Mining the Gobi The Battle for Mongolia's Resources
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."