Previously, I have written about economic and political aspects of the challenges currently facing Mongolia.
Right now, the economic situation seems a bit like a “wicked problem” or a quagmire, and I see relatively little cause for short-term optimism, but the Government of Mongolia and Rio Tinto especially in the long run have too much at stake in the Oyu Tolgoi project not to come to some solution…
In my mind, progress and a re-start of Phase II of Oyu Tolgoi is the surest and most expedient route to addressing the current economic challenges. While construction would not start up overnight, it would rev up somewhat quickly, especially for the predominantly underground elements of Phase II. This would provide jobs, taxes, and multiple spin-off effects that would maintain Mongolia’s growth rate. This in turn would address some of the budgetary challenges and most likely also the current account deficit, at least to some extent. Finally, a re-start of OT construction would be a powerful signal to any potential other investments.
Solutions
From my perspective, the most urgent challenge to Mongolia’s prosperity and development is the lack of progress on Oyu Tolgoi. Given the enormous size of this project, an accelerated development of the project would carry the Mongolian economy at rates that might not set records or send the world’s capital flocking to gleaming Ulaanbaatar office towers, but does have the potential to bring significant employment and other financial benefits to Mongolians. A collapse or much further delay of this project is bound to have a significant impact on other foreign investment and any attempts at economic diversification. Conversely, further delays will certainly dampen the enthusiasm of potential investors no matter whatcurrent legislative initiatives might bring.
To work out such differences, it appear that both partners need to take a less adversarial attitude. Ivanhoe Mines’ and Rio Tinto’s reputation has always been that they are not willing or able to fully engage the local political context and thus continue to run into difficulties with the GoM. As I am not privy to any such discussions directly, I have no direct knowledge of such attitudes, but even if these impressions are unfair, the fact that they keep getting repeated in Ulaanbaatar and elsewhere suggests a difficult-at-best relationship between the partners.
Perhaps recent changes in Oyu Tolgoi management and the replacement of the three GoM-appointed directors will bring about a change in attitude.
Beyond such a shift in attitudes some hard thinking among Mongolian policy-makers is very necessary.
Owning OT?
Is an ownership stake in OT really the best way to proceed? I have long been of a view that this ownership raises massive governance challenges surrounding the regulation (environment, taxation, employment, etc.) of an entity that the GoM co-owns.
A further clear risk in ownership is that it magnifies dependence on a single sector as any downturn in OT’s fortunes would bring immediate demands for state support and thus exacerbate such a downturn.
In contrast, a well-regulated (an ambitious notion in itself) privately-held entity could produce highly liquid revenue streams that are then available for investment towards diversification abroad, and savings.
Therefore, some kind of floating of the GoM’s share in OT or distribution of these shares would seem to be a viable alternative. business-mongolia recently looked at a variant of this proposal that would see equity swapped for a higher royalty rate.
Owning OT!
If the GoM remains committed to an ownership stake, there are many puzzles to be resolved. Currently, there are calls for demands of proportional representation not just on the BoD but across management ranks as well. The recent record of state-managed entities such as TT suggest that this might not be a very good deal for the Mongolian people.
Whether there is active and direct participation in management is something to be pursued or not, the fundamental mandate of such participation needs to be clarified as it does for the role of the members of the BoD. Do they represent the Ministry of Finance and thus aim to maximize financial shareholder value? Do they present the Ministry of Environment and should thus force environment ambition on the company? Is there main task to ensure employment gains? While these are not always conflicting objectives, they certainly can be. If priorities are set, they should be communicated very clearly to the Mongolian public as well.
Follow
While many ECM originator would push (costs nothing to try 🙂 for a listing of OT shares, that does not mean it is as easy as a walk in the Gobi.
Plain and simple, it is like solving a problem assuming we can….solve the problem!
To do anything with its 34% stake in Oyu Tolgoi LLC,
GOM has to first be able to repay the loan to RIO!!!
First,
the amount of that loan is a big subject of discussion because it is related to the costs.
Second,
assuming for a while that this matter is settled, this loan is likely to be north of US$1bn.
Now assuming further this loan could be repaid now with a bridge loan,
how long before OT could become a listed company and GOM get some cash out of it?
(please keep in mind how regulators in overseas stock exchanges may feel comfortable about Mongolian’s understanding of “unpublished price sensitive information” based on what already happened on Mongolian related business listed overseas and the listing of OT ….)
Even assuming the Phase II saga is settled, it would take much longer than 12 months, more likely 24-36 months for GO to get its hands on some cash.
In short, to repay the loan to RIO,
GOM would have to raise north of US$1bn for at least 24 months.
But we are now in October 2013, not 2012,
so no further comment on the likelihood of this happening.
So IF + IF + IF + IF = ?
French saying: “avec des si, on mettrait Paris en bouteille”.
Conclusion:
whatever the end game,
that starts by settling the matter with RIO, all of it, past as well as future for Phase II.
The rest is just a distraction, a fairy tale ECM pitchbook!
Now why would GOM and Mongolians go into the headache of …pretending…to manage OT, even partially, while what Mongolia does need now is regular steady cash flow to support:
* benefits to Mongolians, cash or none cash,
* infrastructure for Mongolians (schools, hospitals, roads, …just anything),
* infrastructure for projects that will generate income in the coming years and change Mongolia into Qatar.
So if Mongolia swaps its 34% OT stake – the loan to RIO against an increase of the royalties (that means % of revenues, no need to worry about costs or else),
then RIO having full control can move much faster for Phase II for the sake of all Mongolians.
Why is that so complicated to understand and do ?
While there may be many areas where progresses are still needed,
there are some, often unnoticed, that will help Mongolia prepare for a better future as well as investors of all kind, local or foreign, to invest in Mongolia!