Canadians
in Ulaanbaatar marked Canada Day on July 1 listening to a tuxedoed Mongolian
baritone perform the Canadian anthem at an embassy reception outside a former
dictator’s palace, says a report in
the Toronto Star.
Not surprisingly, many of the ex-pat guests were mining company executives. As
Mongolia’s second-highest export partner after China, Canada is also the
largest foreign investor in Mongolia’s resource sector, with about 25 firms active
in the country.

Canadian companies spent an
estimated USD500 million in 2008 on drilling and improvements to their
properties, a figure that will grow rapidly as the industry expands.
Significant deposits include uranium, molybdenum, iron ore, copper and gold.
Oil reserves have yet to be fully exploited, and Mongolia has more than 300
coal deposits that can provide China with fuel for power generation and
steelmaking.

For example, Canadian
subsidiary SouthGobi Sands LLC (57 per cent owned by Ivanhoe Mines Ltd.) sold
1.3 million tonnes of coal last year to China. By 2012 it expects to ramp up to
8 million tonnes annually.

In Mongolia’s emerging
economy, Canadian subsidiaries and joint-venture projects are enjoying both
pop-the-cork success as well as the challenge of operating in a young
democracy.

At the same time, Mongolian
leaders are under pressure to ensure the resource bonanza provides enough tax
revenue to underwrite an economic and social revolution for the country of 2.7
million. A saddle-shaped land the size of Quebec (with less than half the
population), Mongolia sits on vast mineral reserves between its
commodity-hungry neighbours, China and Russia.

Billed as the largest
undeveloped copper-gold mine in the world, Oyu Tolgoi LLC will be the project
that changes everything for Mongolia. The capital cost to bring the mine into
production in 2013 is estimated at US$7.3 billion, in a country where the GDP
is only US$4.2 billion.

It took the project’s
majority owner, Vancouver-based Ivanhoe Mines Ltd., years of negotiating to
reach the landmark 2009 agreement with the Mongolian government. Ensuring tax
stability for Ivanhoe and partner Rio Tinto, and a 34 per cent stake for
Mongolia, the agreement was enough to boost the country’s international investment
rating.

Even without using the
cautious lingo of mineral estimates, and the fevered superlatives of stock
promoters, the project returns are expected to be huge: production of 1.2
billion pounds of copper and 650,000 ounces of gold every year for the first
decade beginning in 2013, and a mine life estimated at 45 years or more.

“It is a phenomenal ore
body,” said CEO Keith Marshall. “It has to be exceptional to be developed in
such a remote location.”

Remote is a relative term, of
course. Sure, the nearest paved road is 500 km from the mine and the project
will have to get its electricity from China for the first nine years. Many
vocational schools closed after the Soviet regime collapsed in 1990, so the
company plans to build its own colleges to train the huge labor force required.

But approval for Oyu Tolgoi
indicated that the country may be ideally situated, adjacent to the roaring
Chinese economic engine.

“It’s a great opportunity,”
says John Ross Davies, country manager for Major Drilling Mongol LLC, part of a
New Brunswick-based company that is one of the top three contract drillers in
the world. “The hype on (Oyu Tolgoi) is sending the message to the rest of the
world that this is the place to be.”

Other corporate heavyweights
have come looking for prospects as the government improves the regulatory
climate to attract mining firms. Citing potential corruption, the Mongolian
president halted the issuance of mineral exploration licenses until procedures
can be improved. The sector needs a conflict of interest law and more
transparency to keep officials from profiting, says the mining association.

Still, Mongolia is still
considered a risky place to invest, as some Canadian companies are discovering.
The Fraser Institute’s 2009-10 survey of mining companies measures the effects
of government policy in 72 jurisdictions around the world. Mongolia ranked in
the bottom 10, along with Zimbabwe and Venezuela.

Mining is set to transform
the country’s economy, but building the infrastructure to get that mineral
wealth to market is the major challenge. What’s needed is a transportation
necklace across the country, including 2,000 kilometres of railway tracks,
7,800 km of roads and 100,000 new housing units, says the transportation
ministry.

Mongolians want jobs as well
as taxes and royalties, in a country where unskilled labourers in the city make
as little as $3 a day. By comparison, a driller with two years training can
earn US$4,000 a month in Mongolia – even more on the international job market.

“The vision is to grow the
GDP by processing natural resources rather than extracting and exporting,” says
Ganbat Chuluunkhuu, who returned after six years as a Wall Street investment
banker to become team leader of a government investment task force. “Industrialization
could create that middle class for Mongolia.”

Chile is viewed as a role
model for fiscal success through a strategy that helped local suppliers prepare
to meet international standards. “We’re now seeing Chilean suppliers exporting
mining supplies to the rest of the world. Until a few years ago they were net
importers of things like drill bits,” said Hancock. “I see opportunities for
that in Mongolia as well.”

Until the revenues begin
filling government coffers in a big way, mining companies are providing their
own largesse. A rural development project financed by CIDA and local companies
such as Boroo Gold Co. Ltd., a subsidiary of Canadian firm Centerra Gold Inc.,
trained poor families in vegetable farming and marketing in Mongolia’s fertile
northern region.

Junior mining company Entree
Gold Inc., currently exploring on its South Gobi properties, consults the local
governor every year to see what projects are most urgent. The company has spent
millions on improvements from a new activity centre and pharmacy to a herd of
goats and fodder for a region hard hit last year by the exceptionally cold
winter (called a dzud).

“We could give nothing and
still get our permits,” said Entree operations manager Kelly Patterson. “Or you
can do it the right way.”