Decision time approaches for Mongolia, Rio Tinto and Turquoise Hill on Oyu Tolgoi, the enormous copper mining project that could one day represent about a third of the landlocked nation’s economy.
Since we reported that Mongolia’s yet to be created sovereign wealth fund could take an equity stake in Turquoise (which releases earnings after the close in Toronto on Tuesday), one deadline has been extended, the mining minister has done his best to wind up investors, China has reasserted itself and Tony Blair has popped up.
All of which means that a deal to start work on the underground part of the mine (phase II), funded by $4bn of loans by commercial banks and multilateral lenders, is very close. But it remains caught up in Mongolian politics, and may not hit the March 31 deadline on which the funding hangs.
To deal with those loans first. The agreement with the commercial banks is good until Monday. The World Bank’s International Finance Corporation and the European Bank for Reconstruction and Development had set a February 24th deadline for their involvement, but this was kicked out to March 31.
Rio and a team of Mongolian negotiators led by a former politician have pretty much nailed down the terms of their agreement, and could have some sort of memorandum of understanding and completed feasibility study ready to go by Monday.
We also understand that Tony Blair — who has form in helping big mining deals get past a late-stage impasse — has told the Mongolians that the deal is fair, although in an unofficial capacity only. Officially he is in the country advising on a governance project.
However Rio needs/wants someone with clout to sign the agreement, such as the prime minister, before they start digging on this. Which brings us to the mining minister, Gankhuyag Davaajav.
He was in Toronto this month to talk up the country at a mining conference, the Prospectors and Developers Association of Canada, with a keynote address that gives a sense of the importance of the project to an economy that is exploding:
But then the minister, an unapologetic resource nationalist, had a series of meetings with investors. They didn’t go so well. Sample reaction quote:
He really went out of his way to be a dickhead.
When Gankhuyag was first appointed he said he would renegotiate the underlying investment agreement that specifies the ownership and royalty structure for the mine, or resign. Rio has point blank refused, and he has since rowed back from that, but continues to be noisily opposed.
While not actually being part of the negotiations, the mining minister represents a significant political constituency that is seen in some quarters as an obstacle to getting the deal done.
Further stirring the pot, Mongolia’s Minister for Foreign Affairs Bold Luvsanvandan appeared in Sydney last week and told Reuters that it will all come together when the next parliamentary session starts on April 5. While not involved in negotiations, he is in the cabinet, but then again has since rowed back from that statement as a gaffe, according to locals.
So what is clear is that the Mongolian political situation is not. Prime Minister Norovyn Altankhuyag seems likely to face a no confidence challenge when parliament returns. One way to avoid taking the blame for signing or not signing an Oyu Tolgoi deal — he’ll be attacked either way — would be to present it to parliament for approval.
That way the country’s politicians have to hold hands and jump together. Political victory and happy Rio.
However, parliament can only do that after March 31. If we were a risk officer at commercial bank, we might look at what has happened to Mongolian sovereign risk, interest rates, emerging market risk premiums and perceptions of China in the last year, and decide that our terms have changed. For example, the yield on sovereign bonds which Mongolia issued internationally has risen to 7 per cent, from 4.8 per cent a year ago. (“Oyu Tolgoi is the largest financial undertaking in Mongolia’s history,” the bond’s prospectus said in 2012.)
Change the cost of capital, and might y0u then affect the feasibility study on which the Mongolians appear to place a lot of stock? The whole project is delayed once more.
Meanwhile the importance of the mine to the future of the economy has lessened as China has opened its checkbook to help out a neighbour. The PBoC has doubled its swap line, to about $3.2bn, removing the risk of foreign currency liquidity problems for the government. China also plans to build four coal to gas plants in the country, at an estimated cost in the region of $30bn (or two years’ worth of current GDP).
The Turquoise Hill share price still remains one of the best indicators for investor sentiment towards Mongolia. Were the country’s sovereign wealth fund to take an equity stake, it would be an important signal about future property rights, the country’s “third neighbour” policy (please don’t leave us reliant on Russia and China, developed world) and how Rio will treat minority shareholders.
But while those conversations continue, we hear from sources close to the government that no one really has the first idea what to do with the sovereign wealth fund when it finally starts to get royalties.
And finally, when it comes to valuing Turquoise there is plenty of fun to be had. We got some pushback when we passed on a suggested C$30 plus take out value for the 49.5 per cent Rio doesn’t already own.
We’re told that to get to a ballpark near that requires some enthusiasm for future projects at a mine which could have a 50 (70?) year productive life — enthusiasm that a patient corporate buyer might price in a way short term investors have not. (The share price is C$3.69).
But then the copper this mine produces will be 80km from the Chinese border with nowhere else to go (for now). We think it is unlikely to be priced according whatever is happening at the LME, so good luck forecasting those particular dynamics.
Put a finger in the air and ride your yak to the nearest broker.SOURCE: FT Alphaville