Possible options to solve the OT debacle
September 22 (UB Post) As being one of the leading sources to report on Oyu Tolgoi project, we continue to perform our analysis on solutions to end the debacle. Our sole purpose aligns with the aim of making the project a success. However, we have to define the success first. A successful project for us is balanced and mutual-benefit. Rio Tinto must not lose their investment for choosing to invest in the deposit after their careful analysis which they concluded it will be one of the biggest copper mines in the world. Mongolia as a whole must not lose as a hosting country, because the reserve belongs to the people of Mongolia, and they have the equal rights to benefit from the project as much as Rio Tinto. This arises the question what is losing? Losing can be defined in many ways. But, more importantly, sides should know that any kind of unfair treatment or fraudulent act should not be considered. It must be deemed as unacceptable. Please, be aware that the following analysis is solely a research compiled by Business-Mongolia.com Research team.
Option 1. Swap the 34% with royalty increase.
If you read our article here, we suggested this solution in brief when we were informed that the policy makers are considering to make Erdenes OT a public company to fund its' operations. In fact, the current 34% share is yet to bring income to the shareholders. Instead it makes us bear the 6.5%+LIBOR interest rate debt, enormous amount of stress, and of course self-destructing PR. The main problem is that it is not a free-carry. Some may argue that the set standard in international practices are that shares must be bought, and risk must be shared. However, to share the risk, both of the sides have to be in control of the project. Despite having 3 members in the board, Mongolian side doesn't feel like it has control over the project or have sufficient information.
The engineering giant FLUOR and other Canadian, American and Australian companies get the major contractor jobs to build the mine. When the government side wanted to audit, FLUOR and other companies refused to show contracts and cost breakdowns to the auditors due to the reason of commercial confidentiality.
On top of that, Mongolian policymakers and leaders don't want the full benefits of dividends after 20-30 years. The people don't want the infrastructure and GDP growth after a decade which sometimes merely numbers, because the beneficiaries of these incomes would be a small number of people or companies. We could roughly calculate the worth of the 34% stake equals 10% royalty. Therefore, adding 10% on top of 5% that was in place. 15% is an agreeable solution for both sides. Turquoise Hill is getting 2% royalty that it had bought from BHP almost a decade ago.
In that way, Rio Tinto would not have to deal with the Mongolian government over petty issues such as increase in investment over USD200 million for a shaft soil calculation error or putting a milk and bread billboard for over thousands of dollars a day in central areas.
Option 2. Stretch the mine-life.
This is a strategy that has been used to milk the cash-cow Erdenet JVC back in the 70′s. You may haven't heard, but the original mine design was that the mining capacity was 2-3 fold from the current operations at Erdenet JVC. However, the officials at that time and the Mongolian engineers felt that it would be better to stretch the mine-life to benefit from for long-period of time. It worked, and we see the producing more than half of the country's GDP.
The halting of project financing and therefore, underground development might be a hint that the policy makers are willing to implement the same strategy mentioned above. After open pit depletes, the underground can be built, which is according to the technical report, in 20-30 years. Then, underground mine could be exploited for another 30-50 years or more.
For a country that had distributed the mining boom incomes to as low as 16$ a month to all of the population, it seems like a viable option. We need time and human capital to come up with a sound policy, and educate people that the fate is in their hands, not on the mining industry. We must admit and recognize our mistake. I would support this strategy.
Option 3. Project financing for expansion.
BM wrote a lot about the project financing for OT expansion. The loan would cost us so much that we would not be able to pay the debt even if we generate enough income to pay it before the loan-life. 15 years in minimum would be spent in paying the debt and interest.
It means that risk is not born by Rio Tinto or the government. It will be born by the banks and international financial institutions by taking the whole mine, license, and the feasibility study as a collateral.
It will not get approved by the government and by the people. The logic here is clear. You can't come in here, and pledge our land, then leave us in debt, when we don't even have access to what you have been spending it on. This is an impossible option, as former board member of OT LLC P.Tsagaan as also reiterated in his interview.
Option 1. Swap the 34% with royalty increase.
If you read our article here, we suggested this solution in brief when we were informed that the policy makers are considering to make Erdenes OT a public company to fund its' operations. In fact, the current 34% share is yet to bring income to the shareholders. Instead it makes us bear the 6.5%+LIBOR interest rate debt, enormous amount of stress, and of course self-destructing PR. The main problem is that it is not a free-carry. Some may argue that the set standard in international practices are that shares must be bought, and risk must be shared. However, to share the risk, both of the sides have to be in control of the project. Despite having 3 members in the board, Mongolian side doesn't feel like it has control over the project or have sufficient information.
The engineering giant FLUOR and other Canadian, American and Australian companies get the major contractor jobs to build the mine. When the government side wanted to audit, FLUOR and other companies refused to show contracts and cost breakdowns to the auditors due to the reason of commercial confidentiality.
On top of that, Mongolian policymakers and leaders don't want the full benefits of dividends after 20-30 years. The people don't want the infrastructure and GDP growth after a decade which sometimes merely numbers, because the beneficiaries of these incomes would be a small number of people or companies. We could roughly calculate the worth of the 34% stake equals 10% royalty. Therefore, adding 10% on top of 5% that was in place. 15% is an agreeable solution for both sides. Turquoise Hill is getting 2% royalty that it had bought from BHP almost a decade ago.
In that way, Rio Tinto would not have to deal with the Mongolian government over petty issues such as increase in investment over USD200 million for a shaft soil calculation error or putting a milk and bread billboard for over thousands of dollars a day in central areas.
Option 2. Stretch the mine-life.
This is a strategy that has been used to milk the cash-cow Erdenet JVC back in the 70′s. You may haven't heard, but the original mine design was that the mining capacity was 2-3 fold from the current operations at Erdenet JVC. However, the officials at that time and the Mongolian engineers felt that it would be better to stretch the mine-life to benefit from for long-period of time. It worked, and we see the producing more than half of the country's GDP.
The halting of project financing and therefore, underground development might be a hint that the policy makers are willing to implement the same strategy mentioned above. After open pit depletes, the underground can be built, which is according to the technical report, in 20-30 years. Then, underground mine could be exploited for another 30-50 years or more.
For a country that had distributed the mining boom incomes to as low as 16$ a month to all of the population, it seems like a viable option. We need time and human capital to come up with a sound policy, and educate people that the fate is in their hands, not on the mining industry. We must admit and recognize our mistake. I would support this strategy.
Option 3. Project financing for expansion.
BM wrote a lot about the project financing for OT expansion. The loan would cost us so much that we would not be able to pay the debt even if we generate enough income to pay it before the loan-life. 15 years in minimum would be spent in paying the debt and interest.
It means that risk is not born by Rio Tinto or the government. It will be born by the banks and international financial institutions by taking the whole mine, license, and the feasibility study as a collateral.
It will not get approved by the government and by the people. The logic here is clear. You can't come in here, and pledge our land, then leave us in debt, when we don't even have access to what you have been spending it on. This is an impossible option, as former board member of OT LLC P.Tsagaan as also reiterated in his interview.
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