Erdenes Tavan Tolgoi IPO: Pipe dream or realistic goal?

...M.Enkhbold said that by carrying out the Tavan Tolgoi project, authorities expect to reach an economic growth of more than 10 percent...

On Wednesday, Cabinet officially handed over authority on the government’s shares in Erdenes Tavan Tolgoi to the Ministry of Mining and Heavy Industry and the Agency for Policy Coordination on State Property. This is in preparation for the proposed duallisting on a foreign stock exchange and the Mongolian Stock Exchange (MSE). Since being announced in May by Cabinet, the plan to revitalize one of the largest untapped coal mines in the world has not seen much progress outside of government decisions.

On Cabinet’s part, there has been no issue as it has been able to get its plan to mobilize an IPO on a foreign stock exchange approved on the last day of Parliament’s spring session. Following the approval of the plan, Speaker of Parliament M.Enkhbold said that by carrying out the Tavan Tolgoi project, authorities expect to reach an economic growth of more than 10 percent, receive annual revenue of 400 million to 1.1 billion USD from the project, create 5,800 new jobs and increased export revenue by 2.8 billion USD.

Cabinet has underlined that in order to expand the operations of the company, funding is required. Its plan is to offer up to 30 percent of the company on both MSE and a foreign stock exchange. Minister of Mining D.Sumiyabazar admitted that in order to launch an IPO on a foreign stock exchange, Erdenes Tavan Tolgoi must implement and comply with international standards. In order to do so, Cabinet has tasked several agencies with finding a suitable executor for the foreign IPO. In 2011, the government hired BNP Paribas, Deutsche Bank and Goldman Sachs and Macquarie to lead an IPO for Erdenes Tavan Tolgoi.

The proceeds from the IPO will be used to construct a coal processing plant, D.Sumiyabazar has said. The feasibility study of the processing plant has already been finished, according to the minister. By constructing a processing plant, authorities hope to produce high quality coking coal used for production of steel. But before it can raise the money to finance the processing plant, a railway, and host of other infrastructure needed at the mine, there is a lot of work to do in terms of the preparation for the IPO.

Inevitably, the first question in regards to the IPO is where it will be conducted. The London Stock Exchange and Hong Kong Stock Exchange are the most likely candidates as they were two of the major stock exchanges the authorities were considering in 2011 for the IPO. In June, during a press conference, Minister D.Sumiyabazar said that Erdenes Tavan Tolgoi fulfills all of the requirements to be listed on the Hong Kong Stock Exchange. However, he admitted that there was a lot of work to be done including conducting asset valuations, drafting feasibility studies, redrafting a business plan, conducting risk analysis, and creating a rehabilitation fund. The minister said that the authorities were in talks with professional investment banks and other experts to decide where to conduct the IPO. D.Sumiyabazar added that the ministry was not looking only at the Hong Kong Stock Exchange but possibly the New York Stock Exchange, among others.

Despite the ministers confidence that Erdenes Tavan Tolgoi fulfills all of the requirements Hong Kong Stock Exchange, it will still take a certain amount of time to prepare for an IPO. The main concern does not lie within whether the government will be able to list Erdenes Tavan Tolgoi on the Hong Kong Stock Exchange, but if the investors will want to buy in. In many cases, the IPOs of companies domiciled in countries with higher country risk are valued lower. In particular, the index of economic freedom, developed by the Heritage Foundation, and the Transparency International's corruption index have a significant impact on IPO valuations. Specifically, the IPO of companies that are from countries with more economic freedom and less corruption are associated with higher valuation.

The fact that Erdenes Tavan Tolgoi is state-owned and there is still a lingering association of political instability of Mongolia, there could be some legitimate doubt amongst potential investors. Reluctance of investors could result in the company not being able to raise enough funds to finance the expansion project it hopes to undertake.

Conducting an IPO on the New York Stock Exchange, as Minister D.Sumiyabazar suggested, could be an ideal option in terms of attracting a large number of investors. However, in 2011, traditional financial centers like London and New York were less than eager on the prospect of an Erdenes Tavan Tolgoi listing. The potential political risk will likely lead to a lot of investors choosing other safer options, even at lower returns.

In addition, listing in the US brings a host of regulatory and legal burden for a company. Listing and selling shares in the US means that Erdenes Tavan Tolgoi will be subject to a number of laws and regulations in the US.

One piece of legislation that has spelled trouble for many foreign companies is the Foreign Corrupt Practices Act (FCPA), which makes it illegal for companies to bribe officials of foreign governments. A number of multinational companies from around the world have already been involved in FCPA investigations, mainly for bribery of Chinese officials. A New York listing would open Erdenes Tavan Tolgoi to vulnerabilities it might not be ready to deal with.

As mentioned previously, the IPOs of companies domiciled in countries with higher country risk tend to be valued lower. As a result of this, domiciling Erdenes Tavan Tolgoi in another country or jurisdiction is an option to potentially to increase valuation of the IPO along with interest of investors. However, domiciling or registering Erdenes Tavan Tolgoi to be a company in an offshore zone such as the British Virgin Islands or the Cayman Islands would likely not be received well by the Mongolian public. Any plans that include an offshore listing would be asking for public scrutiny which could derail the whole plan to launch an IPO.

Under these circumstances, it is difficult to tell right now whether or not the current government will be able to do what previous administrations could not. Seeing as there are many moving parts in regards to the plan, we will just have to wait and see. But with the parliamentary election creeping closer in 2020, the clock is ticking for Cabinet.

...Conducting an IPO on the New York Stock Exchange, as Minister D.Sumiyabazar suggested, could be an ideal option in terms of attracting a large number of investors. However, in 2011, traditional financial centers like London and New York were less than eager on the prospect of an Erdenes Tavan Tolgoi listing...