Mining and Investment in Mongolia: An Interview with Terence Ortsland

Katherine Young of Resourcex Investor spoke to Terence Ortslan, a mining analyst at TSO and Associates in Montreal who has been travelling to Mongolia for 20 years, about issues affecting Mongolia's mining sector.

A recent agreement in principle between Rio Tinto, Ivanhoe Mines and the Mongolian government has investors, analysts and mining professionals wondering if the climate in Mongolia is becoming more favourable to foreign investment in the resources sector. Juniors in Mongolia like East Asia Minerals (TSX.V:EAS) and Red Hill Energy (TSX.V:RH) - who have, respectively, uranium and coal deposits in Mongolia - will likely be affected by investor perception of this deal. Katherine Young of Resourcex Investor spoke to Terence Ortslan, a mining analyst at TSO and Associates in Montreal who has been travelling to Mongolia for 20 years, about issues affecting Mongolia's mining sector.

Resourcex Investor:
What do you think the climate is like for junior resource companies in Mongolia?

Terence Ortsland:
I think the principle feature of Mongolia is it's one of the great metallogenic belts of the world. It has been underexplored and has been explored only to Eastern block standards. Russian, Czech, Bulgarian and East German geologists have been through the properties with their own systems and devices, approaches and exploration methodologies. It's not been seen a lot by the western technology and expertise.

Mongolia is very poor in infrastructure. There are no roads, no power, no access. The exploration is old-style exploration by different methodologies of transportation and access. So as a result, most [mining companies in the past] did exploration near infrastructure as much as they could. And the remote areas and distant areas have been not properly explored or, in fact, not explored at all.

So, given the fact that the country is almost the size of western Europe, with a population of 3 million or less, that shows you another issue. In today's world of overpopulation, every time you have a population anywhere you have environmental issues; you've got to move people if the mine is next to the village, town or city. Mongolia doesn't have that.

Mongolia is completely remote, not densely populated at all. That's a positive thing for Mongolia because remote mine economics-like in Canada-why has Canada opened up so much over the last century or so? Regional economics of the North, the Timmins, the Val d'Ors, Norandas, the Pine Points, the Yellowknifes they're all mining towns.

The same thing in Mongolia, they need an industry to open up the country. Out of a population of 3 million [people] in Mongolia, about 1 million are nomadic. So you have less than two million who live in the cities.

The biggest city of Mongolia is Ulaanbaatar, which is, I think 1.2 million people. That means almost 40% of the country lives in one city. The second biggest city is Erdenet, which is only about 80,000 people. So you see the lack of infrastructure and ability to access mining, because mining can go, the infrastructure is going to happen.

So you have the metallogenic belt, which obviously, is of interest to us. The geologic endowment of the country is a positive issue for companies, especially from Canada, who can raise capital and have the knowledge and expertise to explore.

Exploration spending in 2005 reached a record high of about $120 million. That's a record number for Mongolia, which is peanuts, Last year it dropped tremendously, I think to about half that. The $120-$130 million in 2005 was, in the majority, from one company, Ivanhoe. In 2006 although it dropped by 50% they were still a major spender. But you cannot have exploration in a country that is diverse and sophisticated and intense if there's only one project carrying the torch. You need more than that. And here comes the oxymoron statement whereby the country's expectations were raised a lot by all these juniors coming in and spending money, expectations [the Mongolian government] believes were not realized because the [mining companies] haven't discovered anything.

Well, the corollary to that is: the money that has been spent is not a lot, but the [Mongolian government] thinks it's a lot. They think a hundred of million should turn up a bunch of deposits, but it hasn't because the money is not a lot.

So Mongolian expectations were raised but they were not filled because they think these companies come in, take their properties, and ground positions and resources and they don't deliver anything. The counter-argument is that they have to learn that mining is a methodical, long-term task to accomplish your end result.

So where we are now is that the government has been jealous of the Oyu Tolgoy project [a joint venture between Ivanhoe Mines, Rio Tinto and the Mongolian government] and jealous of people coming in and taking ground positions. And as a result they want to guard the rights that they have because the mentality in Mongolia is still very much state-controlled.

They do have a major mine in Mongolia already, which the Russians and Mongolians have developed. And they control the joint venture. It's called Erdenet. The Erdenet mine is one of the top fifteen copper mines in the world. And as the copper price is going through the roof the last year or two or three, obviously the government has seen an enormous amount of benefit from Erdenet. All of a sudden they realized how much [money] resources can provide to the government budgets and to the welfare of society.

I just want to say something else to you, 2.8 million people live in Mongolia. They have a GNP of about $3 billion a year. If you know your Canadian numbers, $3 billion is the daily GNP of Canada. So there's a lot of improvement to be done [in Mongolia]. Because as the Erdenet Mine provides all that cash flow to the government, that's a lot of cash infusion into the system that they aren't used to. So as a result they look at Erdenet and look at other mines and think: we should control and own everything. Now, they don't have a great desire to own everything, but they have a great desire not to let other people own everything.

So, in short, Mongolia has everything to offer, and the western exploration companies have a lot to offer. The learning process is still on. Mongolia is careful and protective of what they want out of the industry. Obviously, they have also seen enormous interest by their neighbors, not only by us, but also by the Chinese and the Russians resource business people. And [the Mongolian government] knows and understands that the western companies are far more into corporate governance, into the environment, into World Bank Standards than Chinese or Russian possible counterparts.

So the other problem the Mongolian government has, is how do you deal with this huge neighbor influence of China and Russia against the Canadian juniors which offer everything but they're distant and they don't even have an embassy in Mongolia?

Resourcex Investor:
People have said that Mongolia could be unpredictable, do you agree?

Terence Ortsland:
I think Mongolia is a country staying democratic but learning the process as they proceed further because they do understand the impact on [their] $3 billion GNP of any major investment. For example the Oyu Tolgoy project may cost $3 billion itself. How many projects do you know of in Canada equal to the GNP of the country?

There's another major project in Mongolia called the Tavan Tolgoy, which is one of the biggest undeveloped coal mineral resources and reserves on this planet. That can feed China and Mongolia for decades to come. That's probably going to cost $6-$10 billion. The government owns that, they have an interest in it. It's a massive, beautiful project, I've never seen anything like it before in my life. It's unprecedented. But to develop that it takes a massive amount of organization to be able to capture the returns.

So the bottom-line is Canadian juniors have been given all the accolades they deserve because they've been pioneering and they've got ground positions. They know what they have but it's going to take a lot of money from the reserves and resources to come to success stories. In the meantime they have to convince their shareholders to put money into Mongolia.

Mongolia has to learn in the process that money's a long-term business and they have to play both ends of the candle, that is the big guys have to come in and also the small guys have to come in because historically we all know small guys are the ones discovering the deposits. So they have to accommodate the big guys coming in, the BHPs and the Rio Tintos, in the meantime they have to accommodate the small guys because the small guys can really put the risk where their mouth is.

Resourcex Investor:
So at this point does the deal that the Mongolian Government made with Rio Tinto and Ivanhoe Mines bode well for juniors, or is Mongolia yet to realize that there needs to be a climate for juniors as well?

Terence Ortsland:
The Rio Tinto/Ivanhoe/Mongolia deal, when it's announced, is going to give people more understanding that it's maybe more [of a testing of the waters] than [it is representative of] Mongolian mineral policy. That's the first thing.

Number two is: with this Ivanhoe agreement, Mongolia will be able to put enough seeds in people's minds that it can be a place to do business with.

Three, the open-door policy of Mongolia for mining exploration will not continue. They will be more scrutinizing and careful who comes in and what they do. Which is ok, because they were initially testing the market: I'll throw you into the water and see if you can swim or not. So the pressure's going to increase on the juniors to [show] what they're offering. And the government is not going to be all that accommodating the way they [used to be.]

So in a global sense I think Mongolia has moved to the medium range of competitiveness. They used to be really competitive They're not anti-mining, they're just case-study mining. They're testing the waters, testing the industry.

From the viewpoint of juniors, I think the juniors are going to have the ability to do things and raise money. Success has to come earlier for the juniors, because the government's going to be in the driver's seat because the benefits of Oyu Tolgoy are going to be reaped earlier than most juniors can deliver. Oyu Tolgoy could be in production by 2010/11 and the Tavan Tolgoy can be in production in the same time horizon.

So you [could] say the government may not need the juniors any more, but the government has to develop this simultaneous parallel policy for majors on the one hand coming in and doing big things and small companies that can deliver to the majors.

So there's room for juniors to play but I think the learning process goes on. And I think the Oyu Tolgoy deal is going to put some parameters on the table like a case-study, but I think there will be enough parameters that there is room for juniors to perform.

But one thing we've got to know is that it's not the good old days where you could do anything you want in Mongolia, which is fine. They were really giving away the properties in the old days, I think they should be more restrictive.

Katherine Young writes for Resourcex Investor, an internationally distributed newsletter specializing in identifying as-yet-undiscovered resource companies representing the best in their class. For more information, visit the website www.resourcexinvestor.com.