HONG KONG (Dow Jones Investment Banker) – News last week that Mongolia’s Erdenes Tavan Tolgoi, which owns one of the world’s largest coking coal deposits, would drop – for now – Hong Kong as one of the listing locations for its long-awaited IPO came as a surprise to market observers. The reasons probably include a disappointing performance for relevant offerings in Hong Kong, disclosure issues, as well as a comparatively weaker depositary receipt platform.

The offering, rumored to be of up to US$3 billion and one of the largest flotations in the Asian pipeline so far for 2012, initially was slated to be made on three platforms: domestically in Ulan Bator, as well as internationally on the LSE and in Hong Kong.

[Click HERE for my column “Golden Horde Of Bankers Seeks Mongolia’s Riches” – 25 April 2011]

Securing a listing outside of Erdenes TT’s home market made sense: Mongolia’s last domestic IPO was in July 2008, according to the Mongolian Stock Exchange’s website, and there were only three follow-on equity offerings there in 2011. The total market capitalization of the exchange hovers around the US$1.5 billion mark (or, in local currency just over 2 trillion tugriks). The most actively traded stock there only achieved a volume of US$55,000 last week.

Even so, the Mongolian Stock Index was up 41.7% in local currency in 2011, as compared to a fall of more than 21% in Hong Kong’s Hang Seng Index.

The mining and resources sector continues to be a key focus of major exchanges and that was one of the rationales for the LSE’s proposed tie-up with Toronto’s TMX Group Inc. as well as Singapore’s SGX attempted merger with the Australian Securities Exchange. Hong Kong is no stranger to this trend. The Hang Seng Materials Composite Index already comprises 36 companies, but HKEx is believed to be keen to secure additional listings in the sector, including from major producing countries.

The reasons behind Erdenes TT’s decision not to pursue a listing in Hong Kong are probably several.

First, the widely publicized postponement there – for the fourth time – of the multi-billion dollar IPO of Australia’s Resourcehouse, which was said to have been very significantly under-subscribed, did little to raise confidence in the exchange’s ability to deliver sizeable deals by giant mining companies, even if the market’s lack of interest was really down to a weak investment case.

[Click HERE for my column, “Will Resourcehouse’s IPO Hit A Hard Rock?” – 25 May 2011]

Cayman-incorporated Mongolian Mining Corp.’s share price in Hong Kong has fallen almost 18% since its IPO in October 2010, while SouthGobi Resources Ltd., whose primary listing is in Canada, saw its share price in Hong Kong drop more than 61% since listing there two years ago.

Second, HKEx still doesn’t permit listings by companies incorporated in Mongolia – or by those incorporated in Russia, another major mining country. Despite a recent change in the rules for the admission of mineral companies, the stringent disclosure requirements in Hong Kong and associated enquiries by the exchange’s listing committee may well have created insurmountable difficulties for the issuer and its bankers, Deutsche Bank, Goldman Sachs, BNP Paribas and Macquarie.

Lastly, the proposed listing on the LSE is said to now be taking the form of global depositary receipts (GDRs) rather than shares. One can only speculate this would be on the Professional Securities Market (PSM) rather than on the Main Board, which would enable Erdenes TT to secure a quotation through more flexible disclosure. While Hong Kong also offers depositary receipts, its own HDR platform has only been used by a handful of issuers (Brazil’s Vale, Japan’s SBI Holdings, Inc and the US’s Coach, Inc.), all of which have illiquid trading. By contrast, The Bank of New York Mellon’s depositary receipt directory shows London as home to 165 DR programs.