Mongolia gears up for mining bonanza

By John Garnaut

The potential is huge, writes John Garnaut in Tavan Tolgoi.

Days after the Rio Tinto executive, Stern Hu, was arrested in Shanghai, the company's chief executive, Tom Albanese, was driven in a small convoy of LandCruisers through drizzling rain to the heart of Mongolia's annual Naadam festival.

Hundreds of seven- and eight year-old boys were racing horses over distances of up to 30 kilometres, while spectators lined up on one side of the finish line and horse owners mingled in their yurts on the other. Albanese was late, so there were no seats in the stand, and he found himself as guest of honour in somebody's yurt.

There are conflicting accounts about who was proposing the toasts and why Albanese stayed in Mongolia as long as he did - opting to return to London via Seoul rather than Beijing - but nobody disputes that he became thoroughly acquainted with Mongolia's famous vodka and its notorious fermented horse milk, aryag. Those festivities lasted for two full days.

''This is my first opportunity to relax and my cell phone doesn't work out here,'' Albanese told his host and friend of 30 years, Edward Rochette, who married into one of Mongolia's premier horse breeding families. ''Let's just say he had an opportunity to enjoy himself and let his hair down,'' says Rochette.

When Albanese stopped for his drink at Ulan Bator, in July 2009, the Oyu Tolgoi copper and gold project was still an idea stuck in the Mongolian bureaucracy and Mongolia's main share index was trapped beneath 5000.

But months later the Mongolian government inked the Oyu Tolgoi investment agreement. And last year the agreement officially commenced, construction began, international money began pouring in and Mongolia's sharemarket index more than doubled to become the best performer in the world.

In the first six weeks of this year the index has doubled again - hitting 29,550 on Friday - and the International Monetary Fund predicts the Mongolian economy will this year grow faster than China's. Indeed, it would be hard not to grow at double digits given that construction of Oyu Tolgoi is already generating about one-third of the country's GDP, and the mine's exports will contribute a similar proportion when they come on stream from late next year.

''We're spending about $7 million a day, which is kind of awesome,'' says Andrew Harding, who heads Rio Tinto's copper division and oversees the Oyu Tolgoi project.

Oyu Tolgoi may be set to become one of the world's top three copper mines in one of the world's smallest economies and located just across the border from the world's biggest copper consumer.

But the story has already been relegated to the bottom of the nation's business pages. That's because its Gobi Desert neighbour, Tavan Tolgoi - a coal project - is getting off the ground. It is the world's second largest coal deposit, after China's Shengli.

The government has been weighing its options on how to develop and structure the mine and investment bankers have been swarming through Ulan Bator hoping for a piece of the deal. ''We had the top 55 international banking institutions here two weeks ago,'' says the Mongolian Prime Minister, Sukhbaataryn Batbold, in an interview at his Ulan Bator residence on the eve of this week's visit to Australia. ''Now it's time to raise the sophistication of the institutions of democracy and civil society and basic economic institutions including the stock exchange.''

Batbold, Mongolia's richest man, is one of several young and capable Mongolian leaders who do not need reminding that the world is littered with energy-rich dictatorships and failing democracies.

''Many investment banks believe the economy will double every three years,'' says Gankhuyag Chuluun, 36, the vice minister for finance, who is advising Batbold on structuring the Tavan Tolgoi deal. ''We need to shovel coal across the border and turn Mongolia's 2.7 million people into dollar millionaires.

''If we really want double digit growth from this year then we need to continue educating people and policy makers about the dangers of resource dependency,'' he says.

And to use the resources, he says, the country first needs to unlock its infrastructure bottlenecks.

Down at Tavan Tolgoi, where temperatures sometimes dip as low as minus 50 degrees, miners are just beginning to scratch the surface of 6.5 billion tonnes of high-grade coal - equivalent to 2400 tonnes for every Mongolian. A small pocket of the vast reserve has been set aside for the Mongolian Mining Corporation and its subsidiary, Energy Resources.

The mining contract has been given to the Australian company Leightons and the site looks like any world-class operation. The pit is two kilometres long and 50 metres deep and may one day extend as far as 10 kilometres and 350 metres underground. They are currently shovelling the ''No. 3'' seam of high grade coking coal, which is between 9 and 12 metres thick and begins just 10 metres beneath the surface.

International shortages are once again beginning to bite, with each new tyre on the 240-tonne Caterpillar tip truck costing upwards of $30,000. But the biggest shortages are for labour.

MMC has been exempted from a law that bans female truck drivers - a throwback to when only the strongest drivers could handle Mongolia's Russian-made trucks. ''Women are better drivers because they have respect for what they are doing, whereas men just go flat out,'' says the Australian training director, as he demonstrates a driving simulator which is programmed to replicate the mine and simulate snow, ice and emergency conditions. ''And we need any operator we can get.''

MMC is spending whatever it needs to overcome acute labour and equipment shortages, as it ramps up production to 7 million tonnes this year. But the picture of world class efficiency ends at the mine gate.

The dirt road to China is so dangerous it takes each of 400 trucks a full day to complete the 200 kilometres to the Chinese border. Many have landed on their sides when the road freezes over and drivers lose control. When the trucks get to the border they dump their loads at the edge of a showcase city of skyscrapers and formidable Chinese infrastructure.

MMC has urgent plans to pave the road to China but a series of political hurdles stand in the way of a railway line. The Mongolian Parliament has legislated that the government first has to connect Tavan Tolgoi with a Russian gauge line to the Russian rail network, which would entail a journey of nearly 7000 kilometres to the Pacific port of Vladivostok.

''We are landlocked, we would like to see we have options in both direction through Russia and through China,'' says Batbold, explaining a desire for market leverage.

While Mongolia is suffering from labour and equipment shortages and acute infrastructure bottlenecks, and the parliament is once again debating whether to renegotiate the Oyu Tolgoi investment agreement and hasn't agreed on how to develop Tavan Tolgoi, the question has shifted from whether Mongolia will become the world's new mining frontier to how it will handle the boom.

''I'd like to focus here on how the people of Mongolia get the benefits of the project as soon as possible,'' says Batbold. The country has come a long way since the prime minister was merely a businessman, albeit the one who personally acquired the Tavan Tolgoi tenement after it was returned to the government by BHP Billiton. ''This was up to BHP, it was a completely free commercial decision,'' says Batbold, who was later required to hand it back to the government. ''Everybody thinks it was like this 15 years ago but it was very different at the time.''

Edward Rochette, who hosted Tom Albanese during the Naadam festivities and was the Mongolia representative for Robert Friedland's Ivanhoe Mining, won't hazard a guess as to the current value of those Tavan Tolgoi mining rights. But he notes that the 4.5 per cent owned by MMC is currently valued at $4 billion on the Hong Kong stock exchange.

It reminds Rochette of an earlier episode, when he had personally negotiated for BHP Billiton to sell its rights in Oyu Tolgoi to Robert Friedland's Ivanhoe Mining.

''Friedland sent me down to Melbourne to negotiate with BHP,'' says Rochette. ''The purchase price was $US5 million … and it's now projected to be the third largest copper mine in the world.''

Since then, Mongolia has defied the odds to stand on its feet, Ivanhoe's Robert Friedland has become a multibillionaire and Rio's Tom Albanese has negotiated his way into the driver's seat at Oyu Tolgoi. With copper prices up more than 50 per cent in six months and hovering around $US10,000 a tonne, and the value of Oyu Tolgoi's gold production alone covering the mine's operating costs at current prices, the Gobi Desert seems awash with profit.

''This decade is going to be a great decade, great demand and [with] supply struggling to keep up,'' says Harding, the copper chief at Rio Tinto. ''And from everything I see, the following decade is going to be much the same. It will take much more than another Oyu Tolgoi coming on to satisfy that demand.''

Source:www.smh.com.au (The Sydney Morning Herald newspaper)