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Wednesday, May 4, 2011

Tavan Tolgoi Still Causes Headaches

A nation of shareholders
It has been settled. All Mongolian citizens born before the 31st of March 2011 will inherit free shares in Tavan Tolgoi. The Government made a historical decision to distribute for free 10% of the 15 billion shares of the Erdenes Tavan Tolgoi Company – a daughter company of Erdenes MGL - to its citizens. Mongolia’s population amounts to only 2,796,000 and every Mongolian citizen will soon have in their possession 536 shares in Erdenes Tavan Tolgoi Co. Despite the fact the Government has already announced the number of shares to be distributed, their price has yet to be fixed. Such acts of kindness could well occur again in the future as, after all, elections are nearing. But has it already occurred that a country’s citizens all become shareholders?
“I do not know a country which, like Mongolia, distributed shares to every of its citizens,” Mr Alisher Ali, director of the Eurasia Capital Group replied. Meanwhile, the President of the Mongolian Financial Market Association Mr U.Ganzorig declared that although “there is no previous experience of a country distributing shares for free to its citizens, it is better than distributing cash handouts.” “People can get loans by using shares as collaterals, or they can sell them in the future. And of course, they can collect dividends and use them towards education and healthcare,” he said. The essential remains that people “understand the real value of the shares.” However, it is highly likely that shares will be sold at the first opportunity as one Mongolian citizen in three lives in poverty.
It has been reported that trading will open once the market price of the Erdenes Tavan Tolgoi’s shares has been established on international capital markets. Let’s hope cunning individuals will not have the opportunity to collect all the shares by resorting to all kind of lies and deceptions; and in 10 years time, the majority of the population will still live in poverty, slaves of the few who hold all the wealth,” economist Mr D.Jargalsaikhan wrote. It is undeniable that since the 1990’s and the free distribution of state properties’ blue and pink shares, the majority of the companies at the Mongolian Stock Exchange fell in the hands of a few, all with a common interests. They robbed these shares through all legal and illegal means by taking advantage of people’s lack of information and understanding of the capital market. In the previous edition of the Mongolian Economy Magazine, an article explained in detail how these events are at the source of the chaos that currently weakens the country’s capital market.
“If we are not careful in raising the public’s awareness and understanding of financial institutions, the blue and pink shares incident will occur again,” the director of the Financial Regulatory Committee Mr D.Bayarsaikhan worries. Meanwhile, the President of Mongolia Mr Ts.Elbegdorj warned of the necessity of conducting trainings on a large-scale so even nomads in the countryside have an understanding of capital markets. In any case, it can only be hoped that the Government will not commit the same mistakes again.

A successful start for a successful finish?
The Government of Mongolia is going, for the first time in its history, to raise large capitals on international capital markets. So far, it has been an unprecedented success. Representatives from more than 20 top international investment banks gathered in Ulaanbaatar and competed with one another for the opportunity to cooperate with Mongolia, a country which until recently attracted little attention but now appeals to the mining, banking and financial “sharks” of this world.
So far, four banks - German Deutsche Bank, US Goldman Sachs, French BNP Paribas and Australian Macquarie - have been granted the right to organize the issuing of Erdenes Tavan Tolgoi Company’s IPOs on international capital markets. Official sources announced that they have already started to prepare the ground to raise capital for Tavan Tolgoi. Could the fact that Mongolians own 10% of Erdenes Tavan Tolgoi’s shares for free negatively affect this process?
According to Mr U.Ganzorig, it will in fact “positively influence the issuing of IPOs.” “The fact that the whole population of the country is behind this company could be an incentive for foreign investors as it is very important for political stability,” he declared. The destiny and livelihoods of the Mongolian nation and its citizens will truly depend on the success of Erdenes Tavan Tolgoi. In any case, Government officials promise that citizens will receive their shares before Naadam, and that IPOs will be issued on international capital markets within the year. However, experts have been pointing out that a minimum of two years is required to organize such a large-scale operation.
Judging from current events, the director of the State Property Committee Mr D.Sugar believes that the Erdenes Tavan Tolgoi Co. will be highly valued. A lot of efforts are made to raise the USD2 to 4 billion dollars from the world market,” he confirmed. Some might say that the Government is rushing despite its lack of knowledge about how much money has to be raised exactly, some might say that “a fast rabbit will gain profits,” as the saying goes. Experts also warn that companies willing to step on international markets need to fulfill high criteria. It is hard to believe that Erdenes Tavan Tolgoi will issue its shares on international markets at a time when the company’s technical specifications have yet to be finalized, operator companies yet to be selected and infrastructure issues yet to be resolved. Experts also caution that even if shares are issued, it is not certain their prices will soar.
Member of the Parliament Mr R.Amarjargal published an article titled “Five, Six Issues Surrounding Tavan Tolgoi” in which he states that It is better to issue IPOs once mining is put into operation and has started to generate profits.” “Who will bear the responsibility in two or three years time if, because of a rushed plan to make quick profits, the strategy ends up to be worthless and ineffective. I consider it a crime to sell our most valuable equities cheap and in large quantities,” he opinioned in his article.

Six bidders for the western Tsankhi area
The Tavan Tolgoi mining deposit is divided in four areas: Tsankhi, Ukhaa khudag, East and Brown Tolgoi. Energy Resources Co. has obtained a special license for 4,000 hectares of land in the Ukhaa khudag area. Meanwhile, a local company named Tavan Tolgoi Co. – not to be mistaken with Erdenes Tavan Tolgoi Co. - has obtained a license for a total of 270 hectares of land. State run Erdenes MGL has authority over the 68,000 hectares in the Tsankhi area, for which the Government has announced two separate international tender bids.
In the East of the Tsankhi area, three companies - India’s Mesco Steel, Germany’s BBM Operta and Australia’s Macmahon - have sent their proposals to mine the deposit only. Transportation and sales will be supervised by Erdenes Tavan Tolgoi Co. Executive director of Erdenes MGL Mr B.Enebish announced that all preparatory works have been finalized to strip off the soil in this area and start mining operations.
in the West of the Tsankhi area, 15 companies and consortiums compete to invest, conduct mining operations and sell the minerals extracted. After two rounds of selection, the Evaluation Committee set up by the Government has chosen American Peabody Energy; Chinese Shenhua Energy and Japanese Mitsui & Co consortium; Russian Railway, Japanese Itochu, Sumitomo, Sojitz, Marubeni and Korean Коres Group consortium; Australian Xstrata coal; Brazilian Vale; and Luxemburg’s ArcelorMittal. Talks between these companies and the representatives of the working group established by the Mongolian Government are currently ongoing.
The conditions imposed by the Parliament are an important criterion for the assessment of the international tender bid for the Western part of the Tsankhi area, Tavan Tolgoi’s main deposit. One or several of the six bidders will be elected based on their transportation and infrastructure development strategies (roads, railways, ports…), their technology, experience and know-how. However, one thing needs to be understood, negotiations will not only favor the Mongolian side since the six companies or consortiums competing to invest their money and capital in Tavan Tolgoi will work to serve their interests and benefits. So the Government has to make sure it sees the bigger picture and think on a long-term scale in order to take the right decisions in these negotiations.
President Ts. Elbergdorj wishes the Government not to be “guided by advance payments only when it comes to elect investors.” “Receiving advance payments is one thing,” he said, but “there are other decisive issues such as infrastructure, and so on.” In any case officials announced that before issuing IPOs on international capital markets, all the issues surrounding the Western part of the Tsankhi area will be resolved.

Start mining operations? Yes, but how?
Despite Mr B.Enebish’s belief that Tavan Tolgoi coal mining operations will start any minute from now, he stays silent on the issues of conducting such mining operations, transporting the coal and selling it. Even the issue of energy has yet to be resolved. On one hand, Erdenes MGL Co. in cooperation with Оyu Tolgoi might have to build a new electric power station, and on the other hand, Tavan Tolgoi could be connected to the public energy supply system. Tavan Tolgoi’s water resources are believed to be insufficient. In such circumstances, we are still deciding whether it is justified to build a new power station or not,” Mr B.Enebish explains. Also unclear is when the State Property Committee will announce the winner of the tender bid for the concessions to build and exploit the 435km of roads linking Tavan Tolgoi, Hanbogd and Hangi and when the road will be ready for transit. Moreover, the start and finish date of the project to construct 1,100km of railway tracks to transport Tavan Tolgoi coal to Sainshand stretching up to Choibalsan are still ambiguous. In short, nothing is sure in terms of infrastructure, which brings one question to mind: how does the Government intent to excavate and transport the coal?
It is interesting that the Government which took the task of turning Tavan Tolgoi into an economically viable project in just three years time has yet to draft a plan of action. Numerous numbers of meetings, consultations and negotiations have been conducted, resulting in little. Although Таvan Tolgoi negotiations are still ongoing, no information on the matter is available for the public. Many people were probably surprised to learn that even the President of Mongolia and head of the National Security Council Mr Ts.Elbegdorj did not know much about the negotiation, like most of Mongolian citizens and future shareholders of the Erdenes Tavan Tolgoi Co. Is it not their due right, as future legal owners, to show interest and receive regular information? The Tavan Tolgoi project, which the Government of Mongolia implemented, is situated at the epicenter of economic, business and geopolitical interests. The lives and livelihoods of each Mongolian citizen depend on the successful implementation of the project. So it is only natural that many citizens remind the Government that the activities of the working group it appointed should be transparent and open to the public.
In such circumstances, what more to do than thank our Government officials for the distribution of Erdenes Tavan Tolgoi Co.’s shares and the putting into economic circulation of the deposit if the aim is to achieve development and raise the livelihoods of every citizen. To repeat Mr U.Ganzorig’s words, “it is better than distributing cash handouts.” However, the wealth of the Tavan Tolgoi deposit could simply be wasted for the sake of putting a show for the coming elections. Let’s just hope that the distribution of the shares will not be in vain and will, in the long term, provide for the guarantee of a better livelihood for all Mongolia’s citizens.

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