 NEWS HIGHLIGHTS:
Business:
Tinpo’s C$74 million cash offer for Western Prospector; Kerry Holdings and MCS Holdings to acquire QGX for C$259 million; Companies receive help to escape penalty; Khan Bank’s online network reaches village in Khovsgol; Mining company agrees to discuss wage raise; Gobi opens luxury store; Textile handicrafts to enter USA duty free.
Economy:
Mongolia’s runaway inflation highest in all East Asia; Oil importers should work for less profit, feels State Secretary; Mongolia should “tax more, own less”; Herder groups to lease own pastures; More flights to Seoul planned; Much at stake in massive railway reforms; Plans to import Chinese wheat; An apartment of one’s own.
Politics:
MPs fail to take oath on first day; Speaker says Parliament did a good job; Elbegdorj may step down as DP head; Canada names ambassador.
TINPO’S
C$74 MILLION CASH OFFER FOR WESTERN PROSPECTOR
Western Prospector Group
Ltd. and Tinpo Holdings Industrial Company Limited announced on July
15 the execution of a definitive agreement for Tinpo to acquire all the
outstanding common shares of Western for C$1.34 per share in cash, valuing
Western's equity at approximately C$74 million.
The offer represents an 86% premium to Western's closing price of
C$0.72 on July 14, 2008, and a 168% premium to Western's closing price of
C$0.50 on May 9, 2008, which was the last trading day prior to the
unsolicited takeover bid by Khan Resources Inc. The offer also represents
a 130% premium to Khan's bid, which consists of 0.685 of a Khan share for
each Western share. Khan's bid currently values Western at C$0.58 per
Western share, based on Khan's trading price of C$0.85 on July 14, 2008.
There is no cash component to the Khan bid.
KERRY
HOLDINGS AND MCS HOLDINGS TO ACQUIRE QGX FOR C$259 Million
QGX Ltd. announced that it has entered into a definitive support
agreement with Kerry Holdings Limited, MCS Holding LLC and Mongolia
Holdings Corp. (the Offeror, a joint venture of Kerry and MCS) to acquire
all of the issued and outstanding common shares on a fully diluted basis
of QGX for Cdn$5.00 per Share in cash. The offer values QGX at
approximately Cdn$259 million representing a 32% premium based on the
volume weighted average closing price of QGX's common shares on the TSX
for the 20 previous days ending July 21, 2008 and a premium of 52% to the
last close before the Company announced it was exploring strategic
alternatives on February 12, 2008.
The support agreement entered into by QGX, Kerry, MCS and the Offeror
provides for, among other things, a non-solicitation covenant on the part
of QGX, subject to customary "fiduciary out" provisions that entitle QGX
to consider and accept a superior proposal, a right in favor of the
Offeror to match any superior proposal and the payment to the Offeror of a
termination payment of Cdn$9.1 million (Breakup Fee) if the transaction is
not completed as a result of a superior proposal.
Kerry Holdings Limited - Kerry is a private investment holding company
incorporated in Hong Kong. It is a member of the Kuok Group of companies
which has diversified businesses throughout the Asia Pacific Region in
commodities trading, sugar refining, property ownership and development,
hotel ownership and management, warehousing, shipping and transportation,
plantations, media, entertainment and leisure facilities. Kerry is a
substantial shareholder of Kerry Properties Limited, Shangri-La Asia
Limited and SCMP Group Limited, each of which are listed on the Hong Kong
Stock Exchange.
MCS Holding LLC - Founded in 1993, MCS is one of Mongolia's leading
enterprises in six major industries, including energy and infrastructure,
information technologies, beverages, property development, cashmere
processing and mining. MCS is one of the largest private sector companies
in Mongolia, with over 3,200 employees as of June 2008.
QGX Ltd. - QGX is a Canadian-based company that has been exploring for
mineral deposits in Mongolia since 1994. QGX's two most advanced
properties are the Baruun Naran and the Golden Hills projects. Barrick
Gold Corp. holds an approximate 9% equity interest in QGX as part of a
strategic relationship between the two companies.
MONGOLIA’S
RUNAWAY INFLATION HIGHEST IN ALL EAST ASIA
According to the June 2008 World
Bank Quarterly, inflation in Mongolian is the highest in all of East
Asia. It was 27 percent in April, and food prices rose 48 percent.
Food product imports increased by only seven percent, with an apparent
substitution effect occurring, as expensive imports like potatoes and
fruit are decreasing in volume, while less expensive rice imports are
increasing. Flour imports from Russia, subsidized by an agreement, have
increased in volume by 57 percent.
Much of the inflation can be explained by food items, while oil prices
contributed a small but increasing portion. Food items and oil have a 41
and 1.6 percent weight respectively in the CPI consumption basket. Among
food items, flour and meat prices are contributing the most to inflation.
Their respective prices have increased by 68 and 39 percent over the last
12 months, with no sign of slowing down.
As per capita income rises, the percentage of income spent on food is
decreasing. In 1995, households would use almost 50 percent of their
monetary income to buy food, whereas in 2007, that decreased to 35
percent. This does not imply that food price increases have no impact on
household welfare: poor consumers (among them, the urban poor bear most of
the shock) are hit especially hard by the rise in prices.
As incomes increase, consumption patterns become more diversified. Meat
consumption is declining and consumers turn increasingly to more
flour-related products, potatoes and vegetables, while fruit consumption,
which was negligible in 1995, has gone up. These changes in consumption
patterns are important to understand if one wants to be able to anticipate
future food supply needs which will have to be met by either domestic
production or imports.
Meat products account for 36 percent of food consumption, and their
prices are more dependent on domestic rather than external factors. On the
other hand, a significant share of Mongolia’s non-meat food products is
imported, bread and cereals coming from Russia and fruits and vegetables
from China.
There is some evidence that domestic policies are fueling domestic
price increases but further analysis needs to be conducted to ascertain
the relationships between domestic and border price movements. Some of the
short-run trade policy options considered may limit longer-term
solutions.
The World Bank feels Mongolia can mitigate the effects of global food
and oil price increases. Cash transfers could be accompanied by food for
work programs. The bank also suggests closely monitoring the fiscal
sustainability and economic incentives of the subsidies. Developing
Mongolia’s own oil and natural gas refinery capacity must be carefully
assessed as refineries require a number of pre-conditions to be
economically viable.
MONGOLIA
SHOULD “TAX MORE, OWN LESS”
A new government in Mongolia could finally pass deals to tap mineral
deposits, but analysts say these would be less than ideal for either
Mongolia or foreign investors. They feel the country will be better served
by taxing its mineral wealth, rather than seeking direct government
ownership in massive mines, writes Lindsay Beck. An investment agreement
with Ivanhoe Mines and Rio Tinto for the Oyu Tolgoi project, still under negotiation,
would be the first such deal. Since Oyu Tolgoi's discovery in 2001,
Mongolia's laws have gone from being among the most attractive in the
world for foreign miners to being increasingly protectionist, on populist
fears the country would trade its wealth for an environmental disaster.
During that time, metals prices have soared to record highs.
The government is unlikely to take an active management role, but has
not specified how it would manage its stakes or whether it would set up a
separate body to do so. "It creates a conflict of interest for the
government -- do you represent the people or the shareholders in a
company," said Adrian Ruthenberg, Asian
Development Bank's Mongolia director. Partial ownership by the
government, rather than taxation or royalties, also leaves it more
vulnerable to dips in production, said D. Ganbold, president of
the Mongolian National Mining
Association.
Mongolia does not have the resources or capital required to undertake
mine development on the massive scale required by Oyu Tolgoi or the $2
billion Tavan Tolgoi project to mine the world's biggest untapped coking
coal deposit. "There's a lot of infrastructure needed. You're talking
about railroads," said Senden Batjargal, deputy director of Baganuur Joint
Stock Company, a state-run coal mine.
The idea of ownership stakes has symbolic importance among Mongolians
wary of foreign investors on the make and mindful that Mongolia's mineral
wealth was for long used to feed Russian industry. Successive governments
have failed to provide objective and realistic information about the
potential deals, and exacerbated misconceptions with promises of revenues
from projects still years away from production.
There has been talk of giving the Government a 51 percent stake in Oyu
Tolgoi. In exchange, the project would be exempt from a 68 percent
windfall profits tax while it built a copper smelter in the Gobi. Even at
51 percent, Rio and Ivanhoe say they could go ahead. "We're totally
comfortable" with a sizeable government stake, said Andrew Cuthbertson,
head of Rio Tinto Mongolia. "The investors are really waiting for the
government to take the leadership and make a decision and move
on."
With no guarantee that mineral prices will stay high forever and with a
population whose top concerns are unemployment and double-digit inflation,
much is at stake.
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