Mongolia plans $1.2 billion bond issuance

Mongolia's frontier economy and mineral wealth attracts international interest amid discussions to tap the international capital markets this year.

Mongolia plans to raise up to $1.2 billion in the international bond markets this year, as part of an attempt by Asia's latest frontier economy to attract foreign investment. The IMF predicts that the country's economy could treble in size by 2020, but estimates suggest that, in order for it to do so, it will need investments of between $31 billion and $42 billion during this decade.

Batbayar Balgan, director general at the Financial & Economic Policy Department in Mongolia's finance ministry, said discussions are underway for the country to issue its maiden US dollar bond. Mongolia has already been assigned ratings by the three major credit agencies. Standard & Poor's has given it a BB- rating (the same rating as it has assigned to Indonesia) and Moody's has given it the equivalent Ba3. Fitch is more cautious, having assigned a single-B rating.

Batbayar was speaking at the Mongolia Capital Raising Conference in Ulaanbatar on Wednesday, which was organised by Frontier Securities, a local brokerage. His optimism was shared by co-panellists Enkhbayar Namjildor, economic policy advisor to the prime minister, and by Chuluunbat  Ochirbat, a member of parliament and former central bank official.

However, Frontier Securities believes a smaller initial deal size is more feasible at this stage. A $500 million transaction with a tenor of up to seven years could pay a coupon of 6.5% to 8%. Despite impressive ratings from at least two of the agencies, the country has much to do to convince investors of its ability to service the interest payments on a large bond issue.

Much hope rests on Mongolia's mining sector. The Oyu Tolgoi Investment Agreement, which was signed in October 2009 between Canada-based Ivanhoe Mines and the government and became effective in March, should help attract more private firms to partner with the state to develop its vast gold and copper resources. Ivanhoe Mines, which together with its strategic partner Rio Tinto of Australia holds 66% of the Oyu Tolgoi project (the government owns the remaining 34%), estimates that the Oyu Tolgoi has copper reserves of 40.7 million pounds and gold reserves of 21 million ounces. Production should start in 2013, but will require about $4.6 billion of pre-production capital. Eventually, the mining complex could become one of the world's top three copper-gold producers, said Frontier Securities.

Coal resources also figure high in Mongolia's future plans. The wholly government-owned Tavan Tolgoi mine has reserves of 6.4 billion tonnes, and a decision on the winning bidder for the contract work is expected later this month. Key to making the mine commercially viable will be building the infrastructure -- notably a railway link -- that can send the coal to neighbouring China.

On the face of it, Mongolia's investment requirements are staggering. According to Randolph Koppa, president of Trade & Development Bank of Mongolia, which is one of the country's leading lenders, all sectors of the economy require considerable amounts of cash. In a presentation at the same conference, Koppa estimated that the mining sector needs $9 billion to $10 billion; infrastructure $5 billion to $7 billion; urban development $5 billion to $7 billion; agriculture $1 billion to $2 billion; environmental improvements $1 billion to $2 billion; social spending $2 billion to $3 billion; and other industrial sectors a further $8 billion to $11 billion. 

However, Koppa was confident that the total $31 billion to $42 billion could be raised from several sources, including sovereign bond issues, which could amount to $5 billion during the next 10 years. Other funding sources he highlighted were foreign direct investment, international banks and corporations, international financial institutions such as the World Bank, and -- perhaps less convincing at this stage -- domestic sources.

Interest in Mongolia among miners, bankers and private equity funds is high, judging from the range of attendees at the two-day conference. But few people question that Mongolia is still at an early stage of industrial and mining development. Legislative stability is needed to give confidence to providers of capital and human resources. And a commitment by the government to improving infrastructure is paramount.

¬ Haymarket Media Limited. All rights reserved.