Mining's Final Frontier

A massive multi-ton dump-truck winds its way down the ramps into the depths of the Erdenet open-pit mine. For scale, the wheels on this truck are about 10 feet in diameter. (Alex Yule / Flickr)

Mongolia is mining’s last frontier. The country is one of a small handful of places left in the world with major untouched mineral deposits. Its best -- and perhaps its only -- hope for broad-based economic development lies in recruiting foreign miners to help develop these resources. The problem is that it has been so difficult for Mongolia’s leadership to get along with foreign mining companies that the country’s whole development strategy is at risk.

The Oyu Tolgoi mine, the largest investment in Mongolia’s history, has become a test case for all foreign investment in the country. It is a mixed deposit of copper and gold being developed by Rio Tinto, the world’s second-largest mining company. Production will not start for another month or so, but even in the preparatory stages, Oyu Tolgoi was almost entirely responsible for Mongolia’s world-leading 17.3 percent GDP growth in 2011, as suppliers and contractors arrived and spread benefits across the wider economy. When fully operational, the mine will account for a third of Mongolia’s GDP. After more than a decade of exploration and preparation, however, Ulaanbaatar wants to renegotiate its share of the profits, and Rio Tinto has threatened to shut down the mine.

Mongolia is not the only country demanding a greater share of profits from mining within its territory. The trend is prevalent enough to have earned a nickname: resource nationalism. But foreign investors in Mongolia are more likely to succeed if they pay attention not to what makes the country similar to others but rather to what makes it different: geography.

Mongolia is landlocked between Russia and China, both of which exploit their neighbor’s vulnerable position. Rosneft, Russia’s state-owned energy company, is Mongolia’s only significant supplier of fuels, and Moscow has a history of using energy exports as a political tool. Rosneft charges above-market rates to Mongolian importers and often supplies less than demand, periodically sending prices skyrocketing throughout Mongolia’s economy. Moreover, because there are so few transportation routes from Mongolia to the rest of the world, China is essentially Mongolia’s only foreign customer for its existing mining output. Consequently, in negotiations over prices, China always has the upper hand.

Mongolia seeks bilateral partnerships beyond Russia and China whenever possible. This goal, known as the “third neighbor” policy, influences almost every decision Ulaanbaatar makes. Foreign investors who fail to account for it -- even those who observe local laws and regulations to the letter -- often find themselves caught in the crossfire between Mongolia and its neighbors. Mongolia is a place where making a profit requires not only understanding the legal environment but also anticipating how authorities are going to act on an ad hoc basis. (It is the spirit of the laws -- and, in some cases, the spirit of the laws officials might have wanted to pass in hindsight -- that count most in Mongolia.) In the past, Ulaanbaatar has blocked investors from selling mines and mining licenses to state-owned Chinese firms and, in one case, even confiscated a mine from a company that tried to sell it.

Although Mongolia’s mining potential has exacerbated its lopsided relationships with its neighbors, it also seems to be the only viable solution to the country’s problems. Mongolia’s cold winters and difficult geography rule out other modes of development such as manufacturing, tourism, and services. That leaves mining as the only possible means of generating enough revenue to address the problems holding back development, which include a housing shortage and a lack of transportation links.

Solutions to both are far beyond the country’s existing means. Oyu Tolgoi, however, is the breakthrough investment that could finally set Mongolia on the right path. If the mine progresses as expected, it will become one of the world’s largest and most important. Canada’s Turquoise Hill Resources, which has been developing the site on behalf of Rio Tinto for more than a decade, will have spent $6.6 billion on the project by the time production commences in the coming months. The mine could bring in enough revenue on its own for Mongolia to start addressing its problems and help establish the country as a place where foreigners can do business.

Mongolia, however, seems to have seller’s remorse: Most Mongolians, including an influential block of parliamentarians, think the state should get a larger share of the profits. Rio Tinto claims that Mongolia is getting a great deal -- according to a 2012 advertising campaign, the company owns 66 percent of the mine, but the Mongolian government will end up with 71 percent of the profits. (The latter number is actually based on the International Monetary Fund’s projected range of 55 percent to 71 percent.)

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