Wednesday, October 7, 2009

Oyu Tolgoi: End of the Beginning

It is official. Mongolia and Ivanhoe Mines are married. On October 6th the government of Mongolia signed the long debated investment agreement with Ivanhoe and Rio Tinto to develop the Oyu Tolgoi copper and gold deposit.

In an ideal world the government would begin or would have already begun developing policy to go along with its new found cash flow. It will be interesting to see what they come up with beyond giving cash handouts of $1,000 per person. If my opinion counted, I would suggest public works projects for a working drainage system in Ulaanbaatar, real urban planning in the city that included parks and streets in the ger districts, rebuilding of wells across the countryside, and investment in the education sector as a start. But that is neither here nor there because I can't vote.

For now, I presume, the focus will turn to developing the mine site and the infrastructure to support it--not to mention the new gold rush mentality that will sweep the country as entrepreneurs and laborers head to the Gobi to seek their fortune. The last 5 years in Mongolia were wild enough with economic growth almost exclusively built upon speculation of great riches once the Oyu Tolgoi agreement was signed. Now with the prospect of real investment and substantial cash flow on the horizon one can only imagine the mad euphoria of get rich quick schemes that will grip every last person in Mongolia. These are heady times for sure.

Over the summer I had a chance to visit the Oyu Tolgoi site with a group of 15 Fulbright-Hays fellows from the US. Ivanhoe was very accommodating, and the camp manager provided us with an extensive tour of the facilities and area around the site. Oyu Tolgoi is situated in the least densely populated province in one of the least densely populated countries in the world. It is isolated to say the least. And yet, in this isolated corner of the world first-class economic and industrial activity is occurring. Although we visited at a low ebb of operations due to tense summer negotiations between Ivanhoe and the government, I was roundly impressed by the size and sheer magnitude of the project. It is a stunning contrast to just about everything else going on in the country, and at this point it's only in the initial stages of development. There is much, much more to come.

Of course there is a lot to consider beyond the development of the site itself. Water will be a huge issue. The site will demand a lot of water in a region that has very little. In-migration unregulated and unstoppable on a level commensurate with Ulaanbaatar is another serious issue. It is a desolate place now, but soon it could be a patchwork of ger districts in the desert. Then there is the inevitable and potentially accelerated encroachment of Chinese and Russian influence on Mongolia. It's enough copper and gold to attract more than just domestic prospectors.

When you see it, Oyu Tolgoi boggles the mind. It is going to be huge. A size unlike Mongolia has any experience with, and the next few years are going to be a wild ride with both positive and negative consequences. October 6th, 2009 marked the end of the beginning. Now the real work will begin.

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