Revenue from railway transport increases by 15 percent www.montsame.mn

Ulaanbaatar /MONTSAME/. As of first 11 months of this year, 25.6 million tons of freight and duplicated number of 2.7 million passengers were carried by railroad transport. Compared with the same period of the previous year, the carried freight increased by 9.2 percent and number of carried passengers increased by 14.7 percent. Moreover, revenue from railway transport reached MNT 646.3 billion as of first 11 months of 2019 which shows the increase of 15.3 percent.

Copper export amounts to 1.29 tons in 11 months www.zgm.mn

As of November 2019, Mongolia exported a total of 1.29 million tons of copper concentrate at USD 1.67 billion, according to the National Statistical Office (NSO). Moreover, coal exports totaled 34.9 million tons in the first 11 months, which is 83 percent of the 2019 target of 42 million tons. This is a 1.4 percent decrease in terms of a physical quantity and 8.4 percent in monetary value year-on- year. Oyu Tolgoi previously reported that the concentration of copper and gold has decreased from the previous year. Exports of mineral products, textiles and textile articles, natural or cultured stones, precious metals jewelry made up 95.6 percent of total export. On the other hand, 68.5 percent of imports was mineral products, machinery, equipment, electric appliances, transport vehicle, and its spare parts and food products.

Inflation rises 5.2 percent yoy www.zgm.mn

In November 2019, the consumer price index (CPI) at the national level increased by 5.2 percent year-over-year and by 4.6 percent from the end of the previous year. However, CPI dropped by 0.4 percent from the previous month mainly due to decreases in prices for food and non-alcoholic beverages group by 2.2 percent. In the first nine months of 2019, the gross external debt of Mongolia reached USD 29.9 billion, increased by USD 2.0 billion or 7.3 percent compared to the same period of last year. During the period, general government debt reached MNT 22.7 trillion, increased by MNT 1.3 trillion or 5.9 percent yoy. In general government debt, foreign debt was MNT 19.3 trillion or 85.1 percent, domestic debt was MNT 1.4 trillion or 6.2 percent, government debt guarantee was MNT 1.1 trillion or 4.7 percent and concessions were MNT 0.9 billion or 4.0 percent. The money supply reached MNT 20.4 trillion at the end of November 2019, showing a decrease of MNT 24.2 billion from the previous month, while it was increased by MNT 1.8 trillion year-on-year. At the end of November 2019, the national currency in circulation reached MNT 860.2 billion, showing a decrease of MNT 13.7 billion from the previous month and by MNT 34.9 billion compared to the previous year. Thus, the amount of outstanding loans to entities, enterprises and citizens amounted to MNT 18.2 trillion, while it shows an increase of MNT 1.4 trillion from the same period of the previous year.

Banking on action: How ADB achieved 2020 climate finance milestone one year ahead of time www.montsame.mn

Budget revenue amounted to MNT9.7 trillion www.montsame.mn

Ulaanbaatar/MONTSAME/. In the first 11 months of 2019, total equilibrated revenue and grants of the General government budget amounted to MNT 9.7 trillion and total expenditure and net lending amounted to MNT 9.2 trillion, resulting a surplus of MNT 486.7 billion in the equilibrated balance.

Sales of industrial production increase by MNT1.9 trillion in the first 11 months of 2019 www.montsame.mn

Ulaanbaatar/MONTSAME/. In the first 11 months of 2019, the gross industrial output reached MNT 16.0 trillion, showing an increase of MNT 1.8 trillion (12.8%) from the same period of previous year. This increase was mainly due to an increase of mining and quarrying gross output by MNT 1.4 trillion (13.3%), of which mining of coal increased by MNT 1.4 trillion (38.1%) and other mining and quarrying increased by MNT 15.3 billion (12.6%).

Monthly air quality statistics released www.montsame.mn

Ulaanbaatar /MONTSAME/. The National Statistics Office of Mongolia released a monthly report on the social and economic situation of Mongolia as of November 2019.

Rio Tinto scores big win in Mongolia www.mining.com

The world’s second largest miner Rio Tinto (ASX, LON, NYSE: RIO) has scored a major win in Mongolia after the country’s parliament unanimously approved a resolution that reconfirms the validity of all the Oyu Tolgoi mine-related agreements approved since 2009.

WHO donates flu drug to Mongolia www.xinhuanet.com

The World Health Organization (WHO) donated more than 5,000 doses of flu drug Oseltamivir to Mongolia on Thursday.

Turquoise Hill: While Mongolia Wants More Money Now, The Decrease Of Uncertainty Pushes The Stock Up www.seekingalpha.com

Summary
- Mongolian parliament approves the resolution regarding the current investment agreements for Oyu Tolgoi.

- The country wants either a product sharing agreement or a royalty.

- Shares react positively, getting an additional boost from rising copper prices. The short-term upside price momentum looks interesting.

In my recent article on Turquoise Hill (TRQ), I wrote that the most likely pattern for Turquoise Hill shares was to trade at a $0.40-0.50 range until the end of this year amidst uncertainty regarding the potential new terms of the investment agreement for Oyu Tolgoi. This prediction did not work out well, since the stock broke out of the trading range on higher trading volume and is trending higher:

From a technical point of view, that’s a major breakout that no momentum trader will miss. But what’s on the fundamental side of the story?

The Mongolian parliament has just approved the resolution that instructs the government to look at the ways to improve the implementation of the investment agreements, the underground mine plan development and the financing plan of the mine. In the press release to which I linked above, Rio Tinto (RIO) stated the following:

Rio Tinto acknowledges the Mongolian parliament’s resolution and notes that this effectively confirms the validity of all Oyu Tolgoi investment agreements […] There is a lot of work to do to ensure Oyu Tolgoi reaches its full potential, and we remain committed to exploring ways to deliver even greater benefits from Oyu Tolgoi to all shareholders.”

Turquoise Hill went into more depth in its press release, outlining the measures included in the resolution: 1) comprehensive measures to improve the implementation of investment agreements; 2) improvement of the mine development and financing plan and 3) decision to “explore and resolve options to have a product sharing arrangement or swap Mongolia’s equity holding of 34% for a special royalty.”

Here are the key practical conclusions as I see them:

Certainty is almost always better than uncertainty for the market. The Oyu Tolgoi story is somewhat similar to Freeport-McMoRan’s (FCX) Grasberg mine, which also struggled from the growing appetite of the Indonesian government. The removal of Indonesian uncertainty was certainly a positive catalyst for Freeport. While Oyu Tolgoi does not have this level of certainty yet (Grasberg ultimately got a final (hopefully) deal), the fact that the resolution did not contain anything truly critical for business is surely a positive catalyst for Turquoise Hill.
It’s still too early to talk about how a product sharing agreement or a swap of current Mongolia’s stake for a special royalty might look like. For reference, Freeport’s deal for Grasberg included a 25% corporate income tax rate, a 10% profits tax rate, 4% royalties for copper and 3.75% royalties for gold.
I believe that the royalty scenario will be strategically better for Turquoise Hill compared to the product sharing arrangement. Once Mongolia swaps its current stake in the project for a pre-defined royalty, it will be easier for Turquoise Hill and Rio Tinto to defend against any additional claims from future governments (the current trend in this space is unfavorable for international mining companies, and there’s no reason to believe that this negative trend will stop in the coming years).
We currently see a relief rally in Turquoise Hill shares. In such situations, fears of the worst outcome are always somewhere in the background even if no one voices them publicly – such fears are removed for now. Also, we should not forget about recent copper price upside which could have provided some additional support to building momentum trade in the company’s stock. At this point, the short-term trend has certainly changed to the upside.
There are still many variables in the Oyu Tolgoi story: the exact changes to the investment agreement are yet to be determined, while the new operating and financing plans for the mine will be known only in 2020. Therefore, the stock comes with a material headline risk which can bring both major upside and downside.
At this point, it looks like the news from Mongolia and copper price upside created a short-term setup for upside in Turquoise Hill shares. Fundamentally, the story remains promising (as always) but risky, so size your positions accordingly and manage your risks properly if you want to join the momentum trade.

By:Vladimir Zernov