RE:RE:RE:RE:RE:RE:RE:RE:Share price moving up!!!Nice post Racer.
Seems to me you have to look to the fundamental core of the OT exercise to get to the bottom of the dispute. It may sound overly simplistic, but all lines of discussion lead to money, pure and simple. What has to be invested and if borrowed by Mongolia at what cost. What free cash flow can be expected and the timeframe, in addition to how flexible will the project be to throttle up or down cash flow dependant on copper and gold markets and/or the partners' own needs for immediate free cash. How will the cash flow be applied both in terms of ownership, but also management fees, reinvestment, debt reduction, and government levies or taxes. How and at whose cost will a smelter be built? How at at whose cost will the ETG portion of the JV be brought within the ambit of the existing IA or a similar framework for state participation.
There are a couple of great uncertainties right now - the JV is woefully under-delineated, to the extent that it is almost impossible to value. Given that it could contain very high grade ore that is 5x or more richer than the open pit feedstock, the extent and timeframe accessibility of the HNE orebody in particular - not the huge block cave target of OT North, but the much narrower high grade core of the deposit.
Surely the Mongolian preference, faced as they are by immediate pressing cash flow needs, is to generate sufficient short term cash flow to both reduce their indebtedness for their capex cost of the IA buy-in and their proportionate share of capital contribution and management costs, and to have free cash flow distribution to satisfy political needs for expenditure and consumption whether publicly sanctioned or more nefarious. Rio Tinto, on the other hand, as a miner with long term experience of cyclical metals markets, knows they are looking at a long period of operation and would prefer to smooth out cash flows and have flexibility to access different ore grades over a longer period to ensure the project will have positive cash flow even during periods of depressed prices and worldwide glut, when only the lowest-cost producers can survive.
So the mining plan is an uncertainty both in terms of strategy and management decision-making, but also in terms of shorter term valuation of the as-yet unpurchased ETG interests (whether only to the extent of Mongolian participation, or perhaps a total buy-out from the JV.). It is not normal or without reason that the highest grade ore in the project has not had it's dimensions delineated further (I think substantially expanded, but it is also possible it just ends beyond current reserves, although we have been told the ore body remains open on strike and to depth). The last exploration update that altered the HNE reserves was in 2007!
When the Mongolians saw the size of their debt service rising due to cost escalation, management fees, and the looming cost of consolidation of the remaining JV interests, they freaked out because to use a homeowner analogy, after they had paid their mortgage they didn't have enough left to buy furniture or throw a few big parties.
Rio's strategy of choking off cash and delaying the prospect of future expanded cash flows has been a massive pressure on Mongolian aggression and greed - now they are essentially saying "uncle" publicly in publishing the Prime Minister's letter, although surely it is propaganda intended for Mongolians primarily. Whether at the negotiating table they are being equally contrite and pragmatic only the inside negotiators know.
They were freaked out as former planned economy animals by the uncertainty of cash flow that made a joke out of all their budgets and government program planning ( like the new Northern railway connection to Vladivostock for coal and/or OT concentrates to end run China, and the huge bulk handling centre/power plant/smelter complex they envision. Without being able to value OT all cash flow predictions are hamstrung. But we seem to be getting closer - once there is an agreed or acceptable price fixed for the remaining JV interests, the ore body is better described, there is a mining plan (and personally I regard the last FS as a propaganda piece that was intended to minimize NPV), then we are closer to what the Mongolians have been calling their "guarantee", which is another way of expressing their need to know what cash flows they can count on going forward.
So what have the drills found on the JV at HNE and further North at Ulan Khud, and will the mining plan be adjusted for some combination of immediate targeted high grading
by more conventional mining vs the longer-term block cave and many years of draw bell and undercut development required?
in my mind one thing is certain. The strategic impasse on planning, and the continuing uncertainty concerning the political stability and reliability of Mongolian state partnership has massively devalued the FMV of OT. If those issues are resolved and Phase II construction commences, coupled with financial projections adding 25 million tonnes/year of 2% to 4% copper ore plus gold credits that may make the entire cost of extraction negative, the financial world is going to have the penny drop that the near term cash flows for OT are huge, and share valuations of TRQ and ETG should leap by several multiples of current prices.
The Mongolians will ultimately do what any of us would, they will go for the money. That means, thanks to Rio's disciplined approach, they will come to the table with further assurances of stability and agreement to abide by the terms of the IA and Shareholders Agreement for OTLLC.
lots of political risk, but I'm optimistic it will be favourable to both Mongolia and all the foreign participants in the long run - the ore body is just too good to be ignored or not be the ultimate driver of a compact towards extraction and profitability.
I predict sooner than many imagine - but of course predictions on timing have been hazardous at OT.
cg