November
16, 2007
"The Mongolian Wakeup Call"
For Mongolian more than perhaps to any
other emerging nation, this is the 21st century.
The facts are as follows. Mongolia, which is the sixth
largest country in the world and has a gross national
product of less than $2 billion and a small population
of 2 million people. This little country which can be
historically described “a far away county about
which we know nothing” can plunge into international
interest and international significance.
The time has granted Mongolians a place in the world history.
Mongolia is becoming an important country in what is called
the Commodity Boom. It has been stated that in the last
six years, the commodity index of the world has gone up
fivefold and some experts project that this upward trend
will continue - commodities of cooper, iron ore, nickel,
and molybdenum are raising.
What does the world know about Mongolia? For centuries,
it was occupied either by the Russians or the Chinese.
The movies show that in 1941, Mongolian troops on horseback
liberated Moscow. It was a cold winter. Historically,
over a thousand years ago, both the Finnish and the Hungarians
left Mongolia.
Mongolia has a sister nation in Europe, namely my country,
Hungary. The friendship has preserved a historical thousand
years and today, I am told that in Budapest in the best
university called Eötvös Loránt has a
faculty, the Inner Asia with Mongolia being the most important
part.
This historical tie has not only survived because of heritage.
Actually, in the last century, both Mongolia and Hungary
badly suffered from foreign occupation. Today, after 1990,
Mongolia and Hungary still do business with Russia, but
we should never forget those foreign forces that shaped
the fate and our daily life not so long ago. This is why
our unique relationship is a valuable, historical tie
between a faraway country and a former satellite of Eastern
Europe, Hungary. This historical relationship may become
handy in the political and commercial world in the current
decade.
Let’s be blunt. Mongolia was oppressed by the Russians,
and we were oppressed by the Russians. Russia has never
been a friend of Mongolia, and Russia, while a business
partner today, has never been a true equal friend of Hungary.
In the 21st century, you will be doing business with Russia;
we will be doing business with Russia. But let us never
forget that great powers, great forces will not be generous
either to Mongolia or to Hungary.
There is a saying, which is I presume international, that
mathematicians only talk to mathematicians; that Prime
Ministers only talk to Prime Ministers, and chess masters
only talk to chess masters. Mongolia and Hungary speak
the same political language.
An unexpected development in Mongolia is now brings your
country to the limelight. The discovery of the largest
copper and gold mine in the history of mankind is in Mongolia.
In order to develop and bring to production this mine,
negations have been conducted between Mongolia, the cabinet,
the parliament, and the Mongolian National Mining Association
with basically two western companies - Rio Tinto and Ivanhoe.
Rio Tinto is the world’s second largest mining company,
owns ten percent of Ivanhoe, and has option to buy another
thirty percent.
The negotiations have gone for a long time. Meanwhile,
world events are putting Mongolia into a historic and
complicated position.
At the moment, global investors are carefully watching
what happens in the so-called Oyu Tolgoi investment agreement.
Their official position is that after five years of negotiation,
the Mongolian cabinet approved the agreement, but it is
now stored in parliament.
Let me now explain what I see behind the facts. The Rio
Tinto/Ivanhoe consortium has so far spent close to a $1
billion on the project. It is difficult to keep them going
without an agreement about production as the have to cover
all the expenditures from their own resources. No bank
would lend against a hypothetical program.
There is a question mark among the international investors
as far as the future of Oyu Tolgoi and in fact the future
for other companies in the mining industry in Mongolia.
In the 21st century, the major steps in mining and in
the history of many countries is decided by money. The
gross national product of Mongolia is $2 billion. Even
with the potential resources of Oyu Tolgoi which is 71
billion ounce of copper and 31.3 million ounce of gold
represent a total value between $60 billion to $100 billion.
And the projected production of 1.6 million ounce of copper
at $4.00 would represent $6 billion. And the production
of 900,000 ounce of gold a year at $1,000 per ounce price
would represent a billion.
In the year 2007, due to major mining discovery, I know
Mongolia is bursting on the world scene. It can provide
four to five billion dollars worth of copper, gold, uranium
just as a time when there is a commodity shortage, where
prices of commodities could increase manifold, and gold
can play an important role as a new currency in our monetary
unstable world.
In five years, people will say when it comes to Mongolia
- the important Mongolia.
Actually, $5 billion GNP for a population of 2 million
is $25,000 per annum. Higher than Russia or China. Potential
capital surplus of $2 billion per annum is higher than
the USA. Money to develop the infrastructure, there is
a place for Hilton, Wal-Mart, and Apple Computer.
In the face of a promising future, there is a stumbling
block of the so-called investment agreement negotiated
and approved by the government of Prime Mister Enkhbold
and being favorably reviewed by the incoming Prime Minister
of Sanj Bayar. The agreement is the result of five years’
intense negotiation which would provide the capital and
the expertise and the marketing of the Mongolian copper
and gold. It is also called the Oyu Tolgoi mining agreement.
As Mongolia steps into the 21st century, it should enter
the century that is government by commercial contracts.
In a turbulent world which has Iraq, Iran, Pakistan, the
stability is not brought by armament, but contract. Mongolian
prosperity, independence, and future, rests in the written
contracts signed by recognized international companies.
Unfortunately, at least for the last century, neither
Mongolia nor many small countries had the opportunity
signed on the dotted line.
For the small nation of Mongolia, $5 billion is a very
big sum of money. It has now occupied the minds of politicians
how to divide this money up, what agreement to make, and
unfortunately, we reached the worst possible scenario
to have no agreement.
Meanwhile, in contrast to a $5 billion production and
the mining value of let’s say 75 billion value,
the numbers are meaningful, but not so meaningful.
Rather than saying the word not so meaningful, there are
other big numbers who rule this world. There are investment
companies in Australia that manage $5,000 billion. In
the United States Fidelity manages $1.5 trillion. The
surplus reserves of China consists of $1.25 trillion which
China wants to invest in other avenues other than U.S.
Treasury Bills. The Russians probably have $250 billion
surplus reserves; Dubai and Qatar, over $500 billion total
surplus reserves.
The world is so big that when the largest brokerage company
in the world, Meryll Lynch, loses $8.4 billion, the security
analysts point out that it is “manageable”.
In other words, the largest loss in MER’s history
is bigger than the one year potential total production
of Mongolian mining once it is full swing let’s
say three or four years from now.
These huge forces suddenly envelope Mongolia. The second
largest mining company Rio Tinto is being offered something
like $165 billion by the largest mining in the world,
BHP, in Australia. The total value of the companies will
be $360 billion, substantially bigger than the ownership
of the Mongolian Oyu Tolgoi.
The Mongolian cabinet and the parliament, the small number
of people just over 2 million in Mongolia, with your current
gross national product which is less than $2 billion.
Meanwhile, one company alone may control $360 billion
market value, and indirectly would own all the productions
rights of your copper and gold venture being in Mongolia.
Furthermore, we have learned the last few days that the
China Development Bank has under one percent stake in
Rio Tinto. That number by now could have increased to
two percent. It can go to up to ten percent. Ten percent
of $165 billion is $16.5 billion in fact probably the
largest stockholder and probably the largest voice in
developing Mongolian reserves.
I am not suggesting there is anything sinister. I am only
trying to point out when one fifth of the world’s
copper productions between BHP and perhaps Mongolia is
at stake, do you have a free voice?
Actually, you have. Actually, there is a way to protect
yourself.
The western world, in fact technically the whole world
since 1991 when Mongolia got liberated, is based on commercial
contracts. The contracts are made by sovereign companies,
sovereign nations, and it’s very difficult to break.
I am pointing out the following: there is a tremendous
monetary turmoil in the world which engulfs mining. The
current takeover effort of BHP and Rio Tinto is already
encouraging Chinese companies to go abroad and buy mining
assets. As a hypothetical example, the bid for Rio is
$143 billion. A combination of Chinese mining companies
can certainly raise $200 billion. At that time, Rio, that
owns 40 percent of the Oyu Tolgoi mining complex would
be directed by the Chinese.
Today Mongolian government is negotiating with the Ivanhoe-Rio
Tinto corporate partnership.
If Rio is bough by the Chinese, Mongolia would be negotiating
with the Chinese.
I don’t want to insinuate which is better for Mongolia.
As far as my personal preference is - stay commercial.
Sign a commercial agreement which obviously carries the
spirit of political independence.
I was told that yesterday the American Ambassador, The
Right Honorable Ravdan Bold, to Mongolia in Washington
left for Mongolia to speed up the confirmation of the
new Prime Minister and expedite one of the commodity world’s
most important commercial contracts in the world, which
is also the most important contract between Mongolia and
Western Corporation.
If so, then in Mongolian’s modern history, it is
Andrew Racz
