Mongolian Resource Play

[Tackler]

Thanks EC, your link doesn't work but I found this...

http://www.canada.com/search/story.html?id=18204329-6621-4995-9b3c-cc5e156d01cd&page=1

New economic era dawns for Mongolia - mining's new frontier

Diane Francis - Financial Post
July 30, 2005

After years of obscure existence sandwiched between Russia and China, Mongolia is coming into its own and what could be the world's biggest mineral rush has western miners racing to get a piece of the action. Diane Francis recently visited the developing country.

SOUTH GOBI, Mongolia - The plane flies over miles of remote dirt roads, wild ponies, camels, goats and the occasional clutch of round tents, or gers, that house the nomadic descendants of Genghis Khan. Two hours out of the country's capital of Ulan Bator the gravel runway of a modern mining camp looms, punctuated by a wooden arch with the Canadian flag flying on top.

This is the exploration site of Ivanhoe Mines Ltd. of Vancouver, which believes it has discovered a gigantic copper and gold deposit here. It is spending US$10-million a month drilling holes, testing results and pouring a gigantic concrete shaft in preparation for production in about two years.

This is Mongolia's flagship mining prospect and has helped spawn a mining boom in this landlocked country of 2.5 million. Terry Ortslan, a Canadian mining engineer and independent research consultant to 15 large North American institutional investors, travelled to Mongolia recently to view a number of mining prospects. "Mongolia is now like Chile was in 1985," he said.

Like Chile, serious challenges must be met to bring about profitable mines in a country without infrastructure. There are issues of power generation, transportation, smelting, water and dust control. Overcoming such obstacles -- and negotiating who's going to pay for what and when -- are what the world's mining companies must do to exploit world-class ore bodies.

Mongolia's government and its advisors are wrestling with infrastructure and revenue issues as they negotiate individual agreements with Ivanhoe and other miners before granting long-term permits.

The process is time-consuming because all stakeholders must be consulted.

"This is what goes on everywhere," said Ivanhoe chairman Robert Friedland. "It is in everyone's interest that the deal is fair to the government and citizens in order to have a sustainable development franchise."

Despite the country's infrastructure shortcomings, the mining world will continue to beat a path to Mongolia because its big draw is proximity to China -- the biggest buyer of metals and minerals and hydrocarbons in the world. But many Mongolians worry this may become a problem if China turns into a marketplace bully.

For centuries, Mongolia was simply a moribund province of China, until 1921 when it became a Moscow-controlled military buffer state. The entire South Gobi, for instance, was a "no-go" military zone until the late 1980s. Foreigners were shot on sight by Soviet troops guarding the border. The Chinese also had dozens of divisions stationed on their side of the border to protect themselves from Soviet marauders.

The collapse of the Soviet Union forced Mongolia out of its servitude. Its communist leadership embraced reforms by opening up its economy and creating a democracy. This strategy was needed, they reasoned, to raise living standards and avoid Chinese domination. A constitution was passed, creating a parliamentary system, and in 1997 it passed the Mongolian Minerals Act which established a level playing field for exploration and production along with generous tax and royalty terms.

And the world's miners came.

Hundreds of companies, including many Canadians, have arrived. By June, 2003, China's newly-minted President, Hu Jintao, visited Mongolia to state that China had no territorial claims on Mongolia and to announce US$300-million in aid to help the financially strapped country build railways, power transmission lines and roads to bring resources down to slake China's enormous economic appetite.

The two governments are involved in infrastructure negotiations, but the Chinese are already building railways and roads right up to the Mongolian border in anticipation of doing big business with their neighbour to the north.

Chinese state-owned enterprises have been exploring here and this year a new lead-zinc mine will open in partnership with the Mongolian government.

"Mongolia looks forward to becoming a mining powerhouse," said Mongolia's Minister of Resources, Lursanvandan Bold, in an interview in his office in Ulan Bator. He spoke flawless English and German to a group of European money managers assembled to learn about the country's mining regime. "Last year, 4% of all exploration dollars spent around the world were invested here," he said. "We are now one of the top 10 exploration destinations in the world and the only Asian country on that list."

Before the 1997 Minerals Act, the country's mining industry consisted of a handful of foreign explorers and a few inefficient Russian mines. Today, there are 6,000 licences for exploration and mining granted to 800 companies. Nearly one-third of its total land mass, which is three times' bigger than France, has been licenced for exploration.

The country is an Asian version of Canada, complete with cold climate, open space, sparse population and resource wealth which includes everything from oil and natural gas to coal, uranium, gold, copper, lead, zinc, rare earth elements, phosphorite and silver. There are also discoveries of massive underground water reserves beneath the Gobi.

So far, Mongolia has done a good job of escaping the fate that has befallen the other resource-rich, but hapless, former Soviet states.

"Mongolia is the poster child of the former Soviet countries. It is not run as a kleptocracy," said Ken de Graaf, a chemical metallurgist and vice-president exploration for Western Prospector Group Ltd. of Vancouver, in an interview in Ulan Bator. "Ivanhoe has a high quality project and is an anchor for these other companies."

Western Prospector obtained the rights to a dormant Russian uranium mine which was closed after the Russian pullout. "They basically got a phone call to come home in 1987 so it was shut down. I grabbed the properties," he said. "Under the Mongolia Minerals Act I have seven years to explore and I have the exclusive right to apply for a mining licence that will last 60 years with an extension possible for another 40 years."

Ivanhoe's Mr. Friedland, who scours the world for opportunities, was attracted to Mongolia as a result of its 1997 legislation. The company explores in several countries and has operating mines in Kazakhstan and Myanmar.

"We went to Mongolia after the country adopted a Canadian-style mining law that guarantees tenure," said Mr. Friedland.

The land where Ivanhoe made its discovery became available after BHP Billiton World Exploration Inc. of Australia, walked away from its higher risk plays in 47 countries in the mid-1990s. Ivanhoe snapped up the lands in 2000, then spent $8-million and five years drilling dry holes.

In 2001, its geologists decided to listen to the advice of Garamjav Dondog, a Mongolian anthropologist and geologist. "He said drill on Turquoise Hill and you will find gold. We did," Mr. Friedland said.

His reasoning was simple. The Hill was where Tibetans mined turquoise 5,000 years ago to make jewellery. Turquoise is oxidized copper and copper happens to be often found with gold.

They took his advice and in August, 2001, drilled their 151st hole on the site. On September 12, 2001, Ivanhoe announced exceptional results. The property is called Oyu Tolgoi in Mongolian, which means Turquoise Hill.

Other Canadians have been finding success. In 1998, uranium giant Cameco Corp. of Saskatoon arrived in Mongolia looking for uranium and gold. Its spinoff, Centerra Gold Inc., in 2003 opened its Boroo mine. Last year, it produced 200,000 ounces of gold in the northern part of the country.

Now the rest of the world has begun to recognize Mongolia's potential. A year ago, Rio Tinto Zinc of Britain publicly heaped scorn on Mr. Friedland's copper-gold prospect in the South Gobi. Last month it reversed its strategy and bought 9% of Entree Gold Inc. of Vancouver, whose property borders Ivanhoe's. Ivanhoe owns 17.8% of Entree, but news that RTZ was investing in the play sent Entree's stock soaring.

"As soon as I saw RTZ involved I said, 'Wow, that's got to be even more interesting,'" said Canaccord Capital analyst and geologist Wendell Zerb in an interview at the mining camp in Mongolia.

"Robert Friedland has a lot of credibility but in the post Bre-X world everyone wants lots of affirmation. This is an exciting project. There are not many gold copper projects that are comparable in size to this and the proximity to China's market makes it work."

RTZ's endorsement followed the re-entry in June of BHP Billiton, which negotiated the right to own up to 51% interest in all Mongolian properties held by Bayfield Ventures Corp. of Vancouver, which also border Ivanhoe's copper-gold deposit.

Exploration activity is underway in virtually every corner of the country. AngloGold Ashanti is here, as is Barrick Gold Corp., Brazil's CVRD, Denison Mines, International Uranium and hundreds of wanna-be juniors.

Offices are opening up and local hotels and watering holes are jammed nightly with consultants, money managers, geologists, engineers and suppliers sniffing out opportunities.

Others are moving their families here even though Ulan Bator is a grim, polluted city designed by Soviet engineers. Its population of one million live mostly in unadorned highrises built beside pipelines. Others, fleeing the hardship and rigours of raising livestock in an arctic climate, live in shantytowns on the outskirts in traditional tents.

Today, small businesses are springing up everywhere to capitalize on the newcomers' expense accounts, from restaurants to dress stores, nightclubs and peep shows. The buzz is constant as rumours fly daily about who will become partners with whom to build gigantic mines.

The good news is the country's leaders understand the reality of mining economics and how activity can lift living standards, said elected party leader and coalition member Oyn Sanjaasuren in an interview in her home outside Ulan Bator.

She is respected as a "moral voice" in Mongolian politics after running for office following the murder of her brother, Zorig Sanjaasuren, in 1998. Dubbed "Mr. Clean," he was poised to become Prime Minister of the country. The crime remains unsolved.

She interrupted a mining career herself to continue his crusade to bolster the country's democracy with integrity and transparency. But she believes Mongolia is not in danger of turning into an oligarch-controlled economy. "Of course we have nouveau riche but, unlike the Russians, they did not acquire enormous assets through privatizations. Also unlike Russia, Kazakhstan, Uzhbekhistan or Azerbaijan we didn't have huge oil reserves. Now Mongolia is recognized as potentially minerals rich, but most of the deposits found before the transition were small or medium size, especially gold and copper," she said.

Years before entering politics, Ms. Oyn was involved in exploration with Rio Tinto Zinc in 1992 on lands which eventually became Ivanhoe's discovery site.

"I earned my PhD in metallurgy at Cambridge University from 1992 to 1994 and while there I was part of a geological team that looked at the Ivanhoe property in Mongolia for Rio Tinto Zinc. We thought it had possibilities and recommended that it take the property," she said. "But BHP Billiton beat us by two weeks."

In May, 2000, Ivanhoe made its initial deal with BHP for the Mongolia property.

Mining is already making a difference for Mongolia's urbanized people as a result of the increase in GDP, Asia's highest at 10.6%. But such growth is off a miniscule base of US$1.5-billion. The country's agrarian or nomadic populations are either unaffected by mining activity, or are seeing some benefits if they are working on mining sites as labourers, security guards or drivers.

Mining now accounts for 64.7% of industrial output and more than 57.5% of export earnings.

In Ulan Bator, there's a noted shift in university enrolment to engineering, sciences and geology as the highly literate Mongol youths realize the transformation that's going to take place. And schools are teaching English as a second language, instead of Russian, from the age of eight onwards.

As for investors, the risks are great but must always be weighed against rewards.

Mr. Friedland reasons: "We know countries like we know stocks and Mongolia is a Buddhist country with peaceful people, with world-class resources beside the Chinese market. What could be better?"

© National Post 2005