As Mongolia develops, Canada leads the way

ULAANBAATAR, MONGOLIA – Instead of the traditional barbecues and fireworks that are part of Canada Day celebrations at home, Canadians here marked July 1 listening to a tuxedoed Mongolian baritone perform our anthem at an embassy reception outside a former dictator’s palace.

Not surprisingly, many of the ex-pat guests were mining company executives. As Mongolia’s second-highest export partner after China, Canada is also the largest foreign investor in Mongolia’s resource sector, with about 25 firms active in the country.

Canadian companies spent an estimated $500 million U.S. in 2008 on drilling and improvements to their properties, a figure that will grow rapidly as the industry expands. Significant deposits include uranium, molybdenum, iron ore, copper and gold. Oil reserves have yet to be fully exploited, and Mongolia has more than 300 coal deposits that can provide China with fuel for power generation and steelmaking.

For example, Canadian subsidiary SouthGobi Sands LLC (57 per cent owned by Ivanhoe Mines Ltd.) sold 1.3 million tonnes of coal last year to China. By 2012 it expects to ramp up to 8 million tonnes annually.

In Mongolia’s emerging economy, Canadian subsidiaries and joint-venture projects are enjoying both pop-the-cork success as well as the challenge of operating in a young democracy.

At the same time, Mongolian leaders are under pressure to ensure the resource bonanza provides enough tax revenue to underwrite an economic and social revolution for the country of 2.7 million. A saddle-shaped land the size of Quebec (with less than half the population), Mongolia sits on vast mineral reserves between its commodity-hungry neighbours, China and Russia.

Billed as the largest undeveloped copper-gold mine in the world, Oyu Tolgoi LLC will be the project that changes everything for Mongolia. The capital cost to bring the mine into production in 2013 is estimated at US$7.3 billion, in a country where the GDP is only US$4.2 billion.

It took the project’s majority owner, Vancouver-based Ivanhoe Mines Ltd., years of negotiating to reach the landmark 2009 agreement with the Mongolian government. Ensuring tax stability for Ivanhoe and partner Rio Tinto, and a 34 per cent stake for Mongolia, the agreement was enough to boost the country’s international investment rating.

Even without using the cautious lingo of mineral estimates, and the fevered superlatives of stock promoters, the project returns are expected to be huge: production of 1.2 billion pounds of copper and 650,000 ounces of gold every year for the first decade beginning in 2013, and a mine life estimated at 45 years or more.

“It is a phenomenal ore body,” said CEO Keith Marshall. “It has to be exceptional to be developed in such a remote location.”

Remote is a relative term, of course. Sure, the nearest paved road is 500 km from the mine and the project will have to get its electricity from China for the first nine years. Many vocational schools closed after the Soviet regime collapsed in 1990, so the company plans to build its own colleges to train the huge labour force required.

But approval for Oyu Tolgoi indicated that the country may be ideally situated, adjacent to the roaring Chinese economic engine.

“It’s a great opportunity,” says John Ross Davies, country manager for Major Drilling Mongol LLC, part of a New Brunswick-based company that is one of the top three contract drillers in the world. “The hype on (Oyu Tolgoi) is sending the message to the rest of the world that this is the place to be.”

Other corporate heavyweights have come looking for prospects as the government improves the regulatory climate to attract mining firms. Citing potential corruption, the Mongolian president halted the issuance of mineral exploration licenses until procedures can be improved. The sector needs a conflict of interest law and more transparency to keep officials from profiting, says the mining association.

Still, Mongolia is still considered a risky place to invest, as some Canadian companies are discovering. The Fraser Institute’s 2009-10 survey of mining companies measures the effects of government policy in 72 jurisdictions around the world. Mongolia ranked in the bottom 10, along with Zimbabwe and Venezuela.

Mining is set to transform the country’s economy, but building the infrastructure to get that mineral wealth to market is the major challenge. What’s needed is a transportation necklace across the country, including 2,000 kilometres of railway tracks, 7,800 km of roads and 100,000 new housing units, says the transportation ministry.

Mongolians want jobs as well as taxes and royalties, in a country where unskilled labourers in the city make as little as $3 a day. By comparison, a driller with two years training can earn US$4,000 a month in Mongolia – even more on the international job market.

“The vision is to grow the GDP by processing natural resources rather than extracting and exporting,” says Ganbat Chuluunkhuu, who returned after six years as a Wall Street investment banker to become team leader of a government investment task force. “Industrialization could create that middle class for Mongolia.”

Chile is viewed as a role model for fiscal success through a strategy that helped local suppliers prepare to meet international standards. “We’re now seeing Chilean suppliers exporting mining supplies to the rest of the world. Until a few years ago they were net importers of things like drill bits,” said Hancock. “I see opportunities for that in Mongolia as well.”

Until the revenues begin filling government coffers in a big way, mining companies are providing their own largesse. A rural development project financed by CIDA and local companies such as Boroo Gold Co. Ltd., a subsidiary of Canadian firm Centerra Gold Inc., trained poor families in vegetable farming and marketing in Mongolia’s fertile northern region.

Junior mining company Entree Gold Inc., currently exploring on its South Gobi properties, consults the local governor every year to see what projects are most urgent. The company has spent millions on improvements from a new activity centre and pharmacy to a herd of goats and fodder for a region hard hit last year by the exceptionally cold winter (called a dzud).

“We could give nothing and still get our permits,” said Entree operations manager Kelly Patterson. “Or you can do it the right way.”