The Dawn of a New Reality

I am delighted to see colleagues and acquaintances from the resource industries. Welcome to all those who share our commitment to initiating transparent investments in Mongolia and to creating jobs and wealth through the application of responsible corporate citizenship practices.

Keeping up with the daily news accounts of imploding financial markets around the world, I am reminded of the often-quoted proverb, “May you live in interesting times.” Actually, this particular proverb is a curse – although rather polite, as curses can go. I don’t know about you, but after a couple of months of this unrelentingly unpleasant news, I’ve had enough “interesting times,” as shock therapy, to last me the rest of my life.

It is safe to assume that everybody at this conference already has been touched by the turmoil in global financial markets, or will be in the near future. And since all commodities have suffered unprecedented pricing volatility in recent weeks, we also share numerous financial concerns that are appropriate to be discussed during this timely Discover Mongolia Forum. Hence the subject of my presentation: the dawn of a new reality – because that where we are; we are living in a world that has changed dramatically in just a few tumultuous weeks.

I plan to cover the following issues in my presentation:

 The status of the Oyu Tolgoi project.

The urgent issues faced by the minerals and mining sector.

The implications of the current world credit crisis.

The way forward for Oyu Tolgoi and other Mongolian mining projects

 The status of the Oyu Tolgoi project

Oyu Tolgoi, located in South Gobi Aimag, truly is a once-in-a-lifetime resource. So far, it is the legacy of all legacies in Mongolia’s inventory of great mineral development opportunities.

Although I am a relative newcomer to Mongolia, I know that many of you have been hearing and talking about Oyu Tolgoi for many years now.

Unfortunately, the current status is that there has been a significant slowdown in the pre-construction activity at the project during the past year. The inability to conclude an internationally acceptable investment agreement required to permit construction to proceed has meant a loss of human resources and a curtailment of spending, with regrettably negative impacts on the Mongolian businesses and communities with which we work.

There has been some progress on the exploration front and with our underground development, but not anywhere near the progress we expected to have made.

One notable success in our ongoing work has  been the continuation of the exploration discoveries that began in 2001, especially around the drilling of the Heruga deposit to the south of the main Oyu Tolgoi deposits.

We also have been able to keep our underground exploration development going. Our team of contracted Mongolian miners, which has been working underground at Oyu Tolgoi since 2005, has set the highest standards for the development of underground mining in Mongolia. Many of them are preparing to assume senior and supervisory roles as we look to expand our underground exploration and development work. Earlier this year we completed shaft #1 to a depth of 1,385 meters – by far the deepest shaft in Mongolia and one of the deepest on the Asian continent. We are driving toward the ore body to put us in a position to assess its geotechnical properties, as well as improving our information about the grades of the copper and gold that our exploration already has identified. The development also will give us a great start when we are able to begin full-scale development of the underground operation – after we have negotiated an acceptable investment agreement.

 At Oyu Tolgoi, we are particularly proud of our “Mongolians-first” Policy.

Since the initial discovery at Oyu Tolgoi, we’ve employed more than four thousand Mongolians. Currently, 90 percent of Oyu Tolgoi’s workforce is Mongolian.

More than nine hundred Mongolian businesses have worked with the Oyu Tolgoi project since 2001. Every month for the past two years, we have spent an average of 1.2 million dollars with Mongolian companies for the supply of goods and services to the project.

Once an acceptable investment agreement for Oyu Tolgoi is concluded, we are committed to giving preference to Mongolian companies, training as many Mongolian workers as possible and laying the foundation for a long-life mine that will provide well-paid jobs for several generations of Mongolians. Oyu Tolgoi will be a tremendous source of pride for Mongolia --a mine that will be one of the best in the world.

Putting Mongolians first also is vital to our enduring partnerships with local communities and in the development of our political and social license to operate. We see this, and our participation in the regional development plans for the South Gobi, to be integral to our operations and good-neighbor policies. These programs are led by my colleague, Layton Croft, who will expand on them in his presentation later today.

Oyu Tolgoi is a world-class resource, it is a huge asset located in here in Mongolia, literally on our back doorstep.

(There have been many promises made about the benefits that will flow from the development of Oyu Tolgoi. but until now, we have not been able to fulfill those promises. surely it is time that we were allowed to convert those promises into actions – and through those actions begin generating some very considerable results. everybody has waited long enough. it is time now to get this project off the drawing board. Oyu Tolgoi is, first and foremost, a Mongolian project. so when we talk about results we are talking about results that immediately will begin to benefit Mongolians. And, more specifically, we are talking about long-term results and a commitment by the investors to ensure that those benefits reach the general population.

 Urgent issues faced by our minerals and mining sector

Mongolians have been mining metals and coal for centuries, mainly to serve their own needs. This tradition of mining is best illustrated by the collection of coal for fuel. We know that people at Oyu Tolgoi were digging pits and recovering copper four thousand years ago, likely for bronze tools and ornamentation.

Large-scale mining of minerals really only began in the last half of the last century. With it came further exploration and the discovery of some quite spectacular deposits, especially of copper and coal. The discovery of world-scale deposits usually is the hard part. However, that has not proved to be the case in Mongolia. Here, the hard part has been the negotiation of an acceptable investment agreement and the ratification of the State Great Khural.

The last few years have been incredibly frustrating for many of the international mining companies in Mongolia – and especially so for Ivanhoe Mines and for Rio Tinto.

The Mongolian parliament holds the key to unlocking these nation-building assets and realizing the benefits for the people living here today – and the generations to come. There are tens of thousands of jobs and a host of tangible economic benefits locked in mineral deposits now being identified across Mongolia.

This has been the subject of unnecessarily protracted debate for a several years now. I would like to think that soon we could be in a position to begin to make some real progress toward an agreement. Certainly that is the indication I am receiving from various government officials. In my view, it is time to stop the procrastination and move on, in good faith, to conclude an agreement for Oyu Tolgoi.

I can tell you from experience in other countries, though, that responsible mining, which minimizes environmental impacts, in itself creates a new legacy of skilled people, diverse enterprises and sustainable communities – generating waves of benefits that ripple throughout the land.

It is satisfying to see that a growing number of Mongolians now know this to be the truth. They have visited Canada, Australia, the United States and South Africa – leading countries that were built largely on their great legacies of mineral wealth. Mongolian fact-finders have talked with legislators, community leaders, ordinary citizens and corporate executives in other countries. In the process, they have seen much that could be part of Mongolia’s future, too.

 KM specific – some success stories and some failures

- failure in Zambian copper belt as state interference starved the operations of capital     investment

- failure in UK tin mining – collapse of region due to cheaper mining in brazil

    - success in south Africa – Palabora

 The implications of the current world credit crisis

Many of the benefits that Mongolia eventually will receive from Oyu Tolgoi are significantly dependent on international market prices for precious and base metals, which in turn are influenced by the health of the global economy.

And, as we all know, metals markets and the global financial system today are in a state of collapse unlike anything that has been seen in 25 years or so – some say maybe 50 years or more.

We can see now that the best time to put a new mine into production was yesterday. Today, unfortunately for all of us, is among the worst of times.

The fact is that the record metal prices, especially for copper, that we started seeing in 2005 – and that continued until recently – represented only a short-term climb above the long-term trend of historical cycles of commodities prices. For the past few years, many economists advised countries to take advantage of the high-price cycle while it lasted -- as history has shown that, customarily, they have not lasted for long.

I’ve been working in the mining industry for 30 years. These past three years produced by far the highest prices I’ve ever seen – and in fact probably the only time i can remember that most mines were finally, consistently making profits.

With copper prices now dropping to $4000/t ($1.86/lb), it would appear that we have well and truly missed this latest boom cycle. During the past few months, the value of copper has halved and copper price forecasts for 2009 are now well below previously anticipated levels.

Of course, prices eventually will reach a bottom and the fundamentals of growth in china and India still exist just at a reduced rate at some time in the future, the inexorable growth of cities and expanding electricity grids linked with increased demand for domestic and industrial piping, computers and cell phones– maybe even all-electric cars – will generate some price recovery; we must make sure that we position the Oyu Tolgoi project to take advantage of the upswing in the next commodity cycle by beginning construction as soon as we can.

Unfortunately for us in response to the global credit crisis, bank insolvencies and wider fears of recession, the mining industry has had little choice but to respond to a costly and painful new reality that is beyond its ability to control.

Around the world, mining companies are tightening their belts and getting ready to weather the storm. Projects have been put on hold or even mothballed. This list by the Reuters international news agency shows projects that have been stopped or stalled. This is the new reality, for mining companies – and Mongolia. (Highlights from the list)

The multi-billion-dollar loans that had been available over the past few years to finance new and highly profitable mining projects have disappeared.

Here in Mongolia, people still are experiencing the impacts of unhealthy price inflation, the unavailability of competitive loans and dramatic shortfalls in budgetary revenues that the government had been banking on to finance its program spending. One result is a lot less money for the government to invest in education, health care, roads, power lines and social programs.

Sovereign countries like Iceland, Ukraine, Hungary and South Korea are facing international crisis-level economic meltdowns. In South Korea, the thirteenth-largest economy in the world, the government recently released 130 billion dollars to bailout  Korean banks that could no longer find the money they need to support the economy. Foreign investors in Korea recently pulled out 900 million dollars in investments, a devastating move that is negatively impacting the Korean economy.

Ready or not, and like it or not, the world is bringing its woes to all of the doorsteps in Mongolia. The impact will be two-fold for Oyu Tolgoi: one, a significant drop in the value of the project, due to lower metal prices, and two, the potential difficulty of trying to raise investment capital in today’s financial markets.

 The way forward for Oyu Tolgoi and other Mongolian mining projects

So far, Mongolia’s mineral legacy is a story of potential unfulfilled. The realization of this potential has been suspended in part by an onerous windfall profits tax and also by the delay in addressing proposed changes to the minerals law. It is ironic that, based on some earlier projections, the Oyu Tolgoi project could have been in production one year ago if it had received the necessary Mongolia’s approval several years ago. But the best we can hope for today is that even if we manage to conclude an acceptable investment agreement by q1 next year, we will not see any meaningful production from Oyu Tolgoi for at least three years.

This past week, during the Mongolia economic policy conference, representatives from the World Bank cautioned that “Mongolia will have to tighten its financial belt,” and that, “foreign investment will drop, unproductive spending must be curbed and that large mineral projects should be immediately pushed into operation.”

Numerous eminent economic advisors have concluded that “state equity participation is not a good idea.” they say that the money the government would be required to invest would give much more beneficial returns if it was directed to education or too much needed infrastructure. Governments should not be deceived by the stellar returns of the last few years; they are the exception, not the norm. for many decades, mining was notorious for being one of the worst businesses in the world to provide an adequate return on invested capital – a point repeatedly made by sir Bob Wilson, a past Chairman of Rio Tinto.

Zorigt, our new Minister of Mineral Resources and Energy, speaking at the recent economic policy conference, noted that in the past few years the mining sector had only grown by 2% per year; a totally unacceptable figure given the abundance of natural resources. Zorigt stated that his priority was to increase mining output over the next four years, to see the mega projects brought into production. His objective was a three-fold increase in output by 2011 and a nine-fold increase by 2018. Quite sensibly, Zorigt also talked about diversification of the economy. This diversification must be on top of, not instead of, growth in the mining sector. Diversification will follow once we establish a robust mining sector. Just look at the successes of mineral-rich countries like Australia and Canada.

I welcome the statements of the new minister and look forward to working with him to achieve all of his stated targets. But I would emphasize that if those targets are to be met, then we need to move forward with some urgency and commitment; we need to start moving forward now.

For our part, Rio Tinto and Ivanhoe Mines are ready. We are ready to get on with the job of building and operating the Oyu Tolgoi mine. It is a job on a scale grander than anything that has ever been tackled within Mongolia. It will take more money and expertise and create more jobs than any previous single undertaking in Mongolia’s storied history, but we are ready for the challenge.

The timing of this conference is excellent, given the new political atmosphere. it is my hope that over the next few days all parties present will be able to engage in constructive discussions on the challenges that we face. The more we can work together and concentrate on initiatives for the broad common good, the higher will be our prospects of meaningful progress toward the responsible development of major mineral deposits.

 Conclusions

At this same conference last year, the chief executive of the Rio Tinto Copper Group stood here and said it was his hope that great progress would be made in the coming year. Regrettably, significant progress has eluded us.

The draft investment agreement for Oyu Tolgoi that was negotiated amid great expectations 17 months ago subsequently was withdrawn from parliamentary consideration; the minerals law, as I’ve mentioned, has not yet been amended; and the rest of the world has gone into an economic downturn more severe than anything we’ve experienced in more than a generation.

The mining and financial worlds continue to monitor Oyu Tolgoi and evaluate Mongolia’s progress as a jurisdiction that is receptive to international investment. The lack of progress on responsive legislation and in concluding fair and equitable agreements is compromising Mongolia’s appeal to others – as evidenced by critical rankings that have been given by mining industry executives who have been surveyed by the Fraser Institute, in North America.

Mongolia is blessed. It has a storehouse of minerals that are the envy of the world. It is time to move beyond the unproductive debate of recent years and ensure that this storehouse is opened to responsible development. Decisive actions now to put major mineral deposits such as Oyu Tolgoi into production will reap early and lasting rewards that will benefit everybody in this great country.
Thank you.