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

October 2009, Ulaanbaatar, Mongolia

Raising Capital - New Opportunities for Mongolian Companies

Financial Information & Investor Requirements

Michael D Lynch-BellPartner in ChargeIPO ServicesErnst & Young LLP+44 (0)20 7951 [email protected]

Raising Capital – New Opportunities for Mongolian CompaniesOctober 20092

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


Is your company ready?

GrowthActual or potential high growth is the main attraction for investors; association with growth industries and regions can attract premiums.

SizeThere 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 structureClear and transparent shareholder and corporate structures with straightforward business models are more attractive to investors.

Use of proceedsThe 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 GovernanceA 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 SystemsThe reporting requirements for listed companies are demanding and will require good accounting and information systems.


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


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


• Short form report

• Working capital report

• Long form report

• Comfort letters

Reporting AccountantReporting

Accountant SponsorSponsor

• 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

AuditorAuditor

• Test marketing

• Identify investors

• Valuation benchmarking

• Marketing roadshow

• Book-building and pricing

Broker/NOMADBroker/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 advisersOther advisersLawyers Lawyers

Financial PRFinancial PR

Registrars Registrars

• Legal Due Diligence

• Verification notes

• Material contracts

• Underwriting agreement

IPO advisers


Accounts preparation

• Financial deliverables

• Historical financial information

• Financial reporting readiness

• Financial reporting procedures

• Accounting issues


Financial deliverables

Pre float services Reporting accountant Other advisorFinancial 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 accountant Other advisorReporting on accounts, pro forma and forecast (if required)

Long form report

Working capital report

Financial reporting procedures – reporting

Partial Full × Prohibited


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


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


Assessing financial reporting readiness

Initiation Mid-stage IPO ready

Financial history & “carve out” Local GAAP Consolidated accounts IFRS 3-year record

Structure Legacy businesses RationalisedEfficient tax and legal structure

Related parties Overlap and confusion Company accountability Clean full year

Forecasting Cash based annual plan Accrual based forecastingReliable working capital forecasts

Taxation Unidentified risks Assessed risksMitigation and disclosure strategy

Legal title to assets Assumed Assessed Attested

Financial control and governance Proprietor discipline Professional management Governance procedures


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 expectationsTaxation

Local historical audit evidence available may not be sufficient to enable sign-off. This may require significant reworkDocumentation

The historical accounting policies may not be in line with your peer group and may need to be amendedAccounting 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 demonstratedLegal title to assets

Public companies have additional disclosure obligationsHigher burden oftransparency 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.


Financial Reporting Procedures review process

Reporting Accountants’ area of focus:

• high level financial controls

• budgeting and forecasting

• accounting policies

• information systems


Level of implementation required

Systems

TreasuryManagement Reporting Budgeting/Forecasting

Revisit S

trategy &

Corpora

te Govern

ance Fra

mework

Revisit S

trategy &

Corpora

te Govern

ance Fra

mework

Internal Audit

Board Committees & Processes

Risk Management

Business Controls Regulatory

Financial Reporting Tax Structuring

Financial controls Training and Culture

Level of im

plementation

IFRSIFRS

Title of AssetsTitle of Assets

CashCash Accounts AssuranceAccounts Assurance

Time

Con

trols

Strategic Investor Float Post FloatJoint Venture


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 monthsbefore admission

6-24 weeksbefore admission

0-6 weeksbefore admission

An indicative timetable of work streams that a company would follow in order to prepare for a major market listing.


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


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

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’

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


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

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

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


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

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 OC300001 and is a member firm of Ernst & Young Global Limited.

Ernst & Young LLP, 1 More London Place, London SE1 2AF.

© Ernst & Young LLP 2009.Published in the UK. All rights reserved.

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