As UsualOur Mongolian partners rushed in, guns blazing last week. Threatening to cancel OT entirely. Ridiculous.
Fundamental issue is, having never spent a cent on the project they negotiated a 1/3 participating equity ownership. So they had to finance their share purchase in OTLLC and promise dividends would first be applied to reduce their share loans. They also did so at a time interest rates were much higher than today. And then by refusing to abide by their original agreement in 2009,:they caused a two year standoff and stoppage of work during which their debt was accumulating interest and compounding.
It may be that Rio Tinto is skimming profits as a lender capable of borrowing at a much lower rate and relending to Mongolia at a profit. Last time I made a major purchase and signed loan or mortgages documents locking in my interest rate and payment terms the bank would have laughed at me if I had come back and complained I wanted to pay less.
Somtoomwith regard to the management fee upcharge by Rio Tinto on project expenditures and time ... it was obvious in the original deal if costs went up management fees would follow. The Mongolians were well advised over many years with access to their choice of prime international consultants.
So so we have yet another shake down attempt, overplaying the hand, likely in knee-jerkmresponsento the prompt application to join the latest seemingly groundless additional income tax demands to the pending international arbitration on the earlier assessment/demand.
They are so papered by endorceable international agreements, and I never hock to significant international lending agencies it only took a week before the degree of their jeopardy in threatening shut-down no doubt heated up the the lines of communication.
Whether it is an exercise in theatre for domestic political consumption - that the powers that be in UB want to swap equity for a royalty stream but are afraid of public backlash and need to create a crisis, who knows. They definitely like to come back to the well repeatedly attempting to renegotiate any Agreement they supposedly commit to. Which of course is shooting themselves in both feet concerning anybody considering investing in the country as they watch the OT test case and considers other stunts at piracy such as Khan Resources, South Gobi Energy, or the Hotel Mongolia hostage-taking, let us not forget the dark of night sudden imposition of the threat of the ludicrously high windfall profits tax either.
So now we get some softening, but with the usual months of unnecessary deliberation to stall clear adhereance to prior promises.
Recall they just completed a lengthy Parliamentary review of all OT arrangements just at the end of 2019 and re-confirmed their agreements at that time,muteness again.
Advice to Mongolia on how global trade and investments works: negotiate with promises of improvement, not threats of conflict. Keep your hardest disagreements behind closed doors. You injure your credibility otherwise. And yes, investing in equity repayment, just like anybody making a mortgage payment is a long process of no payout of dividends. The real reason you structured the deal that way is because your politics is so divided no party wanted another to get its hands on substantial dividend payouts and cement their position greasing the public and private palms, whereas capital reinvestment in earning equity kept Mongolia’s share safe from larceny as they built up an unencumbered share positions.
Today’s latest humiliating reversal:
Deputy Chief Cabinet Secretary: "Economic benefits of Oyu Tolgoi to Mongolia must increase"
However, she reaffirmed that the government has never expressed any position to stop the ongoing Oyu Tolgoi project. “I believe the situation will not become dire of having to stop the project and this matter could be settled in a mutually beneficial manner. Both Rio Tinto and Turquoise Hill Resources have also expressed that the issue is in no way under that serious circumstances of ending the development".
“The government has put forward proposals to coordinate and lower the management services payment received from Rio Tinto in line with performances, and reduce shareholder loans interest rates with LIBOR plus 6.5 percent with a view to increase Mongolia’s benefits” added the Deputy Chief.
Oyu Tolgoi Board of Directors has decided to set up an independent committee made up of experts nominated by Erdenes Oyu Tolgoi LLC and Turquoise Hill Resources to review the causes of cost overrun and delay in the Oyu Tolgoi underground development. “Once the experts are selected, the committee is expected to make conclusion on the matter within six months,” says
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They can put forward all the amendments and termination threats they want - their Agreement is legally binding and requires mutual consent of all parties ... so negotiate!
This is one of the primary reasons why there is such a large gap between the projected cashflow valuation of TRQ and ETG and the actual market share price valuation. When they stop creating uncertainty and confirm stability in the cash flows ... up the valuations will rise, and substantially.
Very frustrating to invest in Mongolia to be sure!
cg