1. Raising Capital - New Opportunities for Mongolian Companies Financial Information & Investor Requirements
October 2009, Ulaanbaatar, Mongolia
Michael D Lynch-Bell
Partner in Charge
IPO Services Ernst & Young LLP
+44 (0)

2. Ernst & Young in the IPO Space
London is the hub for foreign/inbound IPOs
In the last 5 years Ernst & Young was:
Number 1 – all IPOs by proceeds value
Number 1 – all IPOs by Market Cap
Number 1 – all inbound IPOs by Market Cap and Proceeds value
Number 1 – FTSE100/250 inbound companies, by auditor
Recent IPO experience includes Xstrata, Kazakhmys, Hochschild Mining, Petrofac, Gem Diamonds, Scarborough Minerals, Ferrexpo and Fresñillo plc

3. Is your company ready?  Growth Size Corporate structure
Actual or potential high growth is the main attraction for investors; association with growth industries and regions can attract premiums.
Size
There is no right size for listing, but companies from emerging markets are usually of high growth potential. A profitable trading record is not a requirement for listing.
Corporate structure
Clear and transparent shareholder and corporate structures with straightforward business models are more attractive to investors.
Use of proceeds
The amount of the offering and the use to which the proceeds are put will be evaluated by investors. Forecasts and plans will be required as part of the listing process.
Corporate Governance
A strong management team with a proven track record and listing experience is preferable. Many listing companies will recruit new independent non-executive directors.
Accounts and Information Systems
The reporting requirements for listed companies are demanding and will require good accounting and information systems.

4. Why list? Benefits Drawbacks Improved financial position
Opportunities for future financing
A path to mergers and acquisitions
Greater marketability
Improved value
Diversification of personal portfolios
Realisation of capital gains
Enhanced corporate image and morale
Drawbacks
Loss of control
Sharing success
Limiting freedom to act
Loss of privacy
Periodic reporting
Initial expense
Shareholder expectations
Fiduciary responsibilities

5. Issues to address Strategic issues Tactical issues
Attractiveness and marketability
Track record
Exchange selection
IPO structure
Size, structure and scale of offering
‘Lock-ins’ of retained interests
Use of funds
Profile and credibility of board and management in public company arena
Management remuneration / incentivisation
Governance and transparency
Post-float investor relationships and communications
Tactical issues
Structure
Identify what is being floated
Pre-float structuring / carve out / combinations
“Practical issues”
Financial comparability to peers
IFRS conversion
Accounting policies and impact on analyst coverage
Working capital & debt
Post float funding for at least 12 months in place
Change in control triggers
Risk management system and reporting
Non execs and governance
Forecasting and financial reporting
Public v private requirements and deadlines
Reduction in post float flexibility
Shareholder approvals
Pre float dividends unlikely – see article below
Private equity-backed IPOs will need a new look
By Andrew Hill - Published: June
Extract - New Look could suffer by comparison with Debenhams' May 2006 IPO. Debenhams' net debt was 3.4 times current ebitda after flotation. New Look is carrying about £1bn of net debt, 4.6 times ebitda for Three years on, the department store group's shares trade at less than 95p - more than 100p below the IPO price - and it is having to consider raising capital at a discount even to that.
The only cause for optimism is that when the demand exists, the City usually finds a way to tap it. Debenhams' private equity backers paid themselves with the now notorious "leveraged recapitalisation" of the retailer before the credit crunch (as did New Look's). They also took more money out of Debenhams with a refinancing before the flotation. That course, widely criticized at the time, would not be open to New Look's owners - nor to other private equity firms seeking to return their portfolio companies to the public markets. Now the same brains that found a way to re-gear private-equity backed companies ahead of IPOs in 2006 and 2007 have to work out how to de-gear companies in time to catch the next wave of flotations in late 2009 or early 2010.

6. IPO advisers LSE Candidate Auditor Reporting Accountant Sponsor
Broker/NOMAD
Issue audit opinion on financial statements
Comfort letter
Short form report
Working capital report
Long form report
Comfort letters
Ensure that the directors of the Company have received satisfactory advice and guidance as to the nature of their obligations
Coordinate the work of other professionals – such as accountants and lawyers who are involved in preparing a Company for the market
Issue an opinion that it is satisfied that the Company applying to LSE is appropriate to be admitted.
Test marketing
Identify investors
Valuation benchmarking
Marketing roadshow
Book-building and pricing
Other advisers
Lawyers
Analysis and optimization of key business processes, KPIs
Development of IFRS compliant reporting policy & procedures
Definition of internal controls framework
IT Audit & Security
Tax structuring & transfer pricing
Management incentive schemes, Non-executive directors system
Environmental Due Diligence
Actuarial
Mineral expert
Legal Due Diligence
Verification notes
Material contracts
Underwriting agreement
Financial PR
Registrars

7. Accounts preparation Financial deliverables
Historical financial information
Financial reporting readiness
Financial reporting procedures
Accounting issues

8. Financial deliverables
 Partial  Full × Prohibited
Pre float services
Reporting accountant
Other advisor
Financial reporting procedures – advice 
Financial reporting procedures – implementation ×
Tax structuring
Project management support
IFRS conversion/financial reporting advice 
Process improvement (financial, business, IT)
Forecasting / modelling support
Corporate governance design
Corporate governance implementation
NED programme
Sustainability and environmental advisory
Executive performance and compensation
Carve out support
Float services
Reporting on accounts, pro forma and forecast (if required)
Long form report
Working capital report
Financial reporting procedures – reporting

9. Financial deliverables – Main Market
Public reporting
‘Short form report’
Historical financial track record
Contains financial data on at least 75% of the business for all periods
'Go forward' accounting basis.
‘New' opinion in accountant’s report
Pro forma
Adjusted balance sheet and P&L to reflect the Group as it will be organised on IPO
Private reporting
‘Long form report’
Description of the business
Financial analysis including normalised earnings
Key issues impacting earnings or valuation
Key areas of judgement underlying the financial info
Financial Reporting Procedures Report
Financial Reporting procedures and internal controls
Established and implemented procedures
Proposed procedures
Working capital report
Review of assumptions
Description of the forecast
Sensitivity analysis based on identified risks
Comfort letters
Prospectus financial contents
Significant change
SAS72 for rule 144a

10. Historical financial information for equity listings
Requirement
Main Market
AIM
Three year financial track record – last two years under IFRS 
... or shorter period
Track record to cover 75% of group at IPO
Listing Rule 
.. but PD Regulation
Age of last audited period
6 months
9 months
15/18 months with interim
US offering under rule 144a – 135 day rule
Clean audit opinion
… but market practice?
Other acceptable GAAPs for financial periods expiring no later than 31 Dec 2011
US, Canadian, Japanese
Third country issuer has publicly stated convergence with IFRS by 31 Dec 2011
Accountant’s report

11. Assessing financial reporting readiness
Initiation
Mid-stage
IPO ready
Financial history & “carve out”
Local GAAP
Consolidated accounts
IFRS 3-year record
Structure
Legacy businesses
Rationalised
Efficient tax and legal structure
Related parties
Overlap and confusion
Company accountability
Clean full year
Forecasting
Cash based annual plan
Accrual based forecasting
Reliable working capital forecasts
Taxation
Unidentified risks
Assessed risks
Mitigation and disclosure strategy
Legal title to assets
Assumed
Assessed
Attested
Financial control and governance
Proprietor discipline
Professional management
Governance procedures

12. Issues that may be encountered
The Reporting Accountant may need to deal with issues in the following areas:
Taxation
The evolving nature of tax legislation of many countries may mean that changes are required to meet Sponsor and market expectations
Documentation
Local historical audit evidence available may not be sufficient to enable sign-off. This may require significant rework
Accounting policies
The historical accounting policies may not be in line with your peer group and may need to be amended
Related party disclosures
There will be a series of related party transactions and balances that need to be appropriately disclosed
Legal title to assets
Demonstrable unencumbered title to assets (throughout their operating life) needs to be demonstrated
Higher burden of transparency and disclosure
Public companies have additional disclosure obligations
Our approach and early issues review is designed to identify these potential issues, enabling us to design solutions which can then be implemented without disruption to the timetable.

13. Financial Reporting Procedures review process
Reporting Accountants’ area of focus:
high level financial controls
budgeting and forecasting
accounting policies
information systems

14. Level of implementation required
Systems
Internal Audit
Board Committees & Processes
Revisit Strategy & Corporate Governance Framework
Level of implementation
Risk Management
Controls
Financial Reporting
Tax Structuring
IFRS
Business Controls
Title of Assets
Regulatory
Treasury
Management Reporting
Budgeting/Forecasting
Financial controls
Training and Culture
Accounts Assurance
Cash
Joint Venture
Strategic Investor
Float
Post Float
Time

15. Indicative flotation timetable
An indicative timetable of work streams that a company would follow in order to prepare for a major market listing.
12 months+ before admission
6-12 months before admission
6-24 weeks before admission
0-6 weeks before admission
Appoint advisors
Develop a robust business plan
Adopt best practice for corporate governance
Ensure compliance with laws and regulations
Complete strategic initiatives, e.g. acquisitions
Establish financial reporting procedures
Review MIS and operational and compliance controls
Consider ownership and tax issues
Commence initial due diligence
Consider investor relations strategy
Commission specialist reports if required
Make necessary changes to the Executive Board
Appoint Non-Executive Directors
Implement financial reporting procedures
Discuss transaction with the Exchange
Agree draft timetable
Agree final timetable
Review and resolve problem areas
Produce draft prospectus and other documents
Initial review of pricing issues
Review public relations presentations
Commence initial marketing (analyst presentations and roadshows)
Commence formal marketing
Pricing and allocation of the offer
Register prospectus/admission document
Admission granted and trading commences

16. Management - what you need to get right pre-IPO
Compelling investment case to market (management/strategy/financial performance)
Executive support for process
Early preparation to resolve all issues pre float
Adequate resources available to run the process
Fully resourced programme management
Rapid communication of issues to nominated decision makers
Nominated decision maker with authority to commit the company
Communications between all parties
Realistic initial view on status of preparation to inform planning process
Experts/advisors with relevant experience and adequate resource committed

17. Case study: CIS mining co.
Prior to IPO Process
Standard cash-based accounting model as used across CIS
Existing KPIs were cash and production metrics, not EBITDA
Lack of knowledge of accruals accounting and IFRS
Locally ‘audited’ accounts aren’t necessarily fit for LSE
Lack of appropriately skilled staff with huge burden placed on them
Inexperience of LSE regulations
Making it work
Robust and pragmatic client acceptance
150+ Ernst & Young people on the ground in Kazakhstan
Seven Ernst & Young partners spent over two months in Kazakhstan overseeing final stages
Simultaneously did reporting accountants work as local KPMG Kazakhstan conducted audit
Dedicated senior UK team exclusively engaged for nine months working across UK, Kazakhstan and Germany
Multiple solutions provided for potential ‘deal stoppers’
Successful IPO
Listed on main market in October 2005
Entered the FTSE 100 in December 2005
Employs 65,000 people

18. Case study: CIS mining co.
Prior to IPO Process
Significant number of related party transactions with companies connected to the selling shareholder. Disclosure and transparency key
Group and its governance structure was focused on the needs of the selling shareholder. Tougher governance required to ensure Group independently run
Management reporting based on local GAAP
Local IFRS accounts required enhancement for UK listing purposes
Making it work
IPO process lasted over 12 months. E&Y actively involved in preparing the company for listing:
FRP
IFRS
Due diligence
Robust advice on IPO tax structure
E&Y teams across UK, Ukraine and Russia involved over the IPO process
Successful IPO
Listed on main market in June 2007
Approx $420m raised of which some $220m went to the selling shareholder

19. Selected LSE Inbound IPO experience
Main Market
Xstrata
Kazakhmys
Hochschild Mining
Gem Diamonds
Ferrexpo
Fresñillo plc
Global MENA Financial Assets
AIM
Highland Gold
Frontier Mining
Asia Energy
Indago Petroleum Holdings Ltd
Absolute Capital Management
Ishaan Real Estate
GDR
Rosneft OJSC
Kazmunaigas
TMK
VTB Bank
Investcorp Bank
Pharmstandard
Global Investment House

20. Thank you October 2009, Ulaanbaatar, Mongolia Disclaimer
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young accepts no responsibility for loss arising from any action taken or not taken by anyone using this publication.
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