In a blow both to the country and its capital markets, the Mongolian government has once again scrapped its up to $3 billion initial public offering plans in Hong Kong for the central Asian republic's flagship coal mining company Erdenes Tavan Tolgoi.
A 30% sale of the shares of the state-owned company has been expected since at least 2012 and this is the country’s third attempt to raise money for Erdenes Tavan Tolgoi to have failed.
A previous IPO plan in 2012 was pulled after the government changed its plans for the mine and, three years later, a stake sale to a Chinese-Japanese consortium also fell flat after political interference.
Erdenes Tavan Tolgoi is one of the largest miners in the country and holds the licence for one of the world's largest untapped coking and thermal coal deposits, located in Ömnögovi Province in the south of the country.
The company says that reserves are estimated at more than 6 billion tonnes of coal, over one-third of which is high-quality, hard-coking coal which is essential in the steel industry.
And times have been good. Last year Erdenes Tavan Tolgoi reported a 38.8% jump in profits to MNT1 trillion ($358 million) on revenues that had soared 43% to MNT2.7 trillion.
An IPO had been expected before the summer with Bank of America, Credit Suisse and Nomura attached to the deal and with Linklaters in the legal corner. The shares were supposed to list jointly in Hong Kong, Mongolia and London ahead of parliamentary elections in June.
But the country’s cabinet halted flotation plans at the end of April partly because of the market turmoil caused by the Covid-19 pandemic.
The first quarter of the year saw the value of IPOs in Hong Kong slump 31% to HK$14.1 billion ($1.8 billion), according to figures from Deloitte.
The cabinet partially repealed Resolution 296, confirming that an international IPO did remain a long-term goal, but that in the meantime, the company should focus on finishing the construction of the Tavan Tolgoi-Gashuun Sukhait railway.
The $1 billion 240-kilometre rail link from the mine to the Chinese border where up to 30 million tonnes of coke a year could be sold to Chinese steelmakers is part of China’s Belt and Road Initiative and began in May 2013, but has suffered from numerous delays. Tavan Tolgoi has committed to completing the link by 2021, but most believe that is optimistic.
The cabinet also cited “political distortion” as another reason for the delay, referring to long-standing union unhappiness about how the company has been restructured along with familiar Central Asian concerns about selling off its crown jewels.
The cancelled IPO is a blow to the Mongolian economy which is expected to fall sharply this year because of the Covid-19 pandemic. The Asian Development Bank estimates that economic growth will drop to 2.1%, down from 5.1% last year.
“Mongolia enjoyed a solid economic recovery in the past three years, but the Covid-19 outbreak presents a significant challenge due to the impact on global and regional economic conditions,” said ADB country director Pavit Ramachandran.
Several downside risks loom. Deeper and more prolonged consequences from Covid-19 may cause even lower growth than projected, raise unemployment, and impose major pressures on the balance of payments and the fiscal position, making investors less willing to take on Mongolia’s debt and engendering a liquidity problem for the banking system.
On top of this, household indebtedness could worsen the risk exposure of non-bank financial institutions.
One silver lining has been from the World Bank. At the beginning of April, it approved a $26.9 million loan to the country.
“This emergency operation will not only provide immediate support to address the Covid-19 pandemic but will also benefit Mongolia’s health sector in the longer term to become more resilient to future health emergencies,” said World Bank country manager Andrei Mikhnev.
The project funding comprises a $13.1 million credit from the International Development Association and a $13.8 million credit from the International Bank for Reconstruction and Development.
But it is hardly enough. Even if there is a rebound in China and both trade tensions and Covid-19 concerns ease to allow a recovery in exports and domestic demand, growth is still only likely to reach 4.6% next year.
Certainly, the ratings agencies have taken a dim outlook. Last week, 8 May, Moody’s affirmed Mongolia’s B3 rating but changed its outlook to negative.
That shift “reflects rising external vulnerability risks related to a sharp fall in export revenue at a time when access to external financing is highly uncertain, threatening already weak foreign exchange reserves adequacy,” it said.
“Moreover, the government's borrowing requirements will increase markedly, in part to fund a large stimulus package, which raises liquidity risks,” Moody’s added.