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.

$$Ka Ching$$
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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:

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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
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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