IN the Gobi desert, a copper mine that is expected to change the face of Mongolia's economy and whose ability or lack of it, to hit targeted production will swing global copper prices for decades is taking shape at speed.
On 8500ha where herders once tended camels and goats, giant blue sheds are being erected to house ore and a concentrator so mining can continue through the freezing winter an extensive web of power cables crises crosses the plain and 100 meters towers are being erected above planned mine shafts.
The project is the USD 10 billion Oyu Tolgoi mine project, being built by an uneasy union of mining giant Rio Tinto, Canada's entrepreneurial Ivanhoe Mines and a Mongolian government that is threatening to take a bigger stake. If all goes to plan, Oyu Tolgoi will begin producing copper in 2013 and by 2020 will be turning out 800,000 tonnes per year making it the world's third biggest copper mine, based on current output.
Along with 1.2 million ounces of gold by product this sort of output would bring in about USD 8 billion per year in revenue. In an unusual owner operator arrangement, Rio is building and will operate Oyu Tolgoi despite having no direct interest in it. Instead, Rio owns 49% of Ivanhoe which in turn owns 66% of the project. Mongolia owns the rest.
Construction of the first stage, begun in April last year, is already having an immense impact on landlocked Mongolia, where 2.7 million people live between the giant developing powers of China and Russia in an area twice the size of NSW.
Rio Mongolia and Mr Cameron McRae CEO of Oyu Tolgi said that "This place is growing phenomenally. Speaking in the capital, Ulan Bator, he pointed to the large number of cranes on construction sites around the city, countless new restaurants and a boom in manufacturing. That's not money from Oyu Tolgoi, but it's the indirect benefit of the large investment coming into the country where you are actually bringing billions in.
Mongolia's annual economic growth was 17% in the second quarter and is expected to average more than 10% for the next decade. For the first time this year, unemployment has dipped below double digits. Oyu Tolgoi is expected to be responsible for about 5% of Mongolia's annual growth and account for more than a third of gross domestic product in 2019.
Mr McRae said that if the copper price stays strong, you will see that make an even greater contribution. Like any country presented with the chance for massive resources income, Mongolia will need to overcome the pitfalls of Dutch Disease the situation where resource windfalls make other industries uncompetitive. The project is halfway through construction. There are 8000 Mongolian workers and about 6000 Chinese workers on the site.
But the path to its target of first production in 2013 is far from smooth. On the operational side, Oyu Tolgoi's sourcing of 450 MW of power from China is looking shaky because Mongolia and China have not nailed down a deal. Rio has said this could delay first production but Mr McRae said he was confident a power deal would come. He would not go further into the source of the disagreement, other than saying deals between governments can be complicated.
Mr James Reichert World Bank infrastructure specialist based in Ulan Bator said that it could take 3 or 4 years for the mine to build a power station if a deal with China was not possible. They've got a bit of a dilemma. They're having trouble with the Inner Mongolian government and the power company. I don't know what the issues are, whether its price but they're having difficulties."
Mr Reichert said that Mongolia which has said it wanted any big power stations integrated into the national transmission system was looking at letting Oyu Tolgoi build its own station. The issue is a touchy one for Ivanhoe, which is trying to raise $US4bn of project finance for Oyu Tolgoi amid turbulent global equity and commodities markets.
