Business-Mongolia exclusively covered issues revolving around the world renowned Oyu tolgoi. It has been several times that we have reported on project financing for the 2nd phase of the project. The dispute is still ongoing despite the shipment commencement. Erdenes OT, Executive Director Ts.Sedvanchig himself made it clear that there are at least 22 issues to resolved between the shareholders.
One of the major issue besides the cost overrun, or interconnected issue, is the project financing. The project is already exceeded by USD2 billion from its planned initial investment. The latest figure we have is USD6.49 billion. Phase II + expansion is going to cost the project USD11 billion. OT LLC told the press that Phase I and II net cost will be USD13 billion. However, our research indicated that we are looking at overall cost of USD18 billion including the investment from revenue.
Rio Tinto is seeking to raise the needed investment from international financial institutions, commercial and export, import banks. We have mentioned many times about the issue on our website if you click on the tag at the very below (Rio Tinto, IFC, OT LLC, Oyu Tolgoi). Each entity would provide USD200-300 million and up to USD4 billion overall. Rio Tinto is also coming into play as a lender besides being a shareholder. It believes that it would create competition among commercial banks to lower the interest rate. However, the prolonged project financing that has been under discussion for over 3 years hasn’t been closed yet. Bankers have convened several times during these years and re-started the negotiation again after Rio Tinto took over Turquoise Hill Resources.
Despite the cost born over 3 years for lawyers, financial advisers and due diligence, over USD50 million is spent, Rio Tinto still pushes for strategic move of involving as many parties as possible to the project. Mining Minister D.Gankhuyag was clear on the issue. We do not support it, especially when the over spending on cost is not justified and proved. Still, Rio Tinto is pushing with its proud A3 rating from Moody’s. Also, it promises the Mongolian government that the project financing will greatly benefit the country’s overall investor confidence and lower rate of shareholder loan stated in the Investment Agreement, 6.5+LIBOR.
Mongolian government looked at the project financing terms and financial models, and it is not happy about it. The charge from Rio Tinto will exceed USD3 billion just over decade alone. Transaction fees from banks are too high. Also, it is not guaranteed that the interest rate will be lower than 6.5+LIBOR. Even if it is low, can it be low from Chinggis bond of ~5%? Bond market clearly estimates the investors confidence in the country. With the Rio Tinto A3 guarantee can it be around 3-4%+LIBOR?
Without even mentioning the outstanding 22 issues, Rio Tinto is ready to pledge the licenses to the lenders which the government doesn’t approve. Also, still the updated Feasibility study has not been approved by the Minerals Council by the law requirement. We didn’t even get into the 2% royalty that has been derived from BHP, that has been boughtback by Turquoise Hill Resources for USD37 million back in 2006. The parent company is claiming the royalty right from OT LLC. Besides the piling debt, OT LLC threatens Mongolian interest with Entree Gold Inc. Also, an unclear license and Earn-In Agreement that frustrates the politicians.
Considering the issues mentioned above, it is too early to discuss the involvement of third parties into the project. That is why, we, Business Mongolia research team, believes that Mongolia does not want the project financing at the current state.