- The Washington Times - Thursday, May 11, 2006

ULAN BATOR, Mongolia — Under the Gobi Desert lies a potential treasure.

The gold and copper deposits at Oyu Tolgoi (Turquoise Hill) are among the largest ever found and could give impoverished Mongolia its biggest boost since it abandoned communism 15 years ago — if the Mongolians can figure out how to profit from it.

For two years, an agreement between the government and the Canadian company that discovered the deposit in 2001 has been held hostage by a boisterous debate over how to share the wealth in a country suffering from widespread poverty and corruption.

The delay has been aggravated by weeks of protests in which opponents set up tent camps, fasted through a brief hunger strike and burned effigies of Mongolia’s president and the chairman of Ivanhoe Mines Ltd.

The government brokered a deal on April 23 to include civic groups in an investigation into Mongolia’s dealings with Ivanhoe, though some groups said they would continue protesting.

“We are not actually against Ivanhoe Mines; we are against the government’s handling of the negotiations,” said S. Ganbaatar, an environmental activist with the civic movement Radical Reform. “Maybe Ivanhoe is the best choice. Maybe Ivanhoe is the worst choice. We just don’t know.”

Oyu Tolgoi, some 400 miles southwest of Ulan Bator near the Chinese border, embodies the dilemma facing the proud descendants of Genghis Khan: How to secure an adequate share of the country’s mineral wealth without scaring off foreign mining investors.

The opposition accuses the government of giving away Mongolia’s wealth and wants the 1997 Minerals Law amended to change some terms favorable to foreign investors and require a large government stake in any foreign mine.

Foreign mining companies say that without the incentives they now possess, they would not risk such ventures.

“We incur a vast capital investment to build the mine. The mine will bring a huge benefit to the Mongolian people, who can either get the project running and reap its benefits or not,” said Roger Walsh, an Ivanhoe vice president and spokesman.

Getting the formula right is crucial for the landlocked country of 2.8 million people. Next door looms China, the economic powerhouse whose low-cost manufacturers have already pushed Mongolians out of the cashmere industry, once a major export earner. Some fear they could do the same with metal processing.

There have been no accusations that Ivanhoe, which owns 100 percent of the mining concession for Oyu Tolgoi, has acted improperly. “The question is whether the Mongolians are going to get enough out of the project,” said Morris Rossabi, a specialist on Mongolia at Columbia University.

The fear is that foreign mining companies are “trying to get deals that would involve paying almost no taxes,” he said.

Mine firm wants action

“We don’t disagree with raising these issues,” said Mr. Walsh of Ivanhoe, but he added: “We’re a little bit frustrated. We would like things to move forward.”

Ivanhoe estimates the net present worth of Oyu Tolgoi’s deposits to be $3.44 billion in today’s dollars, and says it will make direct payments to Mongolia over the initial 35-year life of the project of approximately $4.5 billion in corporate taxes, royalties and other taxes and fees. It says the project will create tens of thousands of direct and indirect jobs and cites studies saying it could boost the country’s gross domestic product by more than a third.

To remind Mongolians of what is at stake, Ivanhoe has published statements about the economic benefits in their newspapers.

Ivanhoe’s discovery is well-timed: Demand for the copper used in cars, cell phones and other products has pushed prices to record highs of around $3 a pound. This wealth is bringing signs of prosperity to Ulan Bator: construction cranes; a Nissan vehicles showroom; billboards advertising Dior, Samsonite and Revlon.

But 40 percent of Mongolians live in poverty. About half of the capital’s 1 million people live without sewer lines or piped water. Schools and hospitals are crumbling, and the country depends on food aid for nearly 80 percent of its wheat.

Other mine past peak

Mongolia’s biggest taxpayer, the Erdenet copper mine, has already passed its peak output and will probably last only 20 more years.

Over its lifetime, the mines at Oyu Tolgoi are expected to yield more than 35 million tons of copper and 11 million ounces of gold, Ivanhoe estimates.

In the haggling with Ivanhoe, the government is trying to set taxes, water and land use and other conditions while protecting Ivanhoe’s investment from future changes in local laws that might affect revenues.

Everyone wants maximum profits, “but the best way to solve the problem fairly for all people has not yet been established,” Industry and Trade Minister B. Jargalsaikhan, the government’s lead negotiator with Ivanhoe, said in comments published in the Ulan Bator Post newspaper.

Mr. Jargalsaikhan promised on national television that parliament will debate the business terms as well as amendments to the Minerals Law, which currently allows 100 percent foreign ownership of mines, licenses for 100 years and 100 percent repatriation of earnings.

But both he and the government’s critics concede the importance of dealing with Ivanhoe, which says it has already spent $300 million of $1.2 billion budgeted for the project’s first phase.

“Mining is big risk,” said N. Dorjdari, an economist with the Forum, a nongovernmental group. “It’s capital intensive, so we have tried to attract [foreign] companies.”

Ganbat Namjil in Ulan Bator contributed to this report.

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