Mongolia Is Having a Mine Rush

This article, aside from concentrating on Robert Friedland's plans for mining in Mongolia also mentions concerns that, under the current mining rush, Mongolia may be about to open up previously protected areas.

Mongolia Is Having a Mine Rush

October 3, 2003

By James Brooke, New York Times

Bornuur, Mongolia - A single-lane dirt road winds through rolling hills, past a herd of wild horses, past flocks of sheep, and past white felt gers, the traditional homes of nomads of the steppes. Then the road crests a bluff and the view jumps forward by centuriesthe blue walls of a new $75 million Canadian-owned gold mine.

The Cameco Corporation's Boroo mine has advanced the farthest of a dozen foreign mining projects in Mongolia - its mill is expected to start pouring gold bars by December. Victor Collinge, the Saskatchewan native who supervises the new mill, showed off its huge rock crushers and grinders, imported from Nevada and Western Australia. "I see nothing but good in Mongolia's future," he said.

For most of the 20th century, Mongolia, a landlocked expanse of Asian prairie and desert twice the size of Texas, was trapped and isolated - a Communist buffer state wedged between the Soviet Union and China with little economic development and less contact with the rest of the world. Now a mining boom is beginning, fueled by a free-market economy, investor-friendly mining laws, new mineral discoveries, and the rapidly spreading realization that Mongolia can become China's Canadaa close-at-hand supplier of raw materials to the world.

"Last year, China surpassed the U.S. as the No. 1 consumer and importer of copper, and the holy grail in our business is to be the low-cost supplier to China," said Robert M. Friedland, chairman of Ivanhoe Mines, over breakfast at Millie's, one of several American-style restaurants that have sprung up in Ulan Bator, Mongolia's capital, 50 miles south of Bornuur.

Mr. Friedland, one of Canada's wealthiest businessmen, is investing $5 million a month to develop an immense copper and gold deposit in the Gobi Desert, about 50 miles north of the border with China. His name is familiar in the mining world for the discovery of one of the world's largest nickel deposits, in Labrador, and for a leaking dam that led to the cyanide pollution of a 17-mile stretch of the Alamosa River in Colorado.

His copper project in Mongolia, known as Oyu Tolgoi or Turquoise Hill, is tentatively scheduled to start production in 2006. Right now, 13 drilling rigs are busy probing and mapping the ore deposits, about a quarter-mile below the desert surface. Geologists estimate that there are some 21 million ounces of gold and 17 million tons of copper there.

These estimates, audited by an outside company, AMEC, make it one of the largest copper finds in the world, ranking with major mines in Argentina, Chile and Indonesia. The release of the estimates last July caused Ivanhoe's stock to double, and eased Mr. Friedland's task of lining up financing for the $900 million cost of developing the mine.

Its potential output of $1 billion a year would double Mongolia's gross national product. "Ivanhoe remains poised to take advantage of the single most important theme in mining todayChina," HSBC analysts wrote last month in a report on the company.

Mongolia has gone from being the middle of nowhere to an epicenter of prospecting attention because of the rapid rise of Chinese manufacturing. To supply its factories, China stepped up imports of copper concentrate, needed for all kinds of electrical wiring, household plumbing, motors, computer parts and other uses, by 40 percent in the first half of 2003, and there is no sign of slowing.

"There are 500 million people in southern China who want an air-conditioner," Mr. Friedland said. "Mongolia is in the catbird seat."

In Soviet times, Mongolia was closely aligned with Moscow, and it has long been historically skittish of its immense neighbor to the south, so there were few major trade links between it and China until recently. This year, though, Mongolia agreed to allow a Chinese-gauge railroad to be built to Oyu Tolgoi. By December, China is to finish a 140-mile highway to the border near the mine.

Hoping to put Mongolians at ease, China's new president, Hu Jintao, visited Ulan Bator in June, stressing that China has no territorial claims on Mongolia and announcing $300 million in aid for more infrastructure projects.

Mr. Friedland also thinks Mongolia can relax. "We come from Canada, a big cold country that exports raw materials to a southern neighbor," he said. "We are showing the Mongolians they don't surrender their sovereignty by being a major supplier to China."

As mining companies see the advantages of proximity to China, exploration is soaring. In the last two years, the number of prospecting licenses has tripled, to 3,000.

Mining production licenses have jumped from a few dozen last year to about 650 today.

"In the seven years since I have been here, the land under exploration licenses has gone from 8 percent to 35 percent" of the country, said Douglas J. McGay, an Australian mining consultant who researched the situation for a major mining conference in Ulan Bator in late September. Called Discover Mongolia 2003, the conference attracted 60 exhibitors and 400 participants, filling meeting rooms in the capital's most modern hotel, the Chinggis Khaan.

In the last two years, Cameco and Ivanhoe have been joined here by the Western Mining Company of Australia, AngloGold of South Africa and a half-dozen Canadian "juniors" - smaller companies that hunt for deposits and then sell the rights to the big operators that can afford to develop them. The Northern Miner, a trade publication based in Ontario, recently wrote, "Exploration circles are buzzing that Mongolia could possibly be the next Peru."

Christopher Johnstone, Canada's honorary consul in Mongolia, said of the juniors"They come into Mongolia all the time to pick up new ground." Mr. Johnstone is a local executive for QGX, an Ontario mining company, which has the second-largest amount of land in Mongolia under exploration license, after Ivanhoe. Referring to interest in Toronto for Mongolia projects, he said: "We just raised $5 million, and very easily."

Chinese companies are also hunting in Mongolia. A subsidiary of China Nonferrous Metal Industry said it was investing in a zinc mine at Suhbataar. And Mongolia is reaching out to other mining countries for expertiseits president, Natsag Bagabandi, signed a cooperation agreement with the Chilean government on Sept. 25 during a state visit that included a tour of a Chilean copper mine.

While minerals account for half of Mongolia's exports and most of its foreign direct investment, oil also figures in the picture, with a 500-million-barrel discovery by Soco International this summer in eastern Mongolia.

Finding the goods in the ground is one thing; doing business in what can still be a backward, bureaucratic and corrupt place is another, executives and diplomats said.

"The investment climate is good, but the Mongolian government has to do better at ensuring openness and transparency and making sure regulations are published," said Pamela J. Slutz, the United States ambassador, in an interview. Local and central government officials, she said, "would stimulate more investment interest were they to cooperate to create a one-stop-shop licensing process, by eliminating overlapping authorities and requirements."

Enforcing contracts in Mongolia can also be problem. John Karlsen, a Denver native who is Mongolia's dealer for Ford heavy trucks and Caterpillar bulldozers, said in an interview that his business had doubled this year, but that the country can be a minefield for someone trying to make a living leasing and selling equipment.

"The court system is totally, unbelievably corrupt," Mr. Karlsen said. "The judges get bribed. There is no ability to execute judgments."

One often-cited cause for corruption is high taxes. Mongolia's corporate tax rate is 40 percent; Russia and the Inner Mongolia region of China stop at 15 percent. "Private companies are handing bribes to government officials to get out of paying taxes," said Chuluumbat Nergui, leader of an anticorruption committee in the Mongolian National Chamber of Commerce and Industry, a private group.

Mongolia's government has said it wants to simplify its tax code and reduce the top rate to 28 percent by 2005. "We are setting up a working group to look at the tax environment, so foreigners feel more comfortable," Prime Minister Nambaryn Enkhbayar said in an interview.

But environmental advocates fear that Mongolia is becoming too miner-friendly. A decade ago, the government set aside about one-eighth of the country as strictly protected. "But now there is a lot of talk in the legislature of de-gazetting protected areas," said T. Layton Croft, the local representative of the Asia Foundation, an advocacy group based in San Francisco.

Seeing Mr. Friedland in Mongolia worries many environmental advocates. A man with American and Canadian passports who lives in Singapore, Mr. Friedland first came to international attention in 1992 when cyanide-laced tailings washed out of the abandoned Summitville gold mine in Colorado, killing all aquatic life in the Alamosa River for 17 miles downstream. In the late 1980's, the mine was operated by Galactic Resources of Vancouver, and Mr. Friedland was Galactic's principal shareholder.

Mr. Friedland cut all ties with Galactic in 1990 after five years of losses at Summitville. But federal officials pursued him to pay for cleaning up the cyanide, and in 1996 they persuaded Canadian judges to freeze $152 million of his assets. To settle the case, Mr. Friedland agreed to pay $27.75 million over 10 years.

Mr. Friedland's pockets were deep because of a big stroke of mining luck. In 1993, prospectors working for his company, Diamond Fields Resources, found an immense nickel deposit at Voisey's Bay, Labrador. Diamond Fields sold the reserves to Inco in 1996 for $2.8 billion, a transaction that has some Mongolians concerned about his plans for the copper and gold deposit at Oyu Tolgoi.

"We want to be the builder of Turquoise Hill, not the auctioneer," Mr. Friedland said Sept. 8 in a release for the Mongolian news media. "This is not Voisey's Bay all over again."

Mr. Friedland's company has licenses to prospect in a swath of Mongolia larger than Florida.

And he is used to operating in countries where others fear to tread. He has mines in South Korea, where militant unions and nationalist sentiment make the going hard for foreigners; in Myanmar, where a repressive military government is isolated by global opprobrium and sanctions; and now in Mongolia.

Steven R. Saunders, president of the North America-Mongolia Business Council, a group based in Virginia, said: "Half of every plane from Beijing is full of mining engineers from Finland, from Canada, from Australia. It is largely because they say Friedland is no fool."