Mongolian Economy magazine, March 2017 (126)
Mongolian Mining Corporation (MMC) has successfully restructured its investment credit raised on international markets due to the sharp fall in coal prices. It was a needed experience and a new thing to learn for others. In addition, the working group of the Ministry of Mining and Heavy Industry that revived Tavan Tolgoi negotiations invited the consortium that participated in the previous negotiations. We invited G.Battsengel, the CEO of Energy Resources LLC, a company that represents the Mongolian side of the consortium, to our magazine's Premium Interview section.
- Your company has successfully updated its credit structure. How much in loans did the company take out from foreign banks in addition to the USD 600 million bond?
- It was one of the measures taken due to conditions in the coal market. Our company has attracted funds from international banks and international capital markets in order to finance the construction carried out in Ukhaa Khudag. We have done many things that had not been taken done in Mongolia. We were the first company in Mongolia to take USD 150 million loan from Industrial and Commercial Bank of China and BNP Paribas. Then we issued USD 600 million in bonds on international markets in spring 2012. We used it to finance the construction of a power plant, a water supply system and a coal processing plant with an annual capacity to enrich 15 million tonnes of coal. However, the coal market has declined due to factors unrelated to us. Not just MMC, but coal companies around the world are facing difficulties in supply and demand, as well as the Chinese economic deceleration. Many companies were forced to restructure credit.
- Would you please share your company's experience on restructuring credit with international investors and banks?
- Financial markets are based on trust. Our company has been very frank and open with investors. We had no need to convince investors as we always give detailed financial statements on time and regularly met with them. Investment funds are holding on to the USD 600 million bond. So, the main holders of the bond established a bond holders’ committee. We stepped into negotiations with them at first in accordance with international standards. Many things depend on a company's trustworthiness. There were difficult issues to solve, but the sides openly discussed the issues and had a willingness to resolve the issue, so we reached an agreement relatively quickly and set the general foundation of the agreement last May. We came to the same understanding after carefully looking over the calculations and reviewing the current conditions. Then we discussed how to implement the reforms, and we think you are aware that we issued an official statement that includes the general conditions for reforms on July 9, 2016.
- It was reported at the time that substantial progress has been made on loan interest rates, amount and duration. What was the exact agreement you reached?
- We have payables of USD 750 million, which includes the USD 600 million bond, USD 93 million loan and accrued interest unpaid in 2016. This means that we finalised the negotiations on how to update this loan portfolio and how to change its structure just before the end of last year. The loan period was extended by six years, meaning the bond repayment we had to pay in March of this year has been postponed until October 2022. Secondly, we were able to reduce the amount. The total debt is USD 750 million as previously mentioned, and the bond payment was reduced to USD 395 million and loan payment to USD 30 million, which means that it was reduced to a total of USD 425 million.
- I understand that the interest on the loan is correlated with the coal market, am I correct?
- The loan interest rate has become floating. Previously, it had a fixed interest rate of 8.875 percent, but now the interest will be determined in relation to the price of coal. The company's interest payable will decrease if market conditions get bad. We will not have to pay loan interest with cash if market conditions worsen and coal prices fall back to USD 40-50 per tonne. It includes flexible terms that will provide us with an opportunity to delay payment by adding low-interest penalty in such cases. An opportunity to avoid financial difficulties in any situation and conduct stable operations for six years has been presented.
- What works are there to do now?
-Procedural works are remaining. The old bond will expire in March. At that time, we should make a clear decision and make it official by organising the collected documents on paper. The old loan agreement will become a new loan agreement, and the old bond agreement will also become a new bond agreement. We might not do it in the first quarter, but there is entirely possible to resolve it in the second quarter.
- Is it possible get the Ukhaa Khudag enrichment plant running at full capacity this year?
- We have been trying to conduct operations without any interruptions. Even though production and exports have declined due to conditions in the market, we will get the factory to run at full capacity this year. We are aiming to reap the benefits our investments now, so we will focus on restoring and accelerating activities in 2017.
- Has the government met with your side regarding issues concerning the Tavan Tolgoi agreement since the start of the year?
- The sides have not met yet in this year. We have received written proposals from the working group. The consortium members have to give a response from common ground. Therefore, we are working to foster understanding on both sides. It may not be resolved that easily as there are many issues. If we reach an agreement with the working group, the working group must submit the conditions agreed upon to the government. If the government agrees to it, it will submit the agreement to parliament for approval.
- The Tavan Tolgoi investment agreement was postponed indefinitely, saying that it was not discussed by parliament when the previous government was in power. There is the criticism that the agreement was done in investors' interests. What is your take on this?
- The investor, the consortium in other words, did not want to prevent parliament from discussing the agreement. On the contrary, we are working to get discussions going by parliament in case we reach an agreement. We expect to reach a decision by letting the matter be discussed in parliament. Let's imagine that the government signs the agreement on its own. Then we make the investments and start operations, and then suddenly parliament halts operations saying that the government did not let parliament discuss it. Who will lose in this case? Only the investors will be at a loss. Should we sue the government? How many years would arbitration take? Arbitration is not something we want. It requires a lot of time and money. We do not want to create a controversy with the Mongolian government as we are a Mongolian company. It seems like some people hold the suspicion that we are trying to secretly make a hasty agreement. This is not the case. We want everything to be done openly under official capacity, with the press and media reporting on it. In the end, the investors are bearing the most risk.
- A team led by M.Enkhsaikhan negotiated with the investors when the previous government was in office. I personally think that it was a beneficial deal for our country. What are the chances of getting the same conditions in the current agreement?
- The consortium is working to express its position from the same ground. Naturally, it will reflect proposals from all three sides. It will not go by the wishes of solely Energy Resources LLC. So, it is difficult to answer this question. The most important thing is the conditions and criteria set by the working team and the Mongolian government. The next issue is whether we will be able to agree to those conditions and reflect it in the agreement. The position and criteria must be made clear by the government. A rather large working group is handling the matter. Their thoughts and opinions will be reflected. We will work to give joint responses from the official consortium. In the end, the authorities, not us, will decide whether this project will move forward or not.
- Is it possible to get Tavan Tolgoi moving forward this year? What is your opinion as a person who has sat at the negotiation table?
- It is said that haste makes waste. Many issues will arise during the talks. There are legal issues in addition to commercial conditions. There are other things to consider too, such as the state of relations between countries as it is an international consortium. There are many factors that are out of our hands.
- The Ukhaa Khudag project of Energy Resources is definitely a historical project for Mongolia. What is your company's goal?
- Mining still plays a key role in the Mongolian economy. It is the only sector feeding Mongolia even though it receives much criticism. If a global company cannot be born from Mongolia's private sector, we need to at least aim to establish a major regional company of international standards. Such a company can only come out of the mining sector. Energy Resources LLC had this goal from the beginning.
Major international investors and international corporations such as Rio Tinto, Areva and Centerra Gold will naturally come into Mongolian mining. However, Mongolia's private sector also needs to participate alongside with them. Why can’t a major regional mining company come out of Mongolia? The main goal of the steps we have taken up to today had this in mind. We traded on international stock exchanges, attracted funds from international capital markets and undertook large financing. The investments made in the Ukhaa Khudag project were not less than any other mining projects in the world. It is possible to work sustainably in the future. We expressed our opinions and said that we want to participate in Tavan Tolgoi if the government chooses the option to attract investors to it. Obviously we will follow the decision made by the government. In general, our company is interested in implementing the experience we gained as we understand the coal sector the best, and made the biggest investments in this sector among other Mongolian companies. It is a normal and healthy business interest. We have expressed our interest in being involved with Tavan Tolgoi as we consider it as a pure business project.
- There are rumours that Energy Resources will fall into a difficult situation if the government does not move forward with Tavan Tolgoi. What would you say about this?
- It does not make sense to think that Tavan Tolgoi is the only option and that there is no other way to work. We have many options and things to do. We are considering Tavan Tolgoi because it is a little closer and one of the possible options. We will continue our work by focusing on our projects in Ukhaa Khudag and Baruun Naran. It is clear that we will focus on expanding our business based on the above-mentioned goals.