The new gold rush to develop
Mongolia”s resources could make it the world”s fastest-growing economy over the
next five years, according to Renaissance Capital, which projected GDP will
almost quadruple to USD23 billion by 2013 from USD6 billion today. 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, says a Reuters analysis. 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. 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.

“The biggest risk is
government policy — one of the examples is on infrastructure,” said Masa
Igata, founder and CEO of Mongolia-based Frontier Securities. “It makes
economic sense to connect Tavan Tolgoi to China”s border. However, Parliament
has decided to prioritize Tavan Tolgoi to Sainshand. By doing so, they
sacrifice the economic benefit…”

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.
Chinese coal giant Shenhua was often named as a frontrunner in the hotly
contested deal. Other bidders named in the original auction included India”s
Jindal, Vale, and U.S. coal miner Peabody.

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. “They”d given up too much in Oyu Tolgoi,” Frontier”s Igata
said. “A few years ago, Mongolia was eager to be financed.” 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 more 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,” Mr.
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,” Mr.  Friedland 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 told reporters at
last month”s U.N. General Assembly meeting.

Even as firms such as
Mongolian Mining Corp prepare IPOs in more sophisticated markets such as Hong
Kong this year, 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.