Leighton takes train to Mongolia's mining boom

On a bright and breezy summer's afternoon in the Mongolian capital of Ulaanbaatar, Wal King, is enjoying a favoured pastime: walking.

But in true King style, this is no stroll in the park. Rather it is off the beaten track, at pace, straight up a rocky mountain face on the city's dusty outskirts. The Leighton Holdings boss has never chosen the easy road.

As he leaves most of his colleagues -- including a few breathless fellow directors -- in his wake on the march to the peak, King and his long-time walking buddy, former Leighton finance boss and now non-executive director Dieter Adamsas, stop to draw breath and admire the view.

In the distance, amid the sprawl and treeless expanse of Mongolian suburbia, are two dirty-looking, Russian-built power stations bellowing fumes.

Below them sits a city of more than 1 million people choked by traffic, where half the population lives in tiny tents known as gers without running water and flushing toilets, and where many children in the winter shelter in the squalor of the underground sewers to escape temperatures that average below -20C.

It hardly looks like the next exciting frontier for the world's largest contract miner.

But all roads leading south from the capital have long been a gateway to untold mineral riches. Now these are riches King wants to profit from.

For decades there has been talk of a Mongolian resources boom. Yet that is all it has been: just talk. Now talk has finally turned to action. King's local client, the listed Energy Resources LLC, is selling high-quality coking coal to the neighbouring Chinese at $US60 per tonne compared to Australian miners BHP Billiton and Rio Tinto, who are charging more than double the price.

Leighton Asia's executive director in Mongolia, company veteran Mark Bailey, likes to tell the story of what he says Rio Tinto iron ore boss Sam Walsh told a luncheon at the Perth Press Club late last year of Mongolia. "Be scared, be very scared," Bailey says Walsh told the assembled executives of the Australian miners.

"He said the Mongolians aren't just coming, they are here."

The senior vice-president of China Shenhua Energy Company, Wang Jinli, endorsed the potential of the country earlier this year when he said: "Mongolia is coal-rich, especially along the border region with China.

"This puts China in a strong position to co-operate with Mongolia."

Energy Resources' UHG Coal Mine in the South Gobi region of the country, part of the giant Tavan Tolgoi coking coal field, is the first large-scale coalmine in Mongolia developed and operated to international mining standards and practices.

And thus the opportunity for King and Leighton.

"This is the best opportunity for a considerable period of time (to develop Mongolia) because it completely suits the Leighton model of working with people. Big, gutsy earthmoving contracts in remote locations. The Leighton strength really comes into its own in locations like Mongolia," King tells The Weekend Australian.

Coal from the UHG mine is currently transported at high cost over 220km by road to the Chinese border for sale to China's expanding steel industry.

But Energy Resources has now awarded Leighton Asia the design and construction contract for the Ukhaa Khudag to Gashuun Sukhait freight railway in the South Gobi region, which will transport coal from the southern Mongolian coal fields to China.

The UHG mine is currently producing more than 300,000 tonnes of coal a month, including a record 376,000 tonnes in May. Annual production this year will be 4 million tonnes, and beyond 2012 that number is forecast to grow beyond 15 million tonnes.

For Leighton Asia, the project has gone from a strategic initiative two years ago to being an active contributing business.

It now makes up a third of the division's business, and analysts believe Mongolia has the potential to generate future annual revenues in excess of $US600 million ($710m).

King is so excited about the prospect that he has just taken the entire board of parent company Leighton Holdings (minus three of the directors representing its 54.98 per cent German shareholder Hochtief) to Mongolia ahead of their annual planning meeting in Hong Kong, to see things for themselves.

He was even in the ear of Wayne Swan about the potential of Mongolia at a private dinner last month, at which the Treasurer confessed he knew very little about what economists believe could be one of the world's fastest-growing economies in five years.

Last August, the reformist Mongolian government of Prime Minister Sukhbaatariin Batbold (whom King and his chairman David Mortimer met in Ulaanbaatar) finally cleared the way for Rio Tinto and Robert Friedland's Ivanhoe Mines to spend $US5 billion to develop the giant Oyu Tolgoi gold and copper deposit in the south of the country.

It was a signal to the world that, after years of politicking, Mongolia was open for business.

" The opportunity and the timing is right. And with all gold rushes, it is an alignment of the stars all happening at the one time," says Hamish Tyrwhitt, managing director of Leighton Asia. "You get one opportunity in your career to be in the right place at the right time and to be able to participate in what will in time be a turning point in the resource world."

Importantly, Leighton has good relations with the government. It has received special dispensation for trucks at the UHG project to drive on the left-hand side of the road (to match up with Leighton's Australian mine models) and for women to be employed as drivers (a practice otherwise banned in Mongolia).

But there are still massive challenges ahead for Leighton and other multinational companies looking to make a dollar from the predicted development boom.

In February, a planned auction of a 49 per cent interest in Tavan Tolgoi, worth an estimated $US2bn, was suddenly cancelled after the government said it had decided to keep 100 per cent of the deposit to allow the nation a greater return from its development. In May, the government stopped releasing new mineral licences for an indefinite period, blaming the prevalence of bribes, corruption and illegal trading.

It also had previously vowed to introduce its own version of Kevin Rudd's super-profits tax, a "windfall tax" of up to 68 per cent on mining profits to be triggered when commodity prices reached certain levels.

While it was sold as allowing the Mongolian people to reap more dividends from the increasing foreign ownership of mineral assets, it provided a major disincentive for development.

The plan, released in 2006, was scrapped last August, paving the way for the development of Oyu Tolgoi. But history shows government policy can change overnight.

The infrastructure challenges in Mongolia are also immense.

Only 3.5 per cent of the roads are paved. Those that are, are in a poor state, littered with potholes -- as any Leighton director can now testify after many testing hours in tour buses traversing the windswept, treeless plains.

The number of cars on the road has risen from 40,000 in 2004 to 140,000 today. And driving in Ulaanbaatar is only for the brave.

The country still sources some of its electricity from Russia, and most of its oil, and has a very limited rail network which doesn't match the import-export flows. This will worsen as more mines start production.

"The potential of Mongolia is vast, but the issues relate to how quickly the country can accept this rapid rate of change. We talk of resource shortages in Australia. There will be resource shortages in Mongolia, in terms of infrastructure and in terms of people," King says.

"So the big challenge is to allow the economy to expand at a rate that doesn't produce inflation and allows the wellbeing and standard of living of the Mongolian people to advance but not be overwhelmed.

"It is going to be a balancing act for the government to allow the economy to expand but at the same time controlling the rate."

Then there is the cold. In the depths of winter, the temperatures at Leighton's UHG mine site in the Gobi Desert can plummet to as low as -50C. They are literally life-threatening conditions.

Tyrwhitt is lucky to have the tops of his earlobes after suffering a nasty case of frostbite last winter when he ventured out without the appropriate protection to help a friend in need, Leighton deputy chief executive Bill Wild, who had got into trouble in the snow.

Leighton Asia finance boss Tony Jacobs says a posting to the Gobi Desert is arguably the toughest in all of the group's global operations, a fact acknowledged by Jim Barrett, executive director of the Australian Constructors Association, who joined the Leighton board in Mongolia.

"It is hard to imagine a project more difficult to initiate than the UHG mine. The development of the project in some of the harshest possible climatic conditions and in one of the most remote parts of the world was challenge enough," Barrett says.

"But to see an Australian company set the highest possible standards in safety, community engagement, employment and training of local staff -- to standards that meet and sometimes exceed those seen in Australia -- is a significant achievement."

The myriad of challenges are enough to make King sceptics wonder whether Mongolia might become Leighton's next Dubai, where there are fears the company is facing substantial writedowns after demand was crunched by the global financial crisis.

In December 2007, King trumpeted the potential of Leighton's Middle East venture, Al Habtoor Leighton Group. Now he is picking up the pieces.

At one of the company's key projects in the region, the new Dubai airport, the client has simply refused to pay. And Leighton is currently at least $US50m out of pocket.

But Tyrwhitt says Dubai and Mongolia are like chalk and cheese.

"You can't compare the two situations. (With) the life of the mines or the contracts we have (in Mongolia), I don't see the risk," he says.

"(If) we lock ourselves in with one customer or client in a country, it takes away our ability to get into other areas.

"Our strategy in Mongolia is to provide services to companies. We are not going to compete with Mongolian companies. We are there to provide a service to them."

But given their pointed decision not to join the Mongolian site visit, one wonders what the executives of Hochtief, Leighton's major shareholder, think of King's international expansion strategy.

To be fair, their decision not to attend was logistical and largely related to tensions flowing from King's bold move to stare down a December proposal from Hochtief to merge the two companies.

And tension between the two groups remains, despite a peace pact brokered by David Mortimer during a series of late-night meetings in Hong Kong ahead of Leighton's annual planning meeting.

Hochtief remains uneasy about Leighton discussing a joint venture on a mechanical engineering capability in Australia and internationally with ACS, the Spanish construction group that is sitting menacingly on a 30 per cent stake in the German group and is rumoured to be keen to push for control.

And King is determined to control the timing of his exit from the chief executive's role in mid to late 2012, with a handover to his favoured protege, Tyrwhitt. King also wants to stay around on the board of the parent company or one of its subsidiaries as part of the succession plan.

But whether Hochtief will accept that timetable, or Tyrwhitt, remains to be seen.

Certainly few chief executives could ask their board of blue-chip directors and their partners to travel across the other side of the world for only a few days and make them sleep in tents in the middle of the desert without raising the odd eyebrow. But this is Wal King's Leighton.

King justifies the experience, saying: "It gives me great pleasure.

"I like Leighton to be a fun, satisfying place. It was a fascinating experience for those people, something that most of them would probably never do in their lives had it not been for the organisation."

King will now be hoping he can stay around long enough to see his Mongolian dream become a reality.

But his major shareholder may still have other ideas. Watch this space.

Damon Kitney travelled to Mongolia and Hong Kong courtesy of Leighton