Mining the Gobi The Battle for Mongolia's Resources

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Part 2: 'Cash Machine'


By 2005, the price of copper had exceeded the $3,500 mark and Friedland attended an investors' conference in Florida, where he gave a speech that international mining company managers still rave about -- and at the same time made him the most hated man in Mongolia.

"Our lands" -- as Friedland referred to the claim he had purchased -- "are the largest land position in the mining industry." The method he planned to employ there, he said, was so easy that "kids with joysticks can be running these things from the surface." Then he offered an analogy: "So you're in the T-shirt business, you're making T-shirts for 5 bucks and selling them for 100 dollars."

"And the nice thing about the Gobi," he added, "there's no railroad tracks in the way, there are no people in the way, there are no houses in the way. There's no NGOs." Oyu Tolgoi, he said, is a "cash machine," every investor's dream.

After that speech, says Davaasambuu Dalrain, who at the time was Mongolia's ambassador in London, "It wasn't easy to trust Friedland." But Friedland wasn't the only one in need of a company capable of turning the discovery of Oyu Tolgoi into a functioning mine. The Mongolian government was in the same boat. "So we both turned to Rio Tinto," the former diplomat explains.

Where Were the Profits?

In 2006, Rio Tinto bought shares in Friedland's company. By early 2012, when the corporation took over the majority, miners had dug more than 1,000 meters into the earth, and thousands of workers had conjured a small city out of the Gobi Desert, with an airport, a track for vehicles and power lines connecting the mine to China. The price of copper at this point was over $8,000. So much investment was pouring into the country that for a time its economy was growing at a rate of more than 17 percent.

But when Mongolia held parliamentary elections in June 2012, the victorious Democratic Party, until then only the junior party in a coalition government, even though it had been responsible for nominating a finance minister -- found itself gazing into yawningly empty government coffers. How could that be? Why hadn't the country earned its share during the boom?

"The main problem is the loan," says Mining Ministry planning head Otgochuluu. Rio Tinto, he says, has exceeded the mine's originally estimated construction costs of $5 billion by hundreds of millions of dollars. He believes Rio Tinto managers' salaries are too high and that the company deducts consulting and materials costs that don't make sense.

Because the Mongolian government committed to bearing 34 percent of all the mine's costs, as costs rise so do the country's debts with Rio Tinto. "It will take us decades to pay back the loan," Otgochuluu explains. "We expected to see the first dividends on the mine in 2019. But it turns out it will be 20 or 30 years before we receive a share of the profits."

Empty Mines, Bad Experiences

Rio Tinto vehemently denies having broken any contracts. The costs, the company says, are only $786 million higher than agreed upon with the government in a 2009 feasibility study. "By any measure, this is effective cost management for a project of this size," says a representative for Rio Tinto. Besides, he adds, the government has received "over $1.1 billion in taxes, fees and pre-payments so far," with the corporation paying more taxes in Mongolia than in many other countries where it operates mines.

Otgochuluu smiles bitterly. "We've had bad experiences," he says. A Canadian company that set up a gold mine north of Ulan Bator in 2004 insisted on being exempt from taxation for seven years, on the grounds that geological conditions in the area were supposedly very complicated. "Four years later," Otgochuluu says, "the mine was depleted." As for Rio Tinto, he estimates the company will earn around $1 billion with its sales of copper concentrate from Oyu Tolgoi this year and $2 billion next year. The corporation declines to comment on these figures.

"We will end up with $70 million this year and perhaps $200 million next year in licensing fees," Otgochuluu says. "But that's not enough. We need at least $700 million to fund our budget."

Public Distrust Grows

That the government can't get its budget under control and fails to distribute the country's resources fairly can hardly be blamed on Rio Tinto's managers. It is more likely due to incompetent, corrupt government employees such as the former head of Mongolia's Mineral Resources Authority, who was sentenced to several years in prison.

Still, the language used by foreign mining company managers who like to regard the country as a "cash machine," as well as the non-transparent deals they conduct, are increasingly turning the Mongolian people against them.

Sanjaasuren Oyun, Mongolia's minister of the environment and tourism, says she doesn't like the term "resource nationalism," but believes her country unavoidably had a great deal to learn on its way to becoming a raw materials giant, and needs to take a much more self-confident stance.

"Twenty years ago, we thought mining was a business like any other -- you sell your natural resources and collect the fees," Oyun says. In 1997, the 49-year-old explains, the government opened up nearly half the country for mining licensing. That's a geographical area nearly equivalent to the entirety of Turkey. "We fell into the same trap as many others before us -- dig now and clean up later."

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peskyvera 08/07/2013
1. optional
And in Mongolia too...same old, same old. The wrong people benefiting from the country's riches and the poor being exploited even more.
japanreader 08/08/2013
2. Very Conscious of Mongolia in Japan
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.
spon-facebook-1041952182 08/08/2013
3. optional
This is a once in a lifetime opportunity. I hope our Mongolian friends will take care of their nation's interests.
access 08/09/2013
4. Block caving
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.
plutocrat 08/11/2013
5. optional
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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