Question 1
Prepare a brief assessment of country risk in Mongolia and in the neighbourhood as of 2022. Use the EIU country reports, IMF Article IV’s, country ratings briefs from the major credit agencies – as available, and any other sources you wish to incorporate.
Mongolia is a landlocked country in East Asia which is bordered by Russia in the North and China in the South. The land area of the country is 603,909 square miles. (mea.gov.in 2022) The country has risk rating of D which implies that the country suffers from high political risk and the economic prospects of the country is also very weak. The above rating can have significant impact on the corporate payment behaviour and the default probability of the corporate is very high. The highest rating for a country is A1 which implies that risk is very low. Further, the business climate of Mongolia is very difficult and the corporate financial information is often unavailable and even when such information is available it may be considered unreliable. The institutional framework of the country has many troublesome weaknesses and the transaction between the companies run at major risk in the difficult environment and is rated C under business climate rating which is also not a favourable rating.
The major strength of the economy is development of colossal mining resources like coal, copper, gold etc with investments in this sector reaching to 40% of GDP. (sidmartinbio.org 2019) The country enjoys a strategical geographical position between China and Europe and forms part of Silk Road Development Project. Further, there is scope for diversification of production in the field of agribusiness and tourism. Also, the country enjoys major donor support. (store.eiu.com 2022)
The major weakness of the economy is that it is small and vulnerable to change in prices of commodity and the demand from the Chinese economy. There is also internal political dissension in the economy. Further, there has bene major land degradation i.e., 90% of the vast grasslands are prone to desertification and there has been alarming level of corruption and fragile government. (globaledge.msu.edu 2020)
On the other hand, the neighbouring countries are China and Russia which have strong control with a stable government, the Risk of the Russia is C and that of China is B which is lower than the country risk of Mongolia.
Based on above, it may be inferred that performance of the economy has been very poor.
Oyu Tolgoi is a copper, gold, and silver mine. Prepare an assessment of price history in the global copper, gold, and silver markets – go back to, at least, 1990. Is Oyu Tolgoi a low-cost producer? Given what you know about this project and the price of copper and gold, is the mine financially viable given reasonable assumptions? While you do not need to prepare a full financial model, see if you can estimate a floor price for copper and gold, minimum prices necessary to achieve a financial return for the sponsors and government. Does the mine have any technology risk; if so, describe the risks and how these should be managed? What factors influence international demand for copper, now and going forward, say, 10 to 15 years. What is the expected mine life, in years?
Answer 1
The prices of copper have seen an upward trajectory from the period 1990 to date, the price has increased by 200% over the period. The graphical presentation of the price change over the period has been presented as under:
Based on above graph, it may be inferred that the price of copper has been very volatile in the global market and has seen a rapid rise in the period 1990 to 2000 and then fell. (africanminingmarket.com 2021) Further, there has been recent recovery in the prices of copper post 2020. (macrotrends.net 2022)
The prices of gold have been very volatile for the period 1990 to 2020. The prices have seen a drastic fall for the period 1990 to 2000 and post that the price of gold has seen a very drastic recovery from $ 423 to $ 2000. The rise has been phenomenal and the prices are expected to rise further in the wake of global tensions.
(Macrotrends LLC 2022)
The prices of silver have followed trend similar to gold and copper and the movement has been very volatile over the period. The prices of silver fell from 1990 to 1995 and then recovered drastically but the prices of silver have not yet breached the highest once tested in 1979. The graphical presentation of the price is as under:
Oyu Tologi mine is the largest copper mine in the World with annual capacity of 0.45 million Tonnes. The cost of the project has been increasing which is making extraction of commodities from the mine even costlier. Thus, the statement of low-cost producer is incorrect.
The project is financially viable for Rio Tinto as the company has invested $ 2.7 Billion for the project which shall ensure higher group production mix and shall ensure a cleaner at Oyu Tologi. The valuation Oyu Tologi at the acquisition rate has been determined at 11.8 Billion $ while the valuation based on cash flow has been determined at 15.6 Billion $ wherein the price of copper for the purpose of valuation has been considered at $ 3.75/lb which means that Rio is paying $ 3.10/lb. (afr.com 2022) However, the above valuation does not account for three major risk which may exist encompass technical development risk, finance risk and long term sovereignty risk.
The mine suffers from technological risk as new method may make gold/copper excavation easy which shall cause the price of gold and copper to fall and shall result in lower cash flow and may make project unviable. This risk can be managed through higher efficiency and optimisation. The price of copper is expected to rise in the future based on current market trend which is showing upward valuation and other uses found for the copper over the period of time. Also, the expected life of the mine is 40 years.
Question 2
Rio Tinto is one of the biggest mining companies in the world, where do they rank in terms of market capitalization, profits, free cash flow and holding period returns over the last three years – the year-end financial results have just been released. The dividend was a whopper, why? How important is Oyu Tolgoi to Rio Tinto in terms of Rio’s portfolio of cash flow producing properties?
Oyu Tologi has high reserve of copper and gold and it is the largest plant in the world which gives it the highest market capitalisation globally in terms of resources embedded in the facility. Further, the cash flow of the project has been positive. Rio Tinto is the biggest mining company in the world in terms of profitability, second in terms of market capitalisation and third in terms of rank as per data available in Statista. The company is engaged in mining and distribution of aluminium, iron ore, diamond, copper, gold etc. The holding period return for three years for the company stood at (79.86-52.02)/52.02= 53.51%. The said return is in the form of capital appreciation. Further, dividend return for the company over the period stood at 7.87/52.02= 15.13%. Thus, the return is very high over the period of three years.
In the recent period the dividend was whooper on account of rise in the price of commodity namely the iron ore. Also, during the period there was very high demand from the main customer of the company i.e., China. The annual profit of the company has been highest during the period which has prompted such action on the part of the company.
Oyu Tolgoi is a rich reserve of Copper and Gold and shall help the company to set up its dominance in this commodity too. The said action is expected to result in higher cash flow on account of rise in price of commodities globally. Thus, Oyu Tologi shall contribute significantly to the cash flow of the company.
In the broadest terms, who are the stakeholders in the Oyu Tolgoi project? Discuss the power, urgency, and legitimacy of the various stakeholders, including the relationship between Turquoise Hill and Rio Tinto (and Chinalco) – what was the value-added brought by each to the project? Also, please comment on the relationship between the project and the indigenous peoples of Mongolia. Why is Rio Tinto now (March 14, 2022) bidding $2.7 billion for the remainder of Turquoise Hill that it does not already own?
Answer 2
In the broadest terms there are three major stakeholders of the Oyu Tolgoi project which is Government of Mongolia i.e., holding 34% stake in the project, the second investor is Turquoise Hill Resources which owns the balance 66%. Further, Rio Tinto indirectly holds 33% of the stake in the project through acquiring major stake in the turquoise project.
The Government has beneficial interest in the project and does not meddle in the day-to-day affairs of the project. They may be categorised a passive investor. Further, the Turquoise Hill Resource is engaged in active management of the project along with day-to-day operations and Rio Tinto indirectly controls the entire project through majority stake. Thus, major value in the project is added by Rio Tinto and its subsidiary company i.e., Turquoise Hill. The company is currently bidding for turquoise hill so that the remaining stake in the project can be acquired by Rio Tinto and it is expected that company shall manage the entire project and holds 66% stake in the profits of the project. Further, synergy is expected from such stake acquisition as company has deep presence in the global market and such rich acquisition shall further help the company to establish its prominence. Thus, Rio Tinto is aiming to acquire the copper rich reserve of Oyu Tolgoi.
What is the conflict between mining in Mongolia and the environmentalists who are trying to save the Snow Leopards resident in the region? How is Rio Tinto doing in terms of it ESG score, in all countries and compared to other corporations?
There is an increasing conflict between the environmentalist and the company in Mongolia on account of snow Leopards in the region as these Leopard are losing their natural habitat on account of the current mining activities. Further, such mining is deeply impacting the natural flora and fauna of the region. The country of Mongolia is the home to second largest population of snow leopards in the world and the snow leopards are already characterised in the endangered species category and the current mining activity is deeply impacting the survival of these animals. The environmentalist in the region is taking active interest to protect these species as they may soon become extinct if not preserved. There are only 6400 leopards available in the wild today globally and humans pose a serious threat to the survival of these category of animals. Increase in development of roads, railways and other infrastructure in the region for supporting the mining industry is causing a serious threat to the industry. The mining roads pass through the natural habitat of this animals and cause widespread destruction. (worldbank.org 2014)
Question 3
The ESG score of Rio Tinto stands at 32.1 and ranks 31 out of 168 companies in the industry. Thus, company has been very conscious towards the environment and the society. The company has been performing well while performing its duties towards the society and the environment. The rank of 31 is fair and the company may be considered as multi performing company. The score of 31.2 falls under high-risk category while major metal companies fall under severe categories. In the global universe the company ranks very poorly i.e., 10108 out of 14774 companies which symbolise poor ESG performance of the company and thus the Snow Leopards are in threat. (sustainalytics.com 2021)
Discuss the role of the Mongolian government in the Oyu Tolgoi project – what are their objectives and how do they go about achieving them – including making life miserable for Rio Tinto. Recently, Rio Tinto and the Mongolian government agreed to get along – what is the essence of the deal?
Government of Mongolia holds 34% in the private partnership model company. The government has significant influence in the company while Rio Tinto through its subsidiary exercises control over the project. (sciencedirect.com 2020) Though, the Government of Mongolia is a passive investor which aims to benefit from the profit of the project, it is indirectly causing major issue in the smooth operations of the company. The OT project has contributed for eight out of every ten Tugriks in Mongolia. Further, the government of Mongolia has collected more than 2.7 billion Dollars as tax, fees and other payments from the OT. The government also has an objective to create employment from this project and the project currently hires more than 13000 Mongolians and OT has spent 10.7 billion $ in the country and out of the said expenditure 3.3 billion has been paid to the Mongolian suppliers. Further, OT has spent huge amount on infrastructure and development of the country. Thus, the project aims to promote the development of the country and attract FDI. (riotinto.com 2021).
Current State of Operations at Oyu Tolgoi
The issue of Rio Tinto with the Mongolian government for the project was in relation of significant capital expenditure which shall be incurred in relation to the expansion of the project. The amount was estimated at $ 6.925 Billion and the issue has recently been settled when the Turquoise Hill agreed to waive the debt amounting to $ 2.4 Billion from the government. There are range of terms and condition which have been agreed like receipt from sales, debt repayment terms etc.
Answer 3
What is the current state of operations at Oyu Tolgoi? What is the Hold-up Problem?
Current State of Operations at Oyu Tolgoi
Oyu Tolgoi is known for its copper and gold deposits in the entire world and is situated in the South Gobi region of Mongolia. It is the safest, modernised and sustainable operations of the world. The underground development of Oyu Tolgoi consolidates our position as a largest producer of copper, material which is very much important for decarbonisation and electrification. When the underground operation will be in full swing than it will be the world fourth largest copper wine.
In year 2011, Oyu Tolgoi started its open pit mining and the copper concentrator, which is the biggest industrial complex which was built on Mongolia, started manufacturing mined ore into copper concentrator in year 2013.Teh current type of infrastructure will allow the mine to operate for more than decades in near future.
In year 2022 at beginning of month the board of Oyu Tolgoi approved the start of its operations. This undertaken step unlocked the most important part of the mine, with carrying out the production with sustainable type of production commence in the first half of year 2023.It is government owned of Mongolia which ultimately has ownership of 34 in percentage. The other turquoise hill resources also own a percentage value in 66%. The ownership of Rio Tinto is 50.80% of Turquoise Hill Resources and the operation of same is managed on owner’s behalf. (riotinto.com 2021)
At the time of peak, Oyu Tologi is expected to manufacture 500,000 yearly tonnes of copper which is equivalent to what is required to build one thousand and five hundred and eighty wind turbines per day. It is expected to produce sixteen thousand and four hundred electric battery vehicles per day. . (ARBOGAST∗ 2009)
Hold up problem is a situation where the two involved parties are in a position to work more efficiently and properly by cooperating but the same is refrain from doing such activity due to the concerns which they give or argument which they state to other party increases the bargaining power and ultimately harms own profit involved. (ARBOGAST∗ 2009)
Conclusion
Based on above discussion, it may be inferred that the project is surrounded with lot of disputes and issues. However, the project is of economic significance to the people of Mongolia and shall help them to live a higher standard of living. The project is a rich source of cash to the government and helps in employment generation in the country. The project is value additive and is cash rich and shall become more viable with opening of economies, increased demand of copper and rising prices.
Number 1- Price of Copper
Number 2- Price of Gold
Number 3- Price of Silver
Number 4- Holding Period Return
|
Sl NO |
Particular |
Amount |
|
1 |
Opening Price |
52.02 |
|
2 |
Closing Price |
79.86 |
|
3 |
Dividend |
7.87 |
|
4 |
Holding Return |
68.65% |
References
afr.com. 2022. Analysts weigh into Rio Tinto’s Oyu Tolgoi bid. 15 MArch. Accessed March 31, 2022.
https://www.afr.com/street-talk/analysts-weigh-into-rio-tinto-s-oyu-tolgoi-bid-20220315-p5a4pj.
africanminingmarket.com. 2021. Global amrket to see anotehr volatility. 10 August. Accessed April 7, 2022.
ARBOGAST∗,
Logy* We Aren’t Endorsed By This School
Stephen V. 2009. “Project Financing & Political Risk Mitigation:The Singular Case Of The Chad-Cameroon Pipeline.” Texas Journal Of Oil, Gas, And Energy Law
269-298. Accessed March 32, 2022.
https://www.bauer.uh.edu/arbogast/documents/Project_Financing_and_Political_Risk_Mitigation.pdf.
globaledge.msu.edu. 2020. Mongolia: Risk Assessment. Accessed March 31, 2022.
https://globaledge.msu.edu/countries/mongolia/risk.
Macrotrends LLC . 2022. Gold Prices – 100 Year Historical Chart. Accessed MArch 31, 2022.
https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart.
macrotrends.net. 2022. Copper Prices – 45 Year Historical Chart. Accessed March 31, 2022.
https://www.macrotrends.net/1476/copper-prices-historical-chart-data.
mea.gov.in. 2022. Ministry Of External Affairs. Accessed April 7, 2022. https://mea.gov.in/index.htm.
riotinto.com. 2021. Myths and facts about Rio Tinto in Mongolia. Accessed March 31, 2022.
https://www.riotinto.com/en/operations/mongolia/oyu-tolgoi/mythsandfacts.
—. 2021. Oyu Tolgoi. Accessed March 31, 2022. https://www.riotinto.com/en/operations/mongolia/oyu-tolgoi.
sciencedirect.com. 2020. Resource politics in Mongolia: Large- and small-scale mines in collision. Accessed April 7, 2022. https://www.sciencedirect.com/science/article/abs/pii/S0301420721001513?msclkid=6327f9fcb69811eca1d93f53cd60a1bd.
sidmartinbio.org. 2019. What are major landforms in Mongolia? 30 April. Accessed April 7, 2022.
https://www.sidmartinbio.org/what-are-major-landforms-in-mongolia/?msclkid=27d13ea8b69711ec8c3591d281b50d65.
store.eiu.com. 2022. Mongolia Country Risk Service. Accessed March 31, 2022.
https://store.eiu.com/product/country-risk-service/mongolia.
sustainalytics.com. 2021. Company ESG Risk Ratings. Accessed March 31, 2022. https://www.sustainalytics.com/esg-rating/rio-tinto-ltd/1008740749.
worldbank.org. 2014. Saving the “Mountain Ghosts” in Mongolia. 10 Januray. Accessed MArch 31, 2022.
https://www.worldbank.org/en/news/feature/2014/01/10/saving-mountain-ghosts-in-mongolia.
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