April 18 2013, 1:34pm
Analysts at ResCap say they are increasingly positive that a deal will be struck to end a bitter stand-off between the government of Mongolia and Rio Tino over the Oyu Tolgoi copper mine.
Analysts at ResCap say they are increasingly optimistic that a deal will be struck to end a bitter stand-off between the government of Mongolia and Rio Tino over the massive Oyu Tolgoi (OT) copper mine.
This could in turn offer “a significantly higher risk-reward scenario” to investors in the junior copper space, they concluded.
Investor sentiment towards Mongolia depends to a large extent on OT’s success.
ResCap cites several positive indicators that “a win-win agreement will be struck for OT and that this event is scheduled to occur at a time when Presidential elections will conclude”.
The election date was confirmed as 26 June last week.
“[This] will bring to a close a highly uncertain two year political cycle following Parliamentary elections and the subsequent change in government last year,” they added.
If the mine gets up and running it will generate more than US$8bn every year for up to 50 years by producing 425,000 tonnes of copper and 460,000 ounces of gold a year.
OT is expected to contribute close to one third of the country’s GDP in the medium term.
But the Government of Mongolia and the miner are locked in an argument over the implementation of the Oyu Tolgoi Investment Agreement.
Disputed issues range from project development and costs, to the operating budget, project financing, management fees and governance.
However, ResCap noted that “constructive progress is being made” regarding discussions with the Government of Mongolia (“GoM”) according to Rio Tinto and Oyu Tolgoi LLC (as of this week), and that “bank funding in the form of project finance is now well advanced”.
They also highlighted recent government approval for a proposed power plant at Erdenes Tavan Tolgoi, which would supply OT with all of its power needs.
On top of this they say pressure is on the government to do a deal after a leading ratings agency issued a warning on the country’s soveriegn debt.
On 17 April, Standard & Poor’s Ratings Services downgraded Mongolia’s sovereign credit outlook to negative, stating “the likelihood of a sovereign downgrade for Mongolia within the next six to eighteen months has increased to more than one-in-three as the higher policy risk contributes to deterioration in the external and fiscal profiles” .
“[All these factors] have the potential to significantly improve investor sentiment and foreign direct investment into Mongolia in the second half of this year,” ResCap said.