Tuesday 15 December 2009

Copper-bottomed promises

I'VE long believed that Mongolia, among wild countries, is the Last Best Place, to steal the slogan for Montana. But the news that years-long negotiations over the huge Turquoise Hill (Oyu Tolgoi) mineral deposits in the Gobi desert have reached a conclusion leaves me wondering whether the country's future is quite as copper-bottomed as the mine's boosters claim.
The project is potentially vast. The mine is has the biggest undeveloped copper and gold reserves in the world, and is planned to produce 450,000 tonnes of copper a year and 330,000 ounces of gold. Over a life of perhaps 30 years, the mine could earn $30 billion-50 billion in revenues. A former colleague at The Economist, Chris Wood, now author of the Greed & Fear report put out by CLSA, Asia's top brokerage, reckons that the Turquoise Hill project could boost Mongolian GDP per head by a stunning 30% a year.

What is more, the deal the government struck with the project's developers, Ivanhoe Mines and Rio Tinto, the main financial backer, provides a possible future template for mining the country's huge deposits of coal and uranium as well as copper and gold. The government has repealed a windfall tax and in return taken an up-front payment from Ivanhoe and Rio to help plug the bleeding national finances. It will own a 34% stake in the project. Mr Wood, who likes his markets wild, is delighted to have found a new "frontier" market. Where most visitors see a country of rolling steppes and horse-skilled herders, he sees an "ultimate high beta beneficiary" of the investment story driven by China’s hungry demand for resources.

So why am I less thrilled? Ivanhoe's boss, Robert Friedland, has been known as "Toxic Bob" since operating the Summitville gold mine in Colorado, home to America's biggest cyanide leakage and Superfund cleanup.

Ivanhoe promises world-class environmental standards this time. But even if these standards are met at Turquoise Hill and future projects, wildlife (not to mention nomadic herding) sits ill with mining and related development. As it is, the railway that links Ulan Bator and Beijing by crossing the Gobi has blocked off the western range of the once-fabulous herds of Mongolian gazelle. The roads that will be built from Turquoise Hill to China will do no favours for the Gobi bear, though with a population down to just 30, perhaps there is admittedly little hope for the brute anyway.

Then there is the impact of mining fever on the body politic. Mongolia's democratic institutions seem insufficiently strong. Ministers and their friends have been involved in any number of dodgy land deals. The current government is an uneasy coalition between the Mongolian People's Revolutionary Party (MPRP, the former Communists) and the Democratic Party. The MPRP's former headquarters is a charred shell after deadly protests contesting the results of the last election. Any sense that the new mining deal is helping mainly the very rich, in a country which is still very poor, has the potential to trigger fresh unrest.

Taken from the http://www.economist.com/blogs/banyan/2009/10/copperbottomed_promises

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