Source: BLOOMBERG
February 21, 2013

Rio Tinto Group (RIO)’s Mongolia copper and gold mine looks a dream location sitting next to China, the biggest market. Yet, Mongolia’s bid for more control of the project draws comparison with a Rio mine that went badly wrong.

Mongolia’s government is ratcheting up criticism of Rio’s management of the $6.6 billion project, the landlocked country’s single biggest investment. Lawmakers have argued for a bigger share of profit, while President Tsakhia Elbegdorj wants more management control. He faces elections in June with a fifth of the nation’s 3 million people in poverty despite world-beating economic growth of 17.3 percent in 2011.

Rio has refused government overtures to rewrite the agreement on the mine known as Oyu Tolgoi, raising tensions and comparisons with another Rio copper mine more than two decades ago. That project known as Panguna on the island of Bougainville in Papua New Guinea was shut by local protests and is still the subject of a U.S. court case.

“In Bougainville the community felt, rightly or wrongly, they weren’t compensated adequately for the various impacts of mining they were having to absorb,” said Jeffrey Neilson, a senior lecturer in economic geography at the University of Sydney. Governments in emerging economies “have to be seen to be taking a strong stance and making sure that the benefits of their resource wealth are being shared.”

Mining companies also need to consider wealth distribution in countries where they invest as a matter of course, said Michael Bush, who now heads credit research at National Australia Bank Ltd. and formerly worked as a geologist at Triad Minerals Inc.

‘Fingers Burned’

At Panguna, which was closed in 1989 after protests turned violent, the company “got its fingers burned more than many” of its peers, Bush said.

The unrest at Panguna, led by Francis Ona a former Bougainville mine worker, revitalized an independence movement on the island. That prompted the Papua New Guinea government to declare a state of emergency and send in troops in a conflict in which thousands died.

Bougainville landowners later filed a U.S. lawsuit alleging Rio conspired with the PNG government in acts of genocide, human rights abuses and environmental damage. Rio lost an appeal to have the lawsuit thrown out on Oct. 25, 2011. In November the same year, Rio sought to appeal the ruling to the U.S. Supreme Court. No decision has been made, according to the court’s website.

‘Serious Risks’

The company has argued that as the case has no connection whatsoever to the U.S. it shouldn’t be heard in the country and that the U.K. and Australia object to the litigation.

Rio cited a U.S. government filing that supported the company’s view: U.S. courts passing judgment on the conduct of a foreign sovereign, the government warned, pose “serious risks to the United States’ foreign relations with foreign states.”

Mongolia’s Oyu Tolgoi, set to start production in July, has about 25 million metric tons of recoverable copper and an expected life of 50 years. That’s about three-times the size of Panguna, which produced about 3 million tons of copper from 1972 to 1989 and holds another 5 million tons, according to a recent study amid discussions about reopening the mine under Rio unit Bougainville Copper Ltd. (BOC)

“Bougainville Copper Ltd. has a long-term vision of returning to mining and exploration on Bougainville, which Rio Tinto supports,” said Rio spokesman David Luff in an e-mail response to questions. “Any eventual return would be subject to the support of landowners and the government.”

The project will be discussed at Bougainville Copper’s annual general meeting in April, he said.

Resource Nationalism

Rio Tinto fell 3 percent to A$67.30 at the close of trading in Sydney. BHP Billiton Ltd. (BHP), the world’s biggest mining company, declined 3.8 percent. The S&P/ASX 200 index lost 2.3 percent.

Resource nationalism — government demands for higher taxes, royalties or stakes — was the top concern among mining executives in 2011, according to Ernst & Young LLP’s annual risk survey published in August 2012.

“I don’t think nationalism is growing, it’s always been here” in Mongolia, said Vidur Jain, an analyst at the Ulan Bator-based Monet Capital Investment Bank. “The government has an eye on the upcoming elections. Foreign investors don’t vote so the government could be aiming its rhetoric and actions at the electorate.”

The politicians that offer to squeeze the most from foreign investors are likely to win the most public support, Jain said. Government corruption and inefficiencies are the main reasons foreign investments don’t trickle down, “but that’s not something the locals are aware of.”

Losing Pit

A disconnect with local people led to the troubles at Rio’s Panguna mine, with the company not doing enough to mitigate the effect of its project on local inflation or the environment, Sydney University’s Nielsen said.

Nielsen formerly served as a community liaison officer for Aurora Gold Ltd., which had its mine overrun by locals in central Kalimantan, Indonesia, over how mining proceeds were shared.

“All of a sudden the local community cut down these massive trees and put them across the access road to the pit,” Nielsen, who worked for Aurora between 1999 and 2000, said.

“About 5,000 illegal miners took over the asset and started mining the pit. They were mining themselves, digging shafts. Then the company had to slowly renegotiate access to the pit.”

Who Blinks First

President Elbegdorj said this month the nation should have more control of Oyu Tolgoi, adding to calls from lawmakers in the last 18 months to push Rio to cede equity control in the mine. Mongolia, which is almost three times the size of France, owns 34 percent of Oyu Tolgoi and Rio the rest through its Turquoise Hill Resources Ltd. (TRQ) unit.

Mongolia is criticized because of “the absence of respect by the Oyu Tolgoi management toward the government,” Ochirbat Chuluunbat, vice minister at the Ministry of Economic Development, said in an interview. “A lot of decisions and resolutions of the OT management came without any prior consultation with the Mongolian government.”

As Elbegdorj appeals to voters in a nation where about a fifth of the people get by on $1.25 a day, he’s setting up a face-off with Rio’s Chief Executive Officer Sam Walsh, who has his own stakeholders to worry about.

Walsh, less than two months into the job, has to appease shareholders angered by a $14 billion writedown in Rio’s coal and aluminum operations that cost the previous CEO Tom Albanese his job.

Back-Door Deal

“I don’t think Rio will renegotiate the agreement,” said Jain at Monet Capital. If they do, there’s a risk other countries will want the same, so eventually there’ll be some kind of back-door deal, he said.

Lawmaker complaints in Mongolia have centered on cost increases at the mine, which they claimed had jumped almost $10 billion to $24.4 billion. Rio set costs so far at $6.6 billion, according to the Oyu Tolgoi website.

“The two sides don’t even seem to agree on what the cost overruns are for phase I of Oyu Tolgoi,” said Nick Cousyn, chief operating officer at BDSec, Mongolia’s biggest brokerage.

Cost overruns have been used to gain greater state control in a project before.

Russia, the world’s largest energy producer, refused for a year to approve Royal Dutch Shell Plc. (RDSA)’s request to double the cost of investment in the Sakhalin-2 oil and gas project. In 2006, shareholders sold half their shares to state-run OAO Gazprom, giving the Moscow-based company the biggest stake.

No Foreigners

Russia has resorted to tax claims and environmental inspections to pressure foreign investors into relinquishing major oil and gas projects started before President Vladimir Putin first came to power in 1999. First Deputy Prime Minister Sergei Ivanov said June 13, 2007, foreign companies “will never operate” major fields again.

The Mongolian dispute will probably end better than the story of the Bougainville mine.

“The world has changed markedly since the Bougainville situation, both from the global mining companies’ view point and from government angles,” said Tim Barker, investment analyst at BT Financial Group Pty, who owns Rio shares.

What has not changed is where the resources are, said Sydney University’s Nielsen.

“We live on a finite planet and countries are taking a gamble on their resources,” he said. “Perhaps there isn’t a rush to dig it out and sell it now and they can negotiate deals in ten or 15 years.”

Two weeks ago on Feb. 7, about 23 years since Rio closed Panguna, the company announced it may be restarted. The mine still holds more copper and gold than was dug out.

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Yuriy Humber in Tokyo at yhumber@bloomberg.net

To contact the editors responsible for this story: Peter Langan at plangan@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net

Source: THE ECONOMIST
February 16, 2013

Mongolia’s road to riches is paved with shareholders’ tiffs

ONE of the world’s fastest-growing economies, Mongolia finds itself at odds with the sources of its new-found wealth: the foreign miners and financiers dazzled by the unfathomable bounty under its vast terrain. Some foreigners fear that populist politicians, pandering to a belief that the nation is selling its birthright too cheaply, may kill the goose before it has laid any golden eggs. Almost certainly not; but “resource nationalism” will surely make life uncomfortable for geese.

Because of falling commodity prices and a slowdown in China, which takes over 85% of its exports, Mongolia’s roaring economy slowed drastically last year—to a mere 12% or so GDP growth, from over 17% in 2011. But the benefits produced by these giddy numbers remain elusive for many Mongolians. The frozen main streets of Ulaanbaatar, the capital, are gridlocked. In the glitzy mall in Central Tower, it is warm enough to browse the posh shops in a T-shirt. Yet more than half of Ulaanbaatar’s 1.3m people live in “ger districts” on its fringes, shanty towns of felt tents often with no running water or electricity. According to the IMF, the number of Mongolians living in poverty fell by about ten percentage points in 2011, thanks to government handouts. But that still left some 30% below the poverty line. For them, the most obvious effects of the inflow of foreign money are sharply rising prices, unplanned urbanisation and the presence of rich-looking foreign visitors and residents.

In a vibrant young democracy, plenty of politicians tell Mongolia’s 2.8m people that they should be faring better as the country hurtles towards rich-world average incomes. In parliamentary elections last June, about a quarter of the seats went to “resource nationalists”, advocating local control of the mines. Such nationalists make up about a third of the cabinet of the coalition government led by the Democratic Party.

During the campaign, a scandal blew up when the foreign-controlled owner of Ovoot Tolgoi, a Mongolian coal mine, wanted to sell it to a Chinese state-owned enterprise. Acutely conscious of their commercial dependence on China, Mongolians are sensitive to any hint of its gaining control over them. A “strategic entities foreign-investment law” was pushed through, tightening approval procedures. Mongolia is far from unique in having such a law, but it was taken as a sign of an incipient backlash.

A presidential election is due in May. The incumbent, Tsakhia Elbegdorj, of the Democratic Party, is the favourite, and is closely identified with the opening to foreign investment. But new draft mining legislation from his office has provoked howls of protest from the industry, which claims its restrictions would deter all new investment in mining. And this month the president weighed into the foreigners behind much the biggest project in Mongolia to date, the Oyu Tolgoi (“Turquoise Hill”) or “OT” copper-and-gold mine. OT is expected to contribute one-third of GDP by 2020, and is the basis of the strategy of rapid growth fuelled by foreign investment in mining. Some 34% of OT is owned by the Mongolian government and 66% by Turquoise Hill Resources (which also controls the firm that owns Ovoot Tolgoi), a subsidiary of Rio Tinto, a British-Australian mining behemoth.

The mine has just produced its first copper concentrate. It is expected to begin commercial production by the end of June. In the Gobi desert, just 80km (50 miles) from the border with China, which will buy its product, it seems well on track to meet the ambitious hopes vested in it. Yet the president accused the company of having spent more than had been scheduled when the investment agreement was signed in 2009 (nearly $7 billion so far); of being slow in explaining why; of paying its management too much; and of employing more foreigners than it was supposed to. In rebutting these slights, OT pointed out that Rio is shouldering most of the project’s risks. It is lending the government the money for its share of the investment, and the loan will never be repaid if the mine does not make enough money.

Cynics suggest Mr Elbegdorj’s tirade may have owed something to two related factors other than genuine concerns about the project and posturing ahead of the election. One is the government’s gaping budget deficit. OT is already a big taxpayer. By piling on pressure, the government may hope to extract more revenue from it. The second is a fiasco at a potentially even more lucrative project—the nearby coal mine at Tavan Tolgoi (TT). To meet the government’s cash-handout promises, coal from TT was presold to China at prices below what it now costs to mine and transport it. Plans for a global share offering for TT are on hold.

So a row with OT is not all bad for the government. And at least it is not threatening, as it did last year, to renegotiate the investment agreement or expropriate part of Turquoise Hill’s stake. The smug consensus among foreign businessmen is that the government needs Rio more than Rio needs it. That may well be true; but it is all the more reason to expect the government to be suspicious of its foreign partner. By refusing to support OT’s efforts to raise bank finance for the expensive second, underground, phase of the mine, it has found a powerful lever. At a time of stress in global mining, when projects elsewhere are facing the axe, this is a dangerous game.

My name is Chinggis

Mongolia knows its own appeal to global investors. In November it raised $1.5 billion in international markets. Its bond, inevitably called “Chinggis” after the national hero, Genghis Khan, was heavily oversubscribed, and traded initially on terms better than those available to, for example, Spain. But the price of the Chinggis has proved as volatile as its namesake and much more vulnerable to shareholder disputes. Some investors hope the government will moderate its behaviour. But is the land of Genghis, conqueror of China and most of the Eurasian land mass, really going to quail before the scribblers in the bond markets?

^{Economist.com/blogs/banyan}

Source: BLOOMBERG
February 15, 2013

Rio Tinto Group, the world’s second- largest mining company, said its $6.6 billion Oyu Tolgoi copper mine in Mongolia won’t start until disagreements with the government are resolved.

“A number of substantive issues have recently been raised by the government of Mongolia, including the implementation of the investment and shareholder agreements and project finance,” London-based Rio said today in a statement. “Subject to the resolution of these issues, first commercial production from Oyu Tolgoi is scheduled to commence by the end of June 2013.”

Rio, which today named Jean-Sebastien Jacques as the new head of its copper unit, twice rejected Mongolia’s demands in the past 18 months for a greater share of profits from the mine. President Tsakhia Elbegdorj said this month Mongolia should have more control of the copper-gold operation that will be the biggest contributor to its economy once it’s in full production.

“I’m concerned by recent political signals within Mongolia calling into question some aspects of the investment agreement,” Rio Chief Executive Officer Sam Walsh said during a webcast presentation today. “This undermines the partnership we’ve built and the stability on which a project of this size and scale depends.”

Rio and Mongolia, which held talks on Feb. 7 in the capital Ulan Bator, plan to resume discussions this month to resolve concerns that spending at Oyu Tolgoi is overshooting and the country isn’t benefiting enough from the development.

Mongolian Talks

The government is seeking to boost Mongolian participation in management and increase the number of local companies that can benefit from the project, including the use of a Mongolian bank.

“Jean-Sebastien has already been involved in the discussions in Mongolia and in fact he was there last week as part of the shareholder meeting and part of the discussions with the Mongolian government,” Walsh said today on a conference call after reporting the company’s first annual loss.

Rio slipped 0.3 percent to 3,745.5 pence by the close in London, with 8.09 million shares changing hands, double the daily average volume for the past three months.

Rio is considering a temporary halt to work to protest government demands for a greater share of profit, two people familiar with the plans said last month. The mine, the biggest copper project currently under construction, is 66 percent-owned by Rio unit Turquoise Hill Resources Ltd. and 34 percent by Mongolia’s government.

Beat Expectations

Rio would continue to engage with the government to implement its 2009 investment and shareholder agreements “in their current form,” the company said in its statement.

Rio reported a better-than-expected second-half loss as earnings at its iron ore unit beat analyst estimates and it raised its dividend.

The loss was $8.9 billion in the six months ended Dec. 31, from a $1.76 billion loss a year ago, Rio said today in an e- mail. That’s better than the $10 billion median estimate of five analysts surveyed by Bloomberg. The loss, the biggest in at least 15 years, was driven by $14 billion in writedowns on the value of its aluminum and coal businesses and offset by an almost $1 billion benefit from its minerals sands operations.

The writedowns saw Walsh last month named as CEO, replacing Tom Albanese who signed off on the $38 billion takeover in 2007 of Alcan Inc. Rio, which reported full-year underlying earnings of $9.3 billion that beat analyst expectations, said today it boosted its full-year dividend by 15 percent and accelerated expansion at its iron ore mines in Australia.

Pilbara Acceleration

Rio said it has accelerated “phase one” of its Pilbara iron-ore expansion to be completed in the third quarter. The expansion will boost production to 290 million metric tons a year, while a second increase in output to 360 million tons will be operational in the first 6 months of 2015.

The company will pursue an “unrelenting focus” in creating better value for shareholders, Walsh said in the presentation. The company said it is cutting capital expenditure to $13 billion in 2013 from $17 billion last year, while targeting cash cost savings of more than $5 billion by the end of next year.

Rio said its disciplined capital management will help maintain its single A credit rating. Walsh ruled out acquisitions for the moment, saying deals are “not on my radar.” Chief Financial Officer Guy Elliott also said the return of cash to shareholders in the form of a buyback shouldn’t be expected this year.

Costs History

“The group appears to have taken its major writedowns this year and looks well set to pass on the benefits of its cost reduction program through 2013,” John Meyer, a mining analyst at SP Angel in London, said in a note. “Rio has a good long- term history of managing its costs and should realize significant benefit going forward.”

Rio said iron-ore production would be 265 million tons this year, while it would produce 8.5 million tons of hard coking coal, 20.5 million tons of thermal coal and 665,000 tons of copper. The production outlook is “weaker” than Liberum Capital Ltd. had estimated, the brokerage said in a note to investors.

Rio’s second-half earnings from its iron ore unit fell as prices for the steel making ingredient declined. Iron ore prices averaged 27 percent lower during the six months to Dec. 31 than a year earlier, at about $116 a ton, data from The Steel Index shows.

Prices have since recovered from a three-year low in September to a 15-month high of $158.50 a ton last month on signs of economic recovery in China, the biggest consumer of industrial metals.

“We see positive momentum in the fourth quarter last year being sustained into 2013 with Chinese GDP growth returning to above 8 percent in 2013,” Walsh said in a statement. “We expect market uncertainty and price volatility to persist as long as the structural issues in Europe and the United States remain unresolved.”

To contact the reporters on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

Source: BLOOMBERG
February 13, 2013

Rio Tinto Group proposed initial terms on a $4 billion project financing for the Oyu Tolgoi copper-gold mine in Mongolia as it tussles with the government over profits, three people with knowledge of the deal said.

The world’s second-largest mining company sent a request for proposals to lenders after holding bank meetings, said the people, who asked not to be named because the transaction is private. They have been asked to respond by mid-March, the people said.

Rio Tinto is seeking about $2 billion of 12-year loans from banks and a further $2 billion from export credit agencies and international development funds for the project, the people said. The company is said to be considering a temporary halt to work as the government demands a greater share of profit from the mine.

David Outhwaite, a London-based spokesman for Rio Tinto, declined to comment.

The mine, in the South Gobi desert 80 kilometers (50 miles) from Mongolia’s border with China, is controlled by Rio through its 51 percent stake in Turquoise Hill Resources Ltd. which holds a 66 percent stake in the project. The Mongolian government owns the remaining 34 percent stake.

President Tsakhia Elbegdorj said Feb. 1 Mongolia should have more control of the mine that will be the biggest contributor to the country’s economy once it’s in full production.
Interest Rate

About half of the bank debt will pay an interest rate of 2 to 3 percentage points more than benchmarks and be insured against political risks by the World Bank’s Multilateral Investment Guarantee Agency, according to the people with knowledge of the financing.

The cost of building the first phase of mine rose to $6.6 billion from an initial 2010 costing of $5.7 billion, along with $500 million of interest payments on existing loans, according to a Feb. 5 statement on Oyu Tolgoi’s website. The project financing will enable the next stage of development of the mine and help reduce costs for shareholders, Oyu Tolgoi said.

Turquoise Hill predecessor Ivanhoe Mines selected BNP Paribas SA and Standard Chartered Plc to arrange the financing in July 2010, along with the European Bank for Reconstruction and Development, the World Bank’s International Finance Corp. and Export Development Canada.

Export-Import Bank of the U.S., Australia’s Export Finance & Insurance Corp. and the World Bank’s MIGA unit subsequently joined the deal, according to the IFC’s website.

To contact the reporter on this story: Stephen Morris in London at smorris39@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net

Source: MONGOLIAN ECONOMY
February 07, 2013
By Terrance Edwards

Mongolia’s parliament has quietly passed two key pieces of legislation that has international firms worried they may be left out in the Siberian cold.
The recently passed Law on the Legal Status of Lawyers and Law on Tax Specialised Consultancy place more stringent controls over the services legal and tax advisory professionals can provide in Mongolia. It is another round of controls over participation by foreign investors since Mongolia’s Strategic Entities Foreign Investment Law (SEFIL), passed late May 2012, which suffered from similar debilitations that have put a plug on investment dollars for Mongolia’s booming mining sector. The legislation, which requires government approval for foreign acquisition of a third or more of any companies within the communications, finance and banking, and minerals sectors, has left foreign companies at a standstill out of fear of violating the law—which could have the government barring a company from operating in the country.

In an email, MahoneyLiotta Partner Darin Hoffman wrote that the laws would exclude law and tax advisory firms from providing their services and “are symptomatic of the general shift towards increased regulation over foreign investment and foreign citizens living and working in Mongolia that began with the adoption of the Strategic Entities Foreign Investment Law”…

The legislation puts new limitations on auditing and lawyer firms that require practicing professionals to pass state exams similar to the United States’ bar and CPA exams, said Budragchaa Bayar, a managing partner at domestic law firm Economic Legal Consultancy. As far as anyone can tell, the exams will only be administered in Mongolian language—a language spoken by just some five million in the world—and will add even more red tape to the country’s already Byzantine legal system.

The lawyer law is a “revamping of the legal profession” that “should be big news for worldwide legal professionals”, said Bayar, who was also involved in the drafting of the law.

He said the key difference of the law is all law firms will have to register themselves as limited liability partnerships rather than companies. While LLCs in Mongolia may acquire a single license to operate in Mongolia, LLPs do not, which means licensing will only be granted to individuals. Without licensing, legal professionals will not legally be allowed to call themselves lawyers.

Bayar said the law is effective January 1, 2014, but MahoneyLiotta said it was informed that date had been pushed up to April 15 this year.

The tax advisory law similarly asks tax advisors to pass a state-administered exam for licensing. The law also requires auditing firms such as Ernst & Young to establish a separate organisation for its tax advising services. Any firm that fails to meet these conditions will likely face penalties after June 1, 2013.

For their licensing, lawyers and tax advisors in Mongolia will have to answer to the Mongolian Lawyers Association and the Tinz agency, respectively. However, there is some uncertainty with how the law will be enforced and how government services will be administered.

“We are not sure how long it will take for licensing”, said Mandal Uyanga, chief executive officer of Ernst & Young Mongolia Audit. She added, “This is really a new thing, so we need to communicate with Tinz”.

It’s the lack of clarity in the law regulating lawyers that has law firm MahoneyLiotta, who in Mongolia represents Rio Tinto Group and the London Stock Exchange, worried how the law will eventually be enforced by government.

According to Mongolia’s central bank data on the balance of payments, foreign investment fell 45 percent from USD 321.5 million in June to USD 176.9 million in November, last year.

Hoffman said that work on almost all public offerings had been halted since the passage of SEFIL, largely due to the uncertainty felt by investors.

“Even though the SEFIL was adopted on 17 May 2012 the foreign investment regulator has still not created the approval process so no large equity offerings like this can be done until the approval process is created (and an approval is obtained)”, Hoffman said.
Bayar, too, worried on the vagueness of the law and how licensing bodies would behave. He has experienced firsthand how Mongolian licensers can “run like a business”.

“In 2005, when I sat in the exam by the [to-be-dissolved licensing agency] Advocates Association, everyone was young. I was the only one with white hair”, he said. “When I got my certificate there was a ceremony to hand out the certificates. Finally I saw several people with gray hairs. I don’t recall seeing them in the exam”.

Source: BLOOMBERG
February 06, 2013

The yield on Mongolia’s global sovereign notes rose to the highest since the debt was sold in November as the government battles for control over a mining contract with Rio Tinto Group, the nation’s biggest investor.

The yield on the 5.125 percent dollar-denominated notes due 2022 climbed 20 basis points this month to 5.85 percent, data compiled by Bloomberg show. The rate has jumped 41 basis points, or 0.41 percentage point, in 2013.

President Tsakhia Elbegdorj last week called for Mongolia to have greater control of the Rio-operated Oyu Tolgoi copper and gold project, which will account for almost a third of the nation’s economy once in full production. Rio Tinto has rebuffed at least two attempts in the past 18 months by Mongolia to redraw the investment agreement, which gives the world’s second- largest miner a 64 percent stake in the mine, with the government holding the rest. The North Asian nation is due to hold presidential elections in June.

“The bonds are reflecting investors’ shrinking confidence in the direction of the current administration,” Travis Hamilton, founder of Singapore-based Khan Investment Management Ltd., which focuses on Mongolian assets, said in a telephone interview. “There appears to be no real cohesion, the leadership is questionable and there’s a huge amount of political uncertainty” ahead of this year’s election, he said.

Dollar Bonds

Mongolia raised about $1.5 billion from the November debt sale that was managed by Bank of America Corp., Deutsche Bank AG, HSBC Holdings Plc and JPMorgan Chase & Co. The notes are rated BB- by Standard & Poor’s, or three steps below investment grade. The yield on state-controlled Development Bank of Mongolia LLC’s 5.75 percent bonds due 2017 increased 26 basis points this month to 5.13 percent.

Since the bond sales, Mongolia has introduced a draft mining law that would more strictly regulate the industry and increase pressure on Rio Tinto for more domestic control on the Oyu Tolgoi mine. In addition, the biggest state-owned coal miner Erdenes Tavan Tolgoi has let go of two foreign top executives and stopped contracted deliveries to China, citing a lack of funds.

The value of the bonds has dropped by $90 million since the issuance, which could push up borrowing costs for Mongolia in the future, said Dale Choi, an Ulan Bator-based associate with private equity investment firm Origo Partners MGL.

“It’s time for Mongolia to have Mongolian representation on the management team,” President Elbegdorj said at a parliament session on Feb. 1, according to his website. “It’s important that the government takes the Oyu Tolgoi matter into its own hands.”

‘Rude Surprise’

Oyu Tolgoi will hold a shareholder meeting in Mongolia today, where it expects to address concerns held by the government. Rio is considering a temporary halt to work to protest government demands for a greater share of profit, two people familiar with the plans said last week.

“It’s going to be extremely important to see the outcome of today’s meeting with Rio Tinto on Oyu Tolgoi,” said Khan Investment’s Hamilton, who doesn’t own Mongolia’s 2022 debt. Favorable pricing at its last bond sale “gave the government the impression that they could walk on water. But I think they’ll get a rude surprise the next time they go to the market unless they get their act together.”

To contact the reporters on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net; Michael Kohn in Singapore at mkohn5@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

Source: WASHINGTON POST
February 04, 2013

Traditionally, Mongolian life has been based around herding, with nomadic families sleeping in yurts and tending livestock. That’s why it’s surprising to hear stories like that of Khorloo, a 65-year-old Mongolian who spends her days digging through the Mongolian steppe with metal detectors and shovels, plucking out the occasional gold nugget after days of scratching in the dirt.

“It took us a week to dig this out,” Khorloo told Reuters, holding a nugget that could earn her family as much as $6,000. “But we dug for three years to reach the vein.”

Khorloo is one of Mongolia’s 60,000 or so “ninja miners” — former herders who took up amateur mining, using whatever rudimentary tools they have at their disposal, amid soaring mineral demand from China. (They’re called ninjas because the large green pans they carry on their backs look like turtle shells.)

A former economic underdog, Mongolia is now the world’s fifth fastest-growing economy, with an 12.3 percent GDP growth rate that would make today’s anemic, Western economies salivate. (For comparison, the U.S. economy is growing at 1.7 percent.) Like many other Central Asian countries, Mongolia is growing rich from selling minerals to China. According to a report by the Associated Press, Mongolia sends 90 percent of its exports to Chinese markets, and the two-way trade with Beijing makes up 75 percent of Mongolia’s economy.

But several recent reports indicate that Mongolia’s economic success story may turn out not to be all that it seems. Here are four ways its meteoric growth could go awry:

1. The Ninjas: Though they sound like some sort of ore-hunting SWAT team, the herders who have recently sought their fortunes in freelance mining are actually a bit of a drag on the mining economy. Not only do they not pay taxes, notes Morris Rossabi in Foreign Affairs, they also contribute to prostitution, gambling, and other illegal activities. And the herders who have resisted mining complain that mining companies have undermined their way of life, forcing them to migrate.

2. Becoming too dependent on China: Because China has fueled so much of Mongolia’s growth, there could be scary repercussions as China’s economy slows. China’s demand for Mongolian minerals has already slumped somewhat, and most analysts say Mongolia needs to diversify its economy away from just one main trading partner.
Granted, Mongolia has pushed back against Chinese influence, even going so far as to lay railroad tracks at a gauge that makes it impossible for them to connect to Chinese rails. China and Russia are now each limited to a third of Mongolia’s total foreign investment, and Mongolia has been attempting to foster partnerships with the United States, the European Union and Japan in order to hedge against Beijing and Moscow.
“We will not be another Africa,” Ganhuyag Ch. Hutagt, a Mongolian banker and former vice finance minister told the AP. “We cannot afford to have one particular nation control our businesses.”

3. Its mines have been plagued by problems: Mongolia’s “resource nationalists” have made it difficult for mining projects to get off the ground. Nationalist policymakers worried about foreign influence over Mongolia’s resources want to amend the agreement on Oyu Tolgoi, a massive copper mine, so that Mongolia gets a bigger share. Last week, Rio Tinto Group, a British-Australian mining giant that owns the majority stake in the project, said it was considering a temporary halt to construction work at Oyu Tolgoi because of Mongolia’s demands for a larger share.
Mongolia’s massive coal mine in Tavan Tolgoi has also suffered a number of setbacks. In July, the Mongolian government withdrew a decision to hand mining rights in Tavan Tolgoi to a consortium consisting of China’s Shenhua Group, U.S.-based Peabody, and Russian Railways, saying Mongolia might develop the mine on its own. In the past few weeks, tensions between China and Mongolia have escalated after Erdenes-Tavan Tolgoi halted coal exports to China and threatened to cancel a coal-supply deal, with Mongolia’s ambassador to Beijing telling The Wall Street Journal that the pricing terms of the deal were “unacceptable in the sense of normal international trade.”

4. Mongolia is still pretty corrupt: Transparency International ranks Mongolia as 80th most corrupt of 182 countries — not as bad as 62nd most corrupt in 2011, but still not great. Inequality is on the rise, and it’s hard to tackle because independent groups suspect the government is falsifying the country’s true poverty numbers (which are already astonishingly high, at somewhere between 29 to 39 percent), Rossabi points out.

Screenshot: Transparency International

Either way, this is hardly the sort of environment where dramatic, sudden economic growth can be expected to improve quality of life for most citizens.

Or as Sumati Luvsandendev, the director of a polling organization in Ulan Bator, told the Guardian recently: ”Our society worries that things are not going that well in terms of social justice, that there is a growing gap between rich and poor, and that there is an oligarchic class.”

Source: BLOOMBERG
February 05, 2013

Sapaar is 23 and he’s a “ninja” miner, hauling low-quality coal from a pit in the Mongolian steppes for 12 hours a day.

Sapaar’s coal is not the steel-making variety the bigger mines export to China, a trade that helped the economy expand a world-beating 17.3 percent in 2011. The boom brought luxury retailers such as LVMH Moet Hennessy Louis Vuitton SA (MC) to Ulan Bator, Mongolia’s capital, to sell $4,500 handbags. Sapaar doesn’t shop there.

People walk by the Louis Vuitton store near Sukhbataar Square in Ulan Bator, Mongolia. Photographer: Paula Bronstein/Getty Images

As companies such as Rio Tinto Group (RIO), Mongolia’s biggest investor; Peabody Energy Corp. (BTU); and Mitsui & Co. (8031) plan to keep the momentum going by exporting more of the country’s $1.3 trillion trove of resources, about a fifth of the population of 3 million are getting by on $1.25 a day.

The explosive growth of Mongolia in just 10 years makes for a sharp disconnect between French handbag boutiques and hand- digging coal out of frozen rock. That’s raising warnings of public unrest and driving controversial renegotiation of mining deals by the government to keep a larger share of profit at home.

A man stands on top of a hill overlooking the central business district in Ulan Bator, Mongolia. Photographer: Paula Bronstein/Getty Images

Rio Tinto’s $6.2 billion investment in the first phase of the Oyu Tolgoi copper and gold mine in Mongolia is the biggest test case and tensions are rising.

Most of Mongolia’s population are unhappy with the big mining projects, said Dale Choi, an Ulan Bator-based associate with Origo Partners MGL, a private equity investment firm.

“Locals don’t benefit from them directly,” Choi said. “The country as a whole benefits, the tax revenue benefits, but the people don’t feel it” and are getting more irate, he said.

Heavy machinery moves coal at the SouthGobi Energy Resources Ltd. coal mine at the Ovoot Tolgoi, Mongolia. Photographer: Doug Kanter/Bloomberg

‘Minegolia’ Nickname

The gold, copper and coal rush earned the nickname “Minegolia,” made the landlocked nation China’s top supplier of coking coal, and spawned sushi bars, $3,500-a-night hotel suites and Bayerische Motoren Werke AG car dealerships.

Meantime, Mongolians have flocked to Ulan Bator in search of work. About half the residents in the capital, which is home to almost 50 percent of the population, live in traditional huts known as gers without running water, and some without power. They burn coal in stoves for heat and cooking.

Mongolia’s President Tsakhia Elbegdorj said his country should have more control of Rio’s Oyu Tolgoi copper and gold mine in southern Mongolia, according to a statement on his website, referring to a discussion in parliament on Feb. 1.

“It’s important that the government takes the Oyu Tolgoi matter into its own hands,” Elbegdorj said.

Rio Considers Halt

Rio — which owns 66 percent of Oyu Tolgoi, the world’s biggest copper mine under construction, and Mongolia the rest — is considering a temporary halt to work on the mine to protest government demands, two people familiar with the plans said last week.

On at least two previous occasions in the last 18 months, the government has requested Rio renegotiate the terms of Oyu Tolgoi. The miner refused.
“We continue to work together with all stakeholders, including the government of Mongolia, to bring the benefits of Oyu Tolgoi to all parties,” Rio Tinto said yesterday in an e- mailed response to questions. “We are now focused on first commercial production. We are on schedule to deliver that in the first half of this year.”

Although it’s not an industrial hub, Ulan Bator “is among the cities with the worst air quality in the world,” according to a 2011 report by the World Bank that cites pollution from the ger stoves.

The circumstances have the elements for a public revolt along the lines of the “Arab Spring” in the Middle East, said Jack Weatherford, an author and anthropologist who has split his life between the U.S. and Mongolia for the last 17 years.

Property Ownership Alien

Mongolia’s broader public isn’t feeling the benefits of mining investment, said Weatherford, a professor at Macalester College, Minnesota, before he retired.

“People are not convinced it’s going to help the country to develop,” as concepts such as property ownership and land exploitation rights are literally foreign, said Weatherford, best-selling author of “Genghis Khan and the Making of the Modern World.”

“If they themselves have no tradition of owning the land, how do foreigners get to come in and own it?” Weatherford said. “Mongolians go so far and then they stand up and fight.”

Protests over the results of the 2008 parliamentary elections killed at least five people and the government invoked a four-day state of emergency.

Moving Goalposts

Mindful of growing public disquiet, the government has delayed a decision on which overseas companies will develop Mongolia’s biggest coal field. It has also proposed mining laws to give the public a broader say.

A draft of the laws released in December would give even villagers power to block exploration by miners in their areas, according to Choi of Origo Partners. (OPP) That will make it tough for all but the largest to operate in the country, he said.

Rio Tinto’s Oyu Tolgoi mine, due to start up this year, will account for 30 percent of the nation’s gross domestic product once in full production. The deal took six years to complete with Mongolia’s government.

The Oyu Tolgoi accord is good for Mongolia and good for Rio, Chief Executive Officer Tom Albanese said Nov. 28, almost two months before he quit following $14 billion of writedowns in failed deals in aluminum and coal.

Disputed Billionaires

Investment has been good for some Mongolians. Odjargal Jambaljamts is chairman of Mongolian Mining Corp. (975) and was the country’s richest man with a net worth of $2.3 billion in 2011, according to rankings by local publication Hero magazine.

Hero is “not accurate and not based on grounded information,” said Mongolia Mining spokeswoman Ariunaa Baldandorj. Rich lists compiled by U.S. media rely on facts and surveys, while local rankings are “mostly speculative,” she said.

Former Prime Minister Batbold Sukhbaatar is fifth on Hero’s list with $1 billion from stakes in Altai Holdings LLC, which runs hotels, supermarkets and cashmere outlets. Number eight is current Foreign Minister Bold Luvsanvandan with $800 million from Bodi Group, which spans banking, real estate, media and property development.

A Ministry of Foreign Affairs and Trade spokeswoman said she couldn’t comment on the rich-list rankings. Two phone calls made to the mobile phone of Batbold weren’t answered. Questions e-mailed to Altai Holdings, Bodi Group and Batbold’s personal website didn’t receive a reply.

Disputed Billionaires

Investment has been good for some Mongolians. Odjargal Jambaljamts is chairman of Mongolian Mining Corp. (975) and was the country’s richest man with a net worth of $2.3 billion in 2011, according to rankings by local publication Hero magazine.

Hero is “not accurate and not based on grounded information,” said Mongolia Mining spokeswoman Ariunaa Baldandorj. Rich lists compiled by U.S. media rely on facts and surveys, while local rankings are “mostly speculative,” she said.

Former Prime Minister Batbold Sukhbaatar is fifth on Hero’s list with $1 billion from stakes in Altai Holdings LLC, which runs hotels, supermarkets and cashmere outlets. Number eight is current Foreign Minister Bold Luvsanvandan with $800 million from Bodi Group, which spans banking, real estate, media and property development.

A Ministry of Foreign Affairs and Trade spokeswoman said she couldn’t comment on the rich-list rankings. Two phone calls made to the mobile phone of Batbold weren’t answered. Questions e-mailed to Altai Holdings, Bodi Group and Batbold’s personal website didn’t receive a reply.

Ordinary People

“Well, this is what we do,” Sapaar said, his smile revealing a slash of white teeth against his coal-blackened shirt. “At least in winter being down there is warm. I know it’s dangerous. There are no other jobs.”

Mongolia may have between 60,000 and 100,000 subsistence miners, according to Patience Singo, manager of the Swiss state- funded SAM project that aids the workers. The figures are from the World Bank and government surveys, he said.

Sapaar’s coal travels 40 kilometers to Ulan Bator, where one customer, 50-year-old librarian Ganbaatar, uses it in a stove to heat his ger. Like many Mongolians, Ganbaatar goes by one name.

“Mongolia’s economy has grown a lot in the last few years, but it hasn’t touched the roots of the lives of ordinary people,” Ganbaatar said. “It benefits top business owners and politicians.”

Mongolia’s resource boom has made little difference to unemployment figures over the last decade, according to a November report by the International Monetary Fund. Unemployment was at 9 percent at the end of 2011, according to a World Bank report in June, based on informal labor surveys. Government figures put it at 4.4 percent in March 2012.

In 2011 the number of people living in poverty shrunk to 30 percent from 40 percent the prior year, but that was mainly due to state cash handouts, the IMF said.

Life & Death

After a string of mine accidents a few years ago, the pits where Sapaar digs were closed by the authorities, which drove up coal prices in the capital, said Singo at the SAM project. The authorities soon allowed mining to resume.

Sapaar’s coal output doesn’t register in Mongolia’s gross domestic product, yet to ger dwellers like Ganbaatar in Ulan Bator, it’s the difference between life and a freezing death as annual temperatures average below zero degrees Celsius, the world’s coldest for a capital city.

A cluster of five-star hotels and the all-glass Blue Sky Tower on the edge of Ulan Bator’s central square suggest the city is setting its sights on becoming the next Asian business hub in the mold of Hong Kong or Singapore.

An office block and mall with boutiques selling Montblanc, Ermenegildo Zegna, and Hugo Boss has opened opposite the Mongolian Stock Exchange and close to the government palace.

Ulan Island

The transformation is all in central Ulan Bator, said Weatherford.

“Today, it’s the island of Ulan Bator down here and then there’s Mongolia,” Weatherford said. The growing wealth gap adds to potential for public unrest, he said.

“Mongolians have completely overthrown the past and wiped out the elite,” Weatherford said. “These things have happened before.”

In the 1930s, when under Soviet rule and acting on Kremlin instructions, Mongolia’s Communists sought out descendants of Genghis Khan and executed them, with the final purges cutting the population by about 10 percent, Weatherford said.

“This country idolizes Khan,” he said. “Yet they killed every one of his descendants.”

Mongolia’s transformation into a democracy starting in 1990 from a Soviet satellite state began a period when those who understood mining and business could build fortunes.

Pothole Point

In 1990 there were about 450 cars in Mongolia, Weatherford said. Now, Ulan Bator alone adds 35,000 vehicles each year, the local government said in a February 2012 report. The city may have more than 210,000 cars, according to official estimates.

On weekends, Ganbaatar the librarian says he watches black SUVs zoom by on the road through his district, No. 16. The road leads to an area known as the valley of the villas where the new rich go for rest and recreation.

The road’s two crumbling, potholed lanes intersect newly painted facades of roadside buildings, beyond which the district is made up of gers and wooden huts.

“This is a main road and everyone uses it, but it doesn’t get fixed,” Ganbaatar said. “I look at them and think: ‘If you can’t fix the main road, you’re never going to fix the side streets and beyond.’”

When it rains in Ganbaatar’s district, roads between the nomad huts turn to mud. There is no garbage collection, no sewage treatment, and no hot water, he said.

The air pollution in Ulan Bator from coal-burning stoves causes respiratory and cardiovascular diseases and annual associated health costs have reached $727 million, according to the World Bank. Mongolia’s economy is worth about $10 billion.

Roy Orbison

Mortality rates from pollution in ger districts are as much as 45 percent higher than if the air quality met national standards, according to the bank. Ambient annual average particulate matter in the city is six to seven times higher than World Health Organization standards and is worse than in China, the bank said.

The World Bank started the Ulan Bator Clean Air Project to distribute more efficient, clean burning stoves to ger families. Ganbaatar said he threw his new stove away because it didn’t properly burn the coal he buys.

In the town of Nailakh near the ninja mines, pensioner Puruvdorj, 73, sits on a bench in a tree-lined alley opposite the statue of communist-era workers’ hero D. Davaajav.

Dressed in a navy blue track suit, slippers and playing with his granddaughter, his sunglasses give him a look like Roy Orbison with a crew-cut.

Rivers of Alcohol

Puruvdorj says he’s lost faith in government because he’s seen no improvement in Nailakh over the last 10 years no matter who was in power. The town, where most make a living in subsistence mining, needs new equipment as the coal reserves close to the surface are being exhausted.
Instead, the government sends cash handouts, which has only encouraged more bars and karaoke parlors, he said.

“There are rivers of alcohol, but no real development.”

Subsistence mining in Mongolia is a job of last resort, said Michael Priester, who’s been involved in the country for seven years as head of mineral resources at Projekt-Consult GmbH, a German corporate and government advisory business.

When extreme cold in the early 2000s killed off livestock, many herders either moved to Ulan Bator to find work or took up shovels to dig for coal, gold, and other minerals, he said.

Ninja Thousands

“It’s for people who don’t have other economic opportunities,” Priester said. Subsistence mining is practiced in Africa, South America, and other places and may involve as many as 10 million to 13 million people globally, far more than the professional mining industry, he said.

Mongolia’s subsistence miners got the nickname “ninja” in the early 2000s. The gold miners carried blue-green plastic washpans slung across their backs and looked like the Teenage Mutant Ninja Turtles characters in the movie, Priester said.

Ninja miners outnumber those working in large mines two-to- one and operate in 18 of Mongolia’s 21 provinces, the United Nations said in a June 2012 report. Given that they spend their earnings locally and support their families, they are estimated to support 13 percent of the national population, the UN said.

In rural Mongolia, subsistence miners account for a fifth of the economy, earning an average of $176 a month, or 57 percent more than the country’s minimum wage, according to the UN.

No Ladder

Still, ninja mining is a one-way street that doesn’t lead to better jobs with bigger companies that rely on machinery for mining, Singo, a mining engineer and a Zimbabwe native, said.

“Most of them don’t have the necessary skills to switch over,” he said.

Developing an industrial economy is problematic in other ways. The ideas of land ownership and exploitation of what lies beneath it are new concepts in Mongolian culture, according to anthropologist Weatherford. So is selling those commodities to China, a neighbor many Mongolians openly dislike, he said.

The issue came to a head in April last year when state-run Aluminum Corp. (2600) of China Ltd. offered to buy Mongolia’s coal producer SouthGobi Resources Ltd. (SGQ) from Ivanhoe Mines Ltd., a Canadian entity now under Rio Tinto control.

‘Just Shocked’

“They were just shocked how a foreign country can own something in Mongolia and then without asking the Mongolian people can sell it to another foreign country,” Weatherford said. “In this case, because it was a Chinese corporation, it just heightened it.”

What the China bid succeeded in doing was uniting rival lawmakers in Mongolia to draw up and pass in two months the Strategic Entities Foreign Investment Law, which scuttled the takeover. Aluminum Corp. gave up on the bid in September.

In June 2012 elections, the public voted in the Democratic Party on policies that included a fairer distribution of wealth, ousting former communists now known as the Mongolian People’s Party.

“Our party’s goal is to enable every citizen to take part in economic development,” Foreign Minister Bold said in an interview in Tokyo on Oct. 2.
The Democratic Party wants shares of state companies that own Mongolia’s main mineral deposits to be distributed to all citizens, Bold said.
As Mongolians become owners of their land and resources, there will be motivation in supporting the country’s industrial and mining development, and with it foreign investors, Bold said. “It’ll change Mongolia dramatically.”

To contact the reporter on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net