By S.Bold-Erdene
Intense discussions between the Mongolian side and Rio Tinto are on, and three separate committees with members from both sides are holding talks on how the initial investmenton OT had been spent, if the Feasibility Study needs change, and how to find finances to develop the underground mine. Meanwhile, no one is certain how long additional financing for the underground mine at Oyu Tolgoi is to remain suspended.
Many feel the Government should call Rio Tinto’s bluff and scuttle its move to further entrap us in debt. But this does not help us find the finance to complete the OT project. Should we take to printing dollars or should all payments be made in MNT and the Mongol Bank asked to print more tugrugs for the purpose? Where else can we look for funds?
There are several ways to find finance for the phases of a project subsequent to when it starts making money. Part of the revenue can be utilised for further development, or fresh shares offered, or bonds sold, or loans taken. A look at major Mongolian companies would give examples of all methods. Oyu Tolgoi is a project just like others, the only difference being that the investment it needs is substantially more than what we are used to.
The shareholders of OT have also discussed how they can lay hands on the required amount of investment, such as releasing additional stocks, getting loans from a third party and issuing preference shares. But first let us take a look at how the project was financed in the past.
The investment agreement called for the finance to come from issue of preference shares. The idea was abandoned following protests that it would reduce Mongolia’s ownership. Many investment analysts then said, and many still say so, that this would actually have been good for Mongolia, as we would not have had to ‘borrow’ money to pay for our share of the development costs, and thus would not have been burdened with interest payment, even when revenue was not coming. Dividends would have followed in due course, and we would not be left complaining, as we are today, that all our dividends are being adjusted against interest payment.
The second choice was to get loans but such loans proved hard to come by. Rio Tinto then decided to invest its own funds, selling some assets to raise the capital. What is now Turquoise Hill owned a gold deposit in Kazakhstan and 50 per cent of this was sold for $300 million. They also tried to sell their 58% stake in SouthGobi Resources for $1 billion, but failed. Everyone knows who was against the sale and what exactly happened. It is necessary to mention here that the Oyu Tolgoi project ate up $120 million every month for three years. Along with selling assets that belonged to Turquoise Hill, Rio lent nearly $2 billion to it.
All this went to complete just the first phase of the project, and now more is needed to finish the underground mine. Rio Tinto has been approaching the world’s gest financial organisations for a loan, but the other OT shareholder, the Mongolian Government, is against this. Several reasons for the opposition were stated in the letter that is now known as Ts.Sedvanchig’s. The Government’s gest fear is that a fresh loan taken by it as a shareholder, meaning further repayment with interest, would once again delay the time it starts receiving dividends. There is talk of a deal in which the Government approves of taking loans, and in return Rio will see to it that Mongolia gets dividends.
Is this dividend so important? How much should Mongolia expect to get from Oyu Tolgoi in general? Politicians are interested in how much money the State will get, and they are upset when the amount appears to decrease. But in this case it is certain that 53 per cent of the total profit of Oyu Tolgoi will come to the State through taxes and dividends.
The Feasibility Study accepted in 2010 put the total estimated revenue from Oyu Tolgoi at $118.7 billion, taking the global price of copper to be $4,400. The net profit would be nearly $68 billion after deducting the investment cost and operational expenses. Of this, $23 billion would be paid to Mongolia as royalty fees, income tax and other taxes. So post-tax profit would be around $45 billion of which some $14 billion would be dividend due to the Government and Rio would get the remaining $30 billion or so. So, of the pre-tax profit of $68 billion, the Government will finally get $37 billion in taxes and dividend and Rio will get $32 billion as dividend. Approximately, two-thirds of what the Government gets will be taxes, payable whenever due.
Dividend might be delayed (and this will be the same for the Government and Rio) but taxes cannot be kept in abeyance. And when copper price is high, the tax amount will be high. That way, a few years’ delay in receiving the dividend is not really a deal, except that politicians cannot keep their promises to the people.
But the State can do a lot for the people with the amount it receives as tax. The obsession with dividends is not allowing us to look at the ger picture.
Let’s try an analogy from ordinary life. Parents with many children may find they cannot afford to send all the children to college, so they send only the two elder ones, paying their tuition fees by taking salary loans. Do they say to these two children, “Please pay us back after you graduate”? I don’t think so. But the parents will surely expect the two who go to college to do well in their studies and then help them by taking care of their younger siblings later on. Now let’s say the parents are Mongolia and OT project stands for the elder children, the younger children are the people and small companies of Mongolia. Helping OT get a loan and operate successfully will provide the resource for many households and companies in the future.
So far, nearly 2,000 companies registered in Mongolia have supplied goods or services to OT. More than half of these are majority owned by Mongolians. Until 2012, the value of what these national companies supplied had reached $1 billion. This has meant jobs and income for many people, and better business for tax-paying companies. This is a simple example to show it’s not just the State that benefits from the project economically.
Board members who went to London have suggested in informal conversation that it is most likely that additional financing for the underground mine will be approved, once this is seen as an efficientstep. We need to remember, however, that we should not agree with everything said to us just because we need the funds. In order to avoid making the same mistake again, there needs to be a clear understanding of the terms under which the international financial organisations are ready to lend to Rio.
The two most important things are the amount borrowed and the rate of interest and conditions of repayment. The loan Mongolia took from Turquoise Hill for its 34% share of the investment carried an interest of LIBOR+6.5 per cent. What Rio Tinto would pay as interest on the loan should be considered against this. Mongolia’s experience with the Chinggis bond is also a pointer. If Mongolia is able to get a 10-year loan at 6 per cent interest, how much sense would it make for Rio to take a loan at a much higher interest? This is why we need to know much more about the loan that Rio is looking for.
It is imperative to put in black and white what to do if Rio overspends again. The expenses for the first phase grew from the estimated $5.1 billion to an actual $7.1 billion. What guarantee can we have that this will not happen again? Auditing teams from both sides are poring through accounts to ascertain why the initial investment overshot the mark. There should be more control over how development ofthe underground mine is financed. The results of any overspending should be spelt out at the start. We could say, for example, that if the increase is without justification, Mongolia will not pay the extra amount, which will be the exclusive responsibility of Rio Tinto. The guiding document is the Feasibility Report of the underground mine, and we can only hope that this will be approved by the Professional Mineral Council by the year-end.
Work at OT will proceed normally. Income from and expenses on OT have already been included in next year’s budget. New members of the Board will surely untie the knots around the issue of project financing.