Bloomberg reported that Mongolia is considering to IPO its 34% stake in OT LLC offering 10% to the public. Currently, the shareholder of 34% of of OT LLC is state-owned Erdenes OT LLC. Does that mean the government is considering to make Erdenes OT a public company? Well, according to the Strategic policy and planning head of Mining Ministry Ch.Otgochuluu, it is a valid consideration. Furthermore, he stated that government is also considering to IPO 51% of Erdenet JV, biggest copper mine in the country.
Business Mongolia proposes two assumption on the announcement. First, Mongolia is considering selling off its’ 34% stake, as it is a source of debt and will likely to be considered realistically so for the next 20-30 years. For the holding company, Erdenes OT, it does not have a single operating income, however it has to pay salary of its dozen staff on top of the need of consultancy services it requires to understand the complicated documents such as project financing term-sheet or economic models provided by Rio Tinto to be competent enough to have a conversation on the same level. The second assumption is that by offering Erdenes OT’s 10% to the public it will generate more hope as it did with Erdenes TT.
The single source of income Erdenes TT from the group of Erdenes companies is nearly bankrupt after failing to generate revenue because it has to pay off the USD350 million that it owes to Chalco. PM N.Altankhuyag stated that the loan will be paid off in the end of the year, meantime considering to put other part of the deposit in operation. The USD350 million was blown in the wind by the previous coalition government as a cash-handover to the general public. It meant a year and half of USD15 per month to 2.7 million people. The public was eagerly waiting for the Erdenes TT’s IPO that would create value to the common shares that has been distributed to the public, also, for free.
After the new government formed, we started to witness all the lies that the previous government was holding undisclosed. The head of Minerals Authority, the authority which issues mining licenses faced jailtime for hundreds of unlawful licenses. The Investment Agreement of OT turned out to be a “loan agreement”. Erdenes TT was running out of cash to export its product. Erdenet is also has been pledge for USD200-300 million loan. Prepayment and Bond agreement with OT LLC has been also spent for distribution of USD15 to the public. In result of fighting these problems and trying to amend the agreements Mongolia almost destroyed its reputation as the next boom-town. The economic development rate of 17%+ wasn’t affecting the public anyways, some say.
Comparing to Erdenes OT, Erdenes TT has its high quality coal deposit, the revenue generation scheme is simple enough to be understood by the current management. In Erdenes OT’s case, the company doesn’t have any cash generating operations besides its hope for 34% that will give dividend probably in 20-30 years. Who will buy those shares? Sh.Otgochuluu argues that public companies will have better corporate governance compared to state-owned ones. In principal, it’s true, but in practice, in Mongolia, it will be very hard to be true. The government will collect its tax and royalty. Erdenes OT, will still be waiting for a dividend that is far to the future.
If the government is giving up on fighting Rio Tinto and prolonging this exhausting saga, there is a solution.
The solution is simple, sell the 34% of the stake in exchange of triple royalty. From the current 5% to 15%. With this draconian royalty, the government will have no right to complain, and Rio Tinto will be the side that will demand accelerating whatever permissions and affirmations it needs from the government. The government will have no headache of dealing with the mine-building mess, and it is risk-free.