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 Ulaanbaatar there is no electricity so Narnjil knows little
of the world delivered through TV and the internet. But he knows all about Oyu
Tolgoi, and about Tavan Tolgoi. Big mining projects are “very good for our
country”, Narnjil says.

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, says a report in The South China Morning
Post.

“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 USD4.2 billion, annual per capita income
totaled USD1,630 compared with USD6,600 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 USD1 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 is 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 Ulaanbaatar. 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. Its developer Ivanhoe Mines expects the mine to produce 540,000 tons 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.

“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. The deposit has an estimated 1.5 billion tons 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 USD4 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. 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 USD20 billion but the total market capitalization
of the Mongolian exchange is just USD940 million, according to Frontier
Securities. Because most Mongolians are too poor to own and trade stocks, a
paltry USD14 million worth of shares changed hands on the exchange in the first
eight months of this year, Frontier says.

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 labor-intensive
skills rather than capital-intensive jobs,” Mendoza said. But, he adds,
this situation is probably inevitable, at least for a generation. Building an
expert Mongolian workforce “will take a generation”, Mendoza says.