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October 2009, Ulaanbaatar, Mongolia Raising Capital - New Opportunities for Mongolian Companies Financial Information & Investor Requirements Michael D.

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Presentation on theme: "October 2009, Ulaanbaatar, Mongolia Raising Capital - New Opportunities for Mongolian Companies Financial Information & Investor Requirements Michael D."— Presentation transcript:

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

2 Raising Capital – New Opportunities for Mongolian Companies October 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 Raising Capital – New Opportunities for Mongolian Companies October Is your company ready? Growth 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 Raising Capital – New Opportunities for Mongolian Companies October Why list? Benefits 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 Raising Capital – New Opportunities for Mongolian Companies October Issues to address Strategic issues 1. Attractiveness and marketability Track record Exchange selection 2. IPO structure Size, structure and scale of offering Lock-ins of retained interests Use of funds 3. Profile and credibility of board and management in public company arena 4. Management remuneration / incentivisation 5. Governance and transparency 6. Post-float investor relationships and communications Tactical issues 1. Structure Identify what is being floated Pre-float structuring / carve out / combinations Practical issues 2. Financial comparability to peers IFRS conversion Accounting policies and impact on analyst coverage 3. Working capital & debt Post float funding for at least 12 months in place Change in control triggers 4. Risk management system and reporting Non execs and governance 5. Forecasting and financial reporting Public v private requirements and deadlines 6. Reduction in post float flexibility Shareholder approvals

6 Raising Capital – New Opportunities for Mongolian Companies October Short form report Working capital report Long form report Comfort letters Reporting AccountantSponsor Issue audit opinion on financial statements Comfort letter 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. LSE Candidate Auditor Test marketing Identify investors Valuation benchmarking Marketing roadshow Book-building and pricing Broker/NOMAD 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 Other advisers Lawyers Financial PR Registrars Legal Due Diligence Verification notes Material contracts Underwriting agreement IPO advisers

7 Raising Capital – New Opportunities for Mongolian Companies October Accounts preparation Financial deliverables Historical financial information Financial reporting readiness Financial reporting procedures Accounting issues

8 Raising Capital – New Opportunities for Mongolian Companies October Financial deliverables Pre float servicesReporting accountantOther 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 servicesReporting accountantOther advisor Reporting on accounts, pro forma and forecast (if required) Long form report Working capital report Financial reporting procedures – reporting Partial Full × Prohibited

9 Raising Capital – New Opportunities for Mongolian Companies October 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 accountants 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 Raising Capital – New Opportunities for Mongolian Companies October Historical financial information for equity listings RequirementMain MarketAIM 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 Accountants report

11 Raising Capital – New Opportunities for Mongolian Companies October Assessing financial reporting readiness InitiationMid-stageIPO ready Financial history & carve out Local GAAPConsolidated accountsIFRS 3-year record Structure Legacy businessesRationalisedEfficient tax and legal structure Related parties Overlap and confusionCompany accountabilityClean full year Forecasting Cash based annual planAccrual based forecasting Reliable working capital forecasts Taxation Unidentified risksAssessed risks Mitigation and disclosure strategy Legal title to assets AssumedAssessedAttested Financial control and governance Proprietor disciplineProfessional managementGovernance procedures

12 Raising Capital – New Opportunities for Mongolian Companies October Issues that may be encountered The Reporting Accountant may need to deal with issues in the following areas: The evolving nature of tax legislation of many countries may mean that changes are required to meet Sponsor and market expectations Taxation Local historical audit evidence available may not be sufficient to enable sign-off. This may require significant rework Documentation The historical accounting policies may not be in line with your peer group and may need to be amended Accounting policies There will be a series of related party transactions and balances that need to be appropriately disclosed Related party disclosures Demonstrable unencumbered title to assets (throughout their operating life) needs to be demonstrated Legal title to assets Public companies have additional disclosure obligations Higher burden of transparency and disclosure 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 Raising Capital – New Opportunities for Mongolian Companies October Financial Reporting Procedures review process Reporting Accountants area of focus: high level financial controls budgeting and forecasting accounting policies information systems

14 Raising Capital – New Opportunities for Mongolian Companies October Level of implementation required Systems Treasury Management Reporting Budgeting/Forecasting Revisit Strategy & Corporate Governance Framework Internal Audit Board Committees & Processes Risk Management Business ControlsRegulatory Financial ReportingTax Structuring Financial controlsTraining and Culture Level of implementation IFRS Title of Assets Cash Accounts Assurance Time Controls Strategic InvestorFloatPost FloatJoint Venture

15 Raising Capital – New Opportunities for Mongolian Companies October Indicative flotation timetable 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 12 months+ before admission 6-12 months before admission 6-24 weeks before admission 0-6 weeks before admission An indicative timetable of work streams that a company would follow in order to prepare for a major market listing.

16 Raising Capital – New Opportunities for Mongolian Companies October 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 Raising Capital – New Opportunities for Mongolian Companies October Case study: CIS mining co. Successful IPO Listed on main market in October 2005 Entered the FTSE 100 in December 2005 Employs 65,000 people

18 Raising Capital – New Opportunities for Mongolian Companies October Case study: CIS mining co. Successful IPO Listed on main market in June 2007 Approx $420m raised of which some $220m went to the selling shareholder

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

20 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. The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London SE1 2AF. © Ernst & Young LLP Published in the UK. All rights reserved. Thank you


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