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ETT CEO: Parliaments usually don’t decide par value of the shares

According to leading Mongolian news portal news.mn on February 1, 2012 CEO of Erdenes Tavan Tolgoi company (ETT, license holder for TT) B. Enebish has commented regarding Parliament discussions on amendments to TT resolution and increase of number of shares to citizens from 536 to 1072.

  • It’s within Parliament’s full right to decide to change to give 10% of ETT shares  instead of enterprises previously to citizens now.
  • It appears that the bill includes that free shares will be bought from citizens by par value and sold to enterprises at par value
  • It has been proposed that par value is to be equal to one million MNT in connection with approved budget
  • In this case, Parliament will turn out to be organization that directly determines par value of ETT shares. This is in principle wrong. It  is within full rights of Parliament to decide to give that much to these group of people and that much to another group of people. However, determining directly one million MNT will not comply to principles of market based society and capital markets
  • We are in process of preparation for IPO on international stock market. It is necessary to do IPO after those issues are resolved. Issue of par value should be approached carefully. It would be proper to formulate as price to be bought by Government or a price to sell to enterprises.
  • Hong Kong Stock Exchange , for example, prohibits to moves in any away shares of company four weeks before submitting application or six months before shares are traded
  • Yet movements such as Government buying shares from citizens and re-selling to enterprises might cause difficulties in terms of timing
  • Advising investment banks give advice that Parliaments usually don’t decide par value of the shares. Any company determines par value of shares as low as possible.
  • Depending on future of the company, the law of the markets is that value of shares increase tens and hundred times from par value. Yet determining par value at million MNT in connection with political promises is wrong
  • We are working with main plan to do IPO in May of 2012. However, if there are continued changes in ownership of the company it might delayed. If we want IPO on time we have no choice but to do IPO that satisfies requirements of international stock exchanges.

Earlier, Masa Igata, the Founder and CEO of Frontier Securities spoke to leading Mongolian daily “ Unuudur” on January 20, 2009 on risks of Tavan Tolgoi(TT) IPO in a rush before elections this year.

"I understand that a party in a political power needs money before the election to fulfill election promises," Masa Igata said,” However, TT IPO in a rush before elections has risks of being not in the best interests of Mongolia.TT is a world class deposit. Unfortunately, at the moment TT project is still at the raw stage and last year produced its first million tons of coal. The company is only starting to grow.

Investors will have more confidence in the company after contract miner will ramp up production to 3-4 million tons next year. Uncertainly surrounding infrastructure, in particular, railway to China, will also contribute to disappointing valuations. More clarity what will happen in the west part of Tsankhi deposit will also help. More confidence in all these and other factors will help to more fairly value the company. But it will take time.

We estimate that Erdenes Tavan Tolgoi, holder of license for eastern part of TT deposit will be valued at a range of 5-6 billion US dollars if IPO is done in a rush before the elections offering 30 percent stake and raising proceeds of 1.5-1.8 billion US dollars.  Same valuation next year would likely to be in a range of 9-10 billion US dollars range resulting in proceeds of 2.7-3 billion US dollars.

However, there are many issues to be resolved in order to reach such valuation. First of all, corporate governance must be improved. Independent directors on the board of the company must be internationally reputable people, capable of representing interests of minority shareholders.  Construction of coal washing plant must be speeded up. Exporting raw coal does not bring high margins. Attractive margins are indeed in exports of washed coal. As I mentioned, resolving railway issue is of critical importance. Only railroad can match properly full potential of TT. Since eastern and western part of Tsankhi deposit are parts of the same deposit if both are coordinated it would be more efficient.”

He urged the Mongolian public, saying, "Not reaching fair value for this world class Mongolian asset  based on political decisions would be indeed regrettable.”

Click here for the full copy of Masa Igata’s interview in Mongolian.  

Dale Choi

Chief Investment Strategist,

Frontier Securities