“Rio Tinto Is Screwing Turquoise Hill Shareholders!”

So says a contact of ours in Mongolia.

(This post is the result of various conversations which have transpired over the last few weeks. As such consider this a timely “bonus” issue.)

Journalists are often constricted in many ways. Firstly by their publishing houses, whose prerogative is to sell copy. They are businesses after all, and businesses profit from selling stuff. This reality is one of the reasons why we’re inherently skeptical of the mainstream media.

We touched on this topic recently with respect to the New Zealand milk scare which is presently playing out. I honed in on the same topic in my post entitled Why Blogs.

Blogs, or should we say “alternative” media, increasingly fill a much needed gap in the truth and what actually makes it to newspaper headlines.

It’s why Wikileaks is necessary for truth seekers, and is despised, ridiculed and hounded by those who profit from the ignorance of the sheeple.

It has been our experience that issues discussed by the business community in bars, cocktail functions, restaurants, and private meetings most often reveal information closer to the truth than what makes its way to the news stand. By the time it’s been “sanitized and “modified” to be palatable to The Powers That Be, and “dumbed” down for Joe Sixpack, the information is close to worthless.

Since we’re not journalists and could care less what the populace think about us, or our views, we are not hindered by such constraints. We are but humble investors, putting our own balls on the line every day, attempting to sort the good from the bad and profit from it. We don’t care what is politically or even necessarily socially acceptable, our focus is on what is real and bankable. It is the only way for us to profit.

When it comes to Mongolia we have made it clear that we’re bullish, but not in the Maria Bartiromo, sort of way.

As much as we like Mongolia, we believe we offer a balanced view on the place. Case in point, our post Mongolia, it’s a Wrap, which drew a bit of flack from those who only hoped we’d share the rainbows and unicorns version. Sorry folks, no place is 100% perfect nor 100% bad.

What follows below is a free-form debate between multiple parties in our network. They have kindly provided us with their views on the ongoing saga that is Oyu Tolgoi.

Openly discussing issues in small towns such as Ulaanbaatar, Phnom Penh, Yangon and Maputo can often lead to, umm, “difficulties”. One needs to be diplomatic, and as such the lead instigator in this post, whom I’ll refer to as “Zoro”, will remain a masked man. None of us want to find him in the Gobi eating sand sandwiches!

For those unfamiliar with the Mongolian story I refer you to a complimentary report we produced which is available here.

Onto the fun!

Firstly, “Zoro” provided some hard-hitting points to which Mogi Munkhdul, founder of Cover Mongolia replied…

Zoro: I believeRio is spreading negative rumors about Mongolia within the international media to knock the price of Turquoise Hill stock down from $20 to $4 in the last 2 years.

Mogi: It’s interesting how the international media never once questions the colossal conflict of interest Rio has in OT. On one side Rio needs to increase its TRQ stake in order to reap bigger benefits from OT, and on the other side actually bring OT into full production.

I’m sure ideally Rio would love to have equity control of the entire 66% TRQ holds in OT before the Phase II, or the underground portion of OT commences. All of the management of TRQ & OT is from Rio. They even still use riotinto.com email addresses to run the company! Shouldn’t there be a rule against this? Investors seriously need to start questioning the independence of TRQ & OT management from Rio Tinto.

TRQ is still a separate public company after all and Rio is not the only shareholder. I’ve been saying lately that the day Robert Friedland lost the poison pill battle with Rio should be remembered as a dark day for Mongolia’s investment climate. Things might’ve been totally different if Rio had to launch a takeover bid for TRQ, then Ivanhoe Mines. On top of that, looks like we should’ve all taken a moment and pondered what Robert Friedland selling most of his TRQ stake actually meant. Did he foresee all this fiasco?

Zoro: In my opinion most of Rio’s problems in Mongolia are self-inflicted, minor issues generated to create news flow for overseas media consumption and TRQ price manipulation

Mogi: It looks as if it is more in the interest of Mongolia to bring OT into full production as soon as possible than in Rio Tinto’s. All the foreign investors I’ve talked to recently are cursing Rio, and I totally agree with BDSec’s advice that TRQ is no longer an investment play on Mongolia’s economy. You have to remember that GoM (the government of Mongolia), like Rio, is a shareholder and therefore has the full right to do everything in its power to look after its own interest. It’s just unfortunate, and understandably perhaps, that everything GoM does in that respect is taken as a political maneuver and perceived as an added political risk, while anything Rio does in that respect is taken as just a business maneuver. It’s just a case in point why governments should never be in the business of business.

Your readers may have seen last Friday’s TRQ press release. They are slashing their selling price for their Altynalmas gold mine in Kazakhstan in return for an expedited pay day, in order to pay back the $225 million bridge loan they got in late June from Rio Tinto. The original agreement was for $300 million. Looks like minority shareholder and the investment community pressure finally got to them. It should never have been done in the first place, and getting less money for an already agreed deal is better than issuing shares to Rio at a 15% discount, but still bad news for TRQ minority shareholders.

Zoro: The timing of Cameron McRae’s (CEO of OT) resignation coming right in the middle of the death spiral financing is highly suspicious.

Mogi: It is definitely suspicious! While there is still great uncertainty, his resignation seems to be already decided upon. There’s no doubt that Rio should change its Mongolia tactics, and I’m sure they’ve learned enough in the last couple of years to formulate a new strategy on how to deal with Mongolia, its government and its people. Perhaps this is an opportunity to appoint a management team that’s more experienced in matters of Mongolia. Rumors of appointing Bold Baatar, the newly appointed President of Rio Tinto copper operations, as OT CEO, although perhaps a little too premature, was an interesting idea all around.

Zoro: Rio is rumored to be leaving copper on the Mongolia side of the border so they can claim that the Mongolians will not let it leave.

Mogi: Concentrate shipments are being conducted without major problems to China. Rumors of this nature just shows you how much gap in trust has been built up over OT.

Remember the thrice delayed OT shipment commencement ceremony? If I was a conspiracy theorist, I’d say that OT sent those invitations to journalists without having the full confidence the ceremony would go ahead. And if I was double the conspiracy theorist, I’d say that GoM was in on it too. Remember the Mining Minister promising to resign if he couldn’t renegotiate the OT agreement..?

Now, if I was triple the conspiracy theorist, I’d say that GoM has made a “secret deal” with Rio where it helps it gain greater equity control of TRQ, and Rio in return reopens OTIA, perhaps changing the timeline whereby Mongolia can increase its stake to 50%. But like I said, this is just a conspiracy theory, albeit something that everybody should pause and give thought to.

Zoro: They are making up a bunch of nonsense on the issue of Mongolia’s parliament needing to approve the phase 2 budget, as the PM just said it was bogus.

Mogi: It seems Rio misinterpreted a letter sent by Mr. Sedvanchig, the CEO of the wholly state-owned Erdenes Oyu Tolgoi LLC, which controls the 34% Mongolia holds in OT. The content of that letter has not been revealed, leaving us to guess who’s the liar here, or at the least, who is being dishonest, Rio or the GoM? Rio seems to have, perhaps conveniently so, interpreted that letter as a legitimate reason to postpone Phase II development, effectively leaving a question mark on the already negotiated $4B project financing from the likes of EBRD, IFC, export-import banks of America, Australia, etc. I think this just shows Rio is not particularly rushing to develop the underground mine.

Zoro: They are accelerating phase 2 so that they have a capital need when none should exist under the current mine-plan.

Mogi: As I mentioned before, I actually think Rio is not particularly rushing to pile up more debt at a time when all the major mining companies are shifting to a more fiscally conservative policy. Instead I think they are more focused on increasing their TRQ stake.

Chris: Which begs the question. What does this mean for TRQ shareholders, short, medium and long term? What is known is that the damage done to Mongolian FDI is acute and not likely easily restored. Destroying confidence is far easier than building it.

Mogi: My take on what it means for TRQ shareholders is that in the short-term they should expect continued turmoil and therefore treat it as a trading stock rather than an investment stock. On August 9, we shall find out if that Kazakhstan deal goes through and pays off Rio. Then there will be the question of how Rio reacts to the PMs dismissal of TRQ’s statement regarding project financing needing parliamentary approval. Does OT have working capital after August 12 when TRQ’s bridge loan matures? Does TRQ need to issue new shares? What’s the status of the $4B project financing? There are a lot of questions still in play for the next few months to bring back optimism for TRQ shareholders.

Rio/Mongolia battle, or actually collaboration as one friend put it, over OT is one thing, but the more disturbing reality from all of this is that Mongolia’s reputation is now in ruins because of it. When Mongolia says it wants more say in the matter the whole world seems to panic, interprets it as a government overreach, overlooks the fact that Mongolia is actually a shareholder on top of being a stakeholder and therefore has the full right, within the law of course, to assert its ownership over a project. One should not underestimate the political savvy of Mongolia’s government but definitely should question its PR savvy. At the least PMs regular monthly press conferences should be dubbed in English too.

John Polomny, a fellow investor and author of many articles on Mongolia provides his thoughts below.

“In my view Mogi has hit the nail on the head, so I do not have much more to add. What is especially noteworthy is the amount of Rio people at TRQ and OT. Where is the board on this along with exercising their fiduciary responsibility regarding the recent bridge loan? The penalty for default means big dilution for current shareholders and cheap shares for Rio. Looks pretty greasy to me, but I was looking at this TRQ purchase as a speculation. You might note that South Gobi recently appointed a Mongolian as President. With McRae leaving it will be interesting to see if a Mongolian is appointed to replace him.

“As you know I work in upper management of a large corporation. One thing I would consider is that my experience leads me to never view a person’s motives as nefarious when in many cases they are just incompetent. I wonder if RIO is just AFU on this one.”

I then asked our friend, financial writer and investor Jon Springer to share his thoughts on the topic. In his tried and true fashion Jon pulled no punches in providing his opinions!

“There’s an old Mongolian (and Chinese) saying, “Sometimes you have to kill the monkey to scare the chickens.” Since about February of this year, if you asked me what should be the headline for a story about the situation in Mongolia today I’d say: “Mongolia Kills Too Many Monkeys.” 

“Mongolia was warned repeatedly about their schoolboy tactics of always demanding more from Ivanhoe/Rio/Turquoise Hill. The schoolboys in government and major corporations – the rich families of Mongolia who will be on top whether the economy booms or collapses – were told repeatedly by the foreign corporate management of the country’s greatest asset – and particularly often by Cameron McRae – that they were going too far and that there would be consequences to pay.

“However, the whiny schoolboys persisted and engaged in shenanigans. For Mongolia’s schoolboys to now accuse Rio of itself engaging in shenanigans is laughable. It is the government line, and what the government allowed to leak into the international media for weeks and months at a time, over the past few years, that originally weakened Ivanhoe/Turquoise Hill’s share strength. It was the government’s desire to toy with this asset, and these corporations, that weakened the company, and its share price sufficiently to ouster Robert Friedland and put Rio in full control.

“And let us review who Robert Friedland was to Mongolia. He was the “white guy” that put Mongolia on the global investment map. He was the guy that promoted investing in the rocks beneath the frozen steppe. He was the one who dug deep enough to find Mongolia’s riches where others had tried and failed. However, at the end of the day the childish school boys didn’t like the stories on the street of what happened behind closed doors in hotels and offices, and decided they had some sort of ill-advised vendetta against Mongolia’s greatest promoter in 500 years.

“Rather than being strategic like Chinggis Khan would have been, and realizing Friedland was their greatest international marketing asset, they more or less worked to throw him out of the country and celebrated Rio’s takeover of the Turquoise Hill asset like hostages rescued from an armed bank robber.

“And yes, the school boys did this all while the price of copper and gold went up, and the share price of Ivanhoe/Turquoise Hill should have been going up as well. They thought these prices would go up forever, and they had all the time in the world to claim their prize, develop their greatest asset and develop their economy. They dallied on every infrastructure development. They played games with smaller mining outfits. They changed rules after agreements to make life more difficult for foreign investors. They played the games of the nouveau riche against each other, focusing more on turf wars than the development of the nation. Well played it was not.

“For now, the whiny well-off school boys, and the foolish citizenry who votes for them and chooses to defend one group in power over another (as if there’s a difference) all reap what they have sowed. A major global corporation now owns your country’s most important asset. They control its development. Moreover, they are limited in how many shares of the company they can accumulate each year by Canadian laws halfway around the world. The price of copper and gold is down. The stock would be down just for that. Rumors spread driving the price down further only to make the major corporation’s slow accumulation of shares cheaper. You have played them and now you accuse them of playing you?

“I don’t know if that is true, but turnabout is fair play.

“Thus, in a country that for 700 years has had their men wrestle topless because they are afraid of unknowingly being beaten by a woman, all I can say is: Ladies of Mongolia, remember your great queens and princesses and take control from these whiny boys. These school boys convinced you to give up your heritage and move to the city with the promise of a booming economy and then whined their way into destroying the economy before it ever started. Go beat them.

“P.S. Trade TRQ. Don’t hold it. Play the panics down long. Play the “everything seems to be on the mend to well” to sell. Just my opinions… as is the rest of it.”


So there you have it! Differing opinions on what has and is transpiring. What is clear is that the stakes are high, not only for Rio, Turquoise Hill, Mongolia’s credibility on the international stage, but most importantly for Mongolians themselves. It may sound sensationalistic but Mongolia’s future is intricately tied to OT.

I’m not sure what to think with respect to either Rio or Turquoise Hill. Rio seemingly extended an olive branch to Turquoise Hill with the recent announcement that two companies have signed a binding term sheet for a new funding package. The company has received a US$235 million advance payment for the Altynalmas Gold transaction, and Rio has agreed to provide a $600 million bridge-funding facility.

The loan is designed to help Turquoise Hill refinance an existing US$225 million loan from Rio Tinto made in June, and assists in meeting its expenses through the end of the year. Thankfully for Turquoise Hill shareholders, this prevented the need for a dilutive placement of common shares…for now.

What is also interesting is the recent announcement that the Mongolian Government is considering converting its 34% interest in the Oyu Tolgoi mine into a public company, with 10% of the Company being made available to the Mongolian public and another 10-20% sold on the domestic market.

Why would the Mongolian Government do this?

I can think of two reasons off the top of my head. The first is that from a political standpoint the move assuages public perception that OT only benefits foreign investors and big wigs in Government. The second reason is that the Mongolian government have to make good on bond payments coming due. This will put some cash in the coffers and bolster investor confidence in those government bonds.

My gut tells me that instead of repaying the bonds the government hopes to bring sufficient credibility to be able to roll those bonds as well as issue more. I’m still skeptical that this will come to fruition. Time will tell.

Lastly I’d like to point out that the best way to participate in a gold rush is to sell the picks and shovels. With that in mind we invested into a company called Eurofeu Asia, which trades on the uber-depressed Mongolian Stock Exchange. They supply fire safety equipment and security for domestic and foreign companies in Mongolia. Rescap Securities in Ulaanbaatar trades the shares, as does BDSec.

Then there is Mongolia Growth Group, our favoured Mongolian real estate play. The Company has just announced a private placement, details of which can be found here. For those of you who, like us, believe that Mongolia has a bright, if volatile future ahead of it, AND also believe that buying when markets are depressed is a good idea, I’d suggest getting in touch with the Company directly.

– Chris

“It is what we learn after we know it all that really counts.” – John Wooden


This Post Has One Comment

  1. Jane

    Heya Chris,

    There’s been a recent discovery that the RSA and Diffie-Hellman based cryptogragraphy will become crackable in about 5 years. Meaning that you’ll need to un-encrypt and re-encrypt all your stuff with Elliptic Curve based encryption before then to be “ahead of the curve”. Wondering if lockbox does elliptic curve based keys? It’s not so common right now.

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