Mongolia to Sell Up to $1 Billion in Samurai Bonds, Premier Says

Mongolia plans to sell as much as $1 billion worth of Samurai bonds this year and offer foreign investors a new way into its largest coal project as Prime Minister Norovyn Altankhuyag seeks to revive growth.

“This year we’re hoping to launch a yen-denominated bond issue, which will be equivalent to as much as $1 billion,” the prime minister said in an interview in Tokyo, citing expanding relations with Japan for the fundraising plan.

Mongolia’s economic growth slowed to 11.3 percent in the first six months from a world-beating 17.5 percent in 2011 on slowing Chinese demand for its coal and a dispute with the nation’s top foreign investor, Rio Tinto Group. Stricter laws on foreign investment have also damped overseas interest even as the $10 billion economy looks abroad for help to build the infrastructure needed to develop its mining riches.

Foreign direct investments shrank by $1 billion during the first half of the year, a 42 percent drop. After a decade-long commodity boom Mongolia’s sovereign rating is in danger of a downgrade as state spending has been outstripping income, the nation’s central bank said last month.

The World Bank in April cut its forecast for Mongolia’s 2013 economic growth to 13 percent from 16 percent, citing declines in exports and foreign investment. The local currency, the tugrik, has weakened 18.3 percent against the U.S. dollar this year.


Better Climate

“These issues will not continue for a long time,” the prime minister said Sept. 14 at the end of a four-day visit to Japan. The government plans new laws to improve the investing climate and also ways to boost exports, he said.

Mongolia’s Parliament will consider next week a draft bill on investment that should bring more transparency and stability to the process, particularly for overseas investors, he said, without giving further details.

The country will also offer stock in its biggest coal project to foreign investors in power, rail and water projects around the Tavan Tolgoi basin, he said.

Companies that build the infrastructure at Tavan Tolgoi, which has reserves of more than 6.4 billion metric tons, will later have the chance to swap their investments for equity in the mine, Altankhuyag said. Investors may also choose to get paid in coal, he said.


Russia & China

The central part of the coal basin is being developed by state-owned Erdenes Tavan Tolgoi LLC, which sells all of its coal to the Aluminum Corp. of China Ltd, also known as Chalco. The Mongolian miner is in talks with China’s Shenhua Group and Peabody Energy Corp. (BTU) of the U.S. on “strategic partnerships,” Erdenes TT’s Chief Executive Yaichil Batsuuri said Sept. 3.

Samsung C&T Corp. (000830), South Korea’s second-biggest construction company and also a trader of metals and chemicals, said in May it won a contract to build a 217 kilometer (135 mile) rail line from Tavan Tolgoi to the Chinese border. Other foreign investors will take part in building power plants around Tavan Tolgoi, the prime minister said.

The government is still considering whether the rail from Tavan Tolgoi to China should be the wider gauge track used in Russia or the narrower gauge of China, which buys 90 percent of its commodity exports, Altankhuyag said. A Chinese gauge is one of the “many options” Mongolia has to help it boost exports, he said.

Coal exports to China plunged to $542.4 million in the first six month of the year from $1 billion a year earlier as total first-half exports fell 10 percent, Mongolian state data show. Mongolian Mining Corp. (975), which accounts for 42 percent of Mongolia’s coal exports to China, said last month that average prices for its washed coal used in steelmaking fell 29 percent in the first half, versus the same period of 2012.


Capital Markets

As growth slows, Mongolia is turning to capital markets to raise funds. The country will consider debt sales either in yuan or yen to finance power plants and railways, central bank Governor Naidansuren Zoljargal said April 19.

The government sold its first international bonds in November with a $1.5 billion issue in the U.S. currency. Yields on the 10-year government debt known as Chinggis bonds have risen 273 basis points this year to 8.171 percent as of Sept 13, according to data compiled by Bloomberg.

After this week’s visit to Japan, whose premier Shinzo Abe was among the first leaders to visit Mongolia since Altankhuyag took office in 2012, the nation landlocked between China and Russia is turning to the yen for fundraising.

The Japan Bank for International Cooperation in June gave Mongolia its first export credit line to the equivalent of 8 billion yen ($80 million), according to the bank’s website.


Samurai Debt

State-owned Development Bank of Mongolia LLC will be the “main issuer” of yen-denominated debt, Altankhuyag said. The sale is not tied to any conditions that oblige Mongolia to buy Japanese equipment, he said.

The Development Bank of Mongolia sold $580 million of five-year debt denominated in the U.S. currency in March last year in its first public bond sale. The yield on the bonds rose to 8.99 percent as of Sept. 13 from a low of 3.833 percent on Oct. 23 last year, according to data compiled by Bloomberg.

Separately, the prime minister denied that there was a rift between the government and Rio Tinto, Mongolia’s biggest investor and the world’s second-largest mining company. The two sides jointly own the Oyu Tolgoi gold and copper mine.

“There are no issues between Rio Tinto and the government that we could not agree on,” he said. “We are continuously saying that we are ready to discuss issues for the further development of this site.”


Rio Tinto

In July, Rio Tinto, the world’s second-biggest mining company, said it will delay work on a $5.1 billion underground expansion of Oyu Tolgoi pending financing approval by Mongolia’s parliament. The mine, which has so far cost $6.6 billion to build, may expand Mongolia’s economy by 30 percent when running at full capacity.

Since the first commercial copper shipments started in July progress on developing Oyu Tolgoi has stalled. Mongolia, which controls 34 percent, claims cost overruns are delaying future dividends and wants the mine’s underground extension funded with revenue from sales. Rio manages the project via its 51 percent stake in Turquoise Hill Resources Ltd. (TRQ)

“Investment in the underground is a separate issue,” and the need to move forward with this second phase of the project must be weighed against the currently weak global economy, Altankhuyag said. “We support project financing” for the development of the underground section, he said.

To contact the reporter on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net

To contact the editors responsible for this story: Peter Langan at plangan@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net

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