In Depth Analysis: OT Dispute and Expenditure Overruns
On February 1st President Elbegdorj participated in a session of parliament to discuss management and cost issues surrounding the Oyu Tolgoi (OT) mine project. During the session the President, Minister of Mining D. Gankhuyag, and Erdenes Oyu Tolgoi (EOT) Director Ts. Sedvanchig had a series of exchanges regarding what the President perceived as escalating costs for the project.1 These exchanges and the President's extended remarks on the issue included many numbers, references to the OT stability agreement and shareholders agreement, and a general sense that costs are being inflated as a result of mismanagement or more sinister reasons. Since that session of parliament the issue of expenditure overruns has come up several more times in the coverage of the on-going OT dispute between the government and Rio Tinto, but what I have read has generally lacked a clear explanation of why this is even relevant to the dispute. After all, aren't Rio Tinto and other international investors carrying the burden of the project's costs, so what benefit would they get from inflating those costs? There are complicated technical points to go over in order to really understand the issue, and this complexity scares off all but the wonkiest policy nerds among us. What follows is an attempt to make the issue more accessible to the non-nerd.
Speculation: OT Dispute and the Budget
The silence is deafening in the Gobi. Not living in the thick of the Ulaanbaatar bustle has many upsides, but a serious downside is the metaphoric silence of news or even rumors about important issues like the OT dispute. Last week ended with a sense that tensions had eased between the government and Rio Tinto, and the OT board of directors approved stop-gap funding for the month of March to give some breathing room for continued negotiations later in the month.1 Making the best of the situation, I am turning the silence into a chance to speculate on a contextual point that seems to have fallen through the cracks in the reporting on the dispute--the 2013 national budget.
Patterns in Mongolia's Mining Policy
The American baseball player Yogi Berra was known for his way with words, and one of his famous expressions came to mind this week: It's deja vu all over again. The reason was that the great Oyu Tolgoi (OT) debate experienced a revival after a lull of several weeks with President Elbegdorj making a statement before parliament that was highly critical of the management of OT and came at the same time the government demanded a meeting of shareholders with Rio Tinto to discuss outstanding administrative issues.1 These events coincided once again with opinion pieces in the international press regarding "resource nationalism" and the effects of Mongolia's erratic mining policies on investment. I thought to myself, "Haven't I heard this all before?"
Accountability is the Gobi's Scarcest Resource
The Gobi has a government accountability shortage that is reaching breathtaking levels. In the news this week is the revelation that Erdenes Tavan Tolgoi (ETT), the government owned mining company overseeing the development of the Tavan Tolgoi coal deposit, is running low on cash. The cause of the cash flow problem appears to be the fact that the company is selling coal to its main Chinese consumer Chalco for USD 53 per tonne, but it costs USD 61 per tonne for ETT to transport the coal to the border.1, 2 Yes, you read that right. The company is selling coal at a loss of USD 8 per tonne, or at least it was until mathematical reality wiped out the company's cash on hand. What is breathtaking about this story is that it has all the hallmarks of a massive political scandal, and yet it has so far received scant coverage in Mongolia and almost dispassionate reporting in the international press as if such a mistake is routine and a loan of a few hundred million dollars and renegotiation or buy out of the Chalco deal should fix the problem. And, the current CEO of ETT is saying just that. A loan of approximately USD 355 million should about cover the Chalco problem and also address lingering issues of infrastructure and equipment on site.3
The Name is Bond, Chinggis Bond
Mongolia's international debt-instrument of mystery made its debut at the end of 2012 raising USD 1.5 billion for the government without even breaking a sweat. The "Chinggis bonds," which bond traders and the media dubbed the initial offering, appeared to be a tremendous success by not only reaching its targeted revenue amount but also for being "10 times oversubscribed," which simply means there was 10 times more demand than supply for the bonds. There seems to be a rather dubious implication that springs from that last point which is that if there was 10 times more demand, that in theory the government could have raised as much as USD 15 billion if additional bonds had been available. Although I have a mild sense of pride in the Mongolian government's achievement, as an observer I am still trying to unravel the mystery and understand the real implications of the Chinggis bonds.
