RPT-SPECIAL REPORT-Mongolia's fabled mine stirs Asian frontier

Wed Oct 13, 2010 2:52am GMT
 



 The new gold rush to develop Mongolia's resources could
make it the world's fastest-growing economy over the next five
years, according to Renaissance Capital, which projected GDP
will almost quadruple to $23 billion by 2013 from $6 billion
today.
 To profit from its untapped iron ore, coal, copper,
uranium, silver, and gold deposits, the government needs to
build a vast network of roads and railways to ship the minerals
out of the country's vast interior. More than 10 "strategically
important" deposits are in development including the Dornod
uranium deposits, the Asgat silver deposit, and the massive
Tavan Tolgoi coal site.
 Tavan Tolgoi, like Oyu Tolgoi, inspires awe among resources
investors. It is a deposit of approximately 7.5 billion tonnes
-- believed to be the world's largest untapped coking coal
site. Most of its projected 50 million tonnes of production
will go to China.
 The trick is getting it there. To that end, Mongolia aims
to build a massive industrial park in Sainshand, capital of
Dornogovi Province, to help transport metals and coal to
customers around the world. The facility will include copper
smelting and coal processing plants, as well as railroads to
and from the park.
 Much like the debate around Oyu Tolgoi, controversy has
dogged the government's infrastructure plans from the
beginning. In April, Prime Minister Sukhbaatariin Batbold threw
his support behind an east-west railway plan, connecting the
Tavan Tolgoi coal deposit to the eastern city of Choibalsan via
Sainshand, at a cost of around $2 billion, according to one
estimate.
 Some experts say it would be far more sensible, and half
the cost, to build the railway south towards China, which
bought 70 percent of the country's exports last year.
 "The biggest risk is government policy -- one of the
examples is on infrastructure," said Masa Igata, founder and
CEO of Mongolia-based Frontier Securities. "It makes economic
sense to connect Tavan Tolgoi to China's border. However,
parliament has decided to prioritise Tavan Tolgoi to Sainshand.
By doing so, they sacrifice the economic benefit..."
 Feeding into the debate is Mongolia's determination to shed
its historical vulnerability as a landlocked country sandwiched
between Russia and China. Mongolia needs both geopolitical
giants as investors and customers, but wants to be beholden to
neither, preferring to be "the mortar between two BRICs".
 "Mongolia has been quite careful about its sovereignty --
we don't want to be too dependent on one country," Oyun
Sanjaasuren, a lawmaker and former foreign affairs minister
said at a conference in Ulan Bator in June. "Theoretically, we
want to have a one-third, one-third, and one-third balance,"
Oyun added, referring to China, Russia and a third country such
as Japan or the United States.
 INVESTOR UNCERTAINTY
 China's emergence as the region's dominant superpower has
been accompanied by unpredictable swings in Mongolia's foreign
investment policies.
 The government originally planned to sell as much as 49
percent of the Tavan Tolgoi coal deposit to a foreign bidder,
and hired JPMorgan and Deutsche Bank to handle the sale. But in
February, they canceled the auction in favour of 100 percent
state ownership, with plans to sign a development contract
without giving any equity away. Chinese coal giant Shenhua
(1088.HK: Quote) was often named as a frontrunner in the hotly
contested deal. Other bidders named in the original auction
included India's Jindal, Vale, and U.S. coal miner Peabody
(BTU.N: Quote).
  The government's decision to cancel the Tavan Tolgoi
equity stake sale to a foreign company frustrated dealmakers,
but was seen by some analysts as an astute political
calculation -- a move to avoid some of the popular anger that
followed the Oyu Tolgoi investment agreement.
"They'd given up too much in Oyu Tolgoi," Frontier's Igata
said. "A few years ago, Mongolia was eager to be financed."
 Corruption may also prove to be a long-term problem.
Transparency International rated Mongolia 120th in its 2009
corruption perception index, a fall from 102nd in 2008.
 Already whispers persist in Mongolia's business community
that many more workers at Oyu Tolgoi are in fact more
experienced Chinese miners, instead of Mongolian nationals as
promised in the investment agreement. Ivanhoe, however, says it
is adhering to an agreement that calls for 60 percent of the
jobs to go to Mongolians during the mine's development phase.
"As of 30 August, we have 4,200 people at site," Marshall, the
Oyu Tolgoi CEO, told Reuters, adding that 2,536 on site were
Mongolian.
 Environmentalists are concerned that large-scale mining in
southern Mongolia would increase desertification. "Both Oyu
Tolgoi and Tavan Tolgoi will require huge amounts of water, and
from the environmental impact assessment, and from their plans
and their feasibility studies, we know they have not
demonstrated availability of water for the life of this
project," said Dugersuren Sukhgerel, executive director of an
NGO called Oyu Tolgoi Watch. "Mongolia is experiencing higher
degree of climate change -- over 70 percent of Mongolia's
territory is suffering desertification. That is a big concern."
 The discovery of a new vein at Oyu Tolgoi is bound to offer
even more jobs and riches for Mongolia. Ivanhoe said on Sept.
28 the discovery, named the Heruga North deposit, contains an
estimated 10.2 billion pounds of copper and 15 million ounces
of gold. "It's possible that Heruga and Heruga North eventually
could be developed together as one of the world's largest
underground gold mines," Friedland said in a statement.
 The government hopes to channel some of that wealth to its
citizens by privatizing a moribund state-run stock exchange, a
move that would finally plug the landlocked nation into the
grid of global finance, and channel capital to Mongolian
entrepreneurs. The London Stock Exchange is the front-runner to
run the new exchange, "building it from scratch", Prime
Minister Batbold told reporters at last month's U.N. General
Assembly meeting.
 Even as firms such as Mongolian Mining Corp prepare IPOs in
more sophisticated markets such as Hong Kong this year, the
government is making plans to take public a portion of Oyu
Tolgoi mine. It's all part of Mongolia's plans to privatise
assets -- it is committed to handing a tenth of all proceeds to
its citizenry -- and to give Mongolians a way to cash in on the
dream.
 That could go some way toward soothing any leaden feelings
over Ivanhoe's golden deal at Oyu Tolgoi.






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