Rio's Oyu Tolgoi financing task in Mongolia toughens
Updated
The Financial Action Task Force (FATF), an intergovernmental agency that counts Australia as one of its 39 members, placed Mongolia on its "grey list" along with Zimbabwe and Iceland.
The ''grey list'' contains nations whose financial systems are considered by FATF to be lacking in safeguards against money laundering and the financing of terrorism.
Addition to the ''grey list'' typically prompts financial institutions in nations with strong anti-money-laundering rules to sever ties with banks in the ''grey listed'' nation, and may therefore raise the cost of capital and the cost of doing business in Mongolia.
Nations already on the grey list include Syria, Pakistan, Botswana, Panama, Yemen, the Bahamas, Trinidad and Tobago, Ghana and Cambodia.
''FATF has identified Iceland, Mongolia and Zimbabwe as jurisdictions with strategic (anti-money laundering and combating the financing of terrorism) deficiencies,'' said the task force on Saturday Australian time.
''Each jurisdiction has developed an action plan with the FATF to address the most serious deficiencies. The FATF welcomed their high-level political commitment to this action plan.''
Rio and its subsidiary, Turquoise Hill Resources (TRQ), borrowed $US4.4 billion in 2015 to fund a $US5.3 billion underground expansion of their Oyu Tolgoi copper and gold mine in Mongolia's South Gobi Desert.
But Rio and TRQ revealed in July the cost of the project would rise to between $US6.5 billion ($9.5 billion) and $US7.2 billion, and those estimates do not include the billions more dollars that will be needed to build a power station for the mine.
Rio and TRQ have started speaking to lenders about the potential to tap into extra debt to cover the blow outs.
''Our estimates currently assume an incremental $US3.4 billion in debt (a combination of project financing and infrastructure financing for the power plant) and $500 million in equity financing,'' said Canaccord analyst Dalton Baretto, in a note published on September 23.
Macquarie analyst Hayden Bairstow estimated the additional debt requirements would not be quite as big as Mr Baretto suggested.
''The delay to the ramp-up schedule and power station build requirement has created a $US2.8 billion funding shortfall on our estimates,'' he said.
Mr Baretto met with representatives of Oyu Tolgoi's lending syndicate during a visit to Mongolia last month and said they appear willing to continue working with the project.
But Mr Baretto said the lenders will first require certainty over revisions to the Oyu Tolgoi project scope, and they will also need certainty over the Mongolian government's commitment to the legal agreements that underpin Rio's investment in the mine.
''The lenders will require the details of a revised agreement prior to agreeing to terms on a new debt facility. With an election pending in June (and perhaps earlier if a snap election is called), we fear that this negotiation process may be delayed until after the election results are known, resulting in a significant delay to the funding package,'' said Mr Baretto in the note.
''We are very concerned that the debt component of the funding package will not be in place in time to prevent a slowdown on construction.''
Addition to the grey list comes as the International Monetary Fund (IMF) continues to withhold funds that were promised to Mongolia in 2017 under a bail-out program designed to prevent the nation from defaulting on its debt.
The IMF has been withholding the funds since late 2018 because Mongolia had not strengthened its banking sector to the extent wanted by the IMF.
The IMF's mission chief to Mongolia, Geoff Gottlieb, told The Australian Financial Review that Oyu Tolgoi was a very important part of the Mongolian economy.
''It is fair to say that (Oyu Tolgoi) is macroeconomically significant. So for example, if the project were to stop, we would have to substantially revise all of our forecasts for the national economy and we would have to revise our policy recommendations because it would have such a big impact for the balance of payments,'' he said in an interview conducted prior to FATF's grey-listing of Mongolia.
Asked whether the Mongolian government's nationalistic rhetoric toward Oyu Tolgoi would make it harder for Rio to source funding for the mine, Mr Gottlieb said he did not want to comment on specific projects.
But he said as a general principle, there was a delicate balance between local residents getting their fair share of wealth from natural resources and foreign investors getting the certainty they require.
''Investors are always interested in both the current terms of an investment and confidence in whether those terms will remain over time, or what the path of those terms will be over time, and if there is concern that terms will change substantially that always increases concern,'' he said.
"From the government's perspective there is always an obligation to residents that foreign investors that are extracting natural resources are doing so in a way that is sufficiently benefiting the country, and there is just a trade off, and that conversation, as I understand it is ongoing in this particular case.
"Our main view is that Mongolia is a country where, to reach its potential, it will need foreign investors over time. It has a lot of natural resources and those natural resources can be used to invest in health and education and infrastructure and other things that Mongolia needs, and it is a shame that right now the foreign investment base is quite narrow.
"I think Mongolia has potential for much higher foreign direct investment than it is currently getting.''
Mr Gottlieb stressed that he did not have any specific view on whether the Mongolian government or Rio Tinto was ''more correct'' in the various disagreements over Oyu Tolgoi.
Despite the IMF withholding funds and the FATF ruling, Mongolia's economy has been faring better in the past two years.
Mr Gottlieb said three economic tailwinds had emerged for the Mongolian economy around the same time as the bail out program was announced in 2017.
''Mongolia is now in the much better place than it was 2 1/2 years ago," he said.
''We were helped by three other factors. One was it coincided with the initiation of the second phase of the Oyu Tolgoi project. The second was a sharp rise in commodity prices and the third was China's decision to import more of its coal, which led to a sharp rise in the volumes of coal exported by Mongolia.''
Last week's move by FATF was not first time Mongolia has been put on the grey list; the developing nation was given the dubious honour in 2013, but made sufficient reforms to be taken off the grey list in 2014.
Ethiopia, Sri Lanka and Tunisia were taken off the grey list by FATF on Friday.