Better to earn profits, than being mega for the sake of it
31th of 7, 2018
The spring session of Parliament ended on a high note of hope, as on the closing day it approved the resolution to begin work on putting Tavan Tolgoi (TT) into economic circulation, thus giving the Government the formal green signal to realise a long-cherished dream.
The general tenor of the debate that Friday in Parliament showed that members were impatient with the delay in actual progress, and wanted to go ahead no matter what. Some words of caution were heard, but they seemed to have been spoken more as a matter of form than with real intent. Even those unsure of how efficiently the course of action suggested by the working group led by the Minister of Mining and Heavy Industry (MMHI) will be implemented, favoured moving forward towards making Erdenes Tavantolgoi (ETT) a public company that will operate in accordance with standards of international stock exchanges. Given this overwhelming desire for action and progress, the Government should be doubly determined to keep its promise and produce results. The working group basically wants to raise funds by issuing an IPO for up to 30 percent shares in ETT on the international market to “partially finance the infrastructure projects and fully finance the mining projects” in TT. Depending on how much the IPO nets, efforts might then be made to raise additional financing under offtake agreements. Parliament’s resolution approving of this plan asks the Government to:
• Ensure that the preparation work for the IPO is done well by selecting and employing international financial and technical advisors • Explore possibilities of being listed on one or more of the following exchanges -- Hong Kong, New York, and Shanghai • Review the expressions of interest by JP Morgan, Goldman Sachs, Nomura, Deutsche Bank, and Credit Suisse in working as financial advisors • Study who can be chosen as technical advisors.
The working group will have no rest during the long summer days as Minister Sumiyabazar has promised in Parliament that all the preparatory work will be completed within 180 days of the closing day of the session on June 29.
Almost four weeks have passed since then as we write this and there is still no report of any final decision having been taken, not even on the choice of the financial and technical advisors, who must be given enough time for their work. The goal to transform within a short period of time a State-owned company, where political pressure consistently overrides business principles, into one that would impress investors with its corporate integrity, is daunting. The task is being made more difficult by critics who are ready to pounce on any mistake, losing sight of the priority needs of TT. This is too well known to the reader so we are moving to other issues.
According to the working group, TT will go beyond being a mega project, and become a giga one, with $7.11 billion of investments to be spent on setting up mining operations and on developing infrastructure projects, several of which would be a mega project by itself. Of the total $7.11 billion investment, $5.95 billion will be made during 2018-2021.
This is all very impressive but unfortunately no one is giving even the simplest indication of how much of the investment has to be paid back when or how. Nor is there, in the most basic business terms, any information on how much profit the project will make in the next few years. Either these “details” have not been discussed in the euphoria of having a giga project or, if they have been, nothing has been publicly revealed, not even to Parliament.
Instead, what has been emphasized is the likely increase in Mongolia’s foreign exchange reserves and budget revenue. It has been given out that successful implementation of the project will bring the following results to the economy: over 10% economic growth, increase of export revenue by $2.8 billion, between $400 million and $1.1 billion more per annum to the State budget and creation of around 5,800 jobs. The following is the list of the projects to be implemented and the required financing as it was shown in the presentation made to Parliament members. 1. Conveyor system. Implementation period 2018-2010. Required investment - $75 million. 2. Mining equipment. Extraction will be brought to 35 million tonnes by 2021. Required investment -- $1.3 billion. 3. Exploration studies. Implementation period 2019-2030. Required investment -- $150 million. 4. Coal processing plant. Implementation period 2019-2021. Required investment -- $500 million. 5. Water supply. Required investment -- $150 million. 6. Tavantolgoi-Gashuunsukhait 240 km railway. Remaining funding required -- $824 million. 7. Tavantolgoi-Zuunbayan railway infrastructure construction Required investment -- $1.24 billion. 8. Tavantolgoi-Gashuunsukhait 250-km paved road. 9. Tavantolgoi-Oyutolgoi-Khangi heavy load capacity road project. 10. 270-km road starting from the end of 32 km on Tavantolgoi-Baruunnaran road of Khankhongor soum in Umnugovi aimag up to Tsagaandel mountain border port. 11. Tavantolgoi’s 450-MW power plant. Implementation period 2018-2021. Required investment -- $1 billion.
Never before in Mongolia have activities of such variety and range been planned -- railways, roads, processing plant with a capacity of 30 million tonnes, 450MW power plant and so on. This makes us wonder whether ETT aims to be a commercially profitable company or to be a mega project just for the satisfaction of being one. Does the company have the capacity to successfully monitor so many large projects at the same time? Our track record shows how we have been unable to build just one railway after talking about it for eight years.
ETT’s profits will rise substantially as soon as it starts selling processed coal and transports it by railway. Developing this part of the infrastructure is a profitable undertaking, something that cannot be said of all the others. This economic aspect cannot be ignored or overlooked. I refer you to the MICC study published in our March issue that showed how lack of infrastructure and high cost of coal transport makes ETT’s corporate valuation much lower than that of similar international companies. More details on the infrastructure projects, especially roads and railways, can be found in the article by B.Tugsbilegt in this issue.
A recent example of how money ends up being spent inefficiently, if there is no proper study and planning, comes from the Chinggis bonds. The whole country is now paying the price. As we show time and again, our skill lies in planning mega and finishing mini, and we must make sure the same mistakes are not made in regard to ETT. The World Bank has said the same thing this month in its report on the Mongolian economy, where, in suggesting ways to maximize benefits from future investments, it urges drawing lessons from our past instances of the poor results of over optimism and unrealistic expectations. Can we honestly expect the IPO to raise funds to finance all these expensive projects? Many observers of capital markets keep saying that the yield will not be over $2 billion, in the present conditions, which would not change radically in 180 days.
There is another issue to be considered dispassionately. The working group says extraction would rise threefold, but is silent on where this huge amount of coal will be sold, and if the glut would not make prices fall. Have transit transport issues been solved? Do we know where ships will be loaded with Mongolian coal? And where will the ships go? What are the projected prices in the coming years? Will TT operations be profitable in the long run if coking coal price remains $120/t? Nothing has been given out and we can only hope such estimates and studies are in place.
The Executive Director of Mongolian Mining Corporation, G.Battsengel, has said how difficult things were for the company only two years ago when it couldn’t find a buyer for its coking coal for $40/t. Analysts warn of the volatility of the coal market and of the possibility of stagnant demand. Infrastructure development would improve the competitiveness of ETT, but will the prices remain high to allow the company to recover the huge investment costs? From the national perspective, the priority is to be profitable, being mega is of secondary importance.
The best-case scenario is a rise in ETT revenue as it exports more, but will all the extra money be paid as dividends to post-IPO shareholders, or on more exploration? Will costs be cut, or will more efficient technology be installed? These and many other such questions must be left to be addressed by the company’s future professional managers, not by today’s politicians. The working group led by D.Sumyabazar will have to decide whether to perpetuate political control over a national asset, or to make the asset more productive for the nation by putting it under professionals committed only to their responsibility.
There is as yet little detailed information on the specific terms of the Russia-Mongolia agreement on railway transit transport signed in June. This issue carries E.Odjargal’s analysis of what the agreement could mean for the export of Mongolian coal to third markets, and if it resolve the debate on whether to do so via the Russian Far East ports or through Chinese ports? The Mongolian pages have an interview with the Director of the River Basin Administration in Altai Inner Gobi, D.Chandmani, in which he warns us to be prepared for a severe water shortage from 2020.