SOMO Report Preamble: Assumptions

By Julian Dierkes

It struck me while reading the SOMO report on Oyu Tolgoi governance and tax structures that there are a number of big assumptions and elements in the Mongolian context that are not discussed explicitly, but that are fundamental to the project. This includes technical requirements, political pressures, and the ownership of mineral resources.

The perspective that the SOMO report takes is one that I also find common in the investor community, namely an expectation of perfection in governance. Not surprisingly, I would argue that such perfection is unlikely to be achieved and that this expectation is somewhat detrimental to discussions of resource projects.

This is thus the “meta comment” in a series of posts reacting to the SOMO report.

Big Assumptions

There are a number of features of the Oyu Tolgoi project that some readers of the SOMO report may be unaware of. They relate to the nature of the mineral deposit, but also of Mongolian politics. For background, readers might also be interested in Byambajav’s summary of the history of the Oyu Tolgoi discovery.

Economic Development

Most fundamentally, Mongolians decided after the democratic revolution that they wanted to pursue economic development in a market context. Yes, they were surely nudged in that decision by international advice and one might debate to what extent this decision was made based on free and prior informed consent at the level of the nation, but by the time decisions about Oyu Tolgoi were being made, the pursuit of economic development in a global capital context was a foregone conclusion. Following on that discussion, Mongolians did not consider the option not to develop OT. Decisions about OT were also being made more than 15 years after the 1990 revolution, a period that had left Mongolia poor. Again, one might debate the role of international advice in bringing about this poverty, but it was a given by 2005 and led to a desire to see economic development sooner rather than later, thus precluding a number of development paths that would have required patience and a slow build-up of expertise and capacities.

So, even prior to making any specific decisions about Oyu Tolgoi, the fundamental direction of policy had been set: let’s have economic development within a global capitalistic system and the sooner, the better.

Ownership of Minerals

Mongolians own their mineral resources and thus have control over what happens to those resources.

That is not “resource nationalism“, it is constitutional and really any other kind of fact.

Comments from the investor perspective very often try to slap the “resource nationalism” label on any discussions about the level of taxation or other aspects of mining governance. But it is important to remember that Mongolians and the government that represents them are perfectly free and justified in doing anything they want with their mineral resources. If they want to develop these resources with partners, they would probably like to be responsive to these partners, but, fundamentally, it is the duty of the Mongolian government to be stewards of resources and to maximize benefits for the population from these resources.

The Deposit

The OT deposit is BIG. The SOMO report contains some nice maps of the surroundings of the project in the context of various other companies that Rio Tinto also has shares in in Chapter 2. The ore body is also quite deep. Currently, all production comes from the open pit mine that is the earliest phase of the project, but ultimately this will be replaced by production from underground mining.

Most relevant to decisions about ownership and governance structures is the fact that this deposit is best developed through block caving. While I am not a mining engineer myself, I have not heard any engineers or industry representatives dispute that fundamental perspective on the OT project.

As Priyadarshi Hem and  Jack Caldwell write in their overview of block caving as a method: “Block cave mining is a mass mining method that allows for the bulk mining of large, relatively lower grade, orebodies.” It is also a method that requires very complex calculations to predict subsistence as material is extracted underground. That expertise is rare. The method also requires very high investment costs in constructing the underground facilities that allow for block caving while production costs are relatively lower than for other methods.

In the case of Oyu Tolgoi this means that Mongolian mining companies, including long-time copper miner Erdenet did not posses the expertise/technology to develop the deposit when it was moving from exploration to development roughly around the time Rio Tinto bought into the project by acquiring a stake in Turqoise Hill.

So, given that development in a global capitalist context was a foregone conclusion (and is not really under debate in Mongolia currently), the nature of the OT deposit demanded some kind of cooperation with an international mining company that had the technical know-how and financial wherewithal to undertake this project. In the set of companies that fulfill these criteria, there are some but very few alternatives to Rio Tinto.

The Investment Agreement

Given the desire for economic development and the nature of the OT deposit, was the Government of Mongolia bullied into a disadvantageous investment agreement as the SOMO report asserts in several places?

This questions assumes that we have a standard for judging what “(dis)advantageous” is in this context. But there is no standard for what a nation should expect in terms of a return on development of its resources. If such an agreement ultimately produces any kind of positive return, (dis)advantageous is a judgement of relative benefits that might come, but those benefits are very difficult to estimate on the basis of an investment agreement alone.

This entry was posted in Foreign Investment, International Agreements, Mining, Mining Governance, Oyu Tolgoi, Policy, Public Policy, Taxes and tagged . Bookmark the permalink.

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