Mining the Gobi: The Battle for Mongolia's Resources

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The construction of a huge mine in the middle of the Gobi Desert was supposed to catapult Mongolia toward rapid economic growth. But an ongoing conflict over profits from the gold and copper mined there threatens to capsize the young democracy.

Mongolia is over four times the size of Germany, with nearly 3 million inhabitants and a GDP of $10 billion (€7.5 billion) in 2012.

British-Australian mining corporation Rio Tinto employs 71,000 people in more than 40 countries and is worth about $60 billion.

These two unequal partners -- a poor, potentially rich nation and the second largest mining corporation in the world -- have joined together to mine one of the globe's largest deposits of copper and gold. But will they be capable of distributing this wealth fairly?

The mine in question lies an hour's flight south of the Mongolian capital Ulan Bator, near the border with China. There is enough copper in the ground here to build the Statue of Liberty more than 800,000 times over. Once the planned mine goes into full operation, it could increase the country's GDP by a third. It could, at least in theory, bring prosperity to this country where many people still live in simple yurts and huts.

But in practice, the transaction between this global corporation and this country that is poor but rich in raw materials looks quite different. In fact, the project serves as a prime example of what is happening in a growing number of newly industrialized and developing countries.

Here we have a weak country that needs the help of a business that is economically far more advanced to tap its own natural resources. One side has raw materials everyone wants; the other has the necessary technical expertise, as well as a great deal of money and smart lawyers. How can the inexperienced country benefit from this relationship without being taken advantage of? And how can the government of this frail democracy explain to its people that in the coming boom years, a few people will get rich very quickly, while most stay poor?

Custodians of the Mine

The conflict surrounding the Oyu Tolgoi mine, which is named for the turquoise-colored copper ore found in the Gobi Desert, began about four years ago. In order to acquire a 34 percent share in the mine's construction, the Mongolian government had to take out a loan. This loan came from Rio Tinto, the company that operates the mine. When news of that deal emerged, people in Mongolia started asking who will ultimately get more out of the mine, Mongolia or Rio Tinto.

Geophysicist Samand Sanjdorj is the mine's vice president, making the 67-year-old the highest ranking Mongolian on site. His office is in an air-conditioned glass building that rises out of the Gobi Desert like a blue spaceship. Every few weeks, a company jet flies him and his colleagues back and forth between the capital and the mine. Asked whose side he is on -- his country's or his company's -- Sanjdorj takes a long time to answer. Finally, he says, "I'm Mongolian first, but this mine is my baby."

One of the men in the capital responsible for the copper mine is Chuluuntseren Otgochuluu, the 35-year-old head of the Mining Ministry's planning department. His office is on the fifth floor of an aging Soviet building with no elevator and creaking floorboards.

'The People Haven't Benefited'

It isn't far from Otgochuluu's downtown office to the bleak hills north of the city center, where 800,000 rural refugees have settled -- nearly a third of Mongolia's population. They live in gers, a Mongolian style of yurt, and have no running water, no sewage systems and only sporadic electricity. Even in winter temperatures of minus 30 degrees Celsius (minus 22 degrees Fahrenheit), they go outside to reach their outhouses. And they fuel their heating stoves with anything that burns, including carpeting, tires and plastic waste. The air in Ulan Bator in winter is even more polluted than in China.

"So far, the people haven't benefitted from the mine," Otgochuluu says. "Our deal with Rio Tinto hasn't been a fair one. Rio Tinto is doing great work in the desert here, but if they want to cheat us when it comes to money, then we can't be friends."

This is how things have gone all along. The government accuses Rio Tinto of breaking agreements and rejects the company's future plans for financing the mine.

How this dispute ends will have a decisive impact on Mongolia. The country, whose economy has been growing faster than almost any other, is almost entirely dependent on the export of raw materials. Mongolia has things everyone wants -- coal, copper, gold, uranium, rare earth minerals -- and that potential wealth is reflected in the high-ranking visitors it draws. Donald Rumsfeld has been to Ulan Bator, as have Angela Merkel and several Japanese prime ministers. Beijing especially is making an effort to reach out to its northern neighbor.

One hundred percent of the materials from Oyu Tolgoi are exported to China. This July, four years after the mine's construction began, the first flat-bed trucks set out from Oyu Tolgoi to China, each bearing 36 tons (36,000 kilos) of a brown, cement-like powder, from which copper and gold would be extracted on the other side of the border. It was a historic day, whose date had been postponed several times. Geophysicist Sanjdorj had begun to fear he wouldn't get to experience it before his retirement.

Mapping the Ore

Sanjdorj steers his Land Cruiser to the top of the highest slag heap and points out Oyu Tolgoi's open-cast mine, as well as the headframe and ventilation shaft for the underground mine, and a crusher the size of an ocean liner, for grinding the copper ore into dust. The first time he stood on the spot, looking for copper, was over 20 years ago. "The Russians didn't leave us much," he says. "But their geological maps were good. We knew where we needed to look."

In the mid-1990s, shortly after the release of those Russian maps, Australian mining giant BHP obtained the first exploration licenses for Oyu Tolgoi and spent several years digging for copper deposits. Sanjdorj and his colleagues worked there in 40 degree Celsius heat in the summers and minus 40 degree Celsius cold in the winters. If they had dug just 30 meters (100 feet) deeper, they would have reached the richest layers of ore back then. But they didn't, and in 2000 the Australian company lost interest for good, selling its licenses to Canadian mining company Ivanhoe for about $40 million. The price of copper at that point was $1,700 per ton, a quarter of its value today.

Ivanhoe's founder, American mining tycoon Robert Friedland, had made a great deal of money through a nickel project in Canada and his company held a 50-percent stake in a copper mine in Burma. He continued the drilling at Oyu Tolgoi and soon reached his goal, when geologists found a kilometers-long, banana-shaped copper deposit that extended as far as 2,000 meters into the earth and had a very high copper content. Now Friedland just needed people with the skills and means to excavate that banana.

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1. optional
peskyvera 08/07/2013
And in Mongolia too...same old, same old. The wrong people benefiting from the country's riches and the poor being exploited even more.
2. Very Conscious of Mongolia in Japan
japanreader 08/08/2013
What this article did not dwell on is the fact that Mongolia is struggling very hard to maintain its independence in the face of China's seemingly inexhaustible demand for material resources. With this demand comes a tincture of Chinese control that seems to extend into every aspect of the Mongolian economy. Being landlocked, Mongolia basically has no choice but to sell to the Chinese or Russians. For a long time during Communism, Mongolia relied on counter balancing China with Russia. This counter weight is now gone. Japan is always a favorite of the Mongolians when it comes to a potential outlet for their resources. Ron Son, the closest port in North Korea on the Japan Sea is about as far as Amsterdam is from Helsinki. The problem is that the railroad passes entirely over China's Ge Lin province and is entirely chinese owned, and Ron Son itself is now pretty much in the hands of the Chinese on a 99 year lease as a free port. For all that Mongolia is the Australia of North East Asia, it seems doomed to Chinese political and economic dominance and to long term under development and poverty.
3. optional
spon-facebook-1041952182 08/08/2013
This is a once in a lifetime opportunity. I hope our Mongolian friends will take care of their nation's interests.
4. Block caving
access 08/09/2013
The problem the government is having is the mining technique. What rio is doing is setting up block caving. This involves a massive up front investment. The money they are making now will be from the open cut and this is small compared to the block caving. So they will make a lot of money once it is setup. When I was working at the mine, most of the workers were Mongolians. They were a very happy bunch. When the mine is full steam 40,000 Mongolians will work at the mine. This will be fantastic for the country. The Mongolian government just has to stick it out, the money will flow in due course and block caving will maximise the profits. I do not work for rio and never have.
5. optional
plutocrat 08/11/2013
Unfortunately this is a ugly face of the capitalism which is driven by greed and selfishness of those who are already rich and are prepared to do anything to steal anything possible from the poor just for their own profit. That is why Western world needed to destroy socialism and prevent from spreading it as in real and developed socialism there would be impossible to steal from poor just to gain extra penny of profit. If there would be some international financial institution which would be free from capitalist influence and would lend necessary amount of money to the country which would use this money to buy necessary expertise thus allowing the country to exploit their own natural riches people of the world would benefit from that quite substantially. Country would extract and manufacture the minerals and by doing so the product would bring them about 5 - 6 times more net profit and the product would be still much cheaper than it is nowadays. Mongolia gets very little money by granting mining rights, and just a handful of unqualified workers would get the worst miserable jobs as the ore will be exported elsewhere to be processed further. It is just disgusting to think how these multinational companies are exploiting poor nations and in return they create a cast of corrupt and privileged indigenous who will for a few extra ten grants make sure that exploitation will be safe and grand theft will go on unabated.
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