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Monday, 29 December 2014

Mongolia back on dealmakers’ radar

Top Story: Mongolian Capital Markets

New law and upcoming election may unblock capital markets pipeline

Financial institutions are sizing up their prospects in Mongolia’s emerging capital markets weeks before a presidential election that is expected to restore some confidence in the largely mining-based economy.

After a period of little political progress, this month’s election may be another positive development for would-be dealmakers after the Mongolian parliament passed a revised securities law late last month.

The new rules are intended to make it easier for multinational companies ­– especially those with interests in Mongolia’s vast mining reserves – to list on the Mongolian Stock Exchange by allowing dual listings with overseas bourses. That would also make it easier for local investors to maintain a stake in the country’s resource stores and in its economy, which the IMF says will grow by 14% in 2013 and 11.6% next year.

The law will take effect at the beginning of next year. Until then, a lot of details still have to be sorted out, said Altai Khangai, CEO, Mongolian Stock Exchange.

“There are many companies with mining operation in Mongolia that are listed outside the country but local citizens would like to buy their shares,” he said. “The provision for dual listing can enable this.”

The first major company to list is expected to be Erdenes-Tavan Tolgoi. Mongolia’s largest coalminer has been preparing an IPO for multiple exchanges since at least last year. It plans to list in Mongolia, where it is domiciled, and London. The issuer has tentative plan to list shares in Hong Kong, but the stock exchange there still does not recognise Mongolia as a qualified jurisdiction for a foreign listing.

BNP Paribas, Deutsche Bank, Goldman Sachs and Macquarie have been mandated to lead an IPO that was initially set to price as early as last year.

A Hong Kong listing would allow Mongolian natural resources companies – not only Erdenes-TT – to tap investors in neighbouring China, where most of their production is likely to end up.


Once the election has been completed, the new law is expected to reinvigorate the volatile Mongolian equity markets. The Mongolian Stock Exchange’s Top-20 Index rose more than 400% from January 2010 to February 2011 before falling 56% to 14,618.8 as of last week.

Exchange officials are optimistic about valuation and new listings.

“Ultimately we would like to see the market go from just over US$1bn to about US$30bn in the next five to 10 years,” Khangai said.

Typical of other frontier markets, however, the level of uncertainty in Mongolia’s economy and political system has given investors and issuers pause before going ahead with bigger plans.

“One thing that has slowed things down in Mongolia has been political uncertainty. Liquidity has plunged,” said Lee Cashell, CEO of Asia Pacific Investment Partners, which invests in Mongolian property development and cement production. “It should pick up after the presidential elections.”

The MSE has been working on upgrading its capabilities for years. In January 2011 the London Stock Exchange signed a strategic partnership with the MSE to improve the latter’s technology, management and market expertise. The full benefits of that partnership have still not fully developed, sources said.

Meanwhile, the new law encourages foreign and local companies to list in Mongolia and abroad. It updates practices for public and private placement of securities so that they are in line with international rules in terms of corporate governance and transparency. It modernises payments systems related to listing and buying securities and allows the local regulator to communicate with foreign and multinational counterparts.

Bonds and equities

As the equity markets and overall sentiment improve, APIP’s Cashell expects a more liquid term debt market could develop as well.

“This will improve the prospects for the bond market, for bonds and mortgages,” he said.  “Smaller corporations are going to be talking to ratings agencies. This could be the right time for some Mongolian corporations to start to issue some bonds.”

Yet, this will take time, in part because a lot of companies that would want to issue bonds or raise debt outside the small bank market need to get their financial statements in order.

“Due diligence is the problem,” he said. “I don’t think there are 100 companies that could do [price a bond]. There are 100 companies that would want to issue, but there five to 10 that could. It would be useful. To get a bank to lend US$5m–$10m is next to impossible.”

The Mongolian Government, for its part, has already attracted attention from bond investors with a popular debut in the US dollar market last November. The US$500m 4.125% five-year and US$1bn 5.125% 10-year attracted US$6bn and US$9bn, respectively, from investors.

Still, the equity market will probably have to develop first. Now that the new law is in place, there is a lot to do before it goes into effect next year. Even then, however, it will still be difficult to attract a lot of interest in the market without more local demand and liquidity first.

“The idea is getting people to do a dual listing rather than just go abroad,” Cashell said. “But it’s difficult to convince someone to do a US$150m listing in Mongolia. The top 10 brokers can’t place US$150m.”

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