CO CONTENDERS
Miners stake claims amid Mongolian dunes as demand from high-tech industries spurs recovery in metal prices.
When temperatures rise and winds drop in the coming weeks, a band of explorers will join the hunt for copper riches in Mongolia’s Gobi Desert.
For years Rio Tinto has been the sole international copper mine operator in Mongolia, bound closely to a country where it has bet billions of dollars on the giant Oyu Tolgoi project. Others have steered clear due to the risks of operating in a country with an unpredictable and young democracy and judiciary, a frail economy and extreme weather.
Now rising global demand for a metal used in electric cars and renewable energy, at a time of increased costs and depleted deposits in top producer Chile, is driving miners to riskier locations.
Some are looking to Mongolia.
Geologists say deposits such as Oyu Tolgoi — meaning Turquoise Hill because of the staining of the rocks by oxidised copper — rarely occur in isolation. That means, for some miners, the chances of finding another make Mongolia worth a calculated gamble, especially given its proximity to the world’s biggest copper consumer, China.
The new charge is led by a group of smaller players, including Xanadu Mines of Australia, Kincora Copper of Canada and US-based Wood Capital Partners, which have higher risk appetites and are seeking to steal a march on competitors.
Wood Capital Partners, set up by two former Citigroup bankers and specialising in acquiring distressed assets, told Reuters it had invested “several million dollars” in exploration territory in the Southern Gobi.
Co-CEO and managing partner Stephen Dizard said the firm bought the 364-square-kilometre concession from a frontier markets fund that was in liquidation.
He wants to get into Mongolia ahead of a rush driven by the global hunt for new copper. He believes miners will become increasingly confident in buying assets in the country because the economy was slowly improving, aided by an International Monetary Fund bailout.
“[Mongolia] was distressed financially and distressed across the sector,” Dizard added. “We took the view that the situation had to improve. It has.”
Kincora CEO Sam Spring said his company had raised about $4.5 million last year to fund its Mongolian exploration. The Vancouver-based company, which has licences for 1,400 square kilometres of land, drilled 6,000 metres last year and results were promising, and is now stepping up activity.
“We’ve started to see a change of investor sentiment. There is increasing infrastructure and hopefully we are seeing tailwinds rather than headwinds,” added Spring, who describes Mongolia as one of the last frontiers for top-quality copper assets.
Xanadu CEO Andrew Stewart Xanadu, thinks he will be able to gather enough information over the coming months to determine whether he can justify establishing a mine in the country.
He is planning drilling using four rigs compared with two last year. “Mongolia is very good because it has the prospectivity,” he said.
DESERT LABYRINTH
The newcomers are all dreaming of another discovery on the scale of Oyu Tolgoi — a chain of deposits in the southern Gobi, about 550km south of the capital Ulaanbaatar and 80km north of the border with China.
But even Rio Tinto, which is relying on Mongolia to drive growth after committing about $12 billion to the project, only resumed exploration there last year after a five-year hiatus during the copper market downturn.
The Anglo-Australian miner says it has still to make any return on its investment, but in January it announced the opening of its first exploration office in Ulaanbaatar, to underline to the government its commitment to the country.
To make up for dwindling output at the open-pit mine Rio Tinto is building a labyrinth of underground tunnels that will increase annual output to 560,000 tonnes, about three times the current production from the open pit. Ramping up the underground operations will begin around the start of the next decade.
As well as the market downturn, Rio Tinto has had to contend with disputes with the Mongolian government over taxes and power supply. The mine is jointly owned by the government, with 34%, and Turquoise Hill Resources with 66%. Turquoise Hill is 51% owned by Rio Tinto.
Rio Tinto CEO Jean-Sebastien Jacques said problems were inevitable but his company was there for the long haul.
“My personal experience over the last five years is, that [you will encounter] lots of issues as you would expect, but each time we have been able to work through them,” he said last month.
“I’m not saying it’s going to be easy.”
Miners and political analysts say that, while the economy in Mongolia is gradually improving, the legal system is opaque and frequent changes in government have created policy uncertainty.
Miners must also deal with temperatures that can swing from -40C to 40C, and ferocious winds that can last for days. As a result, they tend to limit drilling programmes in the Gobi to between late March and November.
By contrast, drilling can take place all year round in Chile and other Latin American countries.
Such considerations have deterred most miners for many years. BHP chief executive Andrew Mackenzie, for example, told Reuters his preference was for safe jurisdictions, namely the Americas. He described Mongolia as “potentially very prospective but not without security and geopolitical challenges”.
But copper market conditions are slowly driving change. Rio Tinto’s renewed activity and the exploration of rivals comes as demand increases for a metal needed in large quantities for the electric-vehicle and renewable energy industries.
Copper prices have rebounded to nearly $7,000 a tonne from lows around $4,300 in early 2016, which was their weakest since 2009.
At the same time, Chile’s long-exploited ore bodies are ageing and challenged by arsenic concentrations and proximity to large populations. Mine workers there have also been demanding higher wages, adding to costs.
Such is the draw of Mongolia — which has the same type of “porphyry” rock formations — that even the Chinean state copper company Codelco has said it is considering investing in the Asian nation.
An advantage of the porphyry formations is that the copper is often accompanied by gold, which can effectively subsidise copper production.
“Oyu Tolgoi was found in 2001. There have been some small discoveries since then but nothing on the same scale. There is lots of potential for future discoveries,” said Jamie Wilkinson, research leader in mineral deposits at London’s Natural History Museum.
‘NOT FOR FAINT-HEARTED’
However, while there may be geological potential, there is no guarantee of unearthing commercial volumes of copper, and luck is always a significant factor.
The interest from overseas explorers, if sustained, could nonetheless prove crucial for Mongolia itself, which is heavily dependent on commodities and had to turn to the IMF last year following a collapse in foreign investment.
The deal has helped the country pay off its sovereign debt and stabilised the local currency, the tugrik, but required Ulaanbaatar to introduce measures such as higher taxes and cuts to social welfare. About 30% of the country’s 3 million people live in poverty, according to 2016 figures from the World Bank.
Iain Watt, CEO of UK operations for IGI, said it too was exploring possibilities in Mongolia, as well as central Asia, and that there was clear potential for investors.
“Mongolia is definitely on the up — but it’s not for the faint-hearted,” he said. (Additional reporting by Terrence Edwards in Ulaanbaatar and Karin Strohecker in London)
“We’ve started to see a change of investor sentiment [toward Mongolia]. There is increasing infrastructure and hopefully we are seeing tailwinds rather than headwinds” SAM SPRING Kincora Copper CEO