Dividing up Mongolia's mining riches from Oyu Tolgoi

Mongolia has for centuries been characterised as a nation of nomads and cattle herders, but this is all changing thanks to a huge new copper and gold mine.

The mine is Oyu Tolgoi, which is Mongolian for Turquoise Hill, and it is already beginning to transform the economy of this sparsely-populated central Asian nation, sending it towards the top of international growth tables.

But this year, there has been disagreement over the details of the contract between Rio Tinto and the Mongolian government. Ulaan Baatar wants Rio Tinto to explain why it has over-spent on the project by more than $2bn (£1.3bn).

The size of the ore deposit is staggering - running for some 20 miles beneath the Gobi Desert. When this mine is fully operational, in 2020, it will produce 450,000 tonnes of copper and 330,000 ounces of gold a year.

One of those who has been involved with the mine since the very beginning is geologist Samand Sanjdorj, vice president of Oyu Tolgoi operations, who first came to the site 16 years ago.

"When we first came in 1997 it was just open steppe. We had only 11 of us, two ration jeeps and one truck - that's it."

When the survey team realised the size of the deposit below their feet, he says "it was exciting, very exciting".

"This ore body is something like Manhattan Island, this deposit is among the top three in the entire world."

In the past few years Oyu Tolgoi has been transformed. A massive open-cast pit has now been excavated with trucks and diggers the size of houses at work extracting the ore-bearing rocks, and production is due to start this June.

The Anglo-American mining giant Rio Tinto has spent $6.2bn so far on developing the site, which lies in the Gobi more than 300 miles south of Mongolia's capital Ulaan Baatar.Construction challenges

Besides the opencast pit, Rio Tinto is also working on a deep mine to extract copper and gold ore and this is due to start operating in four years time.

Cameron McRae, chief executive of Rio Tinto's Oyu Tolgoi operations, says there have been huge logistical challenges in developing such a remote site.

"It didn't have roads, it didn't have a railway - which it still doesn't have - it didn't have power, it didn't have water, it didn't have an airstrip for flying people in and out.

"A lot of that infrastructure has had to be put in place as well as building the mine. And just getting the materials to the site to start putting that infrastructure in place has been a challenge in itself."

Yet even though the mine has not yet started producing, Mr McRae says its very construction has already benefited Mongolia's economy.

"Six billion dollars has been brought into the country in terms of goods, money for local businesses to assist in the building of the mine, and there have been a lot of indirect effects into the economy."

According to the International Monetary Fund (IMF), Mongolia will be the largest beneficiary - with the country receiving up to 71% of the income from the mine.

Under its agreement with Rio, Mongolia has a 34% stake in the mine and the project is already a major jobs provider, with 13,000 workers of whom 87% are Mongolians.

But Mongolia is concerned it will not receive royalties any time soon because development costs have increased. Under the terms of its deal, Ulaan Baatar won't get a share of the profits until Rio has recovered its investment.

Referring to the current dispute with Rio, President Tsakhiagiin Elbegdorj says that firms mining in Mongolia have a great impact on the country.

"We would like to see that footprint bring development to Mongolian society - not scar it."

"The world has changed, change has to come to mining business. Our people are more informed, more educated and because of that are asking more questions."

Rio Tinto's Colin McRae insists his firm wants to deal fairly with Mongolia's government, but that politicians should let the miners get on with their business.

"Some countries talk of resource nationalism and then what you see is that the investment just leaves the country. And the size of their mining industry shrinks.

"A pretty consistent fact across the world, whether in mining or other businesses, is that governments aren't good at running businesses. They are better off getting out of the way and letting businesses do that - but making sure that businesses do those to the standards that the government desires for its country."

But he denies he is issuing a warning to politicians in Ulaan Baatar.

"I think what we have been saying to the Mongolian government is we want to build a business here that Mongolia, the government and its people, will be absolutely proud of, that will be seen to be run by Mongolians to the highest standards in the world."'We will not gain'

Elsewhere in the capital, some Mongolians are sceptical that the new mine will really bring benefits. Among them is rap artist Gee, who says the government is not doing enough to protect the interests of Mongolians.

"They can't, they are not doing enough."

He doesn't accept that the wealth from the mine will trickle down to ordinary Mongolians.

"They can't get richer, they don't have power. People who have power, they will get the wealth, and they will get more powerful. People like us will not get it."

Yet it is not just Western mining firms that come in for criticism. Much of the mine's output will be taken by road over the border to China, leading some to fear that it will be Mongolia's huge southern neighbour that will ultimately benefit from the mine.

"Their needs are their needs, we should be working on our needs," says Gee.

When asked what he thinks China wants from Mongolia he has a simple answer, "Everything".

Justin Rowlatt presents Mongolia's Mining Boom in Crossing Continents on BBC Radio 4 at 11.00 GMT on Thursday 28 March