Misunderstanding mining and money

Globally, money for mining is tight, and so the way in which miners now deal with local communities and government that demand a more commensurate slice of the pie is changing.

But misguided policies employed in the regions are not only hampering development, they are also possibly putting mines development at risk. 

Recent events in Mongolia and the Philippines are enough to make your average miner want to take his money home; which in the case of Rio Tinto in Mongolia the temporary closure of the underground operations at Oyu Tolgoi, one of the worlds largest gold and copper deposits; as well as GlencoreXstrata removing itself from the major Philippine Tampakan project, seems to be the case.  

In Laos, mining is increasing at such a pace that privately officers of the World Bank are concerned at the speed of growth in the mining sector and the effect it is having on the country. 

Was it the fault of the World Bank, the countries themselves or other factors? 

According to Dr. Pascale Hatcher, the history behind the development of all three countries lays a lot at the feet of the World Bank. 

Speaking at a seminar at Murdoch University, Perth; Hatcher concluded that the activities of the World Bank in these countries may not have been of benefit to miner or citizens of those countries.

The World Bank was involved heavily in the technical assistance in defining new mining regimes, social-environmental reforms, tax reforms and the institutional reforms which have lead to the present impasse that is occurring in Mongolia and the Philippines, and may occur in Laos. 

"Overall the influence of the World Bank Group was as a catalyst for investments in the mining sectors of all these countries," Hatcher said. 

The WBG has assisted more than 100 countries in forming their mining laws; balancing it believed the investment risks of mining with the incentives.  

The result of this was to make the countries themselves compete for the most liberalised types of mining regimes, which did not readily take into account environmental or political factors.  

Points made by Dr Hatcher include: 

  • Priority given to the private sector 
  • Priority given to mining over other types of territorial use 
  • Priority given to an exportable resource (gold) over other mineral resources 
  • Priority given to the industrial sector over artisan & small mines ·
  • Guarantees protecting mining rights 
  • Calculating the mining sector's primary contribution to the national economy in terms of tax revenues. 

It was in 2003 that the World Bank actually asked itself if it should stay in the mining sector?  

To which, it finally decided that future investments in the extractive industries would be selective (including no investment in conflict zones) and promoting environmentally and socially sustainable development. 

But Mongolia, with a population of only three million, had the fastest growing economy in the world last year.  

This was due to mining investments coming on-stream in the last year or two, after many years of exploration and plant development. 

As one miner put it, the Gobi Desert was perfect for mining. 

"And the nice thing about the Gobi, 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," according to Robert Friedlands,

Ivanhoe's (now Turquoise Hills Resources) chief executive officer. 

The Oyu Tolgoi (OT) mine was the jewel in the crown.  

The Oyu Tolgoi mine is a combined open pit and underground mining project in Khanbogd sum within the south Gobi Desert, approximately 235 kilometres east of the Ömnögovi Province capital Dalanzadgad.  

Oyu Tolgoi LLC is Mongolia's largest copper and gold mining company and is a strategic partnership between the Government of Mongolia (34 per cent stake), Turquoise Hill Resources (66 per cent) and Rio Tinto.  

Rio Tinto is the major shareholder in Turquoise Hill Resources and the manager of the Oyu Tolgoi project. 

In January Rio Tinto acquired 510 983 220 common shares of Turquoise Hill under Turquoise Hill's rights offering at a total cost of C$1.29 million or C$2.53 per share.  

The purchase represents approximately 50.8 per cent of the common shares offered under the rights offering. The rights offering was fully subscribed. 

Turquoise Hill will be using a portion of the funds it receives under the rights offering to repay all amounts outstanding under the US$1.8 billion interim funding facility and the US$600 million secured bridge funding facility each provided to Turquoise Hill by Rio Tinto. 

On the 13 of January, 2014, Rio Tinto owned 510,983,220 common shares of Turquoise Hill, representing approximately 50.8 per cent of the outstanding common shares.

Upon the completion of the rights offering, Rio Tinto owns 1,021,966,440 common shares, representing approximately 50.8 per cent of the outstanding common shares. 

Depending upon its evaluation of the business, prospects and financial condition of Turquoise Hill, the market for Turquoise Hill's securities, general economic and tax conditions and other factors, Rio Tinto may directly or indirectly acquire or sell some or all of the securities of Turquoise Hill. 

For 2014, Turquoise Hill expects Oyu Tolgoi to produce 150 000 to 175 000 tonnes of copper in concentrates and 700 000 to 750 000 ounces of gold in concentrate.

Oyu Tolgoi is expected to return to more normal inventory levels by the end of the year. 

In the agreement signed at the beginning of the project OT had its tax rate stabilised for 30 years, generous fiscal provisions and cancellation of windfall taxes. 

However, as time moved on in the case of Oyu Tolgoi, the government chose to buy an equity stake of 34 per cent in the company.  

To fund its 34 per cent Erdenes Oyu Tolgoi chose to borrow money from the other shareholders. Initially the interest rate agreed to between the shareholders was "Consumer Price Index + 9.9%". However, investors reduced this to "LIBOR (London Interbank Offered Rate) + 6.5%".  

This way, investors were able to reduce the loan interest rate by more than three per cent – well below their own cost of capital.  

The political landscape has changed and the facilitator of this mining boom, the World Bank, seems to have washed their hands of it. 

"The aspiration to turn Mongolia into a Qatar is admirable, the likelihood of it becoming Nigeria not negligible. [¬] A country with fragile institutions and a GDP per capita of US$3,000 is about to be hosed with billions of dollars. What could possibly go wrong?" (Financial Times, 2012). 

The results of the boom are not pretty in Mongolia's capital Ulaan Bator, where inflation is 20 per cent; there is increasing inequality with corruption going through the roof.

One-third the population lives below poverty.

All in all, the sort of situation which does not spell the sort of political stability that mining requires.

Of course, all the Mongolians want a job on the mines as well, which is unlikely as foreign direct investment has fallen by 50 per cent.

For development to happen at Oyu Tolgoi, an agreement had to be made in which the Mongolian government took a 34% stake in the project; the royalty arrangement it currently has with the Mongolian government took years to reach which caused significant delays in project development. 

In the Philippines, a country with a much longer and richer history in mining, the Australian partner of GlencoreXstrata is Indophil Resources NL.  

JORC compliant resource estimates at the Tampakan Project have the resource estimate at 2.9 billion tonnes at 0.51% copper and 0.2g/t gold (Measured, Indicated and Inferred) at a 0.2% copper cut-off.

This represents contained copper of 15 million tonnes and contained gold of almost 18 million ounces.

Significant additional mineralisation potential exists.

The Tampakan deposit represents the largest undeveloped copper-gold deposit in the South East Asia – Western Pacific Region. 

An Indophil report conceded that the Tampakan project, located in the troubled southern island of Mindanao, had run into problems, chiefly the provincial government's ban on open-pit mining which delayed the start of development. 

We asked Indophil to answer questions concerning Tampakan how­ever they are waiting on a trip by Australian foreign minister Julie Bishop to the Philippines before making any comment.  Questions to Julie Bishop's office were unanswered. 

The Final Mine Environmental Impact Assessment (EIA) was formally submitted to the Philippines Government in December 2011 in support of the Environmental Compliance Certificate (ECC) application.  

According to Indophil the EIA was by any measure robust and comprehensive and this was confirmed by the Philippine Government during the evaluation period.  

The EIA was completed to the highest international standards which in many respects went beyond the legislative requirement in the Philippines. 

The mine would be the Philippines' largest ever foreign investment but it has faced opposition from church, community and environmental groups and would require numerous other government and community permits to be obtained.  

Since April 2013, there has been considerable uncertainty over the future ownership of Tampakan, now that GlencoreXstrata may be forced to divest its stake in Tampakan as part of the Chinese Government's MOFCOM conditions in order to secure the approval of Glencore's merger with Xstrata. 

This is an interesting development given that when questioned if the World Bank is seen as necessary any more, many observers say it's the World Bank or the Chinese.

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