keeping
and stock-holding infrastructure to administer
this rather unprecedented process. Furthermore,
the Hong Kong and London stock exchanges want a
certain percentage of stock to be clearly out of
the government's hands before they agree to host
the IPO.
Add to that the inevitable
to-and-fro of Mongolian politics.
The
chief executive officer of Erdennes TT, B Enebish,
glumly explained the current state of play to the
UB Post:
[T]he company that is going public
should have a clear investors' structure. But
this is not the case for us. The Government made
a decision to let the Mongolian public own 20%
of TT. This means that the ownership of stocks
are blurry because we do not know who will
decide to keep or trade their stocks, or whether
the Government will offer stocks to other
companies or will they keep stocks themselves.
We planned to resolve this in 2011 but the
problem is still persisting even now.
Two years ago, a resolution was passed
from the State Great Khural on trading 30% of
the company's stake on stock exchanges. But
another resolution [was] passed in January 2012
decreasing this percentage to 20%.
On
foreign exchanges, more specifically the London
Stock Exchange (LSE) and the Hong Kong Stock
Exchange (HKSE), when a mining company is aiming
to release on many different stock listings, it
is required to that at least 20% of the
company's stock is out. It means that we must
determine exactly how many of our Mongolian
citizens will return TT stocks for cash and make
sure the stocks traded are more than 20% before
proceeding to release TT stocks on foreign
exchanges. [3]
Enebish tried to put a
brave face on the delay, declaring that Erdennes
TT could boost its value in the interim by plowing
more investment into production in East Tsankhi,
thereby begging the question of where the money
would come from - since it wouldn't be coming from
the IPO.
The answer:
Since the IPO release has been
postponed we see a definite need to find funding
from a different source. We are discussing this
with a number of investors, seeking to solve it
through the sale of coal, presale of coal, and
various loans.
Sale and pre-sale of
coal most likely means deals with China, probably
on concessionary terms.
Chalco, the same
company that was subjected to the public
crotch-kicking over its purchase of South Gobi,
made a $250 million pre-payment to state-run
Erdennes Tavan Tolgoi in 2011 for coking coal. At
the price Chalco is paying-reportedly US$70/ton, a
far cry from the $200+/ton for Australian coking
coal - that is over three years' worth of exports.
[4]
This cash is by no means a bonanza for
Erdennes TT, or its investors.
Erdennes TT
is obligated to help fund Mongolia's Human
Development Fund.
The Human Development
Fund is funded by revenues from resource
exploitation along the lines of the Alaska
Permanent Fund and the Norwegian sovereign wealth
fund. In other words, it is a non-renewable
resource fund, albeit with Mongolian
characteristics - ie it has become something of a
piggy bank for politicians to curry favor with the
electorate while slighting the restructuring of
the economy against the day, admittedly far in the
future, when all the ores are gone.
In
2011, the payout from the fund accounted for 40%
of the government's budget, raising the specter of
"Dutch disease" inflation the fund is specifically
designed to avoid. In 2012, the payout will be
funded primarily by the Oyu Tolgai copper mine and
the Chalco payment to Erdennes TT. [5]
The
Chalco payment to Erdennes TT amounts to about
half of the value of the $500 to $600 million
social welfare payout (in cash and services) that
Mongolian politicians have promised to make from
the nation's Human Development Fund to Mongolia's
3.1 million citizens in the runup to the June 2012
parliamentary election.
In effect, then,
Chalco is getting a bargain on coking coal while
effectively bankrolling the Mongolian
election-year giveaway meant to demonstrate the
advantages of resource nationalism. [6]
Further complicating the Tavan Tolgoi
situation is the expectation that the Mongolian
People's Revolutionary Party of Nambaryn
Enkhbayar, the hunger-striking ex-president, will
do very well in the upcoming elections. He is
running on the platform that Mongolia should keep
all of Tavan Tolgoi to itself.
Counter-intuitively, not opening Tavan
Tolgoi to foreign investment would probably
strengthen the position of China. It appears that
only China would possess the ability to continue
stumping up hundreds of millions of dollars in
pre-payments for coking coal without holding
equity in the project or sharing the risk with
other investors or stockholders.
It may
not be happenstance that at the same time Chalco
was acquiring SouthGobi - a transaction that will
probably be subject to a Mongolian government
ruling and possible rejection under the new
strategic asset law-it was acquiring a 30% share
in Winsway Coking Coal Holdings Inc.
Winsway is a Hong Kong trading company
staffed to a considerable degree by ex-Minmetals
personnel. Minmetals is the minerals and metals
trading arm of the Chinese government foreign
trade apparatus, in charge of moving material, not
making it.
Winsway's main business is not
investing in coal mines, despite its name. Its job
is running the non-stop parade of 40-ton trucks
that carry coal from Mongolia across the dusty
roads of the Gobi Desert to China.
Chalco's $308 million investment in
Winsway looks like a sizable hedge against the
possibility that the Tavan Tolgoi investment/IPO
project will continue to be dogged by political
gridlock, and Mongolia will continue to hemorrhage
coal across the border to China at concessional
rates in order to finance its national ambitions.
It is also a sign of the difficulties of
reconciling the tension between globalization and
resource nationalism, and a warning signal for
Mongolia's future.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
