bne IntelliNews – Zasag Chandmani mining dispute is a litmus test for Mongolia

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Maximilian Johnson, the younger half-brother of the British Prime Minister, has encountered problems in Mongolia. He works for a Hong Kong-based GRF2 fund that invested $ 19 million along with several other big investors in the Zasag Chandmani multi-metal mine, but now the owner appears to have gotten away with most of the money.

The Mongolian Police and Fraud Team investigated the case and found evidence of fraud, embezzlement and money laundering by the mine owner, Buyantogtokh Dashdeleg, and two other senior officials of the mine.

Arrest warrants were issued and their passports were confiscated. However, in 2019, Dashdeleg appealed to a regional court which quashed the arrest warrant and he immediately left the city and is now believed to be in the United States.

After a year of inactivity, Johnson and his partners complained to authorities, who referred the case to the Attorney General, who ordered a trial. That was four months ago and investors are now waiting for the case to be called. With a new government in power following a general election, the deal became a litmus test for the government, which promised to improve Mongolia’s investment image in an effort to attract more money in the country.

Long road

Johnson has had a colorful career and it has been a long road to Ulaanbaatar. Born in Brussels where the brothers’ father worked for the European Commission, he studied Russian at Oxford. He ended up as a metals trader in Hong Kong for five years and also made a stint at Goldman Sachs, where he met Simon Murray, a famous investor and former head of investment firm Hutchison Whampoa and trader in raw materials Glencore, as well as being, among others, the founder of the Orange mobile company.

Murray was interested in Mongolia and his private investment vehicle GEMS created GRF2 to invest in the Zasag Chandmani mine. As Murray and Johnson knew each other and Murray knew Johnson spoke Russian, he invited the young man to join the cabinet and oversee the Mongolian project in 2018.

“Murray knew I spoke Russian and asked me to help out on the mine project,” Johnson says. “It should have been a good project. It is a polymetallic deposit with gold, copper and iron ore. We loaned $ 19 million in the form of a convertible credit note to finance the start-up of the mine, along with other investors. “

The GRF2 convertible debt could eventually be transformed into a 30% share of the company. GRF2 followed mining giant Nobel Mines in the deal which also pledged $ 30 million. The money was supposed to be used for equipment and to start production, but things quickly started to go wrong.

Both investors did their due diligence, but over time production at the mine failed to start.

“We had board seats, but the company didn’t call a lot of board meetings. They were sending us reports and management accounts – but, well, those were produced by management, ”says Johnson, who is currently based in Indonesia due to the coronavirus (COVID-19) situation. “At one point, GRF2 requested audited accounts, but management said they had no money and if investors wanted audited accounts, we had to pay them ourselves. It was around then that the alarm bells started ringing.

Simon Murray (left), Mongolian Ambassador to the UK (center), Maximilian Johnson (right)

Investigations and Charges

As relations deteriorated, investors began to demand repayment of their money. Johnson reports that Dashdeleg offered to repay the credit at 20 cents on the dollar, which all parties refused. However, Nobel eventually agreed to some sort of deal and walked out of the deal.

GRF2 decided to stick to its guns and at least try to get the main one back; Under Mongolian law, if you go to court to collect a debt, you can only claim the principal amount, but you can also claim interest, as is normal in the West.

Johnson took the case to the local Economic Crimes and Fraud team, which opened an investigation.

“The police have been fantastic and have thoroughly investigated the matter. They discovered a considerable amount of evidence showing the details of the embezzlement and money laundering, ”Johnson said.

Police then issued arrest warrants against the CEO and two other directors, issued travel bans and confiscated their passports in late 2019. Among other scams, police discovered that the mine was signing purchase orders with services at vastly inflated prices that have turned shell companies controlled by the owner and his staff, or their close friends and relatives.

“It wasn’t even clear if these goods and services had already been delivered,” Johnson says. Some of the credits were spent on equipment, but police evidence suggests that some $ 10-15 million was taken out of the business using shell companies and related party transactions.

However, a local court subsequently quashed the warrant and within 24 hours Dashdeleg left the country for South Korea. Since then, Interpol has issued a Red Notice warrant against Dashdeleg, who is now on the international wanted list. After continuing to push, the case has been reactivated and Johnson and GRF2 are now waiting for a case to be taken to court, where Dashdeleg will be tried in absentia.

“At this point all we want to do is get our money back,” said Johnson, who has quietly pushed to move the process forward. “This case is important not only for us, but for the investment climate at large. Mongolia must show that there is a level playing field for investors, that the rule of law works. “

GRF2 is not the only investment that has gone wrong, but the government absolutely needs to bring in investors to mine its huge mineral deposits because it does not have the money to do it on its own.

And the government has made progress. In August, five representatives of the Paris-based Financial Action Task Force (FATF) traveled to Ulaanbaatar on an inspection mission of critical importance to the country’s economy. Experts from the UK, US, Japan, China and Russia questioned whether Mongolia should be removed from the gray list of organizations, which was introduced in 2000. Countries on the gray list of the FATF represent a much higher risk of money laundering and / or terrorist financing. , but unlike those on the blacklist, they have made a formal commitment to work with the FATF to develop action plans that will fill their gaps.

Mongolia was added to the FATF gray list in 2013, after which the government initiated reforms and began to fulfill some of the conditions of the organization.

However, in 2016, the FATF criticized Mongolia for its retreat and urged the government to enforce the laws with a set of recommendations, including improving economic transparency, improving financial market surveillance and accountability. of those who break the laws. To comply with the recommendation, the Mongolian government formed the National Council for Combating Money Laundering and Terrorism in April 2017, which forms the basis of the law enforcement agencies that GFR2 appealed to in its case.

The newly elected new government also pledged to improve the investment climate and in August the new Prime Minister Khurelsukh Ukhnaagiin, the Minister of Finance and Speaker of the Great Khural (parliament) all separately made presentations to officials. of the FATF to present their plan. action. Mongolia has borrowed heavily from global bond markets over the past decade, and between 2021 and 2024 much of that amount will mature. Refinancing costs will be much more affordable if the country can build a reputation for financial integrity and honesty.

Litmus test for a beaten investment image

The case has become a litmus test for Mongolia’s investment climate. The country has enormous potential, as it is home to hundreds of billions of dollars in mineral deposits, but investments in the development of these assets have not gone well.

The biggest project in recent years has been the Oyu Tolgoi mine in the Gobi Desert, another gold / copper deposit, which was agreed with international investors Ivanhoe Mines and Rio Tinto in 2011.

Oyu Tolgoi generated a lot of enthusiasm at the time, as the billions of dollars in revenue the mine was supposed to generate were to trigger an explosive boom for the Mongolian economy. Analysts predicted extraordinary annual percentage growth rates in the 1920s and 1930s and an increase in the incomes of the population.

The project did not take off and got bogged down in bitter feuds with the government, and since then international partners have changed and Ivanhoe Mines has been replaced by New York-listed Turquoise Hill Resources.

In July this year, the UK’s Financial Conduct Authority (FCA) opened an investigation into Rio Tinto and the $ 6.75 billion underground copper mine in Oyu Tolgoi, which may have violated its rules. registration.

In July 2019, Rio announced that the underground expansion of Oyu Tolgoi would require additional capital of $ 1.2 billion to $ 1.9 billion and would be 16 to 30 months behind schedule. He highlighted difficult ground conditions which meant that an overhaul of the design and development schedule would be necessary. However, according to some investors and a former employee, Rio knew the copper mine expansion was in trouble months before the difficulties were disclosed to investors and said nothing. But the mine is now in production and reported 36,735 tonnes of copper in the second quarter of this year and 113,054 ounces of gold.

The start of the last decade was Mongolian sunny day, and other investors were equally excited. New York-based Firebird Management LLC bought 40% of the Mongolian stock market float in anticipation of the expected economic boom. This investment also did not work out as planned.

Mongolia’s investment image has been shaken by these failures and made more difficult by the economic blows to the economy from recent crises. However, the new government is keen to remake the country’s image and with commodity prices soaring – especially copper prices which nearly doubled last year to a record $ 10,000 a ton – mining is hot again.

Johnson’s case is now blocked in court. GRF2 is awaiting the start of the trial and hopes that the court will seize the assets therein so that it can recover its initial investment. Murray sold GRF2 last year to a wealthy Singaporean investor specializing in distressed debt.

“We’re just hoping to get our money back,” Johnson says. “It is not known what assets are left, but one of them is the mining permit, which we would be happy if the court decided to compensate us in this way.”

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