UNTIL GOVERNMENT AND RIO TINTO START DANCING MONGOLIAN TANGO, ALL INVESTORS CAN DO IS WAIT AND OBSERVE Past week witnessed one of most spectacular cases of miscommunication between foreign investors and the Government of Mongolia creating massive confusion and volatility in a marketplace for benchmark global Mongolian equity – Turquoise Hill Resources. Rio Tinto announced on Monday that it has been notified by Mongolian Government that project financing will need to be approved by the country’s Parliament which will require time and that all underground development will be delayed until this and other issues with the Government are concluded and new timetable agreed. Shares of Turquoise Hill Resources shares nosedived about 20% in one day touching multiyear low of 3.82USD in New York during the week. Various representatives of the Mongolian Government, including the Prime Minister on Thursday, have essentially refused Rio Tinto statement that Parliament approval is required, that the issue can be resolved at the board level and implied that the letter from Erdenes Oyu Tolgoi that appears to have started the issue was in essence a cautionary reminder from a minor official in a line of command. The stock has strongly rebounded resulting is 5 day performance of - 9.77% closing at 4.80 USD in New York. In other developments, Senior official at Mineral Resources Authority of Mongolia has stated that after receipt of resolution from Supreme Court on106 mineral licenses related to corruption case of former Chairman of the Authority D.Batkhuyag the agency “will cancel and re-issue the licenses on competitive selection basis.” Official source has commented to the media citing relevant laws that “in case of a guilty official being punished by law, state is not responsible for compensation to the license holders.” Erdenes TT has stopped coal exports due to closure of Tsagaan Khad coal yard and uncertainty related to Mongolian coal truck drivers driving through Chinese border to coal yard at Gantsimadao. Mongolian turgug exchange rate hovering above psychologically important level of 1500 is causing public discontent about state of the economy President Ts.Elbegdorj pardoned Chairman of MPRP N.Enkhabayar convicted and jailed in a landmark corruption case and he is now a free citizen. Our view We don’t believe that Rio Tinto would delay all funding and work on OT underground development based solely on a letter from Erdenes Oyu Tolgoi. We would expect such serious decision to based on evaluation of uncertainty and issues with the Government of Mongolia( such as 22 items of discontent) and in line with general corporate policy of cash conservation by divestiture of non-core assets and so forth. With or without the letter, the fact is that the company evaluates the situation as requiring such action. We interpret Rio Tinto’s message as a sobering but necessary corporate communication to Mongolia that clear resolution of issues is necessary is in order for OT underground investment to continue. In this sense, we view Rio Tinto statement to be within requirements for “timely and accurate disclosure” for “material foreseeable risk factors” and the delay to be within a duty to shareholders for preservation of company’s assets and capital and avoidance of unacceptable risk. We interpret downplaying of an importance of a letter from Erdenes OT by the Government as a) possibly genuinely not being aware of strict requirements for listed companies on clear and adequate disclosures b) certain degree of lack of coordination between Erdenes OT, Ministry of Mining and the Cabinet in official communications that have market moving potential. It is clear that resolution of outstanding issues including project financing (with or without Parliament participation) and joint statement by Rio Tinto and the Government has become another critical catalyst event for the valuation of the company with approximate deadline of December 31,2013 due date for TRQ’s US$ 1.8 billion loan from Rio Tinto( with added complexity of interests of Rio Tinto, TRQ minority shareholders, lenders, development agencies and Mongolian authorities). In this regard, key positive message that we perceive from communications from Mongolian Government is that of support for OT productive development including underground mine and importance of the project. However, as with any difficult communication, amicable resolution is by no means clearly in sight and it remains to be see whether Rio Tinto’s position will pay off due to apparent significant disconnect between the company and the Mongolian authorities as well outcome of cooler heads vs. hot heads debate within Mongolian authorities . It will take hard work from both the company and Mongolian authorities to bridge the disconnect and reach a definitive resolution on outstanding issues. Fragile macroeconomic reality of Mongolia ( MNT depreciation, shrinking mineral exports and FDI , etc) as well favorable internal political environment (temporary fade back of election cycle, two year window to deliver to voters, etc) are factors with potential to aid this process. Ultimately, Mongolian Government is Rio Tinto’s partner in their famous Mongolian tango and until both partners start dancing, all investors can do is wait and observe.
Posted on: Sun, 04 Aug 2013 17:44:00 +0000