Ulaanbaatar city centre, in Mongolia Photo: Philip Wen
In the centre of Ulaanbaatar, the rough and pulsating capital of Mongolia, sleek new skyscrapers share the skyline with the concrete shells of stalled, half-built office towers.
The city, home to half of the country's three million people, has been transformed by an old-fashioned mining boom. The economy of Mongolia, a landlocked country wedged between Russia and China, has doubled in the space of a decade, with the young democracy's transition from a socialist command economy to a free market sparking a global rush to exploit its rich copper, coal and gold deposits beneath the earth's surface.
The biggest of Mongolia's mega-projects is the Rio Tinto-controlled Oyu Tolgoi copper-gold mine, deep in the south of the Gobi desert, 80 kilometres north of the Chinese border.
The above-ground open-pit copper mine at Oyu Tolgoi. Photo: Philip Wen
Oyu Tolgoi is already producing copper concentrate from an open-cut mine, but the true riches – 80 per cent of the mine's value – are nestled a kilometre underground.
Breakthrough
A key breakthrough in May saw Rio Tinto and the Mongolian government settle disputes over terms of the project that had seen Oyu Tolgoi's crucial underground expansion delayed for more than two years. When complete, the fully operating mine will account for as much as one-third of Mongolia's economic output.
The compound at the Oyu Tolgoi mine appears out of nowhere in the desert. Photo: Philip Wen
"Without a doubt it is a huge impact and I think it does cause nervousness in [Mongolian] people in a sense," Munkhsukh Sukbaatar, Rio Tinto's country director in Mongolia, says of the project's size.
"But the other part of it is that what people recognise is that it's 30 per cent [of Mongolian GDP] that didn't exist before."
In the dry and dusty expanses of the southern Gobi, the bright blue buildings of Oyu Tolgoi's camp appear almost out of nowhere amid the desolation.
Inside one of Oyu Tolgoi's mine shafts which extend 1.3 kilometres underground. Some 80 per cent of the copper mine's value lies in the underground expansion. Photo: Philip Wen
There is a renewed sense of anticipation after the lengthy delays. Rio Tinto expects to finalise $US4.2 billion ($5.8 billion) of project finance with its consortium of banks by November, and then obtain outstanding permits.
Rio Tinto has declared Oyu Tolgoi its single best project despite steep falls in the copper price.
The price of copper has fallen sharply.
A worker at Rio Tinto's Oyu Tolgoi mine, one of the world's richest copper deposits. Photo: Supplied
The underground expansion will take between five and seven years to complete and require tremendous feats of engineering.
Reaching the underground ore body will require five mine shafts each approaching 1.3 kilometres in depth.
That will provide access for workers, service carriages and heavy machinery, as well as ventilation, to set up huge underground workshops and proceed to dig around 200 kilometres of tunnels – longer than the underground network of the London tube. Regulated air will be pumped through the tunnel to help insulate against the wild climate above ground – here, it reaches 40 degrees Celsius in the summer and minus-40 degrees in the winter.
Symbol of struggle
Oyu Tolgoi, though, has been symbolic of the Mongolian government's struggle to get to grips with a slumping economy heavily reliant on commodity prices and foreign investment.
Mongolia's government had promised to use its vast untapped mineral reserves to develop its tiny, landlocked economy, but flagship projects have been delayed and foreign investment deterred by political disputes and regulatory uncertainties.
Opposition parties have seized on public concerns that Mongolia will lose its identity and become overly dependent on mining. The shutdown of initial underground operations at Oyu Tolgoi had a devastating effect on Mongolia's economy.
In the first half of this year, Mongolia's gross domestic output expanded by 3 per cent, compared to 8 per cent in the same period last year; and a far cry from the 17.3 per cent growth in 2012.
"We had booming years of very high growth around 2010, 2011," says Batsaihan Jamichoi, director and co-founder of the Mongolia Opportunities Fund, a fund aimed at institutional investors.
"But starting in the second half of 2012 the economic growth has been slowing down very significantly. We are having some issues partly caused by the global commodities cycle, and partially it is home-made mistakes."
Political turmoil
Mongolia's parliament appointed Chimed Saikhanbileg as prime minister in November after ousting his predecessor in a no-confidence motion. While seen as a moderniser, the political turmoil has persisted, with Saikhanbileg replacing six members of his cabinet ahead of an expected election next year, a move the president said could further deter foreign investors worried about political stability.
The Toronto-listed Centerra Gold is awaiting a decision from parliament on the stake size the government will take in the Gatsuurt gold mine it hopes to put into production.
Parliament must also vote on a proposed investment agreement with a private consortium led by China's Shenhua Energy to develop and mine the huge Tavan Tolgoi coal mine.
Amarjargal Khenchbish, a Mongolian-born lawyer and executive now with the copper and coal group in Rio Tinto's London office, says it stemmed from the country's relative inexperience as an open-market economy, having only begun its transition from a socialist command economy with five-year plans in the 1990s.
"So initially there's a lot of misunderstanding and frustration," she says. "The public sentiment was different but now people especially in the past two or three years they understand how big the impact Oyu Tolgoi can be to Mongolia and also foreign direct investment into Mongolia."
"People say that Mongolians are fiercely independent and proud; I think that's probably an understatement. One pattern you'll see emerging again and again is pride, it's a huge thing," Sukbaatar says.
"People felt foreigners came in a bit too quickly and it affected their pride and it felt like their space was being marginalised."
Opportunities abroad
That pride has also seen waves of urbane, foreign-educated young Mongolians return home, excited about the economic opportunities and a desire to contribute to the country's fledgling development. Sukbaatar himself returned after more than a decade in the United States, eschewing the predictability of a lucrative career in financial services for the untapped potential back home.
"It's very common," he says. "You have Mongolians living abroad, you very frequently hear them wanting to come back here and do something more, come back to contribute after learning skill sets."
The confluence of a series of droughts and harsh winters and the growth of the country's mining industry has seen the population of Ulaanbaatar more than triple since 2000.
But most live on the fringes of the city in districts of gers, the circular canvas tents which nomadic herders have lived in since the time of Genghis Khan. With no running water or central heating, sanitation is poor and the burning of coal for heat sees the capital cloaked with thick smog during the winter.
Not unlike Australia, the challenge for the Mongolian government is to recalibrate its economy onto a sustainable footing after the heady heights of the global commodities supercycle, and to demonstrate the windfall from big mining can be evenly spread.
By
Philip Wen
China correspondent for Fairfax Media
The reporter travelled to Oyu Tolgoi as a guest of Rio Tinto
Source:http://www.smh.com.au/
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