D.Achit-Erdene: Giving out more Erdenes TT shares is wrong
CEO of Mongolia International Capital Corporation (MICC) D.Achit-Erdene sat down with Unuudur to discuss the prospect of listing Erdenes Tavan Tolgoi (Erdenes TT) on domestic and foreign stock exchanges and the possibility of increasing the percentage of citizen-held shares in the company.
Despite the fact that it turned in a net profit of 461 billion MNT, Erdenes TT did not distribute dividends. The administration explained that this decision was reached because it would mean one person would only receive 3,000 MNT in dividends. In order to increase the dividends that citizens can receive, there have been propositions to raise the percentage of citizen-held shares. What are your views on this?
A mining company is unique in many ways. One of those unique characteristics is that it does not frequently distribute dividends. Some companies that receive revenue from energy sales or those that have a steady operational cash flow are usually able to distribute dividends every year. Due to the fact that the price of commodities on the global market tends to fluctuate a lot, most mining companies seek to retain profits in reserve in order to survive the next downturn in the prices of commodities it sells.
In addition, mining is a business that requires a large amount of investment. Therefore, dividends are not exactly being distributed that frequently. As a broker, I believe it was the right decision for Erdenes TT to not distribute dividends. The reason is that there are several projects that the company needs to undertake that require a hefty amount of investment. By completing those projects, the possibility opens up for the company’s stock price to increase.
Most people that invest in mining companies are in it to turn in a profit after the stock value of the company increases. The shares in Erdenes TT that were distributed to citizens have not seen an increase in value. It is wrong to give out more shares to the public in this case.
Personally, I believe it is correct for Erdenes TT to register their 1.7 billion shares on the stock exchange and allow for it to be monetized.
It was reported that your company conducted a study to determine the market price of Erdenes TT’s shares. According to your research, how much is one share valued at?
The face value of Erdenes TT was 932 MNT per share. There are five to six companies in Mongolia that have similar operations as Erdenes TT, producing and exporting coking coal. All of them have either have been listed on the Mongolian Stock Exchange (MSE) or the Hong Kong Stock Exchange.
We compared the assets, earnings per share, and several other factors of these companies to that of Erdenes TT. By comparing a multitude of companies, we ultimately determined that the share price of Erdenes TT is somewhere between 800 to 900 MNT. In other words, this is the market assessment. In addition, we compared Mongolian coking coal companies to other foreign and multinational coking coal companies.
This revealed that companies producing coking coal in Mongolia have two times less stock value that foreign coking coal companies have. The shares of Mongolian coking coal companies were only five times more than the earnings per share while foreign coking coal companies had a share value 10 to 12 times its earnings per share. The conclusion we reached regarding the low value of shares is that Mongolia is too dependent on one market and lacks adequate infrastructure.
For instance, we do not have a railway to transport coal. If there was a rail, transporting costs would be cut significantly and profits would rise. Australian coal companies are selling their coal at prices they want in markets such as India, Japan, and China using ships. With the help of a railway, Erdenes TT could reach a lot of markets, which would increase its share value.
Erdenes TT recently determined its total coal assets to be 11 trillion MNT, including it in its balance sheet. There are many who say this is incorrect. What are your thoughts on this?
This is a mistake. It is almost never the case that the face value of the shares is equal to the market value. It seems like the company has tried to make it so when you divide up the total assets by the total number of shares, one share will be equal to 932 MNT, or the face value of one share. In order to do this, a large intangible asset was included in their balance sheet. Going by accounting practices, the assets of a company must be readjusted for depreciation.
If the license of Erdenes TT ends in 20 years, you must divide 11 trillion MNT by 20 years. By doing this, we must account for a 500 billion MNT depreciation in assets. Let’s say the company deducts its costs from its revenue and its net profit is 500 billion MNT. If you account for depreciation, that means the company has no net profit and is only breaking even. Erdenes TT must consider amending its balance sheet.
Does a mining company include its asset valuation in its financial report?
By international standards, most don’t. If a mining company bought a license, the price can be included in its financial report. It is because the company expended its assets to purchase the license. The mining license that Erdenes TT owns was given free of charge by Erdenes Mongol. Erdenes Mongol owns 85 percent of the shares in the company. The value of a mining license is a relative thing. The price can be any number.
The fact that depreciation of assets must be accounted for means it is not valued or registered in the company’s financial report. The value of a company’s stock is not determined by its assets but the profitability of its operations. It is wrong to try and reinforce the face value of shares by adding pointless numbers.
Your estimation of the market value of Erdenes TT shares is rather optimistic and close to the face value of the shares. The government seems to be cautious that allowing trading of these shares on MSE might lower its value. The worry is that a large number of citizens selling their shares might drop the value due to the sheer volume. What are your thoughts on this?
On the other side of that, there are a lot of positives that will come out if trading is allowed on these shares. The Mongolian National Chamber of Commerce and Industry (MNCCI) determined their Top-100 companies and Erdenes TT was named number one. Listing the number one company in Mongolia on MSE will help improve the reputation of the stock exchange. If a stock has good products such as Erdenes TT shares, it will begin to realistically operate as a stock exchange.
I’m not denying that the share value of Erdenes TT might fall. Share values never remain constant. It is a foundational principal of a stock exchange that the value of shares rises and falls. Listing a profitable company that has massive reserves will create a favorable precedent. In the 1990’s, state-owned factories were privatized through MSE.
However, these state-owned factories were operating at a loss. I personally believe that opening trading for Erdenes TT shares will be the second stage development of the stock market.
President Kh.Battulga’s office is drafting a bill to transfer full ownership of Erdenes TT to citizens. What effect will distributing all of the company’s shares equally to citizens have?
There is no international precedent for this, therefore I can’t realistically fathom what it would look like. Shareholders convene in a meeting and appoint the board of directors, which appoints executives to run the company. The operations of the company will undoubtedly suffer due to the uncertainty of who will run the company and who will direct it. If this happens, a large amount of assets will be divided up amongst many people.
On one hand, it might be a very generous move. But, it will be a better investment into the future of the three million citizens if the Social Insurance Fund purchases a stake in Erdenes TT after it is listed on the stock exchange.
The Brazilian social insurance fund owns around 10 percent in the world’s
leading producer of iron ore, Vale SA. The development bank (of Brazil) also owns around 10 percent.
Good governance is key to improving a company’s profitability and share value. Do you think governance is the key to improving the share value of Erdenes TT?
A company works to maximize the profits of its shareholders. It is the administration’s decision to whether increase production, cut costs, or purchase equipment in order to maximize the earnings per share. When a company is first listed on a stock exchange and complies with all the rules and procedures to report on its operations, the stock of a company increases.
The most important thing to improve the governance of Erdenes TT is to list it on the stock exchange. This company operates more like an implementing agency of the government rather than a company seeking to maximize profits for its shareholders. This must be corrected and the company must begin to work for its shareholders. In order to operate like a company, the board of directors must be independent. This is the international standard.
There are many cases where the shareholders of large multinational companies hire external professional and knowledgeable people to work for its management or sit on the board. Many executives are compensated through stock. If a company is profitable and the value of the company’s stock rises, the salary of the executives will increase. Of course, executives will work very hard then. There are ways such as this to increase stock value.
There are many experts who say that Erdenes TT must be listed on MSE as soon as possible. It has also created a lot of expectations among the public. However, there are those who say that more time should be given. Are there any legitimate reasons why waiting might be more beneficial?
In 2011, Erdenes TT was registered with 15 billion total shares. Ever since then, there has been a lot of expectation surrounding the company. Many of our customers ask frequently what is happening with the stock. The shares must begin to be traded on the stock exchange. There are many who want to sell their shares, as there are many that want to purchase those shares. Cabinet valued one share of Erdenes at 933 MNT before the election and began to purchase it from the public.
Initially, shares of senior citizens and people with disabilities were purchased. Before the 2016 elections, shares were purchased from the general public. On one hand, trading of the shares has been happening. If the company is listed on the stock exchange and trading is allowed, Cabinet will not need to expend money and the shares will be in circulation. One reason that trading kept being postponed is that the government said it needed to be valued.
I believe it is not necessary to determine the value of a share. When a company restarts trading of its shares after closing it, trading is done at the last closing price. Since Cabinet last determined the value to be 933 MNT, there is a market price for it. In other words, trading needs to begin at 933 MNT per share. The Law on Company requires that if a company has more than 50 shareholders, it must be registered as a joint stock company. In the Law on Resources, it is stated that 10 percent of companies operating strategic mines must be traded on the stock exchange. Erdenes TT must comply with these laws.
The Ministry of Mining and Heavy Industry has proposed listing the shares of Erdenes TT on the Hong Kong Stock Exchange. What benefits would listing the company on a foreign stock exchange have?
The international market undervalues Mongolian companies, therefore the shares would probably not be valued at a high price. If Erdenes TT was to be listed on the Hong Kong Stock Exchange, the issue of offshore accounts that Mongolians seem to despise will need to come into play. Foreigners don’t trust the Mongolian justice system.
Therefore, if the company that owns Erdenes TT is not registered in an offshore zone, people will not buy shares. UK laws protect shareholders very well. People like to buy companies that are registered in accordance to UK laws. Some territories that comply with UK laws also have an offshore zone. Registering Erdenes TT in an offshore zone will not be well received by the Mongolian public.
The company must be first listed on MSE, improved in terms of governance and infrastructure, and look to expand its market reach. After the cash flow of the company becomes more clear and it becomes large, then it is possible to dual-list it on a foreign exchange.
Erdenes TT needs money to build a railway and to build a processing factory. This doesn’t need to be done through sales of shares but through project financing.
...Most people that invest in mining companies are in it to turn in a profit after the stock value of the company increases. The shares in Erdenes TT that were distributed to citizens have not seen an increase in value. It is wrong to give out more shares to the public in this case...