It would be wise for Mongolia to include HK for TT's possible triple listing

According to Dow Jones Newswires on February 23, 2012 the Mongolian government's multiple listing of state-owned Erdenes-Tavan Tolgoi Co. valued at up to US$3 billion may be delayed until September or October because the company is still seeking dispensation to list in Hong Kong, a Mongolian government official said Thursday.

  • The company plans to list simultaneously in Ulan Bator and London, too, as it seeks to raise at least US$1.5 billion from the sale and possibly as much as US$3 billion.
  • It is still "very keen," however, to list by June, when Mongolia has parliamentary elections, the official said.
  • Earlier this year people familiar with the situation said the plan for a Hong Kong listing simultaneously with London and Ulan Bator was shelved because the Hong Kong exchange was unlikely to make special dispensation for a Mongolian incorporated company to list on the bourse.
  • Hong Kong recognizes more than 20 jurisdictions in which companies seeking to list in the territory can be incorporated. Apart from Hong Kong, these include China, Italy and the U.K.
  • "Listing in Hong Kong is still on our radar. Our Financial Regulation Committee (officials) will meet the Hong Kong Securities and Futures Commission very soon to sort out the issues such as Hong Kong recognizing the listing of a Mongolian registered company," the official said, without saying when.
  • official said Thursday citizens will be allowed to return shares to the state, which will then offer them to domestic companies. Funds raised from this will be returned to the citizens."This return of shares is also an issue that is being discussed with the authorities in Hong Kong," the official said.
  • Mark Dickens, head of listing at Hong Kong stock exchange operator Hong Kong Exchanges & Clearing Ltd. (0388.HK), declined to comment on Tavan Tolgoi's plans or if HKEx will grant the waiver sought. He did say such decisions will be made "at the appropriate time and on a case-by-case basis, depending on the quality of each individual company."
  • HKEx is, however, "keen to work with the Mongolian regulators to facilitate the listing of Mongolian issuers in Hong Kong," he added.
  • Hong Kong has made attracting mining companies to its exchange a priority. It changed rules in 2010 to make it easier for them to raise capital for existing discoveries.
  • Mongolian Mining Corp. (0975.HK)--which operates an adjacent deposit to Erdenes-TT--listed in Hong Kong two years ago, raising US$650 million.
  • A US$3 billion fundraising could value Tavan Tolgoi at around US$10 billion and more than double the market capitalization of Ulan Bator's stock exchange, now about $2 billion.
  • A Tavan Tolgoi IPO would be one of the biggest in Hong Kong this year. Other huge deals set for 2012 are the US$6 billion IPO by People's Insurance Co. (Group) of China Ltd., a state-owned property insurer; and the US$5 billion float of China Guangfa Bank, a provincial bank 20% owned by Citigroup.
  • Goldman Sachs Group Inc., Deutsche Bank AG, BNP Paribas SA and Macquarie Group Ltd. are handling the Tavan Tolgoi IPO.

According to media reports in September 2011, Mongolia plans to seek between $2 billion and $3 billion in an initial public offering of its Erdenes Tavan Tolgoi(ETT) mining company next year, and may simultaneously list the shares in London, Hong Kong and Ulaanbaatar .The IPO would be as much as four times the size of Mongolian Mining Corp.’s HK$5.8 billion ($744 million) initial share sale in Hong Kong last October.

  • A rare and cumbersome undertaking that could delay the country's biggest-ever share offering.
  • A triple listing is relatively unusual because of the logistical hurdles a company must clear.
  • By selling shares locally as well as in Hong Kong and London, Mongolia aims to let domestic investors participate in the IPO


According to interview  of Prime Minister of Mongolia S.Batbold to major Mongolian daily “Unuudur” in 2011, he

  • sees “mining of TT and stable operations in a very short time, specifically, within this year. This must be done as a model project.” In contrast to operations of Mongolian SOE-s that “ are not open, they are closed. Basically, there is no public supervision, profitability is poor.”
  • views that “TT must become world standard, model company, suited to modern market conditions”, brings up example of Rio Tinto, “which bought most of shares of our OT”, stresses transparency and corporate governance.”
  • says that TT “will follow model of Chinese SOE-s” that in 90-s were completely closed, had poor profitability  and were transferred to market condition and IPO-ed in world financial centers and became modern corporates
  • “this is the reason why we were are doing management contract with LSE and aiming to develop MSE to modern standards. Then we will pull flows directed at TT from world’s major markets.”
  • “Erdenes TT must become first of Mongolian champion companies. Operations will be brought to stable level and price of shares to be given to citizens will be clear within this year. Interests of citizens and national enterprises will be equal, there will be no preferences and no special group interests. Mongolian state stake and control will not be reduced from 51%, Government will adhere to strict position on this issue”.
  • regarding distribution of TT shares to public cautions against endless perfectionism that “ might slow down progress”, “best available option should be chosen now” and improvements done “ down the road”

A reputable financial industry source in HK commented to Frontier Securities:

I guess it can be done - you see two exchanges often enough though I am not aware of any listed on three  - the MSE is less a source of future capital and more to let Mongolians own the stock in their own country – I understand the effort, but seems like it could complicate things at least at the time of the IPO.

But I don't think Mongolian stock exchange necessarily creates a problem other than it adds a level of complexity to have a third exchange

lots of companies only list on one exchange - I think TT probably wants a wider base of investors and broader reach for tapping the capital markets given the potential large offering size and as it grows- LSE is also viewed as a primary metals and mining exchange.

I think it is a statement that the company wants to tap global investors, not all whom trade on HKEx,

Still, HK is certainly a major market - but exposure to the Mongolian coal potential is of interest to global mining investors, many of whom are more active on other exchanges given the depth and breadth of mining companies that trade there.

Frontier Securities conclusion:

  • we think it is feasible
  • Urgent MSE reform is needed to achieve full effect of the possible triple listing in order for institutional investors to use MSE
  • Highest valuations and liquidity of Mongolian coal companies at the moment are in HK, therefore, it would be wise for Mongolia to include HK
  • Erdenes Tavan Tolgoi, license holder and developer of massive TT coal deposit, anticipated mining just under 1Mt in 2011, and is planning to export 3Mt in 2012 and progress to 15mtpa by 2015. East Tsankhi mine has over 50 years of mine-life at 20Mtpa.  Better infrastructure is needed to achieve this level of production.
  • ETT will also use MMC road on a toll basis. Offtaker Chalco is buying TT coal for 70USD per ton for the first 1Mt, and after this prices are adjusted according to an agreed index.  At the time the agreement was signed this price was comparable to MMC and TTL.  
  • ETT's CHPP is scheduled for completion of module 1 in early 2014 with the rest of the 3 modules completed over the following 12 to 18 months.
  • ETT and TTL can use MMC’s operational highway on a toll basis.

According to Government of Mongolia on 11/2/2011, cabinet meeting has issued a resolution on resolving pressing issues of development in South Gobi. Within the framework of this resolution following measures are to be taken regarding roads - Capacity of 245 km paved road TT- Gashuun Sukhait border crossing is to be increased. ETT is assigned responsibility to make the road with 4 traffic lanes, secure funding source for the new 2 lanes on the condition that the road is transferred to the State after a certain period.

Construction will commence in 2012 for completion in Q3 2013.

According to Government of Mongolia on 08/24/2011 Cabinet meeting discussed new railroads project and supported feasibility study done by McKinsey & Co for First and Second Stages of New Railroads instructed by State Railroad Policy. It is being estimated that 1 km of rail road base structure will be built for 2.5-2.8M USD. As a result of new railroads project implementation, Mongolia will have capability to export 66Mtpa by 2020. Earlier, McKinsey and Co introduced to First Deputy Premier that direct rail from TT –Gashuun Sukhait (PRC border) should be built at the same time as the new railroad from TT to Russian border which will cost 5.5B USD

Industry consensus view is that if there is a successful IPO for TT then this will also drive investments in 2012 and 2013 and maintain growth.  If TT cannot raise money for mine development then infrastructure like rail could be delayed and wait until West Tsankhi is developed or MMC is allowed to build their rail to China.

If growth drops off Government will have no money for infrastructure development.  A big drop in markets would also make it impossible to IPO MTZ and as a result they would be unfunded and unable to develop rail in Mongolia.

With lower commodity prices it will be more difficult for local mining firms to IPO and there could well be disappointing valuations.

After absence in 2011 of major Mongolian IPO-s on a comparison with MMC’s IPO in 2010, 2012 TT IPO with a possible triple listing in London, Hong Kong and Ulaanbaatar would be a major Mongolian IPO on a scale and complexity which we have never seen before.

In latest TT development in Mongolia, according to major Mongolian daily “Unuudur” on February 21, 2012, Chairman of Social Policy, Education, Culture and Science Standing Committee of Parliament of Mongolia A.Tleikhan briefed media regarding TT shares/one million MNT cash hand outs

According to amendment to 39th resolution on TT, citizens are choose between TT shares and one million MNT. Funding for one million MNT for each of 334 thousand senior and developmentally challenged citizens is reflected in 2012 budget. TT shares will be issued starting from April 1,2012. If citizens decide to choose and get cash, for a start , money will be issued to senior and developmentally challenged citizens

According to major Mongolian news portal on February 21,2012  he also commented

  • starting from April 1,2012 all citizens will get a record of 1 million MNT worth of TT shares
  • then citizens are to express to the Government whether do they want to keep it or cash it
  • For a start, cash will be issued to seniors and developmentally citizens ( total of 334 thousand people)

Frontier Securities expects significant and measurable inflationary impact due the size of the planned injection of cash into the economy as well as expected immediate spending. Per capita GDP in 2011 was 3000 USD. Further, for the majority of population one million MNT(752USD using today’s Bank of Mongolian reference rate) is significant amount of money. On top of that, senior and developmentally challenged citizens have much higher healthcare  and other needs than the general population.

By estimates of reputable experts, MNT 334 Bn is almost 6 times the amount that has gone out in a single cash handout event so far.  The payment of MNT334 Bn is equal to 5.3% of Government's total expenditure for 2012 and equal to 2.75% of the IMF's 2012 GDP projection. Usually the amount of MNT 21,000 to all 2.7 million citizens equals about MNT 56 Bn each time.  This will be a significant amount at one time.  Its macroeconomic impact will depend a lot on how those beneficiaries use this new money. 

According to latest  Frontier Securities Research Report of February 18,2012 on potential serious risks associated with approved by Parliament of Mongolia amendment to TT resolution

  • According to Parliament of Mongolia on February 16,2012 final reading of amendment to Parliament’s 39th resolution on some issues of developing Tavan Tolgoi coal deposit was done by united session of Parliament and it was approved by 76.1 per cent vote of MP-s.
  • According to the bill, citizens are to get up to 20 per cent of shares of “Erdenes Tavantolgoi” free of charge and 10 per cent is to be sold to enterprises at nominal price.
  • If citizens would like to monetize their 1072 shares then the Government will buy the shares from them valuing at one million MNT (752USD using today’s Bank of Mongolia’s today’s reference rate) . In return, Government will propose to sell to national enterprises at the same nominal price.
  • This transaction is to be done before international IPO. Government is to make detailed regulations after bill becomes a law.
  • Government determined that there is probability that about 50 per cent of all citizens will want to sell shares to Government and the rest will want to own shares. Government has position that it has capability to resolve of citizens who would want to cash the shares.
  • Currently 330 billion MNT (248 million USD using today’s Bank of Mongolia’s today’s reference rate)  to issue as a priority to seniors and developmentally challenged citizens is reflected in the budget
  • ballpark figure for nominal price of ETT shares by ex-Chairman of Economic Standing Committee is 800MNT(0.60USD using today’s Bank of Mongolia’s today’s reference rate)

We view that there are a number of potential serious risks associated with the approved by Parliament amendment to TT resolution

  • Government predicts that 50% of population are likely to cash in TT shares. Even with Government estimate, which we think is understated, Government will have to come up with 1 million MNT for 1.35 million citizens which would be 1.35 trillion MNT or roughly 1 billion USD. Can Government afford that?
  • We view that presented with opportunity to get 1 million MNT cash, much more that 50% would be likely to sell. This is supported by the fact that GDP per capita is 3000US in 2011. One million MNT is significant amount of money for majority of population. Let’s hypothetically propose that 90% decides to cash in. This will mean that Government will need MNT 2.4 trillion or 1.8 billion USD. Can Government afford that?
  • Ballpark valuation of ETT based on current information from Mongolian parliament is 9 billion USD.  Frontier Securities estimates that Erdenes Tavan Tolgoi 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. In these case, valuation per share would be 0.33– 0.40 USD. Will the national  enterprises buy shares at 0.60USD from the Government if the real market price will be 0.33-0.40USD.  In this case, it would be rational for corporation to pass on Government offer and buy on the open market. Can the government raise 1.35 trillion MNT or 1 billion USD from selling 10% to national enterprises?
  • If MNT 1.35 trillion in cash will be pumped into the economy in some way or another it would create a macroeconomic crisis of a scale Mongolia has never seen before resulting in hyperinflation. In case the money is pumped into the economy in stages, it will further add fuel in stages into already overheating economy with high inflation, exchange rate volatility, wage pressures, Dutch disease, and the list goes on.
  • Promise of MNT 1 million is already resulting in strong expectations from the population which possibly cannot be met unless there are serious actions to improve ETT’s valuation.  If Government cannot deliver the money there would be possibility of social discontent in various forms further heated by various anti-Government political forces. Resulting political stability deterioration with added uncertainty of election results will further then erode ETT’s valuation 
  • Without the IPO there will be no money to develop the mine's full potential . The shares will have limited value until the IPO.
  • To improve ETT’s valuation actions by Parliament are needed urgently such as allowing a railway to Gashuun Sukhait, entering into a tax stabilised investment agreement with ETT and putting in place an appropriate legal framework for ETT to be able do a premium listing on the London and Hong Kong Stock Exchanges 
  • At the moment it appears that significant problem is created which will come back to bite back - one way or another. Frontier Securities identifies potential risks that we all hope will not realize.
  • Earlier this year, 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.”

A full copy of Masa Igata’s interview in Mongolian is available at

Dale Choi

Chief Investment Strategist,

Frontier Securities