We had interview with Chief Economist of “Erdenes Mongol” LLC Ch.Otgochuluu on privatization and structure and members of the working group in charge of putting Tavan Tolgoi mine into economic circulation.
The working group has been established to take care of privatization of several state-owned companies within this year. The Government of Mongolia sees privatizing state-owned companies as one of sources to increase budget revenues. How many companies which belong to Erdenes Mongol LLC are in the list of privatization?
Parliament approved “State Policies on Mineral Resources” states that state-owned mining companies are to be public company. The decision aims to improve companies’ management and make it public company. Accordingly, the Government adopted resolution which directs to privatize “Baganuur” and “Shivee – Ovoo” joint stock companies owned by Erdenes Mongol LLC. With reducing state ownership to 51 percentages, we are advised to list additional shares at domestic and international exchanges. Then, we are now working according to instructions.
Also, we have started preparing integrated reporting which meets world standards, in cooperation with an international audit company. In order to be listed at international exchange, we must first fulfill several international standards. We are sure to be required to deliver international audit report and appraisal of assets. These works are now in process. “Baganuur” and “Shive-Ovoo” are very crucial joint stock companies which operate in strategically-significant mine fields.
However, the companies have not been profitable whole time because energy prices are state-regulated. The companies’ expenditures have been continuously increasing. For instance, the companies use excavators and haul trucks for period of time twice more compared to regular life span of vehicles. It leads to a greater amount of expenditures which we should change. Future of two companies is likely to be bright thanks to V power station and Amgalan thermal station which are soon to start operations. Also, it is possible to construct small-scale power station and coal gasification plant based on these minefields. Then, it is enabled to supply coal at low price not only to thermal plants in Ulaanbaatar but also to other projects.
Does it mean more buyers coming?
Yes, it does. It is such great deal of opportunity to supply electricity and heating to Ulaanbaatar city for whole year. Additionally, they have a chance to work with other companies.
Is international audit company already selected?
Selection process is underway. Now we are working on tender announcement and evaluation process. KPMG, Price Waterhouse Coopers, Deloitte and Ernest Young have expressed their interests to participate in selection process which have been very competitive so far.
What is reason to list additional shares at foreign exchange?
Mongolian stock exchange development is rudimentary. We have two benefits of submitting shares at foreign exchange. Firstly, Mongolia will be promoted worldwide. Secondly, foreign market has high requirements which will force us to make management reform in order to be competitive alongside world-known companies despite mine reserves here in Mongolia ranked among top 10. Thus, we must renew our management and approaches in order to compete at next level.
For instance, subsidiaries of Erdenes Mongol LLC used to release separate reporting. We are now working on version of integrated financial statement. Also, we have finalized developing draft law of a state-owned ‘holding company’ which will operate as same as a private company does. Current laws and regulations which guide us are contradicted with each other. Frankly, new company will be much more independent than other state-owned companies. Independence and excellent management are fundamental to make the company competitive if not the best.
What foreign exchanges will you choose?
In terms of law environment, any foreign exchange such as London exchange and Shanghai exchange could be chosen. Also, there are sub stock exchanges which operate under top international stock exchanges in the world, which newly established companies are usually listed at. They set more flexible requirements compared to top exchanges. That is why we first target to list our company and sell its shares at those sub-stock exchanges. Instead, it would be much more difficult if the company is firstly listed at NYSE and compete with top companies.
Also, some stock exchanges in Germany, Japan, China and Great Britain are state-owned entities. The goal is to develop domestic companies listed instead of generating budget revenues from trading. Firstly, we should initiate cooperation with those state-owned stock exchanges. We have also established MOU with London Stock Exchange which agreed not to set high requirements for us, and support us.
Will administrations of “Baganuur” and “Shive-Ovoo” companies be replaced?
These matters will be handled by board of directors and shareholders. Additional investors will be invited and entities will operate as same as a private company does. “Erdenes Mongol” LLC is more concerned with stability and professionalism of administrative teams which will lead companies.
As you mentioned, is “Erdenet” factory expected to join “Erdenes Mongol” LLC?
According to the government resolution, “Erdenet” factory set to join “Erdenes Mongol’ LLC. As I understand, both of Mongolian and Russian sides have informed each other of respective merging matters. Russian side has merged its 49% ownership in the factory with Rostechnology.
The Government of Mongolia has decided that it is appropriate to merge all state-owned mining companies under single entity. Currently, Erdenet factory operates under State Property Committee while Baganuur, Shivee-Ovoo, Oyu Tolgoi and Tavan Tolgoi belong to Erdenes Mongol LLC. Personally, I think that incorporating these entities under one roof will strengthen the company’s governance and be crucial to attract investment. However, state and shareholders will have a final say on this matter.
You are Board member of Oyu Tolgoi LLC. Also, you are now working member of Tavan Tolgoi project. Please introduce us the working group led by Director B.Byambasaikhan?
The working group consists of officials from Investment Bureau, lawyers and economists from Erdenes Mongol LLC, Director of “Erdenes Tavan Tolgoi” B.Batbileg, Director of Mongolian Railway Company, and its chief lawyer. The working group was established with professionals in order to limit intervention of political officials. Also, the working group cooperates with international financial and legal experts.
What international company do you cooperate with and how much fee do you pay?
I can not reveal companies’ identity. The reason is that we have established classified agreement with them. That is why we cannot reveal details of them. Even, we will not inform the side which we will establish agreement with. Cooperation with international advisory companies has both advantages and disadvantages. Disadvantage is obviously high cost. However, benefits of cooperation are that international experts will advise us how to carry out matters professionally in alignment with international standards, and protect our interests and rights if facing issues.
There are rumors that investors are not interested in coal mining. What do you think of it?
It is true. Conditions have been dramatically changed. Even China is facing problems in coal sector. Numerous companies have bankrupted or been in difficult conditions while number of buyers has decreased on the other side. Rapid economic growth China was previously experiencing is now slowing down. China is also reducing its consumption of coal gradually because of air pollution. But we hope that trade of coking coal will soon surge because future of steel manufacturing is bright.
The reason steel market is bright is that China needs to make certain developments in some areas. That is why there is a plenty of demand for steel and copper. However, it has been slightly better compared to situation few months ago. Lawyers and politicians expect market and economy to be stable for good. But it has own laws, and upsides and downs.
For instance, we have recently witnessed Chinese stock market crash. Chinese government spent 650 billion dollars to soothe battered sentiment and shore up the stock market. But the result is not promising. USA also face economic downfall in 2007-2008. It means that even big countries face “force majeure” situation.
Thus, we should take practical approaches towards economic difficulties rather than daydreaming ones.
When will the Tavantolgoi working group establish agreement with investor side?
We work under firm instructions approved by Prime Minister. Our main guidance is law of Mongolia. Also, there are parliament resolutions which support putting Tavantolgoi mine into economic circulation. We have not set an exact date to establish the agreement.
We had interview with Chief Economist of “Erdenes Mongol” LLC Ch.Otgochuluu on privatization and structure and members of the working group in charge of putting Tavan Tolgoi mine into economic circulation.
The working group has been established to take care of privatization of several state-owned companies within this year. The Government of Mongolia sees privatizing state-owned companies as one of sources to increase budget revenues. How many companies which belong to Erdenes Mongol LLC are in the list of privatization?
Parliament approved “State Policies on Mineral Resources” states that state-owned mining companies are to be public company. The decision aims to improve companies’ management and make it public company. Accordingly, the Government adopted resolution which directs to privatize “Baganuur” and “Shivee – Ovoo” joint stock companies owned by Erdenes Mongol LLC. With reducing state ownership to 51 percentages, we are advised to list additional shares at domestic and international exchanges. Then, we are now working according to instructions.
Also, we have started preparing integrated reporting which meets world standards, in cooperation with an international audit company. In order to be listed at international exchange, we must first fulfill several international standards. We are sure to be required to deliver international audit report and appraisal of assets. These works are now in process. “Baganuur” and “Shive-Ovoo” are very crucial joint stock companies which operate in strategically-significant mine fields.
However, the companies have not been profitable whole time because energy prices are state-regulated. The companies’ expenditures have been continuously increasing. For instance, the companies use excavators and haul trucks for period of time twice more compared to regular life span of vehicles. It leads to a greater amount of expenditures which we should change. Future of two companies is likely to be bright thanks to V power station and Amgalan thermal station which are soon to start operations. Also, it is possible to construct small-scale power station and coal gasification plant based on these minefields. Then, it is enabled to supply coal at low price not only to thermal plants in Ulaanbaatar but also to other projects.
Does it mean more buyers coming?
Yes, it does. It is such great deal of opportunity to supply electricity and heating to Ulaanbaatar city for whole year. Additionally, they have a chance to work with other companies.
Is international audit company already selected?
Selection process is underway. Now we are working on tender announcement and evaluation process. KPMG, Price Waterhouse Coopers, Deloitte and Ernest Young have expressed their interests to participate in selection process which have been very competitive so far.
What is reason to list additional shares at foreign exchange?
Mongolian stock exchange development is rudimentary. We have two benefits of submitting shares at foreign exchange. Firstly, Mongolia will be promoted worldwide. Secondly, foreign market has high requirements which will force us to make management reform in order to be competitive alongside world-known companies despite mine reserves here in Mongolia ranked among top 10. Thus, we must renew our management and approaches in order to compete at next level.
For instance, subsidiaries of Erdenes Mongol LLC used to release separate reporting. We are now working on version of integrated financial statement. Also, we have finalized developing draft law of a state-owned ‘holding company’ which will operate as same as a private company does. Current laws and regulations which guide us are contradicted with each other. Frankly, new company will be much more independent than other state-owned companies. Independence and excellent management are fundamental to make the company competitive if not the best.
What foreign exchanges will you choose?
In terms of law environment, any foreign exchange such as London exchange and Shanghai exchange could be chosen. Also, there are sub stock exchanges which operate under top international stock exchanges in the world, which newly established companies are usually listed at. They set more flexible requirements compared to top exchanges. That is why we first target to list our company and sell its shares at those sub-stock exchanges. Instead, it would be much more difficult if the company is firstly listed at NYSE and compete with top companies.
Also, some stock exchanges in Germany, Japan, China and Great Britain are state-owned entities. The goal is to develop domestic companies listed instead of generating budget revenues from trading. Firstly, we should initiate cooperation with those state-owned stock exchanges. We have also established MOU with London Stock Exchange which agreed not to set high requirements for us, and support us.
Will administrations of “Baganuur” and “Shive-Ovoo” companies be replaced?
These matters will be handled by board of directors and shareholders. Additional investors will be invited and entities will operate as same as a private company does. “Erdenes Mongol” LLC is more concerned with stability and professionalism of administrative teams which will lead companies.
As you mentioned, is “Erdenet” factory expected to join “Erdenes Mongol” LLC?
According to the government resolution, “Erdenet” factory set to join “Erdenes Mongol’ LLC. As I understand, both of Mongolian and Russian sides have informed each other of respective merging matters. Russian side has merged its 49% ownership in the factory with Rostechnology.
The Government of Mongolia has decided that it is appropriate to merge all state-owned mining companies under single entity. Currently, Erdenet factory operates under State Property Committee while Baganuur, Shivee-Ovoo, Oyu Tolgoi and Tavan Tolgoi belong to Erdenes Mongol LLC. Personally, I think that incorporating these entities under one roof will strengthen the company’s governance and be crucial to attract investment. However, state and shareholders will have a final say on this matter.
You are Board member of Oyu Tolgoi LLC. Also, you are now working member of Tavan Tolgoi project. Please introduce us the working group led by Director B.Byambasaikhan?
The working group consists of officials from Investment Bureau, lawyers and economists from Erdenes Mongol LLC, Director of “Erdenes Tavan Tolgoi” B.Batbileg, Director of Mongolian Railway Company, and its chief lawyer. The working group was established with professionals in order to limit intervention of political officials. Also, the working group cooperates with international financial and legal experts.
What international company do you cooperate with and how much fee do you pay?
I can not reveal companies’ identity. The reason is that we have established classified agreement with them. That is why we cannot reveal details of them. Even, we will not inform the side which we will establish agreement with. Cooperation with international advisory companies has both advantages and disadvantages. Disadvantage is obviously high cost. However, benefits of cooperation are that international experts will advise us how to carry out matters professionally in alignment with international standards, and protect our interests and rights if facing issues.
There are rumors that investors are not interested in coal mining. What do you think of it?
It is true. Conditions have been dramatically changed. Even China is facing problems in coal sector. Numerous companies have bankrupted or been in difficult conditions while number of buyers has decreased on the other side. Rapid economic growth China was previously experiencing is now slowing down. China is also reducing its consumption of coal gradually because of air pollution. But we hope that trade of coking coal will soon surge because future of steel manufacturing is bright.
The reason steel market is bright is that China needs to make certain developments in some areas. That is why there is a plenty of demand for steel and copper. However, it has been slightly better compared to situation few months ago. Lawyers and politicians expect market and economy to be stable for good. But it has own laws, and upsides and downs.
For instance, we have recently witnessed Chinese stock market crash. Chinese government spent 650 billion dollars to soothe battered sentiment and shore up the stock market. But the result is not promising. USA also face economic downfall in 2007-2008. It means that even big countries face “force majeure” situation.
Thus, we should take practical approaches towards economic difficulties rather than daydreaming ones.
When will the Tavantolgoi working group establish agreement with investor side?
We work under firm instructions approved by Prime Minister. Our main guidance is law of Mongolia. Also, there are parliament resolutions which support putting Tavantolgoi mine into economic circulation. We have not set an exact date to establish the agreement.