The Mongolian Mining Journal /July 2016/
The news of the unexpected sale by the Russian State-owned company Rostec to an almost unknown Mongolian company of its 49 per cent ownership in two iconic joint ventures, Erdenet Mining Corporation and Mongolrostsvetmet, took everybody by surprise. No one knows for sure why the deal was done, but E. Odjargal shows how the period of Rostec’s involvement was marked by tension, open or hidden.
Set up in 1973 as a joint venture between the Soviet Union owning 51%, and Mongolia the rest, the Erdenet Mining Corporation started production in 1978. A review of the agreement led to a reversal of the ownership structure in 1991, giving Mongolia 51% and Russia 49%. Since then both parties sought from time to time to raise their stake, but neither achieved any success.
It was Vladimir Putin’s direct and personal decision in 2008 to transfer the 49% ownership of Erdenet held by Russia to Rostekhnologii Corporation, a State-owned company responsible for producing and exporting hi-tech industrial products for use in both civilian and defence sectors. At the time the decision was announced, Russian media commented that Rostekhnologii had become part shareholder of the fifth largest producer of copper concentrate in Asia.
Interestingly, the Russian share was transferred, almost free of charge, to Rostekhnologii by an executive order, even though two other and ger Russian companies -- Ural Mining and Metallurgy, and Norilsk Nickel -- were interested, as they were already selling to China, the world’s largest market. Among the other Russian companies with eyes on the Mongolian copper facility were Russian Railways and Gazprom Bank.
Whatever the rationale behind the decision, it was a profitable one for Rostekhnologii. Erdenet produces, besides copper concentrate, molybdenum which includes rhenium, used in making titanium alloy and high quality steel. Russia had not made much profit from Erdenet.
The average annual dividend on its share was $48.5 million, but in some years, there was no dividend at all. One likely reason why a large company was given the share was a hope that its involvement would make Erdenet work more profitably.
This seemed to be happening. Rostekhnologii took over 49% of the JV’s share at a time of global economic crisis, but even then $402.2 million was spent between 2008 and 2011 on technical and equipment upgrading in Erdenet. No jobs were lost and salaries were raised by 20 per cent. Rostekhnologii’s dividend was $27.3 million in 2009, $34.4 million in 2010, and $75.7 million in 2011. However, it is open to question if the profitability was due more to better management or to rising copper prices.
But then the dividends stopped coming, even in 2012 when Erdenet’s earnings reached a record high. The company has continued to pay large amounts in taxes to the Mongolian Government but its net profits have shown a dramatic decrease. D. Galbaatar, Deputy Director of the Economic and Marketing Department at Erdenet Mining, said at the seminar on the State’s role in large resource projects in Ulaanbaatar last May, that the two were directly related. “We strictly observe Mongolian laws and regulations. We pay 8 times more in royalty than gold or coal miners, and 5 times more than Oyu Tolgoi,” he said, adding, “If we paid less like private entities, we would make more profit.” Even then, he asserted, Erdenet did make profits. “In 2013 we paid MNT523 billion to the State budget, of which approximately MNT80 billion was in the form of dividend,” he said, and claimed “tax pressure on us is the heaviest and we pay them on time”.
Rostekhnologii also must have realized that If Erdenet paid so much in taxes, its profits would never be high. However, copper prices had started rising from the beginning of 2009 and reached $10,000 per ton in early February 2011. That was also when Mongolian leaders made their “historical” visit to Russia, during which the cancellation of the “ debt” was announced. Soon after their return, our leaders said Erdenet and Mongolrostsvetmet would be merged and the new entity would go for an IPO. Nothing more was heard of this after it was learnt that if the new company was to be listed in a stock exchange, Mongolia had to set up a State-owned entity like Rostekhnologii.
Instead, Rostekhnologii suggested selling a certain percentage of the existing JV’s shares to a third party through an international stock exchange and building a copper refinery with the sales proceeds. It proposed that both parties should offer half their shares for sale to a third party. Among the potential buyers it said it had in mind were Norilsk Nickel, Metaloinvest, Rio Tinto, and BHP Billiton. If any Russian company were indeed to buy 50 per cent of the JV, 74 per cent of Erdenet would have been in Russian hands.
Last year, Rostekhnologii changed its name to Rostec and in a public announcement of its corporate restructuring programme, referred to the fact that Erdenet had declared no dividend since 2012, nor had it met the goal of annually processing 35 million tons of ore. On top of this, Rostec had come to know of the establishment of Achit Ikht, in which Erdenet had a 34% stake, only after a special audit. Comments such as “Our country cannot reach an understanding on the Erdenet JV with Mongolia” appeared in the Russian media.
END OF PART 1
Russia has several minerals projects that compare with Oyu Tolgoi in size and are more profitable than Erdenet, which after 30 years of mining have exhausted the richest part of the mine. It is widely believed that to meet its copper needs, Rostec will buy up 25% of the Udokan project, one of three giants. The Udokan deposit lies next to the Chinese border. A consortium that includes Rostec and Metalloinvest won a tender bid for Udokan announced by the Russian Government in 2008. At that time Rostec’s worth was calculated keeping in mind its 49 per cent ownership of both Erdenet and Mongolrostsvetmet.
Udokan is Russia’s largest and the world’s third largest copper deposit, with JORC resources of 2.7 billion tons of ore or 25.7 million tons of copper. That is 60 per cent of the total copper resources in Russia. Rostec made it clear in June 2015 that Udokan’s development was tied to that of Erdenet, thus stressing the strategic importance for Russia of the mine in Mongolia. Rostec’s plan was to build a refinery near Krasnokamensk to process copper from Erdenet, Udokan and another deposit known as Bistrinski. Four months later, an agreement to build a $2-billion facility was signed between a subsidiary of Rostec and the Government of (the Russian) Far East and Zabaikal.
Nobody guessed that the leaders of the two countries were set to dispose of Rostec’s stakes in Erdenet at a meeting in Tashkent just a week later. The surprise turned into incredulity as the agreed price for the sale --$400 million -- would hardly cover three years’ operational expenses at Erdenet. However, Rostec has said this is the highest cash value transaction in its history. But it acquired 45 per cent of VSMPO-AVISMA for $970 million in 2012. Even then, $400 million is not money for a company which works in over 60 regions all over Russia, has over 600 subsidiaries and exports to 70 countries.
The economics apart, the politics of the deal is baffling observers. Why would Russia sell its 49 per cent share in a company that is so important to Mongolia, particularly when all these years it had been trying, overtly and covertly, to increase that share? At this point of time, there can only be speculation on why President Putin acted apparently so out of character, or on the undisclosed quid pro quo that facilitated the transaction.
The bank behind the buyer
The entire Rostec shareholding has been bought by Mongolian Copper Corporation, a company backed by Trade & Development Bank, known generally as TDB. It is one of the gest commercial banks in Mongolia and is known for its recent investments in large industries such as Khutul Cement and Lime, and Darkhan Metallurgical Plant. The Erdenet and Mongolrostsvetmet deal is TDB’s third investment in the last four years.
Khutul Cement and Lime was a State-owned JSC and was offered for privatization by the State Property Committee in 2011. Basement LLC was the successful bidder, backed by TDB which provided $61.3 million or MNT120 billion of the total investment of MNT250 billion.
The investment in DMP has come from QSC under a concession agreement with the Government, with most of the financing coming from TDB.
The Erdenet transaction also covers the acquisition of Russia’s 49 per cent ownership in Mongolrostsvetmet, a major name in the Mongolian mining sector, though not in the same league as Erdenet. It is the largest fluorspar miner in Mongolia in terms of both extraction and export volume. The output from its five mines goes to countries such as Russia, the USA, Thailand and Taiwan. It also owns the Bor-Undur fluorspar concentration plant, the Bargilt iron ore deposit and the Zeregtsee gold deposit.
Mongolrostsvetmet holds 31 licences, among the highest in Mongolia. Two of these are for exploration and the rest are for extraction, including 14 for fluorspar and 7 for gold. Its exploration work in Uvs aimag identified 15 tons of gold resources. Its most important asset, however, is the strategically important Asgat silver-polymetallic deposit. Infrastructure around the deposit is being developed with State funding, including building a 7.3-km road and a 72.8-metre-long bridge. The feasibility study is also ready, but start of extraction needs a huge investment, and we do not know what the new ownership’s plans are.
Additional reporting by S. Bold-Erdene, E.Odjargal and B.Tugsbilegt.