John Lee: power is a very very big issue that has to be addressed now
The UB Post’s exclusive interview with John Lee CFA, Chairman and CEO of Prophecy Coal Corp at the 2nd Coaltrans Mongolia conference.
-We are a company that’s listed on the Toronto Stock Exchange, the company’s been around for two years but the team in Mongolia has been around for over eight years. We had a corporate restructure during the crisis in 2008. Our management inherited these two coal projects in Mongolia and they are thermal coal totaling 1.4 billion tones so in the last two years we’ve commissioned a mining production in the north called Ulaan Ovoo and for the other project we have it’s called Chandgana and we’ve just been granted the construction license to build the next power plant in Mongolia. Altogether we have spent over $60 million in Mongolia and our story is not much like MNC or SouthGobi whereby the products go to China. The coal produced at Ulaan Ovoo, 80% of it goes to Mongolian power plants and the power plant at Chandgana once we construct the electricity will primarily serve to Mongolians. So it’s a Mongolian infrastructure play rather than the China play.
-Can you tell us more about the new 600MW power plant, how is it going to function and who is it going to be marketed to?
-Sure, well Rory I have lived in Mongolia for about two and a half years. One half of the time I’m here and the other half the time I’ve been on the road travelling and meeting investors and taking care of matters at our headquarters in Vancouver. Mongolia has experienced tremendous growth the GDP has more than doubled in the last five years and it’s more than quadrupled this decade. However there has not been any new power infrastructure in the last twenty years. As you know GDP correlates very positively with the consumption of electricity and even in the last few days there have been intermittent black outs and therefore we have to enter into a covenant with the energy authority here in Mongolia whereby they have requested to supply power up for up to 600MW by 2016. Starting 2016 with 150MW blocks and then phase into 170 in 2018 so we don’t envisage a short in demand for our power, it’s a matter of how we can bring on power reliably, affordably and technically integrating our power plant in Mongolia’s existing system.
-And what challenges have you faced when working with Mongolians on this project?
-I travelled all over the world, my father’s a diplomat and I’m originally from Taiwan but now live in Canada.
-You mentioned before and you say it on your website that “Mongolia is an attractive investment destination”, would you still stand by that comment given that the Foreign Investment Law is now posing restrictions on foreign investors?
-I think there are challenges in investing in the mineral sector in any country, if you look at Australia, last year, they had a super tax on coal and Indonesia is now out right banning any raw material coming out of the country. And some of the practices that Mongolia also tried out like the Gold windfall tax and the copper which have since been repealed so like I said Mongolians have a tendency to get things done quickly when they sense the urgency but sometimes the policy may not be well thought after. I do want to preface by saying that I haven’t read all of the investment agreements in detail but my understanding is that it is being, I wouldn’t say watered down but it’s become more accommodating and flexible in dealing with foreign investments and I think that it’s a delicate balance for the government to manage its national sovereignty security versus economic development.
-Do you think Mongolia could miss out on the opportunity to grow as rapidly as it is forecast to?
-Well I think the forecast depends on who you talk to. However, the landmark Oyu Tolgoi project is looking to be in production in 2013 and by some estimate that could add as much as 30% to the country’s GDP and I think that if Mongolia really has the people in Government working together they could have success in developing the Tavan Tolgoi deposit and that could also add further into the GDP. And if Mongolia look to address the infrastructure within the country, looking into tendering and just the processing of taking the project to the central stage of the national market but I think a lot of times there’s got to be a lot of infrastructure in here, otherwise, (Is that really hindering your coal projects?), yes, well somewhat because I sympathise with the Government because there are limited amount of resources available that this is a project that’s not really such much attractive, it’s not going to bring the country tax revenue profits in their immediate future so therefore they will obviously prioritise into ways to get money and so therefore I think it’s a bit of a challenge to work but I think the Government is recognising that power is a very very big issue that has to be addressed now because it’s a long term project, you can’t just get the power tomorrow.
-Was it very difficult in raising money because I heard you were spending quite a while?
-Oh yeah, I think just to put it that we have about close to 200 Mongolians employees and the cost of doing business in Mongolia is rising with anything from accounting to lawyers, parts and fuel and diesel. We’ve managed to raise over $80 Million in the last two and a half years and we’ve put about $60 Million to work in Mongolia but this power plant project is a billion dollar investment and it’s a differing scale and we have been working very hard with the international investment community for almost a year now, the power purchase agreement is a key to getting the project financed and unlocking the potential of the coal that’s in the ground to convert to electricity so therefore we’re just going to continue to work with Government officials to reach a common understanding of the power agreement, not just for looking out for the interest of Prophecy but something can be financed, that’s really the key. We are really the match maker and the vehicle between the Government and the investment community, leveraging our coal to produce electricity for the good of the country but we have to have that power purchase agreement established and from thereon we can then look into wrapping up the project finance.
-Which equity funds and Asian banks have you been in talks with to raise the capital required?
-Almost all of them. It’s a billion dollar project but typical for this project you’re looking at a debt component and an equity component. And the debt component, the loan part could be as much as up to 70 or even 80% of the total package. So therefore the foremost important part is to secure the he debt and once you have the debt and then the equity will follow. And so on the debt we’ve talked to multilateral banks and there are a couple of them that are very active in Mongolia and as far as many commercial banks although with recent slowdown in Europe and the anemic situation in north America and China is also experiencing a slowdown so obviously we’re facing some challenges but in the end we’ve tried to be humble and really communicate what the investors look for with the Mongolian Government so we try to look for an agreement that’s internationally accepted and one that benefits everyone and that’s fair, but it’s not easy.
-Can you tell us a bit more about your Platinum project?
-Sure, we started Prophecy Group two and a half years ago and that was when the crisis hit in about 2008 and we started in 2009. The mandate was to acquire a good project for a good price, price was very depressed, a lot of the projects like copper, nickel, vanadium, platinum and coal. The Platinum Project was last year spun off to Prophecy Platinum so Prophecy Coal could solely dedicate its focus on Mongolia.
-And you’re personally going to dedicate more time to your coal and electricity projects?
-Sure Rory, I’m the chairman and CEO of Prophecy Coal but I’m only the chairman of Prophecy Platinum.
-Will you be refining or exporting the coal raw?
-The Ulaan Ovoo coal is quite special in that its 5,000 NAR, it’s very low ash and low sulphur so therefore the coal does not require processing or washing so it’s very environmentally friendly. The issue that we encounter with export is that the Mongolian Government has this royalty but it’s on the benchmark pricing and for thermal coal, Mongolian’s tax department’s benchmark is $90 which they will asses 10% of the $90 so $9 but when our coal is selling nowhere near that so therefore it really hurt our business product in that respect. But I think once that issue is sorted out we’re looking to primarily export the coal to Russia because we’re at the Russian border so it’s not going to China. Nonetheless, what we’ve experienced throughout the last six months there is an increasing demand for thermal coal within Mongolia, not just for power plants which Government own but for DRI, they need coal, cement factories, they need coal, there’s private boilers that need coal so we’re actually finding a lot of demand for our product. Our prices are almost converging with the Russian prices that are being offered. As a company that’s working in Mongolia, we would take a priority of actually giving our product to Mongolians ahead of giving to Russians given a choice but right now we’re finding that our business is definitely picking up. We are subsidizing our coal to the Mongolian power plants. The Government is looking to regulate and the Energy Ministry is looking to stop subsidies by 2014 and we’re hoping they can live up to their word and finally pay us something that can cover our costs and earn a reasonable return.
-How much do you expect to make in profit?
-It’s not easy. I think we’ve acquired these thermal coal projects in 2009 and like I said there are challenges but at the same time we believe in Mongolia. I think there’s a bright future ahead with development and the resources that eventually will be created and converted into wealth when they’re coming out of the ground and being sold for money for infrastructure, for schools and hospitals. We’re talking in discussions with the Government on the power because the power project is really the main revenue driver for us in the future and to bring the power in 2016 if we complete the PPA this year. The power business is very much a cost plus model so we will agree in advance with the Government what return the investors will see as acceptable both on the interest rate for the debt as well as with equity and from that point on we will draft an agreement on that basis of fair and equitable return. I think what you have to keep is balance because investors are looking to the sovereign rating of Mongolia, taking into account for example the Foreign Investment Law that’s being past or the debt ratings. And they would determine what is the acceptable rate of return and then communicate that out with the Government. It’s not just somebody come with some number out of the sky.
-Have you got any plans for anymore coal projects after the two you currently have?
-Our market cap has gone from $250 million to over around $60 million; it’s a combination of the issues that are taking place in Mongolia like the investment law and the cool down of the economy and the cool down of thermal coal prices. I believe we have a very attractive valuation, our assets and fundamentals are not reflected in the share price so therefore we don’t really have a currency to make addition acquisitions but not to say that we’re not on the look out should something come along that’s actually cheaper than what our assets are, of course we will look at it.
-And how do you see the elections affecting proceedings for your company? Are you at all worried?
-Yeah I lived in the U.S for ten years and I lived in Canada, I lived in Taiwan and the elections are all the same. One thing I believe in is the Mongolian democracy; the president cannot overture the issue of a decree and confiscate assets like Russia or even China or Bolivia or Venezuela so I do believe in the democracy of Mongolia. However, I believe that when the election comes because it’s democracy sometimes it’s dysfunctional because everybody would logically look for votes and there are some Mongolian public who are not well educated or well aware so sometimes you have some politicians who would do things that they would require to be elected. But in the end I think it doesn’t matter which party gets elected. The locomotive in my view is already set in motion that the wealth that’s already been created is very visible for all to see. I have a hard time imagining but I’m not saying it’s impossible to see an autocratic Government come in and just negate all the progress that’s been done before. Not to say that bad laws would not be passed. So I personally have an element of certainty but I have a hard time seeing that any new Government would have any drastic stand opposite of what has been working very well so far in the last few years.
-We are a company that’s listed on the Toronto Stock Exchange, the company’s been around for two years but the team in Mongolia has been around for over eight years. We had a corporate restructure during the crisis in 2008. Our management inherited these two coal projects in Mongolia and they are thermal coal totaling 1.4 billion tones so in the last two years we’ve commissioned a mining production in the north called Ulaan Ovoo and for the other project we have it’s called Chandgana and we’ve just been granted the construction license to build the next power plant in Mongolia. Altogether we have spent over $60 million in Mongolia and our story is not much like MNC or SouthGobi whereby the products go to China. The coal produced at Ulaan Ovoo, 80% of it goes to Mongolian power plants and the power plant at Chandgana once we construct the electricity will primarily serve to Mongolians. So it’s a Mongolian infrastructure play rather than the China play.
-Can you tell us more about the new 600MW power plant, how is it going to function and who is it going to be marketed to?
-Sure, well Rory I have lived in Mongolia for about two and a half years. One half of the time I’m here and the other half the time I’ve been on the road travelling and meeting investors and taking care of matters at our headquarters in Vancouver. Mongolia has experienced tremendous growth the GDP has more than doubled in the last five years and it’s more than quadrupled this decade. However there has not been any new power infrastructure in the last twenty years. As you know GDP correlates very positively with the consumption of electricity and even in the last few days there have been intermittent black outs and therefore we have to enter into a covenant with the energy authority here in Mongolia whereby they have requested to supply power up for up to 600MW by 2016. Starting 2016 with 150MW blocks and then phase into 170 in 2018 so we don’t envisage a short in demand for our power, it’s a matter of how we can bring on power reliably, affordably and technically integrating our power plant in Mongolia’s existing system.
-And what challenges have you faced when working with Mongolians on this project?
-I travelled all over the world, my father’s a diplomat and I’m originally from Taiwan but now live in Canada.
I think Mongolians are one of the smartest of races but on this project, it’s big in nature it requires a lot of teamwork in terms of financing, legal, technically, tariff so we have to interact with various ministries within the Government which sometimes poses a challenging form of coordination. Secondly there is no private power plant in place today so therefore there’s a bit of, I wouldn’t say education..(understanding?) yes understanding, of what internationally accepted practices of common terms to agree upon between governments and independent power plants and not to mention there’s the legal paper work, which you can imagine with a billion dollar project it’s fairly extensive and just the translation of that into Mongolian also poses a challenge.
-You mentioned before and you say it on your website that “Mongolia is an attractive investment destination”, would you still stand by that comment given that the Foreign Investment Law is now posing restrictions on foreign investors?
-I think there are challenges in investing in the mineral sector in any country, if you look at Australia, last year, they had a super tax on coal and Indonesia is now out right banning any raw material coming out of the country. And some of the practices that Mongolia also tried out like the Gold windfall tax and the copper which have since been repealed so like I said Mongolians have a tendency to get things done quickly when they sense the urgency but sometimes the policy may not be well thought after. I do want to preface by saying that I haven’t read all of the investment agreements in detail but my understanding is that it is being, I wouldn’t say watered down but it’s become more accommodating and flexible in dealing with foreign investments and I think that it’s a delicate balance for the government to manage its national sovereignty security versus economic development.
-Do you think Mongolia could miss out on the opportunity to grow as rapidly as it is forecast to?
-Well I think the forecast depends on who you talk to. However, the landmark Oyu Tolgoi project is looking to be in production in 2013 and by some estimate that could add as much as 30% to the country’s GDP and I think that if Mongolia really has the people in Government working together they could have success in developing the Tavan Tolgoi deposit and that could also add further into the GDP. And if Mongolia look to address the infrastructure within the country, looking into tendering and just the processing of taking the project to the central stage of the national market but I think a lot of times there’s got to be a lot of infrastructure in here, otherwise, (Is that really hindering your coal projects?), yes, well somewhat because I sympathise with the Government because there are limited amount of resources available that this is a project that’s not really such much attractive, it’s not going to bring the country tax revenue profits in their immediate future so therefore they will obviously prioritise into ways to get money and so therefore I think it’s a bit of a challenge to work but I think the Government is recognising that power is a very very big issue that has to be addressed now because it’s a long term project, you can’t just get the power tomorrow.
-Was it very difficult in raising money because I heard you were spending quite a while?
-Oh yeah, I think just to put it that we have about close to 200 Mongolians employees and the cost of doing business in Mongolia is rising with anything from accounting to lawyers, parts and fuel and diesel. We’ve managed to raise over $80 Million in the last two and a half years and we’ve put about $60 Million to work in Mongolia but this power plant project is a billion dollar investment and it’s a differing scale and we have been working very hard with the international investment community for almost a year now, the power purchase agreement is a key to getting the project financed and unlocking the potential of the coal that’s in the ground to convert to electricity so therefore we’re just going to continue to work with Government officials to reach a common understanding of the power agreement, not just for looking out for the interest of Prophecy but something can be financed, that’s really the key. We are really the match maker and the vehicle between the Government and the investment community, leveraging our coal to produce electricity for the good of the country but we have to have that power purchase agreement established and from thereon we can then look into wrapping up the project finance.
-Which equity funds and Asian banks have you been in talks with to raise the capital required?
-Almost all of them. It’s a billion dollar project but typical for this project you’re looking at a debt component and an equity component. And the debt component, the loan part could be as much as up to 70 or even 80% of the total package. So therefore the foremost important part is to secure the he debt and once you have the debt and then the equity will follow. And so on the debt we’ve talked to multilateral banks and there are a couple of them that are very active in Mongolia and as far as many commercial banks although with recent slowdown in Europe and the anemic situation in north America and China is also experiencing a slowdown so obviously we’re facing some challenges but in the end we’ve tried to be humble and really communicate what the investors look for with the Mongolian Government so we try to look for an agreement that’s internationally accepted and one that benefits everyone and that’s fair, but it’s not easy.
-Can you tell us a bit more about your Platinum project?
-Sure, we started Prophecy Group two and a half years ago and that was when the crisis hit in about 2008 and we started in 2009. The mandate was to acquire a good project for a good price, price was very depressed, a lot of the projects like copper, nickel, vanadium, platinum and coal. The Platinum Project was last year spun off to Prophecy Platinum so Prophecy Coal could solely dedicate its focus on Mongolia.
We’re very fortunate that the project that we bought for a very modest price has turned out to be one of the largest and most developed platinum and palladium projects in Canada and as 90% of the reserves for platinum come from South Africa you can see how special and unique the project is given its safe jurisdiction. We have a separate team that’s taking care of Prophecy Platinum and they are busy planning to looking into giving a definition to the resource in the ground. The follow up of that would be an economic feasibility study to confront the economic viability of the project.
-And you’re personally going to dedicate more time to your coal and electricity projects?
-Sure Rory, I’m the chairman and CEO of Prophecy Coal but I’m only the chairman of Prophecy Platinum.
We have a marketing person, three geologists and we share accounting but I’m very much hands off with Prophecy Platinum. I’ve spent almost a month here in UB working with my team because we do have a producing mine there are a lot of moving parts we have to take care of and I have met with the Government a dozen in the last two months.
-Will you be refining or exporting the coal raw?
-The Ulaan Ovoo coal is quite special in that its 5,000 NAR, it’s very low ash and low sulphur so therefore the coal does not require processing or washing so it’s very environmentally friendly. The issue that we encounter with export is that the Mongolian Government has this royalty but it’s on the benchmark pricing and for thermal coal, Mongolian’s tax department’s benchmark is $90 which they will asses 10% of the $90 so $9 but when our coal is selling nowhere near that so therefore it really hurt our business product in that respect. But I think once that issue is sorted out we’re looking to primarily export the coal to Russia because we’re at the Russian border so it’s not going to China. Nonetheless, what we’ve experienced throughout the last six months there is an increasing demand for thermal coal within Mongolia, not just for power plants which Government own but for DRI, they need coal, cement factories, they need coal, there’s private boilers that need coal so we’re actually finding a lot of demand for our product. Our prices are almost converging with the Russian prices that are being offered. As a company that’s working in Mongolia, we would take a priority of actually giving our product to Mongolians ahead of giving to Russians given a choice but right now we’re finding that our business is definitely picking up. We are subsidizing our coal to the Mongolian power plants. The Government is looking to regulate and the Energy Ministry is looking to stop subsidies by 2014 and we’re hoping they can live up to their word and finally pay us something that can cover our costs and earn a reasonable return.
-How much do you expect to make in profit?
-It’s not easy. I think we’ve acquired these thermal coal projects in 2009 and like I said there are challenges but at the same time we believe in Mongolia. I think there’s a bright future ahead with development and the resources that eventually will be created and converted into wealth when they’re coming out of the ground and being sold for money for infrastructure, for schools and hospitals. We’re talking in discussions with the Government on the power because the power project is really the main revenue driver for us in the future and to bring the power in 2016 if we complete the PPA this year. The power business is very much a cost plus model so we will agree in advance with the Government what return the investors will see as acceptable both on the interest rate for the debt as well as with equity and from that point on we will draft an agreement on that basis of fair and equitable return. I think what you have to keep is balance because investors are looking to the sovereign rating of Mongolia, taking into account for example the Foreign Investment Law that’s being past or the debt ratings. And they would determine what is the acceptable rate of return and then communicate that out with the Government. It’s not just somebody come with some number out of the sky.
When the number comes out I want people to know it was well thought after.
-Have you got any plans for anymore coal projects after the two you currently have?
-Our market cap has gone from $250 million to over around $60 million; it’s a combination of the issues that are taking place in Mongolia like the investment law and the cool down of the economy and the cool down of thermal coal prices. I believe we have a very attractive valuation, our assets and fundamentals are not reflected in the share price so therefore we don’t really have a currency to make addition acquisitions but not to say that we’re not on the look out should something come along that’s actually cheaper than what our assets are, of course we will look at it.
-And how do you see the elections affecting proceedings for your company? Are you at all worried?
-Yeah I lived in the U.S for ten years and I lived in Canada, I lived in Taiwan and the elections are all the same. One thing I believe in is the Mongolian democracy; the president cannot overture the issue of a decree and confiscate assets like Russia or even China or Bolivia or Venezuela so I do believe in the democracy of Mongolia. However, I believe that when the election comes because it’s democracy sometimes it’s dysfunctional because everybody would logically look for votes and there are some Mongolian public who are not well educated or well aware so sometimes you have some politicians who would do things that they would require to be elected. But in the end I think it doesn’t matter which party gets elected. The locomotive in my view is already set in motion that the wealth that’s already been created is very visible for all to see. I have a hard time imagining but I’m not saying it’s impossible to see an autocratic Government come in and just negate all the progress that’s been done before. Not to say that bad laws would not be passed. So I personally have an element of certainty but I have a hard time seeing that any new Government would have any drastic stand opposite of what has been working very well so far in the last few years.
Comments
Post a Comment