Tavan Tolgoi IPO Goes Cold

Source: UB POST
January 30, 2012

For the first time in its history, Mongolia is going to launch a multi-billion dollar initial public offering (IPO) of a country`s strategic coal deposit.
In November, the Government made the decision to list Erdenes Tavan Tolgoi on the Mongolian, London and Hong Kong stock exchanges. However, global media giants such as Reuters, the Financial Times and Wall Street Journal have reported that Mongolia is likely to drop the Hong Kong listing proposal. While experts have warned that Erdenes Tavan Tolgoi will raise much less than expected. Mongolians citizens, who own 20 percent of the company, are suffering from decision fatigue: Should they hold onto their shares of the company or sell them to the Government now for a 1 million MNT price tag?
Mongolia, which until recently attracted little attention from foreign investors, now appeals to the mining, banking and financial giants of the world thanks to its vast mineral resources. The fact that since April of 2011 Mongolia has been collaborating with four internationally reputable investment banks – Goldman Sachs, Deutsche Bank, BNP Paribas and Macquarie – gives a hope that the Erdenes Tavan Tolgoi IPO will be successful. However, the main hurdle is that the country`s political instability and populist legislation ahead of the elections could negatively affect the overall process.
Mongolian politicians are attempting to acquire large sums of money in a short time, as the elections of 2012 are looming. In order to meet the promises they made to voters, politicians are trying to release the IPO before the elections. Many are worried that it will be a great risk if the IPO is released at a time when investors of Tavan Tolgoi project have yet to be selected and infrastructure issues yet to be resolved.


The questions of underdeveloped infrastructure and uncertainty surrounding Tavan Tolgoi`s investment agreement for its eastern deposit mine are causing doubt among investors.
In order to preserve the value of the deposit, it is better to launch an IPO once mining is put into operation and has started to generate profits, experts warn. But words fall on deaf ears.
“I believe that because it is such a large project, releasing the IPO before the elections will yield much less profit than expected,” pointed Masa Igata, CEO of Frontier Securities.
The plan to list Tavan Tolgoi in Hong Kong at the same time as in London and Mongolia was dropped because Hong Kong Stock Exchange isn`t likely to give special dispensation which would allow the Mongolian company to list ahead of the elections, reported the Wall Street Journal.
“Considering the geographic location of Mongolia, we see that it will be quite successful in building assets throughout Asia. The Hong Kong Stock Exchange would play an important role in this,” pointed Masa Igata. “Since it is now known that the required papers and technical works are not completed for the Hong Kong, the choice of London Stock Exchange remains.”
To launch an IPO in London would be easy, since it has close links with Mongolia. The fact that Mongolia has established a partnership with London Stock Exchange Group to restructure and develop the Mongolian Stock Exchange adds to the sensibility of this move.
However, according to the Wall Street Journal, Erdenes Tavan Tolgoi plans to list in London by issuing global depositary receipts (GDR), which are easier to get approval for but tend to have lower liquidity than primary shares. Getting a primary listing in London is only possible by creating a new company registered in U.K., which can`t be done before the elections. Again, because of a rushed plan to make quick profits, the world class coal deposit may remain undervalued.
Notional shares of Erdenes Tavan Tolgoi had already been distributed to every Mongolian born before 31st of March 2011, making Mongolia a nation of shareholders. Could the fact that Mongolians own 20 percent of the Erdenes Tavan Tolgoi for free negatively affect its IPO? Initially it has been reported that trading will open once the market price of the Erdenes Tavan Tolgoi’s shares has been determined on international capital markets. However, politicians changed their minds, deciding to monetize shares distributed to the citizens before the elections.
It has been announced that since February citizens could sell their shares to the government for one million MNT (1000 MNT per share). Doesn’t this suggest that the share price is already determined, ahead of the IPO? Handing out one million MNT worth of stock to 2.8 million people means giving away 2.8 trillion MNT or USD two billion worth of stocks. If 20 percent of the company valued at USD 2 billion, the entire price of the company’s stock value would naturally be set at USD 10 billion. According to the experts, that kind of expectations will affect the IPO process.
The government is rushing despite its lack of knowledge about how much money needs to be raised exactly. According to the Masa Igata`s estimation, rushing the IPO due to political reasons will take its total value down to 5-6 billion USD and raise between USD 1.5-1.8 billion. On the other hand, if the IPO is postponed until next year, the total value could reach USD 9-10 billion and raise USD 2.7-3 billion.
It’s also important to note that the market-value would be determined by investors at the London Stock Exchange. “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,” said B.Bold, member of the board of directors of the Mongolian Stock Exchange, in a recent interview with the Mongolian Mining Journal.

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