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Economy / Mining / Mongolia News / January 13, 2015

O.Sainjargal: 34 percent of Oyu Tolgoi and 51 percent of Erdenet Mine should be used to establish a company

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The following is an interview with economist O.Sainjargal, highlighting the current economic crisis and ways for overcoming it.

Can you tell us about what you think is the cause of Mongolia’s economic crisis?

Mongolia uses the most expensive money. It has a two-digit interest rate. The interest rate of the funds from bonds isn’t as low as politicians say. A nation using such expensive money will have to increase product prices, which will cause inflation to rise.

Weren’t politicians saying that only Mongolia was able to get the lowest interest rate with securitized mortgage bonds?

Bank interest rates in Mongolia have reached 15 to 16 percent, so a five percent interest rate will seem soft. This may sound less compared to developing countries. Mongolia isn’t developing at the moment, but it can if it utilizes its natural resources equivalent to approximately 1.3 trillion USD. It requires investment of four to five billion USD, approximately 10 trillion MNT, to mine a large deposit. The total balance of Mongolia’s banking system is 20 trillion MNT. This is nowhere near the amount needed for completely utilizing Mongolia’s mining resources.

Isn’t that why the government issued bonds?

In the end, a bond is still a loan. The government took this loan and is spending it by itself. There’s a saying that the government is the worst manager. As long as people are in the government, they will use their connections to settle issues, give and receive bribes, and cause other problems. That’s why it’s under constant speculation.

How can all these issues be resolved?

There’s only one way out – to develop the stock market. Investment can be drawn from two sources. But Mongolia is using only one source. Developing banking and the stock market will help resolve financial issues. Mongolia has become stagnant because its banking market isn’t able to generate four to five billion USD for mining large deposits. Mining deposits based in a stock market is the best resolution.

A large sum of money was used to develop the Mongolian Stock Exchange (MSE) to raise a stock market when large mines were being exploited. Why hasn’t Mongolia advanced and remained in its current state?

The MSE was founded in 1990. To this day, it has only functioned to privatize. Projects in recent years haven’t been successful because the stock market hasn’t developed fundamentally. Issued IPOs have failed and several banks have gone bankrupt. Firstly, we need to get rid of the concept of considering the MSE as a stock market. How can the stock market develop if an investment fund that makes up 60 to 70 percent of the stock market exchange isn’t formed? A draft bill for founding this fund is being discussed only now. Mongolia doesn’t have a bank that will intermediate our stocks in international markets. If you look in depth at trade, there isn’t a market originator with its own funds. It’s unfortunate that politicians thought that the stock market would develop if the MSE was renovated, when required conditions haven’t been met. Now, Mongolia’s created these conditions so opportunities for developing the stock market have become available.

You just said opportunities for developing a stock market have opened. In your opinion, what should be the first step?

Mongolians need to change their way of thinking. Before anything, they should stop thinking that individuals have to own everything and completely lose everything. Businesses and the government are accountable for huge risks because they try to own as much as possible. The Mongolian government gobbled up 34 percent of Oyu Tolgoi (OT) shares as if only they had to own it. Now, they’re suffering the cost. Instead of getting so many shares, they could’ve set a high royalty rate to live plentifully on collected royalties. Yet, they’ve been talking too much about dividends and ended up in this situation.  Shares are discussed after working successfully. Although OT sold its shares, the company increased its expenses to avoid giving out dividends.

Bond repayment will start in 2017, but the economy fell and Prime Minister Ch.Saikhanbileg announced a cut to welfare funds. Currently, rumors about Mongolia selling its OT stock are spreading. Can you comment on this?

Fundamentally, it all started wrong, and now only a short time remains to fix it. I don’t think the government or the PM should expect much. The stock market is essentially raising money with shares. Personally, I believe that shares that aren’t being used should be put into circulation. Mongolia has unused shares – the 34 percent of OT. Also Mongolia has run for too long on the dividends of its 51 percent in Erdenet Mining Corporation shares. No one can deny that Mongolia’s economy will recover if these two stocks are combined into a company and its shares are put up for trade, generating money. Almost everybody is aware of OT.

International companies determined that a 34 percent share of OT equals 98 billion USD. Erdenet Mine is history. If these shares from these two companies are combined into a company and its shares are sold, money can be raised from anywhere. This is the best method for resolving the economic crisis, without increasing the debt ceiling. As a result, OT’s stagnant 34 percent share will no longer be stagnant. The other 66 percent, which doesn’t belong to Mongolia, is able to profit. Rosneft is also generating money. Why can’t Mongolia also think like Russia or Rio Tinto?

Revenue from this should first be used to build a copper smelter. Even a ministry responsible for this issue has been established.

Investors of Tavan Tolgoi mine have been announced. Does this mean that mining work will start soon?

The government is left with only one issue regarding Tavan Tolgoi mine – the ownership. The winners of the tender have to invest four to five billion USD. I’m fascinated to know where this much money will be acquired from. When searching for this money, the selected corporation mustn’t impose on Mongolia’s ownership. Issues will arise if it tries to get money by using our shares as collateral. It’s unclear if the strategic investor is trying to acquire money by securitizing their operation or by securitizing Tavan Tolgoi mine.  This should be made more specific.


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