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3 Rocky
road ahead for Mongolia By
Peter Lee
In Mongolia today, hunger for
coal, copper, gold and uranium wealth is at odds
with democracy as the demands of international
resource giants collide with a stubborn political
culture of resource nationalism.
In time
for the June 2012 parliamentary elections,
Mongolia's grand khural (parliament) passed a law
subjecting the purchase by "state-owned entities"
of controlling interest in strategic Mongolian
mining enterprises to government approval (as well
as a host of other key industries).
The
immediate provocation for the legislation was the
sale by a Canadian company, Ivanhoe Resources, of
its controlling interest in SouthGobi, an operator
of coal mines in Mongolia, to a Chinese
resource giant, the Aluminum
Company of China, known as Chalco.
The
legislation overtly targeted China. Vice Finance
Minister Ganhuyag Chuluun Hutagt told Bloomberg
that the country needed new investment laws to
diversity its exports to countries other than
China, which consumes a lion's share of Mongolia's
coal and copper:
We don't want to be faced with one
sovereign ... Our struggle to gain political
freedom was a long one and we cherish that. We
will not let foreign government-owned entities
control strategic assets in Mongolia.
This is not an unambiguous win for
non-Chinese international resource companies.
After all, there are two ways to make
money from ownership of a mining concession. One
is to engage in the arduous, expensive, long-term
and risky enterprise of operating the mine.
Another is to sell it. And the people who are
willing to pay top dollar for a mine are the
people who are already buying the product and have
a powerful economic incentive for making a go of
it ... like the Chinese.
So the Mongolian
government's involvement in strategic industries
can be looked at in two different ways. On the one
hand, it might hobble a deep-pocketed, overweening
competitor to the benefit of other, grateful
players; on the other hand, it might be seen as
increasing the risk and diminishing the liquidity
of investments in the so-called strategic
industries, shaving precious points off the value
of the assets, be they hard rock or financial
paper.
Unsurprisingly, the investment
community, which is politely slavering at the
prospect of profitable deal flows from Mongolian
mining initial public offerings (IPOs) and mergers
and acquisitions, is not amused by the strategic
industry law. Dale Choi, of the pre-eminent
Mongolia resource investment firm Frontier
Securities, told Bloomberg:
Investors don't like it when the
rules of the game are changed after the game has
started, and changed often at that ... It would
be in the interests of Mongolian people to make
a decision based on commercial factors, rather
than geopolitical factors. [1]
The
uncertain progress of the Tavan Tolgoi project
illustrates the headaches facing Mongolia as it
tries to reap its resource bonanza on behalf of
its citizens even as the remorseless economic
logic of globalization demands marginalization of
their interests. Tavan Tolgoi, in the Gobi Desert
less than 300 kilometers from the Chinese border,
contains over six billion tons of coal reserves,
including 1.8 billion tons of coking coal, a
premium and profitable item used in the iron and
steel industry.
Tavan Tolgoi (Five
Hill) Nothing about Tavan Tolgoi is simple,
except perhaps the physical process of digging the
coal out of the ground (albeit with the usual
environmental and cultural trauma). Chalco is
already buying all the coking coal that Tavan
Tolgoi produces. But it has to truck the coal to
China since the Mongolian government has dragged
its feet on approving the 300-kilometer railway
that would connect to the Chinese rail system,
thereby making China the only feasible buyer.
Mongolia's current anxiety about Chinese
domination of its international trade channels
(China accounts for perhaps 80% of Mongolia's
export and import trade) is buttressed by
significant historical and political factors.
The Mongolian republic's
foundation myth, predating China's Republican
revolution, dates back to the eviction of a
detested Manchu viceroy in 1911 and China's
political and ethnic domination of the parts of
Mongolia it did retain - now the Inner Mongolia
Autonomous Region - is an affront and warning to
Mongolian nationalists. Standing up to Chinese
economic penetration is, therefore, good politics
and may prove to be smart geopolitics. Economics,
however, is another matter. Instead of simply
linking Tavan Tolgoi to the Chinese railway
system, Mongolia is trying to cobble together a
coalition of Chinese, Russian, South Korean and
Japanese concerns that will develop part of the
mine jointly with Mongolia and, most importantly,
build an integrated transport network 5,000
kilometers from Tavan Tolgoi to the Russian export
facility at the port of Vanino.
The objective of the
Russian route is for Tavan Tolgoi coke to find a
home in Japanese and South Korean steel mills, and
to get to those mills through Russia (which has no
coke import needs of its own) without being
captive to the necessity of moving the product
overseas through the shortest and most economical
route-through Chinese railroads and ports.
Total projected cost: US$5.2 billion.
Additional transport cost per ton: perhaps $100.
To bootstrap this diversification, the Mongolian
government already requires that Chalco resell 30%
of its current Tavan Tolgoi purchases to three
Japanese and South Korean trading companies.
Reportedly, this portion is delivered to
Chinese ports for export. Somebody is enjoying a
windfall, as Mongolian coking coal is apparently
selling for a third of the price of the Australian
product currently fueling Japanese and South
Korean steel mills. Tavan Tolgoi itself is divided
into east and west zones, East Tsankhi and West
Tsankhi, each with its own challenges.
West Tsankhi is the joint development mega
project based on foreign operators investing in
and operating the mine and paying royalties to the
mine owner, state-run Erdennes Tavan Tolgoi. This
is the piece wrapped up in the
multi-national/railroad to Russia consortium idea.
The Mongolian government announced a
jumbled up award to an unwieldy collection of
companies but has been unable to work out the deal
it is trying to impose - which probably requires a
hefty up-front payment that somehow has to be
divvied up between the disparate partners, each of
whom has different roles, profit expectations, and
willingness and capacity to pay.
East
Tsankhi is the part of the mine that is already
selling its output to China under the ownership
and operation of state-owned Erdennes Tavan
Tolgoi. Per government plan, Erdennes TT will go
public in a multi-billion dollar global IPO that
will sell a 30% share to fund the further
development and exploitation of East Tsankhi by
some combination of foreign and domestic
construction, equipment, and service vendors.
Mongolia originally had ambitious plans to
list the IPO on three stock exchanges
simultaneously: Ulan Bator, Hong Kong, and London.
The overseas exchanges are panting for the
offering, which is expected to raise $3 billion.
Underwriters are all clamoring for the
business, leading to a fistfight between
pinstriped antagonists in an Ulan Bator watering
hole in 2010 and the generous decision of the
Mongolian government to expand the number of
underwriters to six in 2012.
However, the
IPO has been delayed several times, and the Hong
Kong component has been dropped. The most recent
prediction for the share sale is now mid-2013.
Obstacles include uncertainty involving the award
of West Tsankhi and the royalty revenue Erdennes
TT would enjoy as a result.
A further
complicating factor was a highly publicized
exercise in resource nationalism: the sweeping
decision to allocate 10% of the total stock of
Erdennes TT to every one of Mongolia's citizens
and another 10% to Mongolian corporate entities.
The government has also decided to give
Mongolian citizens the opportunity to sell their
Erdennes TT shares to the state for 1 million
tugrik (approximately US $3000).2 The stock grant
significantly complicated the business plans of
Erdenes TT with respect to the IPO. The chief
executive officer of Erdennes TT, B Enebish,
explained the current state of play to the UB Post
before he left his post in October 2012:
[T]he company that is going public
should have a clear investors' structure. But
this is not the case for us. The Government made
a decision to let the Mongolian public own 20%
of TT. This means that the ownership of stocks
are blurry because we do not know who will
decide to keep or trade their stocks, or whether
the Government will offer stocks to other
companies or will they keep stocks themselves.
We planned to resolve this in 2011 but
the problem is still persisting even now. Two
years ago, a resolution was passed from the
State Great Khural on trading 30% of the
company's stake on stock exchanges. But another
resolution [was] passed in January 2012
decreasing this%age to 20%.
On foreign
exchanges, more specifically the London Stock
Exchange (LSE) and the Hong Kong Stock Exchange
(HKSE), when a mining company is aiming to
release on many different stock listings, it is
required that at least 20% of the company's
stock is out. It means that we must determine
exactly how many of our Mongolian citizens will
return TT stocks for cash and make sure the
stocks traded are more than 20% before
proceeding to release TT stocks on foreign
exchanges. [3]
Enebish declared that
Erdennes TT could boost its value in the interim
by plowing more investment into production in East
Tsankhi, thereby begging the question of where the
money would come from - since it wouldn't be
coming from the IPO. The answer, at least in the
near term, was China:
Since the IPO release has been
postponed we see a definite need to find funding
from a different source. We are discussing this
with a number of investors, seeking to solve it
through the sale of coal, presale of coal, and
various loans.
Chalco, the same
company that was subjected to the grand khural's
rebuke over its attempted purchase of South Gobi
(which it subsequently abandoned), made a
pre-payment of (depending who is talking, either
$250 or $350 million) to state-run Erdennes Tavan
Tolgoi for coking coal. At the price Chalco is
paying- less than $70/ton, a far cry from the
$200+/ton for Australian coking coal - that is
over three years' worth of exports. [4]
However, it transpired that this cash
transfusion was of virtually no help to Erdenes TT
in funding its current operations, let alone
financing its expansion. Erdennes TT is obligated
to help fund Mongolia's Human Development Fund.
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