Source:  Frontier Securities 

Masa Igata, the Founder and CEO of Frontier Securities spoke to leading Mongolian daily “ Unuudur” on January 20, 2009 on risks of Tavan Tolgoi(TT) IPO in a rush before elections this year.

Masa Igata is a well-known pioneer figure in Asian frontier markets with more than 30 years of professional experience in financial markets. He is an active guest-speaker in the Asia region and since 2007, his expertise is focused on the Mongolian fast-growing frontier market and about best practices to ensure and promote its access to foreign investors through a full range of financial services and research.

"I understand that a party in a political power needs money before the election to fulfill election promises," Masa Igata said,” However, TT IPO in a rush before elections has risks of being not in the best interests of Mongolia.

TT is a world class deposit. Unfortunately, at the moment TT project is still at the raw stage and last year produced its first million tons of coal. The company is only starting to grow.

Investors will have more confidence in the company after contract miner will ramp up production to 3-4 million tons next year. Uncertainly surrounding infrastructure, in particular, railway to China, will also contribute to disappointing valuations. More clarity what will happen in the west part of Tsankhi deposit will also help. More confidence in all these and other factors will help to more fairly value the company. But it will take time.

We estimate that Erdenes Tavan Tolgoi, holder of license for eastern part of TT deposit will be valued at a range of 5-6 billion US dollars if IPO is done in a rush before the elections offering 30 percent stake and raising proceeds of 1.5-1.8 billion US dollars.  Same valuation next year would likely to be in a range of 9-10 billion US dollars range resulting in proceeds of 2.7-3 billion US dollars.

However, there are many issues to be resolved in order to reach such valuation. First of all, corporate governance must be improved. Independent directors on the board of the company must be internationally reputable people, capable of representing interests of minority shareholders.  Construction of coal washing plant must be speeded up. Exporting raw coal does not bring high margins. Attractive margins are indeed in exports of washed coal. As I mentioned, resolving railway issue is of critical importance. Only railroad can match properly full potential of TT. Since eastern and western part of Tsankhi deposit are parts of the same deposit if both are coordinated it would be more efficient.”

He urged the Mongolian public, saying, "Not reaching fair value for this world class Mongolian asset  based on political decisions would be indeed regrettable.