Financial "Mongol-Philia": An Investment Debutante Emerges

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000091 SIPDIS SENSITIVE SIPDIS STATE PASS USTR, USTDA, OPIC, AND EXIMBANK STATE FOR EAP/CM AND EB/IFD/OIA USAID FOR ANE FOR D. WINSTON MANILA AND LONDON FOR ADB, EBRD USEDS TREASURY FOR USEDS TO IMF, WORLD BANK E.O. 12958: N/A TAGS: EINV PREL ETRD EMIN ENRG MG SUBJECT: Financial "Mongol-Philia": An Investment Debutante Emerges on the International Stage? REF: Ulaanbaatar 0080 Sensitive But Unclassified - Not for Internet Distribution. Contains proprietary and confidential business information ¶1. (SBU) SUMMARY AND COMMENT: Mongolia has recently become a minor investment "phenom" among the Pacific Rim investment community. One local bank has gone from being unable to get long-term debt-financing to having access to more than it can use, for example. The odd handful of Mongolian IPO's and bond issues are now hot prospects for JP Morgan, Citibank, and Dutch ING. Experienced and reliable Mongol hands attribute this new found passion to the fact that mining giant Rio Tinto made a US$300 million buy-in investment into the Mongolia mining sector, a move interpreted as a financial housekeeping seal of approval for this developing nation. However, experts express concern that this financial "Mongol-philia" may be leading normally prudent investors, who apparently hope to be early beneficiaries, to imprudently ignore and forgo standard due diligence procedures. If this is so, and there are many reasons to believes it is, then passion for Mongolia may dissipate as quickly as it rose in the face of a financial reverse or two, and investors, even though they may have only themselves to blame, will hold Mongolia at fault and withhold much needed long-term investment funds. END SUMMARY AND COMMENT. $$Ka Ching$$ -------------- ¶2. (SBU) An American banker of a Japanese-owned and U.S.-operated Khan Bank, told CommOff of amazing, unprecedented offers for cash from extremely reliable funding sources. A year ago the bank could not get long-term debt dollars, Euros, or yen at interest rates it could afford. But in late December and early January, the bank found itself the recipient of tremendous attention. Citibank's Hong Kong office contacted the banker and asked him if he'd be amendable to taking on US$25 million in debt at almost acceptable rates. JP Morgan offered much the same deal. Several unnamed Japanese financial institutions made similar offers. ¶3. (SBU) The World Bank's International Finance Corporation (IFC) and the European Bank of Reconstruction and Develop (EBRD) were also willing to pony up long-term financing, too . The banker stated that collectively the offers totaled up to over US$135 million. Will the bank bite? The banker says no, because the interest rates are still a bit high, but he believes these initial offers constitute a starting point from which the bank might be able to negotiate a good deal. ¶4. (SBU) Other signs point to Mongolia having become an increasingly acceptable destination for foreign investment, albeit on a relatively small scale compared to other venues. Both JP Morgan and Citibank have told EmbOffs that they could easily loan the GOM US$500 million, assuming likely projects exist. Merrill-Lynch's Hong Kong Office is busy mobilizing several hundred million dollars for a proposed Ulaanbaatar casino-resort project aimed at the North China market. JP Morgan's Hong Kong IPO specialists have recently joined with a controversial Mongolian miner to float a gold issue on the Hang Seng. Finally, banking and institutional investors from South East Asia snapped up some US$75 million in high-yield bonds peddled by the Trade and Development Bank of Mongolia and Dutch banking giant ING. ¶5. (SBU) Although small in relative terms, the banker notes that the new money has warped Mongolia into a true investment destination for Western dollars. The banker attributes the change to the coming of mining giant Rio Tinto to Mongolia. According to the banker, few knew about Mongolia and what little was known was not encouraging: ULAANBAATA 00000091 002 OF 002 Mongolia was an emerging post-communist state with more sheep than finance. But Rio invested some US$300 million in a major but controversial South Gobi copper-gold project (ostensibly when cash-strapped Canadian mining firm Ivanhoe was unable to conclude a stability agreement with the Government of Mongolia (GOM)),with plans to invest an additional US$900 million. As the banker noted, real money from the world's second largest mining company-in spite of a controversial windfall profits tax and a problematic new mining law--brands Mongolia, on its face, as a viable investment destination. (Note: Rio's continued investment is conditional on striking a commercially viable deal with the GOM. Negotiations are currently hung up over Mongolia's wind fall profits tax on gold and copper and GOM demands for an uncompensated equity stake of some 34% in the project.) ¶6. (SBU) Other observers of the Mongolian scene concur with the banker's assessment. EBRD's country director noted that Rio's real dollars are big housekeeping seal of approval for Mongolia. An Australian mining consultant noted that Rio's announcement stabilized share values on Mongolian mining firms in bourses specializing in mining ventures, which had been forced down by shareholder worries about the windfall profits tax and the new mining law, as well as recent mining license shenanigans (reftel) and the GOM's inability to conclude a stability or investment agreement despite three year's of negotiations with Ivanhoe. Love's Dark Side -------------- ¶7. (SBU) However, the banker and others worry that this financial "Mongol-philia," modest as it is in relative terms, may be leading some investors to throw caution to the wind. We and our local experts note that normally shrewd investors seem to be shirking or short-cutting due diligence. While the banker was tickled at the availability of funds, he noted that all the institutions seemed more than willing to lend without much scrutiny of the bank. JP Morgan's IPO for the Mongolian mining firm Mongol Gazar raised eyebrows here as its client is reportedly notorious in Mongolia for duping its partners on deals. One American firm had to spend several years in Mongolia's courts to recover losses from a fraudulent leasing deal gone bad. Yet JP Morgan's representatives did not consult with post or apparently others about the problematic factual record of their new client before, during, or after the deal was done. ¶8. (SBU) Rio Tinto told CommOff that Mongol Gazar had stung Rio Tinto, but Morgan did not talk with Rio. The bank has had some sour experiences with Mongol Gazar as well, and the banker is a touchstone for investors coming to Mongolia; and yet Morgan, which has visited him on other occasions, did not ask him about this deal. ¶9. (SBU) The banker and Rio expressed concern that these investors seem willing to let their Mongolian partners slide on some basic prudential provisions, consequently exposing the foreign investors to financial reverses. Our interlocutors are worried that this new passion for potentially volatile and brittle Mongolia could easily dissipate in the face of a perceived stock fraud or bond default, once again relegating Mongolia to the financial wilderness - or at least until this recent experience fades from memory. The banker and others argue that this time, however, Mongolia will have a track record for failure, for which Mongolia will no doubt be blamed, even though her failure was abetted by the arguably shoddy due diligence of the foreign investors. Minton