IT IS NOT THAT WE ARE PROCRASTINATING AND THEY ARE IN A HURRY

For example, the copper price was record high at USD8,900 per tonne on July 2, 2008. In Mongolia, it coincided with post election time and Mongolians imagined themselves that they were about to reach the peak of prosperity. However, three months later or at the end of last year, once soaring copper price plummeted to USD2,800-2,900 per tonne. This price paradox did not hit copper only. All raw material prices were affected by this swing. The value of the global mining industry has weakened considerably. Share prices dropped two to three times up to 80%. Russian and Chinese companies have seen sharp drops in their share prices, followed by giants such as Rio Tinto. When the value was still high Rio Tinto acquired the aluminum producer for USD40 billion. All businesses including major ones depend on loan facilities for operating. When the time comes to repay the loan of USD 40 billion, the value of the collateral had already fallen three fold. So there will be a shortage of money. Therefore, Rio Tinto is in a search for money around the world. Most of the money is in China and Asian countries. Rio Tinto is now holding talks on capital injection of around USD 20 billion by Chinalco, out of which USD 7.2 billion will be convertible bonds. It means that it can be converted into shares or placed for other purposes. The rest will be in the form of shares. It will make Chinalco’s participation weight in Rio Tinto around 20%. However, Rio Tinto’s shareholders put forward their requirements in this deal. The requirement is that there shall not be any interference whatsoever in anyway. In other words, the pivotal condition precedent set forth by Rio Tinto to the Chinese part is a promise not to influence in the process of setting global commodity price. This is a common practice worldwide.
 

Japan imports its raw materials from Australia. When Australian companies encounter difficult situations they also receive similar aid from Japan. One of the conditions both sides agree on is not to impose any pressure on the company’s operations. The suppliers negotiate their prices with major customers according to international market rules. It seems to me similar arrangement is made between Rio Tinto and Chinalco. Also according to the latest reports, Rio is refraining from taking 19 billion in its funding from Chinalco and alternative sources of financing.
    
Chinalco’s 20% participation in Rio Tinto is not sufficient to influence the decision making, is it?

No interference means swearing not to influence in the decision making. There is a provision in a charter not to influence the operation of a professional company. However, this process of acquiring and selling the shares is taking a long time. It will not be complete until the end of June this year. The majority of Rio Tinto’s shareholders are not only in London, but also in Australia. Australian Government shall make a decision whether to approve this deal by the 20th of June. Australia’s Foreign Investment Regulatory Agency has to submit report the decision in June.

Upon hearing the condition of non-interference in the company’s operation, shareholders in London gave a green light for obtaining the capital if such a need should arise in the near future. The company has an outstanding loan of USD38 billion out of USD 40 billion. It has to repay USD 8-10 billion this year according to the schedule. There is one point to turn one’s attention to. Mining companies have been rated recently. The top has been taken by BHP Billiton with 3.1 points and Rio Tinton has taken the second place by 2.9 points. Although it has a huge debt it still has a high rating. In general, if the share price picks up and when used as collateral, the USD 40 billion loan is not too troublesome to cover. At the moment, there is no money around; therefore, the interest rate is high. The commodity price has increased again by 20-30%. This growth will enable major companies find more money.
It will subsequently lead Rio Tinto review the interest rate with Chinalco. The media has started covering this topic these days. If the copper price increases considerably it may not be necessary to get funding from China. Therefore, Australian Government is waiting for the market to improve and not making the decision until the end of June. It is a deal.

(During the interview Mr.Davaasambuu told us the he understands that Rio Tinto is planning to sell 50 % of its interest in its Australian iron ore deposit to BHP, raising 15 billion in funding. That’s why Rio probably will leave this deal with Chinalco by paying a penalty)

 If  so, for a while, powers in mining like BNP, Rio Tinto and Vales are going to be dominant in international commodity price setting.  

How is it beneficial for China to buy shares of multinational corporations? Although it holds 20% stake in Rio Tinto it is not a sufficient portfolio of a decision making level, is it?

No, it is not sufficient to reach the decision making level. However, it is profitable for China. It entails a political interest. It means it is trying to attract major commodity suppliers. In other words, China is striving to secure its raw material reserves. This is the first benefit. On the other hand, Rio Tinto will also depend on China. It also needs a local partner in this huge market to minimize the complexity of operating in China.

Copper price is slowly picking up. Can this trend be understood as a consequence of measures taken by China to increase its reserves? Or is it a natural steady price increase in the commodity market?

Copper is a major indicator of the world economic situation. Most industries deploy copper in their production. In construction sector, for example, all high quality unstained wires of drainage and electricity transmission are made of copper. The main raw material of automakers and electronics is copper. Therefore, price increase of copper is the main factor of the world economy. If the world economy recovers, the copper price will increase subsequently. According to a number of analysts, the economy is on the stable track to recovery. However, the price increase will be gradual and the full recovery will be seen after a long time.

IF MONGOLIA IS CONCERNED ABOUT CHINA, THERE IS NO GREATER BUFFER THAN RIO TINTO

The first talks on Oyu Tolgoi investment agreement were held when external circumstances were harsh. The current economic situation is different than that of the end of the last year or January this year. How this positive trend will influence the second phase of the negotiation?

Well, there is an influence. There is a chance to soften a little bit harsh conditions set forth by the investor. It was very difficult to find any money in December, January, and February in the whole world. Therefore, the investor’s side offered shares to Mongolia and the corresponding loan had a very high interest rate. Now, more money is available and the interest rate is likely to go down.

On the other hand, the investors are not in a rush because they are waiting to find the funding. They are still working on the main construction. It doesn’t mean that we are procrastinating and they are in a hurry. In reality, the investor is not rushing at all as there is no funding available.

However, the production has to start before the commodity price cycle reaches the next peak. The investor is thinking about that, so is the Mongolian side.

There is a concern that Oyu Tolgoi will be owned by the Chinese gradually. There are the Chinese standing behind Rio Tinto and somehow it will entail a connection with China?

There could be such concern. However, China is neither an enemy of ours. It is one of our customers. The important point is that the world will follow its own path of development. A highly developed nation will dominate in the world. Only in case Mongolia hands over the Oyu Tolgoi to any company other than Rio Tinto, the very concern of China’s dominance could be substantiated. Whom could Mongolia rely on as a buffer except the world class company? The gest buffer is the multinational corporation itself if Mongolia is scared of China.

In what extend the economic recession had impact on the mining industry, especially major copper producers?

When the copper price dropped to USD2,800-3,000 per tonne, the cost of production was higher than the market price, which compelled closures of many factories. There are some places, which made technical renovations. In general, the total loss of the major copper producers is estimated to be well over USD100 billion. 

Did Rio Tinto close down a few projects?

There were few ones with minimum return. The gest loss was due to the acquisition of Alcoa. In addition, Rio Tinto also runs oil minor projects. It has many subsidiaries. It is trying to sell them out. It is a common practice not to sell when the price is too low and sell later when price goes up. Every time the market changes, policies shall be reviewed and planned accordingly.

Just before the economic downturn BHP offered to acquire Rio Tinto. Some of the Rio Tinto shareholders accused the management that the offer was better to be approved and the company would not find itself in such a difficult situation during the crisis. As a market analyst, what is your opinion in this regard?

In general, main customers, especially China, some European countries, and Japan were very concerned on the merger of two companies. Therefore, shareholders of the two companies were forced not to approve the merger. On the other hand, the Competition Regulation Acts of the EU, USA, Australia, and Japan are intertwined and recognize each other. For example, according to the EU Law on Competition, it is very difficult to obtain an approval for the merger. Every country will oppose a monopoly to be created by the merger. Especially, the main customer, China will protest a lot.
Although, the question of a merger is still open, and that is not bad position for us.

If Chinalco acquires 20% stake of Rio Tinto, will China attempt to increase the stake subsequently?
 
At the moment, it has already acquired 9%. It is doing its best to increase up to 19.9%. There are many professional companies in the world, which supply raw materials to producers. The Chinese are very interested in entering those professional companies and acquire a stake. On the other hand, these global companies also have interests to enter China. Any company wishing to be comfortable to set a price is not willing to let China do whatever it wants to do. China, of course, will have an interest to increase its stake in Rio Tinto.

There is a concern that the supplier and buyer of the mineral products of Mongolia will be one entity?  

Yes, indeed. However,If I see now , there are certain contradiction toward the way people are addressing this concern. There is some resistance to Rio Tinto or other western investors in Mongolia.

Once Oyu Tolgoi agreement is approved can Mongolians benefit directly? It is said it would take some time to reap the benefit. What will determine the duration of this period?  

This is a matter of technology. Nobody can tell concretely. Due to sophisticated  modern technology, exploration and mining work can be conducted simultaneously. I saw myself that 4-5 machines of 10-20 tonnes were placed underground 1,200 m below and the holes joined each other diagonally. According to the Mongolian law, the cost of exploration should be included in the cost of production in 2-3 years. However, the investment agreement says to reflect the cost up to 7 years. If the cost is incorporated gradually, mining operation will be profitable from the beginning. If Mongolian Government approves this condition the mining will be profitable bit by bit from the beginning. Therefore, it will depend on how the technological matter is reflected on the agreement.

The draft agreement mentions different taxes. D.Zorigt, head of the working group said that Mongolia’s return from the project would be approximately 76%. How realistic is it?

The first factor directly determining the yield for Mongolia is the copper price on the world market. When the price is low, the yields to us look high because royalties still apply. If it(price) exceeds USD5,000, the tax will not reach 50%. If it reaches USD6,000 it will be even less. If the price increases it is said that a new resource rent tax will be imposed. This record has been included in the draft agreement, but it must be improved.  

When meeting the investor the Parliament Speaker asked to agree on a condition that Mongolia would acquire minimum of 55% of the profit. If the percentage is to be less then the negotiation had to be held again. Mongolia will collect all types of taxes.
When the price increases, the tax will be less. If the copper price is estimated at USD3,500, then 76% return is likely to be realistic. If it reaches USD4,000, the return will be 50%, in case of USD5,000, the return will drop to 30%. The tax is low in Mongolia. Therefore, Speaker is advocating a standpoint that minimum of 55% of the profit should go to Mongolia. Let’s refrain from talking about other figures.

POWER STATION IN TAVAN TOLGOI IS VERY IMPORTANT

There will be mega infrastructure projects surrounding the mine site. There is much discussion on major projects. For example, there is an initial talk of getting USD1billion loan from China and fund the mining projects. What should be Mongolia’s position on infrastructure projects?

There are three benefits deriving from foreign partnerships.
The first one is the portion Mongolia will gain from the total profit. That should be minimum 50%.
Secondly, services and supply chain for producing the copper concentrate and mine construction shall be of high quality from Mongolian side. The most costly component in operating mining and metallurgy business is the energy. Therefore, Mongolia has to build a power station by its own funding and foreign loans and aid. And Mongolian Government has to provide electricity supply to Tavan Tolgoi and Oyu Tolgoi independently on its own. It will comply with the national interest. By doing so, Mongolia’s gain from the projects will escalate. That’s why Mongolian Government has made a decision to own some portion of Tavan Tolgoi coal deposits. I think it made that decision in order to build a power station making a meaningful use of the coal deposit. Financial sources to fund Tavan Tolgoi power station has to be raised from the third market, for an example  EBRD, ADB or other development funds
 
Thirdly, new technology, knowledge, training and experience must be brought to my country


Shivee Ovoo has a lot of coal. I believe there will be negotiation regarding a power station to be built by for the China. As far as I know thereis always a question of pricing. Infrastructure cooperation between us and our neighbour is vital for the long term.

Does it mean that there will be two power stations in the southern Gobi?
 
If  the Chinese want to buy energy from Mongolia let them build a power station based on Shivee Ovoo coal mine. Mongolia has to build a power station with a capacity of producing 400-600 megawatt based on our own Tavan Tolgoi coal deposit with a vision to own and deploy it in the future. Who will dominate on Oyu Tolgoi? Of course, Rio Tinto and Ivanhoe Mines. In railway, Energy Resources is likely to dominate. We are happy It is a Mongolian company,  The railway to be built by the Energy Resource Rail LLC is the shortest route to the Bugat/Batoy steel factory of China.  

Besides, the railway, Mongolia is striving to take a hold of other most important element, e.g. energy. Therefore, Mongolian Government has to build the Tavan Tolgoi power station. Mongolians are trained to run a power station. The Governments and international banks are willing to raise the funds. The end user is just next to Mongolia. There are Tavan Tolgoi and Oyu Tolgoi. The modern railway to be built by the Energy Resources LLC under the German technical monitoring will be electric one. There power will be supplied to the railway as well.

How long will it take to build a giant energy complex on Tavan Tolgoi?

Two years.

Is it feasible in such a short time?

Yes, of course.

How about the capacity, for example, compared to Shivee Ovoo power station?

The Shivee Ovoo power station could have a capacity of 1 million MW as the demand from China will be huge. According to some experts, Oyu Tolgoi and Tavan Tolgoi electricity demand will be 300-600  MW. At the moment, Mongolia is producing 500-600  MW electricity. It means that this size of electricity will be produced there. If the produced energy is enough and China is willing imports it, then it is good. But the meaning of production is not to depend on China’s willingness to buy it. There will be Oyu Tolgoi and Tavan Tolgoi mines, railway, and a city with a population of 60,000-80,000 people. The electricity has to be supplied to all of them.

Will it be connected to the central energy line?

It will be connected to the central energy line through Dundgobi.

Does the energy have to be converted to commercial form in order to implement these major energy projects?

Of course, in order to get a loan from China or any other foreign country, it has to be converted to commercial term so that funds are raised for the projects. The income has to be kept separately in order to repay the loan.

Does it mean that end users also have to pay in commercial terms?

Nowadays, we pay MNT60-70 for a kilowatt from the central power system. This is the international level price. Therefore, the energy sector has to shift to the commercial standard first. It has to decrease the cost and abolish the practice of forcefully supplying expensive materials from abroad. Shifting to commercial terms doesn’t mean that the price paid by the customer shall be increased. Commercial term means the energy sector has to have the ability to control its costs.  


It is said that the electricity charge will be increased from July 1, isn’t it?

The costs have to be controlled. The energy sector monopoly has to be dismantled.

MONGOLIA SHALL CARRY OUT ITS RAILWAY POLICY INDEPENDENTLY

Mongolia has to make a transit transport agreement and create legal environment in order to market the raw materials to the third market, doesn’t it?

The closest market is China. It is very close to market to further destinations through China.

Will China let us in?

China is a respectable country with international market principles, WTO member country, which joined the UN economic organizations and swore to the world. It will be a shame by not letting in coal from a small country like Mongolia. Of course, there should be cautions. As it is WTO member country it can’t refuse a small amount of coal from Mongolia. It is in the interest of China to transport it and make money out of it.
Mongolia joined the UN international convention approved in 1994. The convention says that Mongolia shall enjoy a favorable term at Tianjin port and Mongolia shall deploy the Tianjin port freely in order to access the world market and China accepted this responsibility.

The second railway route to transport Tavan Tolgoi coal is designated to transport coking coal to North East Asia. How is it realistic? It is a very costly project and it seems has no financial sources?

It can be realistic. But let’s talk in a sequence. In the first five years, we have to be self sustainable. It is not practical to see something very far away and fail to do the urgent work in front.

It is said that the railway issue will be determined first and then the second stage of Tavan Tolgoi operator bid will be made.  

That’s completely absurd.

Well, that was the reason of Putin’s visit and a delegation of many Russian companies to Mongolia, wasn’t it?  

If the Russians want to build railway, most welcome. Mongolia must have its own independent railway. Mongolia is a sovereign country. In railway, Mongolia must have an independent policy. If the Russians would like to cooperate on railway and have funding available, then Mongolia will agree. I have my own principle on the issue. Mongolia has to implement its own railway policy independently. If the Russians want to invest, then it has to be fast and let us wait for that. However, building a railway to the south from Tavan Tolgoi is vital and Mongolians requested a help from Russia to connect from there with the main railway and it is agreed that Mongolia will build railway further to the south. That is a very important route for Mongolia.

Is it the first objective?

It is more than the first objective; it is a future objective. Further the railway will join Chinese railway and directly reach Tianjin. It will be closer to the North East Asia.

The steel production of China is moving from the central regions towards the northern periphery. Will China’s changing trend have an impact on the commodity prices of Mongolia? Will Mongolia have a favorable condition?

The conditions will be more favorable. Once locations of the processing factories come into proximity, the transport cost will be less. For example, Baotau/Bugat steel factory imports coking coal from Australia, which is a very long way. Then Mongolia can offer coal to China and can supply even further to Japan. At the moment, Australia is supplying coal to Japan. If Baotou/Bugat receives coal from Mongolia, which is very close, rather than Australia, the transport cost will be less. That’s called a regional integration. The reason of inviting multinational corporations to the mining industry of Mongolia is to have a wider spread of cost and join Mongolia into the regional integration.

Coal costing USD20 in Mongolia will travel around in a long distance and reaches USD80. The transport cost absorbs nearly all the benefits. It travels to Erlian and reaches Baotou by Mongolian railway after a long way around. If the coal is supplied directly to the factory, transport cost of USD20 can be deducted and USD60 will of net income go to Mongolia. I can’t comprehend why there is a need to reduce benefits ut to USD 20 when it is possible to gain USD60.


CONGRATULATIONS TO ENERGY RESOURCES RAILWAY PROJECT!

So, you don’t think the northern railway route very promising?

It is a lot of work. When transporting the Tavan Tolgoi coking coal to the south, there is no need of that railway turning to the northern direction. China and Russia both need coking coal. That’s why they want to connect to the main railway line. Therefore they are telling us to build a line in an urgent manner, which will be later connected to the main line of theirs. Otherwise, the shortest route to transport coking coal to the Asian market is in the south.

This issue has to be discussed at the Parliament and made into a state policy, isn’t it? I understand that a decision has already been made to construct the northern route railway and the Government has already held talks with the Russians on the matter?  

It has been discussed at the Parliament and it has been decided to build railway to the southern and northern directions. As the Government doesn’t have any money it said the Energy Resources LLC to build railroad. Mongolia is also welcoming Russia to build its wide railway; therefore, Mongolia has made a joint venture. Now let’s wait for the Russians start working.  

You mentioned that Mongolia has to be one’s own maser in railway sector. Can it be a master when it is sharing stakes on the basis of 50:50?

As it is located on the Mongolian territory of course, Mongolia is a master. A master means that Mongolia has to deploy it. The costs will be borne by Mongolia. Whoever invests in anything located in Mongolia, belongs to the country. For example, there is Toyota carmaker operating in Britain. Who the factory belongs to? As Britons are working there it belongs to the British.

How important is the railway route from Ukhaa Khudag to Gashuun Sukhait by Energy Resources Rail LLC?  

That has the highest priority. We have to cheerfully applaud the project. As it is 200 km long, probably it will take a year to construct. Maybe around this time next year, it will be complete. However, it is better for the Government to construct the power station in order to supply electricity to the railway.

Companies of every continent are participating in the Tavan Tolgoi bid. What kind of geopolitics should be associated?

You mentioned previously the golden principle, meaning that the end user and supplier shall not be the same. I think that is the important principle. Of course, it is good to cooperate with neighbors. However, monopoly shall not be granted.

Do you think the Parliament and Government will have a common position on the issue?

Policymakers probably know that. The Government platform also mentions that there will be the second pathway to the south. The National Security Commission also has the policy of putting the railroad to the south and to the sides- connecting routtes to main line also. I think that the issue is already clear. Now it is waiting for a funding partner.

I doubt that Mongolians are the masters on the railway and but it is simply waiting for Russia to take action?  

There is no such a thought in the minds of Russian Government, either Russians or Mongolians.  I think that there is a wide spectrum of misinformation about the participating companies. Otherwise, there is no such intention for the Russian Government to solely control the Mongolian railway. I think it is a misdeed of people, who are trying to make some money in the middle. It will be clear later that it was a misdeed. Reliability and safety of the Mongolian railway and its economic independence is of vital interest of our two neighbours and other countries. when my people t don’t like something they make references to Russians in past. That is an old mentelity. If there are available resources they could go to rehibilitations and development of national railway that is in national interest.   

Is there any hope to approve the investment agreement by spring session of the Parliament?

Because of the strong will of the people, as well as government, I believe this agreement will be approved. It seems to me investors are not in a hurry because they have  put tough conditions on the agreement. These conditions make me think that they are in a waiting position.
The loan to be given for buying shares has estimated at the interest rate of 9.9% plus inflation and threshold for applying resource rent tax is high.  In this regard  estimates of future value of the investment  are  0.299 plus inflation. International experts say  it should be a maximum of 0.20. These tough positions  might be connected with the conditions of the market last year. That is why I believe those conditions could be revised.

Secondly, it mentions an investment of USD 5 billion. Last fall, when the price was high the estimation of investment was USD 5 billion and now the investor is trying to bring it down to USD3 billion. The investor wants to review the projections. Also I think that it is waiting for a better source of funding once the economy gets better.