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The Unexpected Mongolian Dilemma

February 4, 2008

We are not the best friend you have got …

We are the only friend you have got!

New forces have entered the picture. Last week, China jumped into the Rio Tinto saga. Chinalco and Alcoa, both at 12 percent stake in Rio Tinto. Aluminum Corp. of China, Tinto put up $14.5 billion for a minority stake of Rio. China is obviously interested in the world’s mineral resources and it is forcefully entering global business.

The following issues should now be considered. The purchase by Chinalco has been approved by the Chinese authorities at the highest level. Furthermore, the combination of various banks in China could regiment $120 billion necessary to consider buying the control in Rio.

Up until this event, Mongolia negotiated with the Ivanhoe group which is 42 percent owned by Rio. The negotiating team was lead by the representatives of Rio. A smaller third party, Entree Gold, is 16.5 percent owned by Rio, 15.5 by Ivanhoe, or approximately 20 percent owned and controlled by Rio.

The negotiations are likely to terminate by the end of June. The Prime Minister Sanj Bayar stated that he wants to conclude an agreement with foreign investors by the parliamentary elections in mid 2008.

Now comes the unwelcome Chinese connections. China is the most commodity hungry country, China has money, and China does not necessarily adopt the interest and methods of the board or Rio Tinto when it comes to Mongolian minerals. Among others, China is pro-gold. It has recently established the Shanghai Gold Market. It has very little gold, but it is acquiring gold at government level, banking level, and retail trading level. Five years from now, they may be the second largest gold players and reserve asset owners in the world.

China’s appetite for copper is insatiable.

The liquid resources for the Far Eastern and Middle Eastern nations maybe $2,000 billion of which they invested in western financial institutions about $85 billion.

It should be mentioned that the so-called financial agreement between Mongolia and the Ivanhoe Group is only about $3 billion. The rest is coming from future mining. If one assumes an eventually $2,000 for gold, the 32 million ounce suspected in Mongolia represents $64 billion, a negligible sum to the free floating liquid assets of $2,000 billion in the hands of the far eastern and middle eastern countries.

The logical question comes up:

Who calls up whom? Who pays whom?

Keeping the value of gold both at the current $1,000 price and the eventual $2,000 price, I have brought my idea “gold-indexed bonds” to pertinent parties.

If a powerful investment banker would monetize Mongolia’s gold reserves and raise against future production, $1 - 2 billion, Mongolia could start its development program immediately, and the potential $64 billion gold reserves would be reflected in the balance sheet and market price of Rio Tinto.

Mongolia’s other assets could also be monetized as well.

The re-evaluation of Mongolia’s gold would strengthen the hands of the Ivanhoe Group and enable Mongolia to sign an early financial agreement with its current western partners instead of permitting itself to be a soccer ball in Wimbledon.

Ivanhoe and Rio Tinto must maximize its resources and its potential resources in Mongolia.

Correspondingly, Mongolia may consider speeding up its current negotiations as it is possible that the Ivanhoe Group is not the best friend Mongolia has, but the only friend it has.

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