October 2012
The recent beginning of soil removal at BaruunTsankhi of the TavanTolgoi deposit will be remembered as one of the main economic events of Mongolia in 2012. The company’s plans for this were ready before the parliamentary election, but the actual work could not begin because of political reasons. Even after the election, Erdenes TT found it needed to wait for the newly established Government to settle down.
The start of operations at the BaruunTsankhi mine defines the main principle relating to the commercial exploitation of the TavanTolgoi deposit. Both Tsankhis will be operated by Mongolia in the “matryoshka” doll fashion. Concluding that Mongolia benefits the most if Erdenes TT is the main actor in mining BaruunTsankhi, the company “gave birth” to a daughter company, much like a matryoshka, and transferred its 51 percent share to the new company, named BaruunTsankhi LLC. This system of corporate structure – forming a subsidiary company and transferring to it the shares of the parent company – is quite common in the global world of business.
Take the case of SouthGobi Sands, which works a coal mine in southern Mongolia, only 40 km from the China border. Its “mother” company, SGQ Coal Investment Pvt. Ltd., is Asia-based and the matryoshka helps raise funds. The “father” company is SouthGobi Resources Ltd. And your guess about the “grandfather” company is correct –it is Ivanhoe Mines before it changed its name. For those who may be wondering what I talk about, a matryoshka doll, also called a Russian nesting/nested doll, refers to a set of wooden dolls of gradually decreasing size placed one inside the other. Similar nesting of several companies inside one another is called the matryoshka method and its main advantage is that it reduces the risks of the original investor.
The major risks in the TavanTolgoi project are that it could become too dependent on one buyer and that the transit transportation remains outside Mongolian control. To minimise and/or to spread the risks,Erdenes TT decided to sell some stakes in the daughter company to investors from China, Russia,Japan,South Korea and the USA’s Peabody Energy. Together, they will get 49 percent of BaruunTsankhi LLC while Erdenes TT remains 100 per cent owner of the licence and decides policy.
All the likely participants in the project will be introduced to the new situation before a final choice is made and an agreement to begin work at BaruunTsankhi entered into. A priority criterion for the selection would be that the operating company should not have any direct links with the likely major buyers of TavanTolgoi coal. This dims the chances of China and Russia and brightens those of Peabody Energy. Officials would no doubt be aware that a daughter company of Peabody has a joint venture with Chinese coal transporter Winsway, whose warehouses near the southern border of Mongolia hold huge stocks of coal from here. This could go against Peabody which is the world’s leading coal mine operator.
The Russian participants including RZD were not so much interested in the coal mining part as in having 50 per cent ownership of the railway to be built from TavanTolgoi to Sainshand. An agreement on transportation could be discussed with them. As for China, a coal sales agreement will be high on the agenda. Easier terms than before are likely to be offered for all three agreements now likely – on operation, transport and purchase.
It may very well be asked why Erdenes TT, extracting coal at ZuunTsankhi and selling it profitably, cannot handle operations at BaruunTsankhi, too.B.Enebish, until recently Executive Director of Erdenes TT, was confident it could take up the challenge and also said that the company’s worth will increase drastically if it operated both Tsankhis by itself. But it was felt others needed to be brought in to minimise the long-term risks of transportation as well as sales. The daughter company would retain control, though.
It has been a bold step on the part of Erdenes TT to start operating BaruunTsankhi. It is a national company and is in need of the Government’s support more than ever. Much time has been lost but it needs beemphasised that Erdenes TT had to wait for two years to allow the political situation to crystallise and investors’ moods to settle down. Also, the company must, until such time as the BaruunTsankhi operations are on theirfeet, be freed from the legal compulsion to put money into the Human Development Fund. The Human Development Fund Law that makes this mandatory can be changed with the support of two thirds of Parliament members. So far, Erdenes TT has paid MNT410 billion into the fund and the money has already been distributed as “the nation’s blessing” to fulfill politicians’ promise.
State support for the strategically important deposit should be earmarked in the 2013 budget now under preparation. MNT58 billion is needed as “children’s money” and the Speaker of Parliament has hinted that the money can found only by cutting down on other planned expenses. Whatever that may be, with the price of minerals falling globally, the 2013 budget must provide for support to national mining companies.
The year should be seen as one where legal steps will be taken to lift the Mongolian mining industry to a professional level. Amendments to the Mineral Law and other related laws will be discussed by the end of this year. A lot of changes are waiting to be made in the mining sector, all aimed at professionalising operations and supporting companies that act responsibly. A bright future is possible only when the State is supportive of national companies and clear guidelines are set for foreign investors.