Oi Vey! Oyu Tolgoi!

Ivanhoe CEO Robert Friedland is not happy with recent relations with the Mongolian government or its working partner Rio Tinto.

Parliament’s behavior in regard to the Oyu Tolgoi copper and gold project sends a disturbing message to investors. Proof of this can be seen in Ivanhoe Mines’ stock prices, which bottomed out at CAD 17.50, its newest 52-week low. Further complicating things is Ivanhoe and Rio Tinto’s tenuous relationship which came to a head when Rio bought CAD 73.1 million worth of stock at CAD 19.42 each.

Ivanhoe Mines has a 66 percent stake in the Oyu Tolgoi copper and gold project while Rio Tinto, the project chief, has an indirect stake in the project with a 48.5 percent stake in Ivanhoe Mines.

A faction within Parliament would like to see the government’s stake in Oyu Tolgoi rise to 50 percent from its now standing 34 percent stake. Currently the government is unable to increase its stake until after 30 years have passed.

“I think there is an opportunity to say to investors, the people of Mongolia don’t want to change the agreement as a whole, but to discuss two issues: Mongolia’s stake and additional payment for use of our reserves,” said President Ts. Elbegdorj in response to the controversy.

Rio Tinto Country Director and Oyu Tolgoi head of operations Cameron McRae has already warned the government against altering the deal at the “Discover Mongolia” mining forum. Reversing the deal would tarnish Mongolia’s reputation as a fair climate for investment and risk the livelihood of Mongolian workers, he said. Both Ivanhoe Mines and Rio Tinto insist the deal is fair.

“The investors agreement is a great deal for Mongolia,” said a representative

Oyu Tolgoi is supposed to be the world's largest untapped copper deposit in the world. Once it hits full production it will only fall short of Chile's Codelco Mine in annual production.

from Oyu Tolgoi Company. “The government gets more than 50 percent of pre-tax profits when you include equity, dividends, taxes, royalties, and VAT. That’s more than five tugrugs out of every 10 going directly to

Mongolia before you even think about what the mine will do for jobs, local suppliers, and technology improvements.”

The agreement gave Rio Tinto the confidence to invest “such a mammoth sum” into Oyu Tolgoi, said McRae. “What we are demonstrating is the investment agreement is a contract. We’re going to honor it and we expect the government to honor it.”

Shareholders plan to raise a sum up to USD 4 billion to finance the project’s development. This would be the largest project financing ever in mining history, said McRae. Rio has invested more than USD 3 billion into the project in the past five years. Ivanhoe spent more than six years negotiating an investment pact with the government for the 2009 agreement. Rio believes the entire project will cost up to USD 10 billion.

This week the anti-coalition faction of government opposing the investment agreement addressed a letter to Rio Tinto and Ivanhoe claiming that the agreement violates Mongolia’s 57th Resolution. The faction claims that the resolution in question mandates a 50 percent stake in the project. The letter does not explain, however, why this particular project requires such a large stake as opposed to others.

“When the price of minerals rises several times on world market it is not influenced by any country or company, it is related to an increase in demand for that specific mineral,” said the letter. “It is not fair to view that the investors must benefit from increased profit more than the owners of the resource.”

The letter goes on further to say that a “generation of Mongolian taxpayers” has funded the exploration for Oyu Tolgoi. The copper and gold at the site is worth a total USD 400 billion for which initial investment can be recovered within two or three years. According to the 57th resolution, Mongolia is entitled to 60 percent of profits, but doesn’t even earn 50 percent under the current agreement, said the MPs.

Meanwhile, there has been friction between Ivanhoe and Rio this week as well. Ivanhoe Chief Executive Robert Friedland accused Rio of releasing “unauthorized and incomplete information.”

It is possible the comments of Rio Tinto Copper head Andrew Harding struck a nerve with Friedland. Harding said last week that scheduling targets may be delayed if the operators could not deliver electricity with a preferred method.

“Ivanhoe Mines remains confident that the necessary agreements between Mongolia and China will be satisfactorily concluded to secure the timely supply of interim, high-voltage electric power from China to ensure that Oyu Tolgoi can begin commercial production on schedule,” said the firm in an official release.

Rio continued its gradual creep towards a majority holding of Ivanhoe’s stocks this week to acquire a 49 percent stake. Rio’s stock is up from a stake less than 15 percent at the beginning of this year. Currently Rio is barred from increasing its stake further due to a standstill agreement put in place last year. A quarrel over that move resulted in Rio being awarded the position of head of operations at Oyu Tolgoi.

“Ivanhoe needs to develop its stock price,” said Business Council of Mongolia Executive Jim Dwyer. “Ivanhoe’s interest is getting top dollar for its shareholders. Mr. Friedland has 17 alternatives we know about, all with the underlying goal to maximize shareholder value.” [Note: Look for the rest of this interview discussing merger and acquisition activity in Mongolia next week]

The actions by the government are reckless and entirely self-serving. It is very likely the letter addressed to Rio and Ivanhoe has much more to do with impressing voters than any moral platitudes or a need to stand up to big business. Without the investment Rio has already paid in addition to the additional USD 4 billion it plans to pay further, the mine will not return anything. Today the Central Bank of Mongolia reported an exchange rate of MNT 1280.83 to USD 1. The tugrug has been depreciating rather quickly against the U.S. dollar all month and it does not look as though the trend will let up soon. Mongolia does not have the capital to develop a mine like Rio does and it will only get more expensive as long as the tugrug continues to depreciate.

The government needs to quit pandering to anti-globalization and resource nationalist sources in this way because it helps no one. It is also dishonest because it does not actually agree with them. The government has made it clear it wants to enter the world market and grow using its mineral resources. It has also said it knows it needs help from foreign companies like Rio to do so. If the government really wanted to help the average Mongolian, it would work with the Central Bank to put a lid on inflation rather than exacerbate it by acting against the bank as it has in the past three months. Mongolia needs foreign business and investment in Mongolia, and its 30 percent ownership in addition to the taxes and royalties it receives on its resources is not a bad deal at all. Rio has done some nice projects training Mongolians, building hospitals, and building infrastructure but it is not a charity. It does these projects for a social license to operate, something Mongolian mining companies and illegal “ninja” miners tend to ignore. If a company like Rio is going to do this project, it needs a large enough return.

Finally, the government will get a chance to buy its 50 percent stake, but it has to wait until 2041 just as it agreed to do in its 2009 investment agreement. This part of the agreement was never a secret and the same 20 MPs raising hell over Mongolia’s stake had no problem two years ago when they passed and signed it.

Link to this post

Nuclear Fallout

In this month’s issue of Mongolian Economy is an article by myself called “Mongolia’s Big, Glowing Nuclear Question” reporting on the rumors about nuclear waste disposal on Mongolian soil that persisted in the media all summer. A string of stories about officials from foreign nations soliciting Mongolia for nuclear storage littered newspapers throughout the season. The government repeatedly denied the stores, but still even today, the reports have not fully gone away.

Three central aspects to this story are worth further analysis: the irresponsibility of the media; the flippant behavior of Mongolian officials; and the very real desire of the United States to store spent uranium rods on Mongolian soil.

Mongolian media houses are very rarely independent or free. They are most often controlled by specific members of Parliament or companies rather than the government as a whole, as is the way in China. However, reading the coverage of events, one must sometimes wonder which is worse. Unfortunately, the media is just as crooked and corrupt as the government (this remark is not made lightly or meant to give an unfair characterization of Mongolia. It is infact116 on Transparency International’s Corruption Perception Index). Dubious reports with unspecified sources often make the headlines and many prominent journalists take bribes to print a story in a certain way or print mis-truths. Sources have also said that newspapers will sometimes call government offices with an ultimatum that they will print a false story unless bribed well enough.

So then it is understandable that when these reports first started circulating this year, most read them with skepticism. It was not even unusual when they persisted because stories like this so often do and it was gathering a lot of attention. However, people were genuinely become fearful. Protesters organized in front of the State Central Library when U.S. Vice President Joseph Biden landed in Ulaanbaatar. Students have circulated pamphlets spreading a “nuclear-free Mongolia” message and warning about the dangers of nuclear waste.

Then, just a few days after Biden’s 7-hour visit to Mongolia, the New York Times released a story called “U.S. in Early Talks About Int’l Nuclear Leasing Arrangement.” The story discussed a statement from a high level official from the Obama administration about a U.S. plan to begin a program to “lease” uranium rods from foreign countries for nuclear reactors and return the material to the country of origin once the fuel was spent. Mongolia was mentioned by name 12 times in the story and eluded to throughout. Russia and Kazakhstan, who were also mentioned as possible partners in the program, were only mentioned twice and once respectively—however, it should be noted that the second time Russia was mentioned it was only be used to give a geographical description of Mongolia.

According to the report, the United States had also been denying its interest in storing nuclear waste as well. The controversy began with a statement from Director of the State Department’s Nuclear Energy, Safety and Security Office Richard Stratford to the Carnegie International Nuclear Policy Conference on March 29 that the United States was in discussions about building an international storage depot” for spent nuclear fuel in Mongolia. The United States followed that report with a statement denying Stratford’s remarks:

We regret that recent statements made by a U.S. official responsible for nuclear energy, safety & security during the recent Carnegie International Nuclear Policy Conference may have been misinterpreted to mean we are in discussions with Mongolia about the establishment of a storage facility to accept foreign spent nuclear fuel.  That is not correct. We fully respect that Mongolians are making sovereign decisions about their activities in the nuclear field as they deem necessary, and we stand ready to collaborate with and support them where our interests converge.  The U.S. Embassy to Mongolia decided to maintain the same statement after the New York Times report was released.

Since this report, however, the Mongolian government has continued to deny any plans to store spent nuclear material on Mongolian soil. On the part of Mongolian officials, they continued the same denials as they had from the beginning.

Most frustrating, they paid no mind to the fact that there was already a report from a reputable source saying that the United States is in fact interested in storing nuclear waste within Mongolia. Officials refused to comment for the Mongolian Economy story as well. However, there were more reports from “political scientists” telling first-hand accounts about their visits to offices of government officials with shady U.S. and Japanese officials arguing over the storage of nuclear waste. Eventually S. Enkhbat, Chairman of the Atomic Energy Agency, spoke to the newspaper Unuudur, complaining about all the false reports. He denied plans to develop a nuclear storage program, but did admit officials have discussed the possibility unofficially. Another statement by former Central Bank President and currently sitting MP O. Chuluunbat demonstrates just how out of touch some of the government really is.

President Ts. Elbegdorj has forbidden government from discussing nuclear energy issues

“It’s very beneficial business, nuclear waste,” said Chuluunbat to the media. “It’s not as terrible as people say. Thermal power plants with ash and smoke are much more harmful than nuclear waste. Ulaanbaatar’s air pollution and outdoor latrines are 10 times more harmful than nuclear waste.”

Since publishing the article, President Ts. Elbegdorj has forbidden the cabinet from discussing the issue and reports are far less frequent than they were. It is hard to say if the issue is truly closed, but for now it seems it is at least on hold.

Link to this post

Discover Mongolia: Day 2

Yesterday was the conclusion of the Discover Mongolia international mining conference. The second day of the conference focused on a lot of technical details and infrastructural plans as opposed to the progress reports and market projections of the previous day.

A number of infrastructure concerns and plans were addressed at the start of the day. The South Gobi region of Mongolia is still a very remote place and goes without running water and power. Roads are sparse and the rail lines are not enough to transport the large volumes of minerals mining companies plan to ship to China and Russia.

Currently, Umnugobi Aimag has a 6 megawatt thermal power station built by a South Korean company in 2000. By 2025 the government hopes to have a 1,500 megawatt plant producing 9 billion kilowatts per hour. However until then the speaker, Professor Ts. Balkhuyag of Mongolia State University described a hydro power plant, a 600 megawatt condensation power plant, and renovating its existing electrical infrastructure. Obviously, these water-based solutions will no help Umnugobi and the other Gobi provinces much. His other suggestion to rely on natural gasses and liquefied natural gas imports is worrisome because it puts further dependence on Russia. It’s a strange suggestion when Russia is already putting the squeeze on Mongolia with soaring oil prices.

It was not mentioned in the speech, but Mongolia Mining Corporation has already opened a new power plant of its own to power Oyu Tolgoi and Tavan Tolgoi, although Oyu Tolgoi is not yet receiving power from them.

Three government officials also spoke about infrastructure needs for the transportation of minerals; mainly roads and railways. For roads, the government plans to build the government plans to construct 44,000 kilometers of road. The private sector has already constructed 500 kilometers, but reports state that more work needs to be done because they were built too narrow.

Mongolian Railway plans to partner with another company to construct 5,000 kilometers of railway. It hopes to have technical design and international tender bids by December of this year and then to finalize its choice for a partner in the first quarter of 2012. In June construction will begin. In addition to a foreign partner, Mongolian Railway plans to subcontract to a number of Mongolian firms. Land stripping has already begun in preparation for the project.

Finally Jane Chen, senior process engineer of Brass Engineering International, introduced a plan to transport coal slurry transported through water in a system of pipelines as a low cost, low-impact transportation solution. Of all the solutions for transporting minerals this was the most attractive. However, that does not mean Mongolia does not need those roads and rails.

In the afternoon session, a panel of government officials participated in a question session. Questions focused on the “Law on the Prohibition of Mineral Exploration in Water Basin Areas and Forest Areas” (commonly referred to as “the long name law”) and the activities of illegal miners. The long name law prohibits mining activities near rivers, lakes, and woodland areas selected by the government. As a result, 240 mining companies had exploration licenses revoked with compensation. The effort may only be a half-hearted one as illegal miners are able to settle in as professional companies pull out. It does not seem as though the government will make a great effort to prevent this from happening as the panel called on local government and communities to stop illegal miners from mining at these areas deemed off limits for mining.

One audience member accused the local government of violating the Mongolian constitution with this law. He went on to accuse authorities of concentrating on closing down the operations of gold mines, while the mines for other minerals remain open. One panel member responded that he does not believe the mineral authority has violated Mongolian law because it does not have the right to do so. It is a pretty strange logic that government cannot act a certain way because it is against the law when it is accused of doing just that—breaking the law—but it is also a pretty common one here. Unfortunately, no one ever argues that point. In any case, the mineral authority clearly is not breaking any laws, but is only acting in the way Parliament has told it to. Whether or not the long name law violates existing laws or the constitution truly is a matter for Parliament to decide.

The effects of illegal mining can be devestating

The discussion quickly focused on the activities of illegal miners. Enterprising miners mining without licenses or permits are in breaking the Mineral Law, but not a lot is being done by government to stop these activities. The government has considered professionalizing them, but it is unlikely the government would do much to prevent the activities of unlicensed miners or regulate the activities of licensed independent, artisan miners even if it did.

The agency heads were all too happy to pass the buck on to Parliament and it is up them to discuss these issues in the upcoming autumn session. It makes one wonder why no MPs were present to speak on its behalf.

So ended the Discover Mongolia conference. A lot of investors seemed genuinely excited about the opportunities discussed in the past two days. It is more than likely 2012 will be an important year for growth in development in Mongolia.

Link to post

Discover Mongolia: Day One

Discover Mongolia is Mongolia's largest annual investors' conference.

Today marked the opening of the ninth annual Discover Mongolia mining forum. This is perhaps the biggest investors’ conference of the year, featuring speeches by some high level executives and special guests.

For anyone who follows the market and current events closely in Mongolia, there was not a lot of news. However, for those interested in jumping on the bandwagon to invest in Mongolia and needs acquaint his or herself with the mining market, this would be a great opportunity.

Although the event lacked any real news, there were a few speeches that shined.

Ghee Peh from UBS gave a thorough analysis of the existing and potential synergies that exist between China and Mongolia. China is a huge consumer of fuel, specifically coal and Mongolia has that in droves. However, perhaps the most lucrative deal Mongolia can make is for its self is copper. Copper is China’s number one import and it needs a lot of it for its construction projects as it continues to urbanize. Coking coal for steel production will also likely play a factor here.

Mongolia can really profit off of China because it happens to hold a lot of the minerals it needs and its close proximity. China freely admits this as well, calling Mongolia and China’s economies “highly complementary.”

Mongolia is a major producer of copper and coal, two minerals China cannot get enough of. Mongolia's close proximity to China gives it an enormous opportunity.

M. Uyanga from Ernst & Young gave an honest presentation identifying the risks for investors; even though this event is intended to promote investment, not deter it. Again, this is far from news, but it could be fairly helpful to new investors. The risks include a shortage of skills and infrastructure, resource nationalism, maintaining social license, prices and currencies, and fraud and corruption. Actually, none of these are unique to Mongolia. Resource nationalism is one issue that mining companies have become very sensitive to and is why a lot are hesitant towards Africa.

John Lee of Prophecy Coal had a pretty standard talk, but the issue of energy is actually a pressing one for most of Mongolia. It is hard to believe so many small towns in Umnugobi Aimag still go without electricity despite all of the money being poured into the province. Mongolian Mining Corporation’s thermal energy plant will likely bring energy to most of the Gobi desert region, however. Prophecy has similar plans, having decided that energy was more profitable than coal sales.

The speech from Erdenes Tavan Tolgoi was given in very dry Mongolian that would be difficult to report. However Rio Tinto Country Director and Oyu Tolgoi Chief Executive Officer Cameron Mcrae gave a more lively speech (in English). The executive projected that by 2024 China will buy 50 percent of all the copper sold in the world. It will also consume 59 percent of the world’s energy. Mongolia’s proximity makes its relationship with China very important and Mongolia stands to profit greatly. All across Asia, copper demand will likely grow as consumption increases and construction projects continue.

Oyu Tolgoi is the world’s biggest undeveloped copper mind in the world and will become one of the top-5 producers in the world. 179,000 tons a years are already produced in Mongolia, but Mcrae estimates that it will reach 450,000 tons per year by 2019 when the site is fully developed. Gold and other precious metals also stand to contribute to profits. He also said that Oyu Tolgoi is insulated from commodity prices and market slumps because of its low cost of production.

Oyu Tolgoi is the world's largest untapped copper deposit. It stands to produce 24 percent of Asia's entire supply of copper.

Mcrae went through a long list of social responsibility activities that include trainings, education funds, and infrastructure development. In this vein, he spun Rio Tinto’s recent move to acquire 48.5 percent of Ivanhoe as increased investment into the Oyu Tolgoi project, rather than a hostile move to gobble up more of the firm.

Tomorrow, Discover Mongolia will end and hopefully some real news will come when Parliament opens once again for its autumn session. It is a shame the Mongolia’s biggest investors conference is held in what feels to be like a real life cliff-hanger. What will become of the Tavan Tolgoi deal? Is it too late for revision (probably so)? Will Parliament repeal its policy to effectively insure mining exploration? Will the hold on the issuance of mining license continue (almost certainly)?

Link to this post

Uncovering Talent in Education

The Parliament House of Mongolia

Last month, the Mongolian government decided upon a new grant to distribute MNT 70,000 to qualifying students each month. Although it was passed, the law has yet to be implemented and it won’t be until next January. However, recently the the head of the Department of Education in Mongolia commented on the new law.

It was specifically this comment I found most interesting:

Certain students currently qualify for fee allowances, such as orphans, the children of civil servants, and children whose parents are herders or are extremely poor. This is a type of social welfare, and these allowances may be eliminated. It is best to give grants to the best students, so the students who study most will benefit. This is the healthy system.

This isn’t a very typical outlook in Mongolian society. Actually, it sounds down-right American. Thousands of years of close communal society and decades under a soviet system has created a system extremely sensitive to social welfare.

Does a student study hard because he or she is less lazy than another or because she has the resources to do so. Does the student have more time to study or is there not enough time between raising younger sibling and house work? Does the student have supportive parents that encourage scholarly achievements or is there an alcoholic in the family and the parents are poorly educated themselves (there are some directors in the countryside forcing volunteers to give their children special one-on-one tutoring time)? Is the student privileged with a wealth and family of social importance and high-ranking jobs or does he or she live in a student dorm or orphanage and only sees her family on holidays and summer when they can return from their herds in the countryside?

Socio-economic status and environmental factors carry a lot of weight in a student’s performance. The logic spoken by this education official seems counter-intuitive and a real step backwards to providing equal education to students. Education standards in the countryside are low already and too many kids are ignored by teachers because of social standing. Yes, there is apathy among students of poor socio-economic status too, but doesn’t this exacerbate that condition? An opportunity to go to the city and study away from one’s family is for many young people in Mongolia the first chance they have to live independently and really focus on their studies (if they so choose).

In the USA, students may receive subsidized loans based on their parents income and with extra-effort can receive grants for scholastic excellence or if they meet certain criteria in their background (i.e. affirmative action). Although controversial, many believe affirmative action gives people the chance to achieve the same goals as their peers from different ethnic backgrounds and socio-economic backgrounds. It isn’t that merit-based rewards are bad or unfair. However, I hope the Mongolian government thinks twice before removing programs already existing to the benefit of students with needs.

Source: MAD-Mongolia

link to this post

China’s Grab for Ethnic Diversity

After decades of supplanting and suppressing ethnic cultures in China, the Chinese government has put a lot of energy celebrating and grandstanding on its support for ethnic minority groups, at least in this last decade. Unfortunately, in its exuberance, its infringing on the identity of other nations– specifically Mongolia.

The Seattle Times reported the dismay and outrage of at least one man for UNESCO’s decision to grant traditional Mongolian throat singing to China on its “Intangible Cultural Heritage of Humanity” list. B. Odsuren, a skilled throat singer travelled to China for the first time 20 years ago to share this Mongolian tradition.

“I was in shock,” Odsuren told the Seattle Times. “I don’t like people lying and claiming something that everyone knows in Mongolian.”

Khoomei is the Mongolia art of singing in very deep tones and high-pitched whistles simultaneously. When sung, it produces a haunting sound that is unmistakable for anything else (though, I think I’ve heard similar sounds from certain deathcore groups growing up on Long Island). It’s a very difficult skill that many foreigners try when they come to Mongolia, but with meagre results. It’s a very traditional, old custom, but most foreigners first come in contact with it the first time they hear the Mongolian rock group Altan Urug.

Apparently Mongolia isn’t the only victim of China’s effort to grab as many cultural traditions for its ethnic minorities as it can. The Seattle Times reported that cultural arts from Tibet, Kyrgyzstan, and Korea have been claimed by China under the UNESCO collection. As it stands, China takes claim to over 25 percent of the items on that list. Currently, both Mongolia nd China take credit for khoomei.

This issue is particularly sensitive to Mongolia, due to its long-standing rivalry. The irony is, a lot of Mongolia’s anger comes from the Manchu Dynasty’s efforts to suppress Mongolian culture. I haven’t seen or heard much of this story in the Mongolian media, but Odsuren claims he’s suffered for a whole year for selling Mongolia’s culture to the Chinese, and I believe it.

Here is a music video of Altan Urug. They perform each Sunday at Ikh Mongol at 9 p.m. in Ulaanbaatar.

Source: The Seattle Times

link to this post