Mongolian bonds soar on Oyu Tolgoi deal

By Daniel Stanton

SINGAPORE, May 19 (IFR) - Mongolia's sovereign bonds jumped three points this morning after the government, Rio Tinto and Turquoise Hill Resources (Toronto: IVN.TO - news) signed an agreement for the next stage of development of the Oyu Tolgoi copper and gold mining project.

The sovereign's 2022 bonds leapt 3.125 points to 92.375 in early trade, according to Tradeweb prices, while the US$500m 2020 9.375% government-guaranteed bonds issued last week by Trade and Development Bank of Mongolia were at 105.1/106.1, up nearly three points today and more than five points since pricing on May 12.

The agreement over Oyu Tolgoi will boost government finances, and eases fears around Mongolia's hostility to foreign investment. Around US$6bn has been invested in the Oyu Tolgoi project to date, and Mongolia has received US$1.3bn in taxes, fees and other payments. Around 95% of the workforce is Mongolian.

"Unlocking Oyu Tolgoi's underground mine will have a significant impact on the Mongolian economy, which will benefit Mongolian citizens for generations to come," said Chimediin Saikhanbileg, Prime Minister of Mongolia. "Our joint agreement clearly positions Mongolia as an attractive country for investment and underscores the fact that Mongolia is open for business."

The rally raises further questions about the timing of TDBM's issue. The privately owned bank marketed its bonds at a generous spread over the Mongolian sovereign, suggesting that it could have slashed its interest costs by waiting just a week longer until uncertainty over the mining project was resolved. TDBM priced the 9.375% bond at 280bp over Mongolia's sovereign curve, and the bonds rallied three points on the first day of trading.

Mongolia's State Bank (Other OTC: SBAZ - news) is also said to be considering a government-guaranteed offshore bond, and could now expect to pay a lower yield.

Next (Other OTC: NXGPF - news) , foreign investors will want to see a similar agreement on the US$4bn Tavan Tolgoi coal project, in which Mongolian Mining Corporation, China's Shenhua Energy and Japan's Sumitomo Corporation plan to invest.

Fitch rates Mongolia B+ with a negative outlook, noting that public debt stood at 60% of GDP at the end of 2014, and that the country's external liquidity reserves had fallen to US$1.7bn in March 2015 from US$2.3bn in December 2014. However, in a research note published last night, it said a resolution on the Oyu Tolgoi mining project could have "potentially transformative consequences". (Reporting by Daniel Stanton, editing by Steve Garton)