Parliament hastily approves Cabinet’s uncertain plan for Tavan Tolgoi
On June 29 or the last day of its spring session, Parliament hastily approved the bill to speed up the massive Tavan Tolgoi coal project with 83.1 percent of MPs voting for the bill. With almost exactly two years left until the next parliamentary elections, Prime Minister U.Khurelsukh’s Cabinet has set its sights on turning around the elusive project as a way to cement its political legacy.
Former Prime Minister J.Erdenebat’s Cabinet flagship policy decision was the extended fund facility arrangement with IMF that helped Mongolia avoid a default and recover in a relatively short amount of time. After J.Erdenebat’s Cabinet was dismissed by Parliament, U.Khurelsukh’s Cabinet largely continued the action plan of the previous administration. This included a firm commitment to the IMF program and the accompanying measures aimed at stabilizing the macro economy. What J.Erdenebat’s Cabinet was not able to do is follow through on its plan to speed up the Tavan Tolgoi project. That is where Prime Minister U.Khurelsukh is planning to make his mark.
As the prime minister and chairman of the ruling Mongolian People’s Party, U.Khurelsukh had the largest role in deciding the future of the Tavan Tolgoi project. In a matter of a month, U.Khurelsukh has gotten the ball rolling quickly with the approval of Cabinet’s plan by Parliament. The main feature of that plan has been advertised is the IPO of the state-owned Erdenes Tavan Tolgoi on a foreign stock exchange and a subsequent dual-listing on the Mongolian Stock Exchange. Officials believe that the IPO will help raise enough capital for necessary infrastructure projects such as a power station, railway, and road system at the mine. The IPO is seen as a way to raise enough money without ceding majority control to a foreign corporation.
The ongoing controversy surrounding the Oyu Tolgoi investment agreement, which saw two former prime ministers and a finance minister arrested, has likely made Cabinet sour on the prospect of involving a major global mining corporation such as Rio Tinto. As recently as December 2016, former Prime Minister J.Erdenebat restarted talks with the consortium of Energy Resources LLC, China Shenhua Energy, and Sumitomo Corporation that won the bid for the Tavan Tolgoi project in 2014. The consortium had won a bid to operate four of the eight licenses owned by Erdenes Tavan Tolgoi at the East Tsankhi and West Tsankhi mines. Those renegotiations never amounted to much.
As a result of all this, the government is now restarting a plan that was originally drafted in 2010 to float 30 percent of ETT in an IPO on the Hong Kong, London and Mongolian stock exchanges. But some have questioned how successful an IPO will be at this time to economize the 6.4 billion tons of coal under the ground at Tavan Tolgoi. Stock market analysts such as D.Achit-Erdene, CEO of Mongolia International Capital Corporation (MICC), questioned whether foreign investors will be interested in investing in Erdenes Tavan Tolgoi. He believes that the international market undervalues Mongolian companies, therefore the shares would probably not be valued at a high price.
“If Erdenes Tavan Tolgoi 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,” D.Achit-Erdene said in an interview in May.
The concern by D.Achit-Erdene and other economists is that Erdenes Tavan Tolgoi will have to be domiciled or incorporated in an offshore zone such as the Isle of Man or Cayman Islands in order to meet the expectations of investors and accommodate the requirements of any relevant listing rules.
“Therefore, if the company that owns Erdenes Tavan Tolgoi 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 Tavan Tolgoi in an offshore zone will not be well received,” said D.Achit-Erdene.
While countless multinational corporations choose to incorporate in offshore jurisdictions for a myriad of reasons, a state-owned corporation being incorporated in an offshore zone is not an issue that will be taken lightly domestically. If Cabinet is fully set on the idea of an IPO on a foreign exchange, it needs to pay special attention to how it handles the narrative surrounding the IPO and how the public will receive it. Listing on a foreign exchange will take at least one to two years, in which time the current administration will be nearing the end of its term.
The challenges that come with an IPO listing on a foreign exchange have caused some to urge Cabinet to only list on MSE initially. From there, it could improve in terms of governance and infrastructure, and look to expand its market reach. After improvements in its governance and cash flow, the company could be dual-listed in the future. Needless to say, regardless of which path the government takes, we will likely be seeing more concrete progress on Mongolia’s massive flagship coal project.
...If Cabinet is fully set on the idea of an IPO on a foreign exchange, it needs to pay special attention to how it handles the narrative surrounding the IPO and how the public will receive it...