He Said She Said, the OT chessboardThe press release war between TRQ and EOT is turning interesting, so may be a bit of brutal analysis may be needed. That is how I see it. The (main) players: • GOM o In fact there are those at GOM understanding how the situation is critical for Mongolia and onboard with an urgent settlement of the matter, o And those still in denial believing they are in control and can succeed without concessions/capitulation. • RIO o RIO, o TRQ. • The supranational banks willing to guarantee to loans • The banks that would be lending • TRQ minority shareholders o Big ones like Temasek, o Small ones (me). • China Issues at stake: • Peace treaty on OT Phase I, i.e. FULL compliance to the IA, not only in words, from all parties, including the local administration in South Gobi, and no more harassment / guerilla warfare of any kind. • OT Phase II. On OT Phase II, the Feasibility Study seems an interesting issue where GOM talks about a 2014 H1 deadline while TRQ talks about a 2014 Q1 deadline. If the Feasibility Study is not ready yet, we can assume that early last year it was very far from being completed for sure while the deadline for the guarantee from the supranational and the loans from the banks was reached. Then the deadline for the guarantee was rolled to Q1 2014 without including a pre-requisite for the Feasibility Study which would come up a bit later. However GOM makes it a pre-requisite to have the Feasibility Study BEFORE approving the financing at the OT board, wasting precious time as Mongol Bank is steadily running out of foreign reserves, not matched by FDI surge. SO if GOM is afraid about cost overruns for OT Phase II, then on the other hand RIO will not give up an inch until all the GOM allegations on OT Phase I are gone and settled for good (whatever that means). So what drives the players here? • Supranational: o They will provide their guarantee anyway as long as it’s not too ugly as they are buying political goodwill for their countries stakeholders interested in other businesses with Mongolia. Not one wants to be single out as non-friendly. They extended the guarantees; they will again, it’s just a matter of paperwork which can delay things. o Size wise they have flexibility as they know those projects always face cost overruns. • Lending banks: o As long as they have guarantees from the exim banks / supranational, they can lend as long as the documentation is water tight so that they can pull on the guarantees at first accident. It boils down to covenants and documentation in general, the devil is in the details. o Are all Mongolian authorizations in place? Are all local authorizations in place? (between what the PM said in April about the first shipment and what happened for 2 months may trigger some prudence) Can international lawyers and accountants exercise due diligence on the ground, and not only on OT premises? o Then there is the Chris Bradley case study: All investment banks have so-called commitment/reputation/resource committees (was member of one for years) where before pitching for an M&A, ECM, DCM mandate very senior bankers have to review potential profitability, costs, headcount resources, market and credit risk, reputation risk, conflict of interest. What is the point trying to make money if there is a high probability of making newspaper headlines for the wrong reasons? Potential alleged forged signatures? For bankers familiar with commercial banking, the Standard Bank case seems perfectly standard on the face of it. That is why for instance banks are very careful about doing business with P.E.P., Politically Exposed Persons. After what happened to Chris Bradley, I am sure quite a number of people in those committees just come to the conclusion that it’s just not worth it and veto (I would!). So if the 2014 Q1 deadline had to be extended, I am sure the pool of lending banks would shrink very seriously…arguing that “Emerging Markets are out of favor”, not of course stating it is because of Mongolia, just in case. Count the banks in now and then later if needed. And of course with less banks, funding costs WILL increase further. • RIO o It has a new CEO since last year and having seen what happened before on OT, he is not likely to commit lightly and expose RIO further and his career at the mercy of any potential greenmail from GOM, this one or the next. o While loans are needed, OT Phase II would be a large commitment (staff, equity, time,…) from RIO and the new CEO cannot afford to take it lightly with kind words. His predecessors paid dearly. o The pre-requisites for Phase II are 1) an absolute and definitive settlement for OT Phase I and 2) making sure no more warfare tactics of any kind does happen on OT Phase II. That implies, at least, an OT LAW with a 2/3 majority of the parliament to amend anything. FIL is a precedent! o Thanks to the experience with GOM on OT Phase I and IA, RIO has now built his own hostage buffer, minority shareholders of TRQ that subscribed to the rights issue. If something goes wrong, they will be the “first loss”, then RIO’s equity (because it can always go for another rights issue at US$0.01 if needed), then lenders/guarantors. o RIO will go on ring fencing TRQ to minimize damages whatever GOM tries. • TRQ o It has to behave as an independent self-reliable and because of class actions, it has an even greater duty to “communicate” facts as they come, so it implies that any story GOM is spinning for whatever reason will face an official factual communiqué from TRQ. • GOM o FIL or others should have long term positive effects but are unlikely to trigger a $ FDI surge in the short term, o The horror saga of the 106 licenses is still not solved so foreigners are unlikely to run back to Mongolia for a while, o In the short term, I am sure imported consumer items are still selling well in UB and USD flowing through the windows, o As the Mongolian supply-chain is far from complete, the Mongol Bank printing construction boom stretches even further this supply chain sending USD north or south to import construction materials, o Raising pennies through a JBIC guaranteed samurai seems an act of desperation to replenish FX reserves (before the funds are spent in the Japanese lead projects) so one may wonder how many shafts is GOM left with for its damaged bow? MNTUSD will tell how it is perceived. o As chasing corruption among politicians has been active, one may wonder the level of support GOM may find in parliament to build a consensus. o The Chinggis Bond yield (as well as MMC yield!!) and MNT USD are strong indicators of the confidence foreigners have about Mongolia. o On the PR side, GOM has to remember how detrimental was the uncontrolled communication we saw before but GOM and the president have also to understand they are HELD by the promises made by outside Mongolia to international investors and businessmen of all kind. They already FAILED to deliver on promises made in November 2013. More cheap words soon ? o One may wonder if this DP lead GOM does really care about launching OT Phase II (may be preparing a $ inflow for the next, MPP, government) instead of focusing benefiting from the OT Phase I spoils? o Why +1.5 years after a change of government was there still a MPP board member at OT? Was DP short scapegoats? • TRQ minority shareholders are hostages of the situation and if GOM expects ever to list some State-Owned-Enterprises outside Mongolia one day, it’d better think about it. The bigger ones among them have even more leverage so if Mongolian does not want to become a pariah in international financial markets, it’d better wake up very quickly and ACT. • China: The objective there is while “helping” Mongolia to keep it under strict control and cap its overconfidence so letting copper from OT in or not is a way to add some pressure in the OT negotiations between GOM and RIO. Once GOM got the message and has really signed whatever is needed on OT, I am sure things will be running very smoothly at the border and copper will run very fast.