By Julian Dierkes
On the morning of December 13, PM Oyun-Erdene “unveiled” an offer he received from Rio Tinto/Turquoise Hill that appears to be intended to form the basis for a new agreement to jumpstart underground development at Oyu Tolgoi.
Оюутолгой төслийн Монгол Улсад ногдох $2.3 тэрбумын өрийг бүрэн тэглэнэ.
Дубайн төлөвлөгөөг цуцлана. https://t.co/5lN3VRZsfH
— Bolortuya Chuluunbaatar (@Bolort) December 13, 2021
The offer appears to have five main points:
Big News: Largest foreign investor #RioTinto concession in Mongolia:
1.100% debt cancellation on Mongolia’s 34% equity in OT;
2.Cancellation of UG finance agreement;
3.Allowing ind. audit into UG financing;
4. No new debt burden;
Letter copy: pic.twitter.com/Py0V42wZ2V
— Dolgion (@DolgionE) December 13, 2021
Of these, the offer to write off debt stemming from initial 34% equity stake appears to be garnering the most attention.
$TRQ confirms offer made w/ #RioTinto to govt of ???????? re #OyuTolgoi.
“The offer includes…proposal to…write-off entirety of approx US$2.3 billion carry account loan owing by #Mongolia-n-owned shareholder (Erdenes)… & cancellation of UDP agreement.”https://t.co/ejBd79gcPj
— Julian Dierkes (@jdierkes) December 13, 2021
Some of my previous guesses about the negotiations appear to be coming true, i.e. PM Oyun-Erdene has been the focus of attention and a restructuring of debt is an element that I suspected to be likely.
Reactions to PM Oyun-Erdene’s announcement from fellow MPP officials were swift and enthusiastic.
Ерөнхий сайд Л.Оюун-Эрдэнэ: Сүүлийн 12 жил шийдэгдээгүй асуудалд х/о-чид буулт хж бга нь чамлахааргүй үр дүн.
ОТ хэлэлцээрийг дэмжиж , хамтран ажиллаж буй Ерөнхийлөгч, УИХ-ын дарга, УИХ-ын гишүүд, Засгийн газрын ажлын хэсгийн гишүүдэд баярлалаа. ???????? pic.twitter.com/9iirQqee49
— М.Оюунчимэг (@M_Oyunchimeg) December 13, 2021
Энэ бол амжилт шүү! Гоё мэдээ! Баяр хүргэе!!! https://t.co/73BN2nkmSF
— Tsogtbaatar Damdin (@TsogtbaatarD) December 13, 2021
Without impugning the support of these MPs, it would be fair to assert that this enthusiasm may be more of a sign for party unity in support of PM Oyun-Erdene, following his election as party chair only some days ago, than substantive approval of the offer made by RioTinto/TRQ.
But, this support and the extent to which it celebrates this as a breakthrough, seems to suggest that the offer is highly likely to be acceptable to the MPP and finalization of an agreement might thus be swift.
I have not seen a reaction from former MPRP stalwarts former president N Enkhbayar or his son and newly-elected MP E Batshugar, or from former MPRP presidential candidate and now MP for the DP, S Ganbaatar. Given the MPRP’s re-merger into the MPP, perhaps they can be expected to be silent on this offer. Nothing from the DP so far either, though they are perhaps more likely to be critical.
I would hope that KhUN might be more analytical in their response. MP Dorjkhand focused on the professionalism of negotiations in his initial reaction.
ОТ гэрээний нөхцөл сайжирч бгаа нь үнэн. Мэргэжилтэн залуусыг хэлэлцээрт ажиллуулсан, улстөрийн тогтвортой орчныг бүрдүүлсэн, гадаад зах зээлийн эерэг орчин, Монгол менежерүүд нөгөө талдаа зөв мэдээлэл өгсөн зэрэг олон х/з бий.
Сургамж: Гэрээг улстөрчид биш МЭРГЭЖИЛТНҮҮД хийдэг‼️ https://t.co/s8ZqJKKJHn
— Тогмидын ДОРЖХАНД (@dorjkhand_t) December 13, 2021
Reactions might still shift as the news sinks in, but these initial reactions and particularly the apparently strong support from fellow MPP MPs for PM Oyun-Erdene suggests that this offer might unlock an agreement.
But what about the offer is generating this support and what questions remain open?
It seems like the main focus in the reactions is on the write-off of the $2.3b of debt incurred by taking a 34% equity stake in the project. I will say more below about how I interpret this offer regarding RioTinto’s approach to managing this project. What the write-off of this debt means is that the government (or, Erdenes Mongol as the holding company) will have received its share in the project “for free”. Indeed, an article in the FT reporting on the offer quotes PM Oyun-Erdene as saying, ““Basically, the Mongolian people get 34 percent for free”.
At first glance, that sounds great for Mongolians as the ultimate stakeholders in this debate. However, is it really? This debt was going to be paid out of OT dividends once those were going to get paid anyway, so this debt in particular would have only delayed revenue streams, not prohibited them entirely. Is this the big win that turns the agreement from something vaguely but widely criticized in the Mongolian public, to something that is “fair”? Or, is Rio Tinto delivering what seems like a major concession to help the government save face by claiming a major victory, without actually changing much about the arrangements?
In terms of other aspects of the arrangements that seem untouched, this includes the IGC report that identified mismanagement by RioTinto as a source of cost overruns, not the geotechnical difficulties that RioTinto has pointed to all along. That mismanagement is thus paid for by shareholders, including shareholders in TRQ, but also by the government, but less so by Rio Tinto itself, happily continuing to collect management fees all along.
What about the various disputed tax payments of the past?
I do not have the resources to compare the debt write-off in financial terms and long-term implications to some of the other areas that have been disputed in the past. I would really look to more independent analyses to help answer whether this offer is as good as it sounds initially. Only the kind of analyses provided by independent sources like the Natural Resource Governance Institute is likely to provide answers to these questions.
Free Carry Interest
So, what does this offer to write off the debt for Erdenes Mongol’s equity stake say about RioTinto and its approach to Mongolia? I had previously criticized RioTinto management for essential attempting to manage Oyu Tolgoi by remote spreadsheet, i.e. by focusing exclusively on financial and operational data, but refusing to engage Mongolians on their own terms, in terms of their aspirations.
I see my sense of RioTinto’s approach confirmed. The original desire for an equity stake expressed by the government was rooted in the symbolic importance of owning a piece of this nation-building project. Yes, some observers noted that an approach focused on revenue streams might provide greater benefits (cash!) and flexibility, but participation in the project was important enough for the government to insist on a stake and to double-down on that insistence through legislation regarding “strategic deposits”. So important, in fact, that the government at the time seemed to ignore the implication of taking on significant debt to acquire this stake, but also participating in the financing of the development of the mine as a part-owner or the operation (not just the deposit which the government owns, obviously).
What was RioTinto’s response to this? Constructing a debt structure that would ensure that this debt-for-equity would hang over the government’s head for some time. Now, it turns out, 12 years later, an arrangement that does offer that equity for “free” is acceptable. Would everyone not have been served better if RioTinto had taken the care to understand why an equity stake was important to Mongolians and how to account for that desire best? Instead, there were the ever-present grumbles about “resource nationalism“, resource investors’ favourite made-up and vapid concept that blames governments for striving to maximize benefits to their citizenry, while investors certainly demand maximum return on their investment. In a similar, er, vein, is the outraged often expressed about “free carried interest”. But apparently, such an option of governments participating in a resource project via “free equity” is not so terrible, since RioTinto has just offered that up in this case.
Perhaps more energy might have been devoted to trying to understand why the government and the Mongolian public had and appear to continue to have a preference for an equity stake, rather than riling up the financial media, analysts and other investors to express their indignation at the nefarious strategies of host governments.
I have seen very little evidence of such attempts to understand the aspirations of Mongolians and its not clear whether the current offer represents some recognition that such attempts are necessary to place social license to operate on a sounder footing, or whether it is just a relatively easy negotiation ploy, offering the government a face-saving concession that may or may not be expensive to investors. Talk of “final offers” in this context does not appear to be particularly promising.
In a subsequent post, I will attempt to dream up a process that could provide a publicly accessible and credible analysis of the offers made and, ultimately, any agreements considered.
Given the speed with which current discussions have proceeded, suddenly, this post has gone through fewer revisions and edits than is my usual practice. Apologies for hasty editing mistakes or underdeveloped reasoning.