Mongolia teeters on the brink of a mining boom
Over a bowl of mare’s milk, Narnjil, a chubby, middle-aged herder contemplates how mining could shape the future of his country.
Inside his yurt on the outskirts of Mongolia"s capital Ulan Bator there is no electricity so Narnjil -who like most Mongolians goes by a single name - knows little of the world delivered through TV and the internet.
But he knows all about Oyu Tolgoi, a gold and copper deposit almost as big as Macau that sits 550 kilometres south of the capital. He also knows about Tavan Tolgoi, another massive deposit owned by the Mongolian government that is yet to be tapped. Asian investment bank Eurasia Capital estimates it holds 5.1 billion tonnes of coal resources, mostly coking and thermal coal.
Big mining projects are "very good for our country", Narnjil says.
Sandwiched between Russia and China, landlocked Mongolia is as big as Western Europe but home to about three million people.
The young democracy, which at one time or another has been part of either China or the Soviet Union, has vast coal, copper and gold deposits, yet its people are mostly poor by anybody"s measure. Some Mongolia watchers say the country is on the cusp of a natural resources boom, thanks to China"s appetite for commodities.
But there is a big if - it all hinges on whether Mongolia"s mercurial government manages to put the right partnerships and policies in place.
"The country is sitting on so much coal. For example, it could mine continuously for 10,000 years before it ran out," Graeme Hancock, the World Bank"s senior mining specialist in Mongolia, said.
According to research by Russian stockbroker Renaissance Capital, Mongolia has the 11th biggest coal reserves in the world.
It also has the planet"s second-largest copper reserves after Chile; the world"s second-largest uranium reserves behind Australia as well as significant deposits of gold, lead and zinc. The problem is money, or the lack of it. The government does not have the cash to pay for capital-intensive mining, and is wary of selling the country"s assets too cheaply to foreigners, or of turning the nation into China"s quarry.
Meanwhile, some Mongolia watchers fear the spoils of any resources revolution will not trickle down to the public. By some estimates, Oyu Tolgoi will eventually create 80,000 jobs. But locals do not have the necessary skills, so foreign miners are likely to import expatriate workers.
While Mongolia"s mineral wealth is enormous, "its poverty rate is even more impressive", World Vision"s Juergen Wellner says.
Last year, Mongolia"s gross domestic product was only US$4.2 billion, less than half the economic output of Papua New Guinea. Annual per capita income totalled US$1,630 compared with US$6,600 in China. Roughly one-third of the population has no access to clean drinking water, and World Vision estimates that more than a third of Mongolians live on less than US$1 a day.
Most Mongolian men do not make it past the age of 65; women live to 70 on average.
A tour of the capital city gives some idea of the economic situation. Few roads are paved, groups of unemployed men stand idle during the day, swigging vodka, and, according to World Vision, abandoned children often live in tunnels beneath the city.
Like Narnjil, one-third of Mongolia"s population are herders, who rely on their livestock for survival.
The fragility of that lifestyle was highlighted last winter when heavy blizzards blanketed the countryside in snow, and temperatures plunged below minus 50 degrees Celsius in a severe deep freeze the locals call a dzud. At least 130,000 animals, or about 3 per cent of the total population, froze to death, the World Bank estimates.
Motioning outside the yurt to his family"s small collection of horses and goats, Narnjil mimics a shiver and says: "We lost quite a few."
Today, his friend Luvsandugar is visiting from Ulan Bator. Munching on a nomad"s snack of pungent cheese made from sheep"s curd, the old man whose mind is clear as a bell at 109 years old, agrees with Narnjil that mining will be good for Mongolia. It is already paying dividends for his family - both grandsons are working as carpenters at Oyu Tolgoi.
"They bought me a mobile telephone," Luvsandugar says, with a toothless beam.
Oyu Tolgoi is a landmark project backed by foreign investors that is set to kick-start Mongolia"s economy and by becoming a key resources supplier to China.
The deposit, which according to its developer Toronto and New York-listed Ivanhoe Mines, is one of the world"s largest untapped copper mines, spans 240 sq km in the south of the Gobi Desert.
Ivanhoe expects the mine to produce 540,000 tonnes of copper and 670,000 ounces of gold a year when it reaches peak productivity in 2018. Eurasia Capital forecasts that this project alone will increase Mongolia"s economic output by up to 35 per cent a year after the mine begins operating in 2013.
Ivanhoe owns 66 per cent of Oyu Tolgoi, while the Mongolian government controls the remaining stake. Global mining giant Rio Tinto is a partner by virtue of its 30 per cent stake in Ivanhoe.
Controlled by Canadian billionaire Robert Friedland, Ivanhoe started work on Oyu Tolgoi in 2000, after it bought the project from Australia"s BHP Billiton.
But the Canadian company only won Mongolian government permission to develop the resource last year, following five years of negotiations as Mongolian politicians grappled with how best to extract money from the project.
"The timeline was directly correlated to the fact it was the first major [mining] deal done in Mongolia so there was no precedent," Oscar Mendoza, co-chief operating officer of Ulan Bator-based investment bank Frontier Securities, said.
One tactic the government tried was to slap a 68 per cent windfall tax on all revenue from gold and copper mining in the country. That was in 2006, and analysts saw it then as the government taking direct aim at Ivanhoe. The government changed its mind and repealed the tax in August last year. That led to a big burst of excitement over Mongolia among global investors.
An Ivanhoe spokesman did not respond to requests for an interview.
"In a world in which China continues to grow at eight per cent a year, you are going to get a monster boom in Mongolia," Christopher Wood, chief economic strategist at stockbroker CLSA in Hong Kong, said. "With GDP growing 30 per cent a year because of the big mining projects, it"s the most interesting story in Asia at the moment."
Others argue that such optimism is premature.
That is partly because the next big project in the pipeline, Tavan Tolgoi, also looks set to take a long time to get going.
Also in the Gobi Desert and 270 kilometres north of Gashuun Sukhait on Mongolia"s border with China, the deposit has an estimated 1.5 billion tonnes of coking coal, which is used to make steel and sells at higher prices than thermal coal, which is used for electricity.
According to Eurasia Capital, Tavan Tolgoi could generate US$4 billion in royalties annually for Mongolia"s cash-strapped government from the date production starts.
That all depends on production starting, though. And up until now, the government has pursued a development model for Tavan Tolgoi that "simply will have to change", Frontier Securities" Mendoza says.
At first, the government was widely expected to fund the project by selling a stake to an international mining company. Analysts say there were nibbles from global mining majors, including Switzerland"s Xstrata and BHP Billiton. Xstrata declined to comment; BHP did not respond to requests for comment.
Then, in an about-face, Mongolia"s government announced in February that it had decided to hold on to 100 per cent of the project. On August 30, the government invited global mining companies to bid on the mine"s management contract.
"I cannot work out how the contractors would get paid," the World Bank"s Hancock said.
To raise cash to fund Tavan Tolgoi, the government hit on selling a 10 per cent stake to investors on Mongolia"s stock exchange, which opened in 1991 and boasts 350 companies. But the Mongolian stock market is too small to handle such a large initial public offering. Investment banks estimate that, all told, Tavan Tolgoi is worth up to US$20 billion but the total market capitalisation of the Mongolian exchange is just US$940 million, according to Frontier Securities.
Because most Mongolians are too poor to own and trade stocks, a paltry US$14 million worth of shares changed hands on the exchange in the first eight months of this year, Frontier says.
So far, China"s Shenhua Group and Japan"s Mitsui have signalled interest in bidding for the management contract. Mendoza believes some bidders will present counterproposals, involving them taking an equity stake in the asset to fund its development.
But that could reignite government debate, potentially delaying the start up of Tavan Tolgoi.
Meanwhile, Hancock cautions that ordinary Mongolians have become prematurely optimistic about reaping rewards from mining projects during their lifetimes.
"People are expecting a lot of changes too soon," he said.
What"s more, Hancock says, because locals do not yet have specialist skills, the trickle-down effect will mostly come from mining companies using local suppliers.
Some people warn that a lack of government investment in education also risks simply turning Mongolia"s herders and blue-collar workforce into "metal-bashers", which might not increase their quality of life.
"You have a risk where the population is just focusing on labour-intensive skills rather than capital-intensive jobs," Mendoza said. But, he adds, this situation is probably inevitable, at least for a generation.
The Mongolian government has scrapped university tuition fees, making higher education free from September 1, the start of the country"s academic year.
Still, building an expert Mongolian workforce "will take a generation", Mendoza says.
"In one family, you may see the father working [down] the mine for 20 years. It is his children who can hopefully become educated enough to pursue professional careers within the sector."