Masa Igata: If Tavan Tolgoi IPO is done in a rush there could be a loss of USD $3 – 4 billion
Below is an interview with the CEO of Frontier Securities, Masa Igata. He has worked in the Asian stock markets for over 10 years, and is currently invested in the Mongolian mining industry.
-It was announces that the Erdenes Tavan Tolgoi (TT) IPO would be released on three exchanges: London (LSE), Hong Kong (HKSE) and the Mongolian Stock Exchange (MSE.) It was decided that the IPO would be released on two of them. There are also reports that the IPO is postponed to May 2012. How reasonable is it to rush to release this IPO?
-The 2012 elections are coming, and it is clear that Mongolian political parties who are in administrative positions will require a large sum of money in a short time. I believe that because it is such a large project, releasing the IPO before the elections will yield much less profit than expected.
The TT project is still in its developing stages. Last year, it produced its first million tons of coal from deposits at Tsankhi. Having more permanent mining companies involved, mining 3-4 million ton of coal a year and gradually increasing it will earn the trust of investors. The question of underdeveloped infrastructure and the fact that its coal is being transported by trucks is causing doubt among investors. As to what would happen to the eastern deposit of Tsankhi is a mystery. It will be at great risk if the IPO is released. If certain questions answered, it may be possible preserve the value of the deposit.
-Have you estimated the losses if the IPO is released before the elections?
-Rushing the IPO of the eastern part of Tsankhi due to political reasons will take its total value down to USD $5 – 6 billion. On the other hand, if the IPO is postponed until next year, this value could USD $9 – 10 billion. To enable this growth, there are numerous obstacles that need to be resolved. First, independent Board Members of TT must be individuals with exceptional knowledge in international commerce. Second, it is essential to speed up the building of the coal preparation plant. The income will be greatly increased if raw coal is prepared, washed, and refined.
-So you prefer to release the IPO next year?
-Yes. At the current TT value of USD $5 – 6 billion, there will be a total profit of USD $1.5 – 1.8 billion if 30 percent of the IPO is released now; but if it is released next year when TT’s total value reaches USD $9 – 10 billion, the profit will increase to around USD $2.7 – 3 billion. The Government needs USD $1.2 billion funding to distribute cash and stocks. It is possible to effortlessly get this funding through the first method I mentioned above but the overall yield will be low. The second option will bring an additional USD $1.5 billion in profit.
-Initially it was said that the IPO will be released on three Stock Exchanges, but due to precautions about Mongolia’s inexperience in the market, it was reduced to two. What do you think of this?
-Considering the geographic location of Mongolia, we see that Mongolia will be quite successful in building assets throughout Asia. China, Korea, Japan, Hong Kong, and Singapore – they are the main economic partners of Mongolia. The HKSE would play an important role in this. Since it is now known that the required paper and technical work is not completed for the HKSE, so the choice of LSE remains. But because of unstable economic situation in Europe, this might be a risky move.
-Do you mean it is better to rely on Asian markets?
-Yes. I’m sure Mongolian Government understands this, but I believe they have already made the decision. Not only does the Government have their own economic reasons, but also possible hidden political reasons for doing so. TT is a world class coal deposit; it is unfortunate that it is at risk of losing its value because of political reasons.
-The the renovated MSE was ranked the second best performing Stock Exchange in 2011. Soon it will start trading TT stocks. What is your opinion on the future of MSE?
-The most important part of a stock exchange is corporate governance. It is essential to always consider the importance of small stock owners. The future looks bright for the MSE. Its capital was a little over USD $400 million ten years ago, but today it has over USD $2 billion in circulation. I have no doubt that this will reach USD $100 billion ten years from now.
-The Mongolian economy is a bit fragile at this time. The economy has grown and GDP has increased – but are there any negative effects of these changes?
-It is not easy to hold inflation at a constant level. As the economy grows, inflation increases with it. This is difficult for the people. The value of Mongolian tugrug also weakens. The Democratic Party leaves the Cooperative Government, causing political instability which in effect turns away investors.
-Analysts note that there will be a sudden decrease of investors because of political issues in Mongolia. Is there a way to prevent this decrease?
-Even if there are many risks involved, investors are not interested in forfeiting their investments in Mongolia. This is because they are very much interested in investing in Mongolia, the country that will witness a rapid economic growth in the next ten years. I think all they desire is certainty. Unless there is an unexpected turn of events in Mongolia’s economy, or shocking decisions are made by the Government because of political issues, there is no other reason for investors to get bored of Mongolia in the next several years.
-Your view on the future of Mongolia seems positive; do you think Mongolia can become an influential country in Asia’s economy?
-There are many reasons to predict an optimistic future for Mongolia, but it also has its risks. For example, Russia and China’s influence on Mongolia has not decreased at all thus far. The fact that a small portion of the population owns most of the wealth warns Mongolia to ensure even distribution of wealth.
-It was announces that the Erdenes Tavan Tolgoi (TT) IPO would be released on three exchanges: London (LSE), Hong Kong (HKSE) and the Mongolian Stock Exchange (MSE.) It was decided that the IPO would be released on two of them. There are also reports that the IPO is postponed to May 2012. How reasonable is it to rush to release this IPO?
-The 2012 elections are coming, and it is clear that Mongolian political parties who are in administrative positions will require a large sum of money in a short time. I believe that because it is such a large project, releasing the IPO before the elections will yield much less profit than expected.
The TT project is still in its developing stages. Last year, it produced its first million tons of coal from deposits at Tsankhi. Having more permanent mining companies involved, mining 3-4 million ton of coal a year and gradually increasing it will earn the trust of investors. The question of underdeveloped infrastructure and the fact that its coal is being transported by trucks is causing doubt among investors. As to what would happen to the eastern deposit of Tsankhi is a mystery. It will be at great risk if the IPO is released. If certain questions answered, it may be possible preserve the value of the deposit.
-Have you estimated the losses if the IPO is released before the elections?
-Rushing the IPO of the eastern part of Tsankhi due to political reasons will take its total value down to USD $5 – 6 billion. On the other hand, if the IPO is postponed until next year, this value could USD $9 – 10 billion. To enable this growth, there are numerous obstacles that need to be resolved. First, independent Board Members of TT must be individuals with exceptional knowledge in international commerce. Second, it is essential to speed up the building of the coal preparation plant. The income will be greatly increased if raw coal is prepared, washed, and refined.
-So you prefer to release the IPO next year?
-Yes. At the current TT value of USD $5 – 6 billion, there will be a total profit of USD $1.5 – 1.8 billion if 30 percent of the IPO is released now; but if it is released next year when TT’s total value reaches USD $9 – 10 billion, the profit will increase to around USD $2.7 – 3 billion. The Government needs USD $1.2 billion funding to distribute cash and stocks. It is possible to effortlessly get this funding through the first method I mentioned above but the overall yield will be low. The second option will bring an additional USD $1.5 billion in profit.
-Initially it was said that the IPO will be released on three Stock Exchanges, but due to precautions about Mongolia’s inexperience in the market, it was reduced to two. What do you think of this?
-Considering the geographic location of Mongolia, we see that Mongolia will be quite successful in building assets throughout Asia. China, Korea, Japan, Hong Kong, and Singapore – they are the main economic partners of Mongolia. The HKSE would play an important role in this. Since it is now known that the required paper and technical work is not completed for the HKSE, so the choice of LSE remains. But because of unstable economic situation in Europe, this might be a risky move.
-Do you mean it is better to rely on Asian markets?
-Yes. I’m sure Mongolian Government understands this, but I believe they have already made the decision. Not only does the Government have their own economic reasons, but also possible hidden political reasons for doing so. TT is a world class coal deposit; it is unfortunate that it is at risk of losing its value because of political reasons.
-The the renovated MSE was ranked the second best performing Stock Exchange in 2011. Soon it will start trading TT stocks. What is your opinion on the future of MSE?
-The most important part of a stock exchange is corporate governance. It is essential to always consider the importance of small stock owners. The future looks bright for the MSE. Its capital was a little over USD $400 million ten years ago, but today it has over USD $2 billion in circulation. I have no doubt that this will reach USD $100 billion ten years from now.
-The Mongolian economy is a bit fragile at this time. The economy has grown and GDP has increased – but are there any negative effects of these changes?
-It is not easy to hold inflation at a constant level. As the economy grows, inflation increases with it. This is difficult for the people. The value of Mongolian tugrug also weakens. The Democratic Party leaves the Cooperative Government, causing political instability which in effect turns away investors.
-Analysts note that there will be a sudden decrease of investors because of political issues in Mongolia. Is there a way to prevent this decrease?
-Even if there are many risks involved, investors are not interested in forfeiting their investments in Mongolia. This is because they are very much interested in investing in Mongolia, the country that will witness a rapid economic growth in the next ten years. I think all they desire is certainty. Unless there is an unexpected turn of events in Mongolia’s economy, or shocking decisions are made by the Government because of political issues, there is no other reason for investors to get bored of Mongolia in the next several years.
-Your view on the future of Mongolia seems positive; do you think Mongolia can become an influential country in Asia’s economy?
-There are many reasons to predict an optimistic future for Mongolia, but it also has its risks. For example, Russia and China’s influence on Mongolia has not decreased at all thus far. The fact that a small portion of the population owns most of the wealth warns Mongolia to ensure even distribution of wealth.
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