In 2005, Robert Friedland, chairman of the Vancouver-based Ivanhoe Mines Ltd., famously regaled potential investors in Florida with his Mongolian mega-project, the “cash machine we really intend to build,” – a massive copper-gold and coal project in the southern Gobi desert called Oyu Tolgoi or Turquoise Hill.
Friedland talked about the size of his claim: “Mongolia is three times the size of France, twice the size of Texas, 2.6 million people, and our lands...are about the same size as Japan...about 135,000 square kilometres, the largest land position in the mining industry.”[1]
Friedland talked about his good relations with the government and low anticipated tax rates: “Now Mongolian political leaders have helped us a lot, the president of Mongolia came to Canada. We met with Paul Martin and we’ve signed a free trade agreement between Canada and Mongolia to avoid double taxation. We have virtually no taxation contemplated on the remittance of dividends and we are in the final stages of a very important long-term agreement with the Mongolian government that will protect our stakeholders on everything we are going to do.... if our tax rate was say 5% or 6%, we only have to be half as good as Grasberg to make as much money for our shareholders.”
Friedland talked a lot about how much money would be made:
• Block caving was described as a cash cow – “The amount of money that this block cave can draw off is terrifying...typical operating cost for a block cave would be a dollar or two a tonne. And about 3 or 4 dollars a tonne to mill it say 5 or 6 bucks a tonne, all in. What’s amazing is this 3%, 4% copper is 100-dollar rock. So you’re in the T-shirt business, you’re making T-shirts for 5 bucks and selling them for 100 dollars. That is a robust margin.”
• Labour costs would be low – “Now you can see how these trucks are just going to come in here and pull money out of the bank. The mining is automatic. It’s just like a rock factory. There’s no moving parts, it can be totally automated. Kids with joysticks can be running these things from the surface. You don’t need any people underground, it’s all done by gravity drainage.”
• The associated coal was another money maker – “These old coals are really the Beluga caviar of coals.... And you can make more money digging that stuff up, and hauling it south, than you can screwing around with sort of a marginal gold mine anywhere in the world.... You can mine this coal for a buck a ton. If it’s worth 100 bucks a ton, it’s a quarter of an ounce gold equivalent. If it’s 50 dollars steam coal, it’s still several grams per ton gold equivalent, and you don’t have to mill it, you don’t have to wash it, you don’t have to clean it, you don’t have to process it. All you do is do what the Chinese are doing in these pictures. You load it into trucks and they go across the Gobi Desert, see that dust, heading for China. And you trade it for money. This is what mining is supposed to be.”
Finally, Friedland talked about the lack of social hassles in the desert – “And the nice thing about the Gobi is, there’s no railroad tracks in the way, there are no people in the way, there are no houses in the way...there’s no NGOs...You’ve got lots of room for waste dumps without disrupting the populations...”
If Friedland “underestimated” anything in his typically hyperbolic speech it was likely the social landscape. When Friedland’s speech – especially the analogy to making 95% profit on T-shirts – hit Mongolia and was translated it caused enough anger to lead to the burning of his effigy (in a top hat) in a protest in the capital Ulaanbaatar in April of 2006. And the “Toxic Bob” moniker Friedland has carried with him since long before his disastrous Summitville mine in Colorado is now commonly used in Mongolia. By 2008, Ivanhoe had found a partner in Rio Tinto but the agreement Friedland had talked up between Ivanhoe and the Mongolian government had failed to materialize.
Friedland also failed to anticipate approvals by the Mongolian parliament for windfall taxes on gold and copper exports and for the government to take up to 50% stakes in certain mining assets.[2] Amidst global outcry by mining moguls a call went out for political intervention. According to a cable from the U.S. Embassy in Ulaanbataar dated January 11, 2008, recently released by Wikileaks, that intervention was certainly forthcoming.[3] In January 2008, then-trade minister David Emerson flew into Ulaanbaatar. While there he expressed concern that Mongolian President “Enkhbayar’s approach to mining was too statist for Canadian tastes, saying that Enkhbayar was behind many of the efforts to re-nationalize Mongolia’s natural resources.”“The Canadian minister, however, praised Mongolia’s prime minister, foreign minister, and minister of the interior, saying they agreed nationalization was not the preferred choice, but that “severe political pressures” and a fear that the country would not benefit from its natural resources were at play.... Emerson also met with mining companies that “want and need foreign governments to project a united front to the [Government of Mongolia] to cover their political flank,” the cable reads. “In short, the mining companies told Canada to join US, British, Japanese, Australian and German efforts to encourage (cajole, harangue, etc.) the [Mongolian government] into staying out of the mining business...” During Emerson’s visit, Canada and Mongolia announced they would begin negotiating a Foreign Investment Promotion and Protection Agreement to provide protection for foreign investors. Later in 2008, Canada opened an Embassy in Ulanbaatur.
In October 2009 Ivanhoe signed a long-term investment agreement with the Government of Mongolia, and on March 31, 2010, the Government approved the investment agreement with Ivanhoe and Rio Tinto for the development of Oyu Tolgoi.
In spite of these developments, NGOs, whose existence Friedland has somehow failed to recognize in 2005, have been increasingly vocal in raising social, environmental as well as political concerns associated with the Oyu Tolgoi project. “The Mongolian Government approved the Oyu Tolgoi Investment Agreement on 31st March 2010 without obtaining the prior consent of Mongolia’s parliament (the State Great Hural) and despite the fact that the technical and economic feasibility study submitted by Ivanhoe Mines Mongolia Inc. had been rejected by Mongolia’s Mineral Expert Council [the technical council that has the responsibility to approve mining projects]” said Ms. Urantsooj of the Centre for Human Rights and Development, a NGO which has made a study of Mongolia’s mining and environmental legislation.[4]
On April 1, 2010, Mongolian NGO Oyu Tolgoi Watch tabled a complaint with OECD National Contact Points (NCP) of the U.K. and Canada on behalf of the Centre for Citizens’ Alliance, the Centre for Human Rights and Development, Steppes without Borders, Drastic Change Movement, and National Soyombo Movement.[5] In brief, the complaint alleges the company’s Technical and Economic Feasibility Study that was accepted by Mongolia’s Technical Council of Minerals Experts in March and implemented in April 2010 does not demonstrate the availability of sufficient water resources to carry out the project. It also raises issues concerning the long-term commitment of Ivanhoe Mines to the region and proposed royalty transfers among owners of the mining licence.[6]
After a lengthy process of requesting further information and documents from both sides the Canadian NCP decided not to take the case to the next stage. In its final statement the NCP determined the “environmental assessments to be complete and of a high quality” and finding the “governance and management of the water and all other resources of the area” to be “the responsibility of the Government of Mongolia.” The NCP further argued that “it is not practical or realistic to expect these extensive and complex matters to be resolved by dialogue between NGOs and companies on a case-by-case basis. These matters are more appropriately addressed by the national government using a comprehensive governance mechanism with appropriate laws, regulations and enforcement mechanisms.”
This finding is remarkable for at least two reasons. Firstly, the Canadian NCP made a statement of fact about the quality of Ivanhoe’s environmental assessment. The Canadian NCP normally takes the position that it will not make determinations of fact regarding the validity of a complaint but rather seeks to offer its “good offices” to bring about dialogue between the parties. The fact that the Canadian NCP determined that dialogue could not be expected to resolve these issues, and that they be best handled by the Mongolian government, is the second remarkable finding. As noted elsewhere in this newsletter, non-judicial grievance mechanisms such as the NCP are touted by U.N. Special representative John Ruggie as an effective response to weak governance. It is hard to see how non-judicial grievance mechanisms can fill the void left by weak governance if they refuse to accept that role. The question of whether there was a conflict of interest given that the complaint came in to the Canadian NCP at the same time that Ivanhoe was seeking funding from Export Development Canada is pertinent in this case.
Not long after the Canadian NCP prepared its final statement on the Oyu Tolgoi complaint, the International Finance Corporation (IFC) replied to a letter of concern by Oyu Tolgoi Watch.[7] The IFC’s letter confirms many of the very concerns regarding the lack of adequate environmental assessment, particularly with respect to water resources and social impacts, that were raised in Oyu Tolgoi Watch’s complaint to Canada’s National Contact Point. The financial institution insists it is “deeply committed to helping the Oyu Tolgoi project develop in a manner that will maximize its benefits to the people of Mongolia.” The question is whether the IFC’s stated commitment to achieving benefits for the Mongolian people is more believable than the less politically smooth, but perhaps more honestly rapacious statements of Friedland when he described the Oyu Tolgoi project as a “cash machine” for investors and shareholders.
For more detail on the concerns raised by Oyu Tolgoi Watch see "Oyu Tolgoi Issues" attached below.
Notes:
1. Robert Friedland’s presentation to BMO Nesbitt Burns Global Resources conference, July 29, 2008.
2. Big Dig: Mongolia is Roiled by Miner’s Huge Plans – World-Class Deposits Spur Battle for Spoils: Makeover for ‘Toxic Bob.’ Patrick Barta, Wall Street Journal. January 4, 2007.
3. Lee Berthiaume. Latest leaks touch on Fowler deceit, Americas. Embassy Magazine. May 11, 2011. p.16.
4. Mongolian NGOs Appeal to the UN’s Special Representative of the Secretary-General on Business and Human Rights to Resolve Oyu Tolgoi Mine Dispute. April 23, 2010.
5. OECD Complaint Filed Against Rio Tinto and Ivanhoe Mines in Mongolia. July 18, 2010.
6. The complaint is posted on OECDWatch.
7. See the International Finance Corporation’s letter to Oyu Tolgoi Watch.