Peter Koven in Oyu Tolgoi, Mongolia, Financial Post · Friday, Nov. 26, 2010
 |
This is the big one.
Deep in the Gobi Desert, in one of the most remote and bleak parts of the world, the most talked-about copper-gold mine in history is going up with remarkable speed.
Outside the Oyu Tolgoi mine site, the Gobi is as it always is: Empty landscapes carry on as far as the eye can see, interrupted by the occasional camel herd dotting the countryside. Inside, more than 5,000 people from 24 countries are hard at work, building a mine over a deposit holding an estimated 81 billion pounds of copper and 46 million ounces of gold, and just 80 kilometres from commodity-hungry China.
In any country, this would be a monumental project. In Mongolia, with only three million people, this is the most important and controversial capital project in its history, and nothing really comes close. When Oyu Tolgoi reaches full production by 2018, it is expected to make up a staggering 30% of the country’s gross domestic product. While there has been a lot of talk in Canada lately about “strategic” potash deposits, they can’t hold a candle to this.
The US$4.6-billion project is also Canada’s most significant investment in Asia. While Oyu Tolgoi employs workers from all over the world, it is a Canada-led venture: Vancouver’s Ivanhoe Mines Ltd. is the majority owner, and Canadian contractors like Moncton, N.B.’s Major Drilling and North Bay, Ont.’s Redpath Mining are doing much of the dirty work on the ground. Ivanhoe, which is made up of stakes in a loosely connected group of resource assets in the Asia-Pacific, has a market value of more than $13-billion due mainly to the promise of riches at Oyu Tolgoi.
Construction of the mine is still in its early stages. But it is going up on schedule, with initial production expected in late 2012. While construction costs look to be ticking higher, they have been kept in check so far.
As investors know, getting to this point has not been easy.
Oyu Tolgoi seemed like a pipe dream for much of the past decade. While Ivanhoe’s legendary leader Robert Friedland travelled the world talking about its amazing potential, many doubted that a remote deposit in a land-locked country they knew nothing about would become a reality. It took years of on-again, off-again negotiations with the government for it to happen, and the mine dominated political discourse in Mongolia over that period.
The project is now so big that it has become a litmus test for Western investment in Mongolia, which the government badly wants to attract.
“If we do succeed with this project, it will encourage many other Canadian and international companies to work in Mongolia,” says Sukhbaatar Batbold, the country’s Prime Minister.
Yet the future of Oyu Tolgoi is still cloudy. A dispute between Ivanhoe and joint-venture partner Rio Tinto Ltd. has overshadowed all the progress at the site and made investors nervous. Rio Tinto, a London-based mining powerhouse, has made it clear it wants the biggest piece of Oyu Tolgoi it can get. And Mr. Friedland is not eager to cede control as he tries to raise billions of dollars of financing.
It all happened because Ivanhoe decided to drill deeper.
The discovery of the Oyu Tolgoi site actually dates back decades. In 1983, local herders told Mongolian government geologist Dondog Garamjav about green-stained rocks they noticed in the South Gobi. He mapped out the area as part of a country-wide exploration program. It became known as Oyu Tolgoi, or “Turquoise Hill,” because of the colour of the copper ore in the rocks.
By the mid-1990s, Mr. Garamjav was working for Australia’s Broken Hill Proprietary Co. (later BHP Billiton), which got an exploration licence for the area.
BHP drilled 23 holes on the property over the next couple of years, and while it found some interesting mineralization, it never hit anything significant. Its mistake was not looking deep enough, as it was just trying to find shallow copper systems. One hole that was halted for technical reasons came just 30 metres short of hitting the motherlode.
Before long, BHP gave up and put the project up for sale. Copper prices were down around US65¢ a pound and the company was cutting back exploration around the world.
In March 1999, at a mining conference in Toronto, Ivanhoe executive Douglas Kirwin took a look at BHP’s drill core and saw potential to expand the copper resources. Ivanhoe bought the property in 2000 and started drilling shallow holes.
The results were nothing special, and by the end of 2000, the company had not found anything close to a mineable resource. It was also burning through cash, and the company considered giving up on Mongolia. Project head Charles Foster decided to drill some deeper holes and see what happened.
“The result was incredible,” recalls Sanjdorj Samand, vice-president of the project.
The drills passed through high-grade copper-gold mineralization that was hundreds of metres thick.
It was clear right away that Ivanhoe had made one of the most significant mineral discoveries in decades. And from there, it just kept growing. A scoping study in early 2004 confirmed that Oyu Tolgoi was a world-class deposit, and Ivanhoe began negotiations with the government on a stability agreement covering the project.
It turned out to be one of the longest and most protracted negotiations the mining industry has ever seen, and neither side made things easy.
Mongolia has a long history of mining, but it was not equipped to deal with a project of this scale. It is, after all, a brand new country that only emerged as a fledgling democracy in 1990 after the collapse of the Soviet Union. It has remained fiercely independent despite being sandwiched between China and Russia, two less-than-democratic neighbours. Mongolians are not fond of either one, especially China.
In its first 15 years of democracy, Mongolia enacted liberal mining policies to attract foreign investment, including extended tax holidays. It didn’t help. Commodity prices were dreadful throughout the 1990s and early 2000s, and little money was coming in.
That started to change by 2004, when prices moved up and investors took a keener interest in the country’s resources. Like many developing countries at the time, Mongolia reacted with a wave of resource nationalism.
“It was a very natural reaction after we had these liberal policies for the first 10, 15 years,” says S. Oyun, a member of parliament and democracy activist.
Ivanhoe saw this first-hand. By mid-2004, the company was already saying negotiations with the government were in the “late stages.” But at the same time, there were nationalistic forces in government and parliament that were against any type of deal with foreign stakeholders. Other officials were openly speculating about state ownership in the project.
Mongolians were also not amused by comments Mr. Friedland made at a conference in 2005, when he joked that the Gobi Desert has plenty of room for “waste dumps.” He became a lightning rod for enraged local protestors.
No agreement was signed into law, and in May 2006 the process took a huge turn for the worse when the government passed its infamous 68% “windfall tax,” imposing a punitive levy even at very low copper prices.
The tax, which was an effort by some politicians to meet election spending promises, was a fiasco. It was rapidly voted on and approved on a Friday night when most politicians were not even in parliament, and gave credence to the doubters who wondered if Mongolia would ever forge good mining policy. Ivanhoe shares plummeted.
“It certainly didn’t help the negotiations,” says Keith Marshall, the outgoing president and chief executive of Oyu Tolgoi LLC, the joint venture tasked with building the mine.
“Also, we were heading into parliamentary elections and change of government. You’ve got to do these negotiations at the right time, which is really after government is elected and you know who you’re dealing with.”
By 2007, Ivanhoe had what it called a “draft investment agreement” with the government, but there was still no sign of parliamentary approval.
It ultimately took the most severe downturn in a generation to get things moving.
When the economic meltdown struck in late 2008, Ivanhoe went into survival mode and laid off more than half its on-site personnel, going down to about 600 people. It was a wake-up call to the Mongolians that development of the project was not inevitable.
In the summer of 2009, the two sides returned to the bargaining table with a renewed conviction to get a deal done. The talks were tortuous, with negotiations lasting until 2 or 3 a.m. every night in the last few weeks.
Whether it was taxation, labour quotas or environmental impact, every topic took an enormous amount of time to negotiate. And given the size and scope of the project, most government ministries were involved at some point. The World Bank, a former Chilean minister and countless other experts took part at various stages.
A deal was finally signed into law on Oct. 6, 2009. It scrapped the windfall tax and gave the government a 34% stake in the project with Ivanhoe holding the rest.
“It’s a pioneering project,” says Batsukh Galsan, chairman of Oyu Tolgoi LLC. “Since Mongolia had no experience with anything like this, the government took its time to make sure this could be a template for other strategic mining projects in the country.”
Ivanhoe had all the development plans in place before the deal was signed, and with the green light given, contractors were able to mobilize fast to get things moving. Within months, the site exploded from about 500 people to more than 4,000.
Today, it has moved above 5,600, with Mongolians making up more than 60% of the total.
On site, everything is happening on a huge scale. About 3,000 tonnes of material are being trucked in every day.
Foundations are being laid for a massive copper concentrator, and a 14-storey pebble crusher already dominates the skyline. One underground shaft is already in operation, and a second 31-storey shaft along with an open pit are in development.
Exploration is also ongoing, with management all but certain it can add more resources and extend the mine life beyond the estimated six decades.
The construction site turns into a raucous party at night, as the Mongolians head to an on-site pub to knock back drinks. Others play basketball or take in an English class, at which they practise their speech and sing a stirring rendition of Love Me Tender, in perhaps the last place in the world one would expect to hear that song.
The Chinese workers are not part of the festivities — in a telling commentary on Mongolia-China relations, the Chinese keep to themselves in a separate compound. It is an arrangement that seems preferable for both sides.
The festive atmosphere at the site has probably not carried over to Ivanhoe’s head office in Vancouver, where a dispute with joint-venture partner Rio Tinto has overshadowed progress in Mongolia. When Mr. Friedland signed up Rio as a strategic investor in 2006, it was a perfect match. Ivanhoe needed both capital and a skilled mining partner to develop Oyu Tolgoi; Rio provided both. Rio also gave a stamp of approval to a project that seemed far-fetched to some investors at the time.
But tensions have grown during the past several months. Rio chief executive Tom Albanese has made it clear that he is unhappy with the status quo, in which Rio holds a 35% stake in Ivanhoe and Ivanhoe holds a 66% stake in the project. In a perfect world, he wants direct ownership of the mine without having to take over Ivanhoe and acquire its many subsidiary assets.
Ivanhoe, meanwhile, needs to raise billions of dollars to build Oyu Tolgoi, but wants to do so on its own terms.
The first signs of trouble emerged last summer, shortly after Ivanhoe enacted a shareholder rights plan (or “poison pill”) to help prevent a creeping takeover. Rio disputed it and began arbitration.
Around the same time, Rio publicly mused about converting its Ivanhoe stake into a direct stake in Oyu Tolgoi, and said it held talks with an outside company (Chinalco of China) about participating in the project as well.
It was a strange disclosure from Rio, given that Ivanhoe is the company that controls the deposit. Mr. Friedland responded by terminating a clause that prevented Ivanhoe from bringing in new strategic investors. And most recently, Ivanhoe began a “rights offering” that allows it to raise money without increasing Rio’s influence in the company.
The dispute also extends to the mine, where the two sides have disagreed over how quickly the project should be developed, and how much it will cost.
Mr. Marshall, the joint-venture chief, maintains that it is not disrupting work in Mongolia, but he acknowledges that it is a concern.
“When we see they are going to arbitration and we see that they’re publicly discussing each other’s tactics, sure it affects everybody on the ground,” he says.
Mr. Galsan, who works closely with both companies, calls the dispute a “disagreement between mother and father.” “I don’t think they want to kill this beautiful daughter they’re raising together,” he says.
They don’t. But it is also clear that the status quo cannot last forever. Both companies want to develop the project as quickly and affordably as possible. The dispute is purely about money, and the rapid progress of Oyu Tolgoi has raised the stakes for both sides. Investors are hoping for a quick resolution that would remove the uncertainty and firm up the project’s ownership.
In Ulaanbaatar, Mongolia’s capital city, there is no talk about strategic investors or shareholder rights plans. People merely want to know when they will finally see some benefits from a mine that they have heard about for almost a decade.
Some hold the view that it is going to fix the country’s economic problems, particularly its 32% unemployment rate.
“There are unrealistic expectations,” Mr. Galsan says. “Oyu Tolgoi is a mine; it can’t solve all the problems the country faces.”
Of course, there will be benefits: The Mongolian government will receive about 54% of the revenue from Oyu Tolgoi once it begins production. And there will be significant job creation, particularly in the communities near the mine.
Ms. Oyun, a former Rio Tinto geologist-turned-politician, says the biggest risk is bad political decision-making. She wants to see the mining revenues invested in education and health, but worries that a bad call by government, like a repeat of the windfall tax, could undo many of the benefits from Oyu Tolgoi and other projects.
“I’m very optimistic for the next five or 10 years, but I always put in brackets, ‘Subject to politics,’ ” she says.
Mr. Batbold, the Prime Minister, would probably agree. He and his Cabinet recently toured the project with Mr. Friedland, and came away impressed with what they saw.
Once the Canadians and the British and everyone else are finished building, it will be up to Mr. Batbold to harness Mongolia’s massive economic opportunity
source: http://www.financialpost.com
0 comments:
Post a Comment