Mongolia Debt Costs Rise as Government Battles Rio Tinto

The yield on Mongolia’s global sovereign notes rose to the highest since the debt was sold in November as the government battles for control over a mining contract with Rio Tinto Group, the nation’s biggest investor.

The yield on the 5.125 percent dollar-denominated notes due 2022 climbed 20 basis points this month to 5.85 percent, data compiled by Bloomberg show. The rate has jumped 41 basis points, or 0.41 percentage point, in 2013.

President Tsakhia Elbegdorj last week called for Mongolia to have greater control of the Rio-operated Oyu Tolgoi copper and gold project, which will account for almost a third of the nation’s economy once in full production. Rio Tinto has rebuffed at least two attempts in the past 18 months by Mongolia to redraw the investment agreement, which gives the world’s second-largest miner a 64 percent stake in the mine, with the government holding the rest. The North Asian nation is due to hold presidential elections in June.

“The bonds are reflecting investors’ shrinking confidence in the direction of the current administration,” Travis Hamilton, founder of Singapore-based Khan Investment Management Ltd., which focuses on Mongolian assets, said in a telephone interview. “There appears to be no real cohesion, the leadership is questionable and there’s a huge amount of political uncertainty” ahead of this year’s election, he said.

Dollar Bonds

Mongolia raised about $1.5 billion from the November debt sale that was managed by Bank of America Corp., Deutsche Bank AG, HSBC Holdings Plc and JPMorgan Chase & Co. The notes are rated BB- by Standard & Poor’s, or three steps below investment grade. The yield on state-controlled Development Bank of Mongolia LLC’s 5.75 percent bonds due 2017 increased 26 basis points this month to 5.13 percent.

Since the bond sales, Mongolia has introduced a draft mining law that would more strictly regulate the industry and increase pressure on Rio Tinto for more domestic control on the Oyu Tolgoi mine. In addition, the biggest state-owned coal miner Erdenes Tavan Tolgoi has let go of two foreign top executives and stopped contracted deliveries to China, citing a lack of funds.

The value of the bonds has dropped by $90 million since the issuance, which could push up borrowing costs for Mongolia in the future, said Dale Choi, an Ulan Bator-based associate with private equity investment firm Origo Partners MGL.

“It’s time for Mongolia to have Mongolian representation on the management team,” President Elbegdorj said at a parliament session on Feb. 1, according to his website. “It’s important that the government takes the Oyu Tolgoi matter into its own hands.”

‘Rude Surprise’

Oyu Tolgoi will hold a shareholder meeting in Mongolia today, where it expects to address concerns held by the government. Rio is considering a temporary halt to work to protest government demands for a greater share of profit, two people familiar with the plans said last week.

“It’s going to be extremely important to see the outcome of today’s meeting with Rio Tinto on Oyu Tolgoi,” said Khan Investment’s Hamilton, who doesn’t own Mongolia’s 2022 debt. Favorable pricing at its last bond sale “gave the government the impression that they could walk on water. But I think they’ll get a rude surprise the next time they go to the market unless they get their act together.”