Mongolia: Politics threaten to delay landmark Tavan Tolgoi IPO

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By:
Lawrence White
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Hong Kong, London, Mongolia exchanges involved; Korea, Japan angry over contract exclusion

Political wrangling in Mongolia is delaying the $2 billion to $3 billion IPO of mining company Erdenes Tavan Tolgoi, according to sources in the country. The deal, which would be Mongolia’s largest ever equity offering, is expected to transform the country’s economy by providing thousands of jobs, revitalizing its stock market, and bringing in billions of dollars of outside investment as well as providing direct economic benefit to citizens in the form of allocations of shares. The government itself is keen to get the deal done before the forthcoming election. However, two pressing political problems are threatening that deadline.

The first problem is where to list the company. The government has insisted from the outset that Erdenes Tavan Tolgoi, which will operate one of the country’s largest coal deposits, list in Mongolia as a means of bringing much-needed liquidity to the country’s moribund exchange. The problem has been in deciding which of two global exchanges, London and Hong Kong, should be included in the deal. Both have been lobbying hard in the months since the deal was announced, with executives from each of them visiting Ulan Bator. London has played up its strengths as a traditional hub for metals and mining companies and its convenient location between the Asian and US time zones, while Hong Kong has focused on its leadership in Asia, proximity to China, and the fact that it has already hosted several successful IPOs of Mongolian companies. The issue was further complicated when the London exchange signed a deal to provide technological expertise to its Mongolian counterpart, as reported in these pages previously (see Mongolia: Deutsche, Goldman win plum Mongolia IPO rolesEuromoney, April 2011).

The government appears to have answered the London or Hong Kong question with a definitive yes, with Mongolian securities firm Frontier Securities reporting at the time of going to press that a deal involving all three stock exchanges seems likely.

"This is going to be a fantastically complex transaction," says a source close to the deal, "but there’s a determination from the government to do it properly. They are very concerned about making sure the Mongolian people benefit from the deal, and also to get the local exchange moving."

Listing a company on three exchanges at once is an extremely difficult undertaking, says the source, who is a veteran on large global IPOs. Each market brings its own local difficulties: in London, for example, Erdenes TT will want inclusion on the all-important FTSE 100 list, which means application to a separate committee, a majority free float and UK incorporation. In Hong Kong, pricing the deal so that it is attractive relative to the company’s China coal peers will be a tricky balancing act, as recent IPOs on the exchange have shown investors to be pickier than in the past.

In bowing to the demands of both London and Hong Kong, the government seems to have opted for a strategy that will please more partners at the expense of making an already complex deal harder to execute. There also remains the question of what happens to the shares post-listing: it might be difficult to stop liquidity for the company’s shares migrating to London or Hong Kong, leaving the other exchanges behind.

The second big problem facing the government is deciding whether to add to the list of three global mining groups selected to develop the Tavan Tolgoi coal deposits. After a lengthy bidding process, in July Mongolia announced that China’s Shenhua mining group would form 40% of the final consortium, with the US coal producer Peabody taking 24% and a Russian group that is to include a Mongolian contribution taking the remaining 36%.

The announcement angered the Korean and Japanese governments, which had expected the Russian-Korean-Japanese consortium that formed during the bidding process to secure a spot in the final arrangement. Instead, a new Russian-Mongolian group appears to have formed at the expense of the Korean and Japanese companies bidding for the project. The Korean companies thus excluded include state-owned Kepco, steelmaker Posco, trading firm LG international and Daewoo International.

"It’s a very difficult situation to balance, because it will anger the majority investors if too many parties are included on the deal but on the other hand the government wants to keep the balance and please as many of its economic partners as possible"

Masa Igata, Frontier Securities

In an interview with the UB Post, a local newspaper, chairman of the state property committee (which is in charge of the deal) D Sugar offered the explanation that invitations to participate were mistakenly sent out only to decision makers in each consortium, with the result that the Japanese and Koreans thought they had been excluded. Sugar offers his "personal opinion...that there are no particular reasons to exclude Japan and South Korea". But having appeared to placate Japan and Korea with these words and the suggestion that their exclusion from the announcement was a mere administrative oversight, he then says that companies from both countries had "disappointed" by refusing to offer enough cooperation in their proposals on technology transfer.

"It’s a very difficult situation to balance," says Masa Igata, chief executive of Frontier Securities, "because it will anger the majority investors if too many parties are included on the deal but on the other hand the government wants to keep the balance and please as many of its economic partners as possible."

With each of Shenhua, Peabody and Russia pushing for a 51% stake in the contract, Sugar says that deciding the eventual composition has been very difficult and matters have been further complicated by the fact that the Mongolian company to join the Russians has yet to be decided.

This thorny issue of international relations, together with the debate over which stock exchanges to list on, threatens to delay the listing and sources on the deal now say the first quarter of next year looks the most realistic target for the deal, potentially in time for the June 2012 election if there are no more delays.