Nearly 2.5 million Mongolian citizens will finally be registered as shareholders in Erdenes Tavan Tolgoi (Erdenes TT) nearly six years after a mass distribution of shares in 2012. More than two thirds of Mongolian citizens currently own 1,072 shares each in the majority state-owned coal mining company. But that ownership has been in name only, with many displeased with the government’s inaction in mobilizing citizen-held shares. But thanks to a recent vote by the board of Erdenes TT, the issue is likely to reach a resolution in the near future, and with that comes the potential for a monumental shift in the nation’s economy.
The board of Erdenes TT convened on March 1 and ultimately voted to register nearly 2.5 million Mongolian citizens who collectively own about 20 percent of the company amidst much speculation. The vote is set to have massive implications for not only the fate of Erdenes TT but the entirety of the Mongolian financial system.
The immediate and obvious implications of registering citizen-held shares is that individuals will now be able to freely dictate their shares in the company with the possibility of receiving dividends in the future. After the registration of shares is completed with the approval of the Financial Regulatory Commission and Mongolian Central Securities Depository (MCSD), shares will be allowed to be traded on the secondary market of the Mongolian Stock Exchange. This in itself will signal a monumental shift in Mongolia’s young free market economy.
Since the transition into a market economy, Mongolia’s financial sector has been bank-centric. As many of our readers are aware, banking accounts for nearly 95 percent of the financial sector. The stock market and the non-banking financial sector has been heavily underutilized, leaving businesses and people alike to rely on banks for funding and revenue. In terms of businesses, bank loans have been and still are the most common source of funding. However, with high interest rates and the liability that comes with a bank loan, Mongolia has seen many companies opt for funding on the stock exchange in the past year or two. Just last year, ITools became the first information technology company to launch an IPO and just last month, LendMN became the first fintech-based company to do so as well.
It is not only companies that have begun to see the advantages that a stock market offers. As a part of maximizing state budget revenue for the IMF program, the government imposed a 10 percent tax on the savings income from bank accounts. In the past, savings income was a major source of revenue for many who enjoyed up to 18 percent interest rate income. Since the tax was imposed, a spike in investment for government bonds on the Mongolian Stock Exchange has been observed, as well as overall improved capitalization. The most recent IPO of ITools was three times oversubscribed, evidencing the increased interest in the stock market.
The shares in Erdenes TT mobilizing could be the biggest catalyst to help propel Mongolia’s stock market to a new level. Never before had 2.5 million Mongolians had the opportunity to actively trade on the stock market. Now more than two thirds of Mongolian citizens will be eligible to trade on the secondary market, albeit through a broker.
However, despite the massive influx of participants on the stock market, as economics professor G.Khashchuluun at the National University of Mongolia points out, Erdenes TT’s shares will not be enough to tip the scales for the stock market. Banks still dominate the financial sector and that is likely not to change in the next few years.
“While the registration of citizen-held shares in Erdenes Tavan Tolgoi will increase the number of traded stocks on the stock exchange significantly, it will not be able to fully substitute the banking sector. But it will probably create that motivation for individuals to become more involved in the stock market,” G.Khashchuluun told the UB Post.
What has been even more encouraging is that Erdenes TT has been profitable and been able to almost pay off its debt in its entirety. Last year, the company paid off a 100 million USD debt to Aluminum Corporation of China Limited (Chalco) and a 60 million USD debt to TTJV Co. In addition, the company reported that it paid 150 million USD of the 200 million USD debt to Development Bank of Mongolia. This essentially leaves Erdenes TT debt-fee with only 50 million USD to be paid to Development Bank.
In 2017, Erdenes TT mined more than 10.1 million tons of coal and exported 8.4 million tons, amassing revenue of 1.1 trillion MNT. From this revenue, 243 billion MNT was contributed to the state budget. G.Khashchuluun believes that this revenue can be doubled or even tripled, helping to strengthen the value of the company.
“Right now, Erdenes Tavan Tolgoi mainly exports raw coal to China. If the company ceases export of raw coal and begins exporting processed coal, revenue could be increased twofold or even threefold. This can be accomplished by the government with an increased export tax on raw coal,” G.Khashchuluun said.
No matter how the situation plays out, the fate of Erdenes TT is on pace to have far-reaching effects on not only Mongolia’s financial and mining sector but also the economic and political landscape of the nation.