Friday, June 11, 2010

Share and Bounty

UB Post

June 11,2010

Any company in the world raises capital in three different ways. Initial step is to make own investment, second is to get credit from third party, final step is raise funds by issuing own shares.

So a company issues shares to raise funds, but not to distribute. But those two major ruling political forces in Mongolia have joined their voice to support this strange motion.

A political “brainwashing” process is taking place in Mongolia as there a superwealthy named company established, and its “Bounty of the Nation”, a election promise of wealth distribution, has turned into a decision to make ten percent of total Tavan Tolgoi shares to be given to every citizen. The decision was announced in a recent televised news that it would be made available through so called Human Development Fund.

Tavan Tolgoi project, first of all is a business, profit seeking one. The project will go forward smoothly when all parties earn profit. But it won’t if it is largely politically favored, and used as a tool to rationalize some election promise.

Even it will take time to see first expectation of profit after it goes all the way through lay out initial investment, coal extraction, production, sales and finally make profit. For the necessary infrastructure constructions of paved road, railway, and power generator, it needs huge amount of funds. The government is expected to build those infrastructure developments as well as urban planning around the mining town. A private company makes no investments in those assets, but if the government releases certain amount of funds to finance those infrastructure projects, then the private company makes commitment to do that.

So far what is clear is that all these projects would be managed by “Erdenes MGL”, a state owned corporation, ten percent of which would later become available for public. The point is Human Development Fund may open accounts in the name of each eligible citizen of Mongolia to make cash transaction as those two political parties have promised to make. And, ten percent of Erdenes MGL would be one available option for public to buy under that cash transaction. But who will represent that ten percent in the board of directors?

Another question is Erdenes MGL company’s market evaluation of its own, which should be approved by all shareholders. In order to make market evaluation, investment amount on each part of the Tavan Tolgoi project should be clear. The project’s profit relates to its total sales.

However, the project will move forward with the efforts of both and foreign developers, but head company Erdenes MGL should trade its shares in both local and foreign stock markets.

The main reason to make it public traded is derived from difficulties how to differentiate from which Mongolian company would benefit. In other words, Mongol-999, a national consortium that joined more than 2000 private local businesses under its flag, cannot be given a special power. The rest of 50,000 Mongolian private businesses will be kept out of beneficiaries because they did not join. This may cause a defect in market evaluation of the project’s operation expense.

Generally speaking, in Mongolia, a political risk has always affect cost of private business’s normal operation. But this consortium and groups, first of all, should define themselves investors or contracted developers. It can not be both. There is even no any private company in Mongolia who can handle this project both financially and technically capable.

By inviting foreign mining giants into the project, it will build a confidence to sell shares in foreign stock market. How would foreigners believe even when Mongolians, ourselves, do not believe in government owned corporation.

In order to get listed at local stock exchange, all companies must announce their annual reports accurately. 64 public listed companies out of total 342 registered at the Mongolian Stock Exchange have announced their annual reports in 2009. But only four of them had complete reports. It is doubtful whether to sell share at the Mongolian Stock Exchange which has ten public companies actually. Some people are not even aware that Financial Regulatory Commission is accountable for this failure of misreport, not Mongolian Stock Exchange.

It may not be a matter of question for the Government, who does not differentiate points of share and bounty, how the local stock market is working, especially during these historical days of Tavan Tolgoi project discussion, but it matters us a lot, to people of Mongolia.

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