EurasiaNet Business & Economics - Mongolia: Canadian Mining Firm Inks Blockbuster Deal with Ulaanbaatar

BUSINESS & ECONOMICS

MONGOLIA: CANADIAN MINING FIRM INKS BLOCKBUSTER DEAL WITH ULAANBAATAR
Joshua Kucera 10/08/09

Mongolia’s agreement with mining companies Ivanhoe Mines and Rio Tinto to develop the largest copper mine in the world should transform the country’s economy and spur a huge wave of internal migration to the remote Gobi Desert area around the mine.

The mine, Oyu Tolgoi (Mongolian for "Turquoise Hill") is expected to yield a billion pounds of copper and 330,000 ounces of gold every year for at least 35 years, though company officials say it could be much more. "I think this is a 200-year mine," Sanjdorj Samand, Ivanhoe’s vice president for Oyu Tolgoi operations, told EurasiaNet.

Canada-based Ivanhoe and Rio Tinto, headquartered in Britain and Australia, will make an initial investment worth up to $5 billion, company officials say. That’s a figure roughly equal to Mongolia’s annual gross domestic product.

The deal, signed on October 6, had been six years in the making, slowed down by numerous street protests by citizens who thought Mongolia was getting a bad deal, government hurdles and repeated threats by the western companies to pull out of the project. The final hurdle was surmounted in August, when Mongolia’s parliament changed four key laws, in particular the repeal of a 68 percent windfall-profit tax.

"It’s been a long road," said Peter Meredith, Ivanhoe’s deputy chairman of the board, at a signing ceremony in the capital of Ulaanbaatar attended by Mongolia’s president, prime minister and other top officials. "These agreements are designed to benefit all Mongolian people."

While leaders of the opposition to the mining deal said they still had concerns about the mine, they don’t anticipate further popular protests. "I’m satisfied with the deal, but now if there are problems with the environment or corruption, of course we’ll have our voices heard," said Batzandan of the Civil Movement Party, a non-governmental organization in Ulaanbaatar that has led past protests.

Another leader of opposition to the deal, Ganbaatar, president of the Confederation of Mongolian Trade Unions, said Mongolians still didn’t know enough about the deal given its unprecedented size and the government’s inexperience in this scale of mining. And the signing of the deal is just the first step of a long relationship between Mongolia and Ivanhoe, and he said he intends to closely monitor the conduct of both parties. "Of course we want to use the resources. But we don’t want to follow the African way. We want to do it like Canada, or Australia, very responsible mining," he said. "The Mongolian government tries to make decisions without any technical independent experts’ analysis. The first thing to know is we don’t know anything about [world-class] mining."

There seems to be a lingering suspicion among some of Mongolia’s business elite that the government is making a bad deal. As Ganbaatar noted; during government-corporate negotiations it seems as though "behind the Ivanhoe/Rio Tinto executives are "10 very professional experts on every aspect -- infrastructure, metal prices, whatever. And behind our minister are ten very ambitious politicians."

"And this is a very difficult competition. It’s too dangerous -- I can’t trust them," Ganbaatar added.

Public opposition resulted in some changes to the deal favorable to Mongolia, including 34 percent Mongolian ownership of the mine and some Mongolian presence on the board of directors of Oyu Tolgoi, said Batzandan.

"This is a democratic country, and we have a sense of freedom because this is a nomadic people," Ganbaatar said. "It’s maybe not like other Asian countries like Burma, where Ivanhoe invested before. They have easy contact with the generals and dictators and make decisions easily. This is a completely different nation. And I must tell other foreign [investors] -- yes, we need your technology and management and money. But before any money, we need respect as well -- we are partners."

"Mongolia has really been saved by its democracy here," said one western analyst who asked not to be named. "Even if they’re not that savvy, there was always someone saying ’wait a minute,’ we need to look at this some more,’" which resulted in a better deal for their side, the analyst said.

With the deal, thousands of workers are expected to flock to the now-remote region of Oyu Tolgoi, several hours on a bumpy dirt track from the nearest city. The populations of many towns near the mine are expected to grow exponentially, as the 3,000 permanent mine workers that are expected to be hired, plus others at other mines starting operation in southern Mongolia, will likely have large multiplier effects. [For background see the Eurasia Insight archive].

A report by the Asian Development Bank said that the population influx to the Gobi from other parts of Mongolia could be on "an unprecedented scale."

The sensitive role of China in Mongolia’s economy, coupled with notions of endangered sovereignty, played a large role in the protracted negotiations. The mine lies just 80 km north of the Chinese border, and China is expected to be the main, perhaps only customer for the copper.

A private company, Energy Resources Rail, is planning to build a railroad from the mine (and a nearby coal mine, Tavan Tolgoi) directly to China. The railway will use the standard gauge used in China, making it incompatible with the narrower Soviet-style gauge used in Mongolia.

Many Mongolians fear that Chinese leaders secretly hold irredentist claims on Mongolian territory, and the government went to great efforts to make sure Oyu Tolgoi could not fall into Chinese hands. "The big fear here is that China will control the mine," said the western analyst.

That fear was more pronounced in the early days of the negotiations, when Ivanhoe was operating alone. Because it is a relatively small company, Mongolians feared that it would have trouble raising capital for the mine and be forced to find other investors, who would likely be Chinese. But the 2006 involvement of Rio Tinto, a company with much greater access to capital, allayed those fears.

"They are the leading company in copper mining, but Ivanhoe is just a junior company. It’s too dangerous -- they can easily sell their controlling shares to China. To Rio Tinto, their leadership in the mining industry is more valuable than some short-term profits. That’s what I hope," said Ganbaatar.

Editor's Note: Joshua Kucera is a freelance journalist based in Washington, D.C.