Dale Choi: Chalco’s 898 million USD would have went into our country’s development

Dale Choi, on the right

By D.Oyunchimeg

The following is an interview with Mongolian Metals & Mining analyst Ch.Erdenedalai, commonly known as Dale Choi.

Founder of Independent Mongolian Metals & Mining Research, Choi has a master’s degree in financial economics from City University of London.

We heard that you analyze and research the capital market? Can you tell us about your work?

I produce and sell analysis and research on public companies listed on international stock exchanges. I operate independently as a third party. This means I am neither on the “sell side”, such as brokers, nor on the “buy side”, such as investment funds. As such, I provide independent opinion on buying and selling shares. As a financial analyst, I aim to tell the real market numbers and facts.

Lately, foreign investment has been deteriorating in Mongolia. How are Mongolian companies listed on international stock exchanges doing?

The deterioration of foreign direct investment (FDI) in Mongolia is directly reflected and closely related to the performance of companies operating in Mongolia that are listed on international exchanges. Specifically, one can say that their stock prices are a market barometer for the investment condition of Mongolia. The deterioration is reflected in collapse of prices of stocks of these companies. I want to illustrate the relationship between the collapse in FDI and stock price, on the shocking example of one company.

The company is called South Gobi Resources. In the beginning, it was operating very successfully and now it is in a very difficult condition. When the company released its IPO on the Hong Kong Stock Exchange in 2010, it valued itself at 17 CAD per share, or 2.73 billion CAD in total, and raised 459 million CAD. Foreign institutional investors were optimistic about the future of Mongolia’s mining and expected it to grow. South Gobi exported four million tons of coal to China in 2011 and Mongolia was the leading coal supplier of China, even ahead of Australia. However, since the last election cycle, and because of regrettable coincidences, today’s tragic situation has been realized.

Are you saying that the collapse of this company was caused by Mongolia’s regulations and laws?

Of course there should not be an overstatement blaming everything on Mongolia. Factors such as the collapse of the coal market and decline in coal price affected the company. However, the biggest factors were laws and regulations. Shareholder of the company, Turquoise Hill Resources, announced a financial agreement that it will sell 56 percent of the company to China’s Chalco company before the 2012 elections. At that time, populists have treated the issue emotionally, and this led to the initiation and approval of a law to limit foreign investment. At that time, Turquoise Hill Resources owned 56 percent of South Gobi and valued each share at 8.48 CAD to raise 898 million CAD from the sale. In other words, the buyer and seller both valued the company at 1.54 billion CAD. Now in 2015, Turquoise Hill Resources is selling its last remaining shares in the company to a Chinese company at 0.35 CAD per share, making the value of the whole company 77 million CAD, to raise 17 million CAD. In short, South Gobi, which was worth 1.54 billion CAD in 2012, is now worth 77 million, or there is 95 percent destruction in shareholder value. The wealth of investors, who invested in Mongolia, dropped by 95 percent. This closely resembles the fall in FDI from 4.45 billion USD in 2012 to 506 million USD in 2014, or by 89 percent.

How dire is a fall from 898 million CAD to 17 million CAD?

What matters most for Mongolia is how 898 million CAD would have been spent. Turquoise Hill Resources was to use the capital from the transaction on productive development of Oyu Tolgoi. This money would have ended up in the pockets of our country, reason being that majority of the workforce in the construction of Oyu Tolgoi are Mongolian workers and national enterprises. Yet our authorities have prohibited this and have hurt the economy badly.

Controversy surrounding South Gobi hasn’t stopped. There have been mentions of inaccurate reporting of financial statements, money laundering and corruption. Are there any analysis by foreigners about the financial statement of the company?

Of course, there are. As financial analysts, we are required to make analysis of financial statements, which are validated by auditing. One can say that the foundation of financial analysis are audited financial statements. South Gobi is listed on two reputable international exchanges. Therefore, there is no possibility at all to prepare a false financial statement, evade taxes and give bribes.

The flow of money and capital of companies listed in the capital market is transparent because they can raise funds only by having excellent corporate governance. As a financial analyst, I understand that there can be no such things at South Gobi. Of course, I am not an auditor so I am not the person to directly determine and make conclusions.

How much are the shares of South Gobi worth now?

Shares of South Gobi have declined all the way down to 34 cents per share. However, curiously last month, share prices rose to 1.06 CAD per share. As I understand, the market has optimistic expectations for the company’s business. Currently the company has a total of 219 million shares outstanding and market capitalization of 235 million CAD.

A criminal case has been filed based on the conclusion of Mongolian experts that claim that South Gobi evaded 35 billion MNT (approximately 17.5 million USD) in taxes. The company doesn’t agree.

The criminal case is based on tax conflict. Actually in our tax law procedure, the process to resolve tax disputes is clearly instructed. In other words, there must be a legal process. Yet not only me, but many people are shocked that the dispute has become a criminal case. According to our country’s law, a criminal case can be filed on tax issues if it is proven that taxes due were intentionally concealed or the evading taxpayer has fled from justice and caused large losses. Yet South Gobi is listed on two reputable international stock exchanges, the company’s office and mine are operating in our country. I am skeptical about the filing of the criminal case when the company’s employees are working regularly within the country. As I understand it, there is a breach in the law and due processes. The way I see it, if the court decision is against the company, the company will be in a very bad shape.

If the company is found guilty of tax evasion, what kind issues will arise in the domestic business environment?

The company itself has reported that it might go bankrupt. At the same time, foreign investors are likely to view that Mongolian authorities bankrupted the company. This is a very risky issue. In general, top western investors are selling everything almost for free and leaving our country. We are throwing away capital that investors have brought us. In a sense, we are falling deeper and deeper into a hole that we are digging ourselves. Therefore, one can see how uncertain the future of our mining sector and economy has become.

How would you solve this problem?

As I am a bystander and observer, it is not proper for me to directly instruct. However, from a financial analyst’s point of view, if this case can be resolved according to the law, it will be very important positive message to foreign investors.

Short URL: http://ubpost.mongolnews.mn/?p=13870

Posted by on Mar 25 2015. Filed under Prime Interview. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

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