The
new gold rush to develop Mongolia”s resources could make it the world”s fastest-growing
economy over the next five years. 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 tons — believed to be the world”s largest
untapped coking coal site. Most of its projected 50 million tons of production
will go to China.

The
trick is getting it there, says Reuters in a recent analytical report. 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 S. 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 USD2 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.

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,” Mrs. S. Oyun, an MP and former foreign affairs
minister, said at a conference in Ulaanbaatar in June. “Theoretically, we
want to have a one-third, one-third, and one-third balance,” Mrs. Oyun
added, referring to China, Russia and a third country such as Japan or the
United States.

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 favor of 100 percent state
ownership, with plans to sign a development contract without giving any equity
away.

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. 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 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,” Keith Marshall, the Oyu Tolgoi CEO, said, 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 S.Dugersuren,
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 Sepember 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,” Ivanhoe 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
recently said.

The
government is making plans to take public a portion of Oyu Tolgoi mine. It”s
all part of Mongolia”s plans to privatize 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.