ECONOMY IS BACK TO BUSINESS

The prolonged dispute between Rio Tinto and the government has finally ended. The signing of the Oyu Tolgoi Underground Development Plan (UDP) in Dubai, signifies the turning of an important page. Mongolia has stepped up to the big league, and successfully negotiated a settlement with a global business force. This deal is equitable and sets great precedents for those contemplating investments - large and small - in Mongolia.

The PM appointed an internationally experienced Mongolian negotiator, and supplemented the Erdenes Mongol team with international legal and strategic advisors. This ensured that a principled and strategic approach was taken and that the team was clear about what needed to be achieved for Mongolia.

The key principles driving the GoM side were

1.    The IA (Investment Agreement) and ARSHA (Shareholders Agreement) were to be sanctified, as they were the bedrock for Oyu Tolgoi’s Phase 1 funding of over $6B. The IA is also critical to winning the worlds largest ever Project Financing package in the mining industry.
2.    That Mongolia modified or clarified certain tax and legal issues and ensured that these issues removed any confusion and uncertainty for Rio and the Project Finance consortium.
3.    To ensure the parties understood that the achievements of Phase 1 were clearly seen as achievements. For far too long politicians have fired cheap shots at OT when in fact the construction was a well executed project and that OT is now operating at over the nameplate capacity.
4.    To get Rio to negotiate quickly when they had repeatedly stated they were being patient and had given their best and final offer some eight months ago. It was important here to rebuild confidence and trust in the negotiating process and across the negotiating teams.
5.    To leverage the government’s interest in OT.

These five priorities meant refocusing the debate away from when dividends would flow to ensuring that OT became (again) the engine of growth for the Mongolian economy. This meant that the critical priorities were

•    Resolving the shareholder stand-off,
•    Quickly accessing the project finance and starting the underground development.

This in turn would free up the 80% of project value, stimulate the economy and generate more tax revenues - directly and indirectly. This approach will also put Mongolia back onto the lenders map and ultimately OT will become the source of an annuity income stream for Erdenes Mongol for decades to come.

In a relatively short 10 weeks the Erdenes Mongol team were able to reach settlement, on a dispute that was already in play as early as 6 months after the signing of the Investment Agreement - back in October 2009.

While the whole of Mongolia has suffered due to the actions of irresponsible politics, it is pleasing that the current political leaders have had the courage to seek a solution that meets international standards.

Critically, Mongolians should be proud that the global mining industry’s largest ever Project Finance raising will be for the OT project. This $4.2B facility will be implemented in accordance with international lending standards led by EBRD/IFC and 15 global lending institutions. This is an international benchmark facility that future Mongolian financings will benefit from.

So has Mongolia been short-changed or cheated here? The answer is clearly no, but there will undoubtedly be a small group of populists who criticize the solution. But their criticism will be purely on the basis of local politics and not what is in the national interest of Mongolia.

Effectively this agreed solution now unlocks a $6B capital project that will spend about one billion dollars per year, employ 1,700 people directly and open up a score of business contracts for local companies. Importantly it will triple the revenues of OT, and provide additional tax revenues to GoM. It will also help turn around Mongolia