Mongolian goalposts move again

Euromoney, June 2012

Seasoned observers of Mongolia have long had a sense of tantalising opportunity always slightly out of reach. In recent years agreements on some of the world’s most exciting copper and coal mines, with heavy foreign involvement, and with the expectation of a major international IPO for one of them, have caused many foreign investors to believe that Mongolia’s moment has truly arrived. But, once again, the goalposts have moved.

In May, Mongolia’s parliament passed a law that caps foreign ownership in strategic industries, including all-important mining. From now on, foreign investors will be allowed to own a maximum of 49% of companies in mining, finance, media and telecommunications, after which they will be subject to scrutiny by a government panel.

Still, while new restrictive legislation was not on top of anybody’s wish-list, the prevailing opinion among foreign investors has been: it could have been worse. The new law came about after Ivanhoe Mines, which is Canadian, agreed to sell its 58% stake in the Mongolian coal miner SouthGobi Resources to Chalco, the Chinese aluminium corporation. Chinese ownership of Mongolian resources is much more sensitive than Canadians owning them, it seems, and a number of back-bench parliamentarians immediately set about drafting a law that would limit foreign investment to 49% of any company in more or less any sector they would ever be interested in, including property, food and transport.

In the event, the bill that has passed has been watered down in three senses: first in a more limited range of sectors that are affected, second with a concession that it will only affect foreign investments worth more than 100 billion tugriks (about $75 million), and third that it will only apply to deals involving state-owned enterprises. Even then, they’re not banned; they just have to be approved by Mongolia’s Foreign Investment and Foreign Trade Agency (Fitfa).

Still, any change to Mongolia’s position on inward investment is a big deal; in 2011, foreign investment represented 62% of Mongolia’s $8.6 billion GDP. Mongolia has one of the greatest bounties of natural resources in the world, but at this stage lacks the wherewithal to extract it in any significant quantity, so does need foreign participation in order to grow its own economy (not that it’s struggling much: first quarter GDP logged 16.7% year-on-year growth, while Dale Choi at Frontier Securities says the official forecast for 2013 is 19%).

In an interview with Euromoney, Ganhuyang Chuluun Hutagt, Vice Minister of Finance, was keen to stress that the new law was not anti-foreign, instead saying it “is bringing a new level of sophistication to the environment.” The law reflects Mongolia’s hope “that investors from overseas who come bring new technology, employment, and taxes; not short-term investors who just want to maximize profits in the short term. We want to see foreign investors, but we want to see who they are and what their real intent is. But it is not indicative of any changes in terms of not welcoming foreign investors to Mongolia.” 49%, it should be said, is the same ceiling many countries hold on foreign investment in particular industries, including China and India.

Foreign investors do have something else to keep an eye on though: elections in June. Fear over the Chalco deal should be seen in the context of that election, since managing the nation’s resources to the benefit of the public is a key electoral issue. Consequently Ganhuyang talks of policies “that benefit all Mongolian people in a more equitable fashion,” and of restructuring the planned sovereign wealth fund – which will take a proportion of mining revenues – in order to allocate resources for investments that help the national good.

One of the many things that is considered to be on hold until after the election is the Erdenes Tavan Tolgoi IPO, which will be the country’s largest ever capital markets transaction by an order of considerable magnitude. The company owns one of the world’s largest coking coal deposits, and last year appointed Goldman Sachs and Deutsche Bank as global coordinators alongside Macquarie and BNP Paribas as bookrunners (which have reputedly since been joined by Barclays and Jefferies). In fact, this IPO is likely to remain on hold a while longer than the election; for a start, it has to wait until a new securities law passes parliament, and secondly, particularly since part of its listing will be in London (alongside Hong Kong and Ulan Bator), it has to wait for better markets. Its CEO indicated at a recent conference that it may be 2013 before it sees the light of day.

When it does list, it will do so on an Ulan Bator market that has undergone a major restructuring process partly overseen by the London Stock Exchange. “It has been a huge job but we have made great progress and are almost done with this work,” says Munkhtushig Dul, Deputy Director and head of finance and logistics at the Mongolian Stock Exchange. “We are adding the final touches to the software and the rules and are expecting to conclude this project within one month.” T+3 settlement was underway at the time of writing and the market’s regulations were designed to be familiar to international investors. He says the Mongolian local market has five IPOs lined up including a telecommunications company, an iron ore project, and a resort company. Progress here would help the exchange to keep at least some of the listed capital of Mongolian enterprises in the country, rather than heading for Toronto, Australia and Hong Kong. “We are trying to build a good, decent infrastructure so companies and investors feel confident investing in the Mongolian markets,” he says. “It’s not a secret that, up to this point, capital markets here were not receiving investor confidence. That’s what our job is: so listings can happen in Mongolia and they don’t have to go overseas to raise money.”