Monday, January 18, 2016

Out of Sight is Not Out of Mind


After years of manipulation, slight-of-hand, and misinformation, RioTinto (ASX: RIO) concluded a $4.4 billion project financing package with Export Development Canada, the European Bank for Reconstruction and Development, the International Finance Corporation, the Export-Import Bank of the United States, the Export Finance and Insurance Corporation of Australia, BNP Paribas, ANZ, ING, SocGen, SumitomoMitsui, Standard Chartered Bank, Natixis, HSBC, The Bank of Tokyo-Mitsubishi UFJ, KfW IPEX-Bank, and Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden for the reinvigoration of the Oyu Tolgoi underground copper mine in Mongolia.  In other words, if you have pension or mutual fund investments (many of which are investors in RIO) or if you live in most of the world, you’re now part of the long and sad legacy and future of the Khan’s Turquoise Hill.  Congratulations.  This deal was signed just before Christmas and most of us were too busy with our last minute electronic gadget shopping to pick up on this little gem. 

According to RIO CEO Jean-Sebastien Jacques, “This kind of mining development partnership model sets the industry benchmark for future schemes and underscores Rio Tinto’s commitment to responsible and prudent growth. Long-term copper fundamentals remain strong and Oyu Tolgoi as a tier one asset will be a globally important source of supply as the market moves back into structural deficit over the next few years.”

After spending about $6.4 billion so far and in another few years with between $4-6 billion more invested, RIO will be able to extract Mongolia’s mineral wealth through an elaborate and sinister financing scheme that may enrich them and their investors while leaving Mongolia with precious little more than a hole in the ground and sovereign debt.  When RIO talks about a “mining development partnership”, this is code for leveraging a nascent democratic government and an ill-informed population for the purposes of extracting financial – not mineral – returns.  If it’s a “responsible and prudent” plan to supply the world with copper that they want, why is it that this same RIO, after years of environmental and social degradation in Panguna, Bougainville, Papua New Guinea is trying to pawn off its majority ownership of Bougainville Copper Limited to the already grossly over-leveraged PNG national government (or any other buyer) that can distance it from its violent past and present environmental negligence liabilities?  After the mine-induced civil war that cost an estimated 20,000 lives, this long-term Pacific island copper asset to support the global copper market is unattractive, in part, because the citizens of the Autonomous Region of Bougainville “democratically” approved a Mining Act (heavily influenced by RIO and Australian advisors) that did not give the mining license away.  This same asset was given to Bougainville Copper Limited by the Australian government and the United Nations and is 54% owned by RIO today.  The copper’s easier to access geologically but for that nasty little colonial detail of corporate-induced genocide.

RIO, like many other companies in many other industries, continues to deploy a business model that identifies a confirmed asset reserve, creates an elaborate corporate structure that puts itself in the driver’s seat with respect to securing control of financing and revenue associated with the speculative phase of mining (in many cases “offering” debt financing to a government so that it can participate in the illiquid equity of an operating shell corporation in country) and then makes money on the spread between its own cost of capital and the rate charged to the country for “participation” in their own asset.  Long before the first concentrate is shipped away from the mine, RIO has already rung up another enormous “asset” in the indebtedness of the unsuspecting country.  By the way, this is part of the reason why its “prudent” investment needs to pay the Multilateral Investment Guarantee Agency (MIGA) political risk insurance.  After all, the financiers are cunning enough to know that opaque operating agreements, illiquid shell corporation “participation” in mining development, and environmental abuse sometimes result in citizens getting seriously upset and toppling regimes that gave away the wealth of a land and its people. 

If the world needs copper, why is it that an underground development project in Mongolia is “prudent” while and open-pit proven reserve is not feasible?  Copper concentrate would flow much more rapidly from Panguna than from Turquoise Hill for the same amount of money!  Why did so many commercial banks put up $2.34 billion for the BNP Paribas funded debt facility and why did the European and American “development” banks put up so much public money when minerals (like so many other commodities) are trading so poorly in the global market?  And why, in their December 15, 2015 press release announcing the financing, did RIO make the point of stating that “Oyu Tolgoi has a workforce that is 95% Mongolian and Oyu Tolgoi LLC has paid $1.3 billion in taxes, fees and other payments to the Government of Mongolia to date,” but somehow didn’t choose to state how much the Government of Mongolia has been charged in project-related interest for their equity in the project?  In their 2009 financing agreement, the government of Mongolia owed the mining company about 40% of its GDP for the right to participate in its own country’s asset!  And while, since our retention in 2010 to inform the government and the citizens of Mongolia of their horrific abusive financing issues, there have been several structural alterations in the Government of Mongolia’s participation in the project, the underlying financial model still favors RIO and the global markets at the expense of the citizens of Mongolia.

Years ago I was asked by Sir Julius Chan, Governor of New Ireland, Papua New Guinea, if an ethical mining company could exist in countries like PNG and Mongolia.  I said then, as I would now, that it’s theoretically possible.  But in the nearly decade long experience I’ve had working across the globe in economically and politically challenged countries, my conviction is fading on the probability of such a company actually emerging.  And while the earth geologically distributed the Periodic Table variously, the economic model we have for conductive metals seems to be more likely to produce violence, war and environmental ruin than the opulence of a Saudi Arabia, Norway, or Abu Dhabi.  The opiate of electrical power has cauterized our collective consciousness so that we are numb to the bleeding of humanity and the persistent desecration of the earth.  And in sterile press release after sterile press release, we never stop to ask why “development” marches on hand-in-hand with MIGA-insured political risk.  If the system were working ethically, this would not be necessary!

I know that these posts, like the dozens before them, are not Inverted Alchemy favorites.  I know that they’re not pick-me-up, feel-good, themes to discuss.  But in the big scheme of things, I think that these are some of my most important offerings to the world.  For it is a generous world that offered me the invitation to see what most never do and with that blessing comes the accountability for the stories of our fellow humans who bear the cost for our unconsidered consumption.  

Sunday, January 3, 2016

FDR, Stalin and an Icarian Crash


Economists are scratching their heads over the dawning of 2016 about as vigorously as a kindergarten class with an outbreak of lice.  2015 went off like a damp squib with official estimates for economic growth at a globally imperceptible 1.9 percent or so.  The wizards at Goldman Sachs have revised their estimates for growth down nearly 20% from just a year ago – not very heartening when you consider the numerator in this equation.  Commodity dependent economies ranging from Australia to Venezuela are looking at the most bleak economic forecasts in recent times courtesy of the lower demand for oil, copper and other extractive industry resources.  Profits are shrinking in most major sectors; costs of capital are at their subsidized nadirs, and the ability for the great capitalist hegemonic illusion to remain propped up is about as resolute as a drunken reveler the morning after Mardi Gras. 

Seventy-one years since the Bretton Woods grand imperial utopian experiment and it looks like the unconsidered assumptions of this Icarian dream have finally been melted by the sun.  Next stop – a watery grave marked by melted wax and feathers.  Allow me to broaden the metaphor.

Leading up to Bretton Woods, the United States and its allies were fighting a motivated, technologically unified foe led by Germany and a ruthlessly ideologically emboldened Japan.  In the ideological morass oozing from the Great War a few decades earlier, the world was in the labyrinth of faux socialism that would make the most astute minotaur pine for a sudden death.  Franklin D Roosevelt and his vice-president Harry Truman were busily placating a largely impoverished populace with grand projects that would forever prove the beneficence of big government.  Marx and Engels had been sufficiently long dead and forgotten so as to make the Soviet Union a festering ground for the metastasis of communism – a lovely extreme but for the autocratic tyranny of those who determine what is in the best interest for all “others” while they themselves live in cloistered opulence.  Germany knew that the solution rested in the elimination of the “others” while Japan, with its centuries of bigotry and classism, knew that they were more German exclusionists than Great Experiment capitalists or communists.  So, in or around 1945, the world decided to set itself on a collision course with 2017. 

Now before you go off trying to decipher the significance of 72 years (which may be a wonderful diversion for some of you), let me simply offer the following comment.  The life expectancy of humans on Earth right now is 71 years.  It is merely informative to realize that the social and political experiments that were constructed to institutionalize capitalist socialism (pensions, social securities, and the like) are likely not going to survive the generation for which they were designed.  But allow me to return to the Icarus metaphor. 

When We The People were advised that governments were going to care for what communities once saw as their purview, we were giddy and strapped on the wings fashioned in the shop of a master craftsman (Daedalus in our story).  Being the designer of said wings our paternalistic overlords knew that wings of wax are best not used in proximity to the sun.  But unlike Daedalus, not only did our patrons not advise the risks of solar approximation, they encouraged it.  Using the cunning wax of central bank manipulation and the seemingly innocent feathers of industrialized consumption, they created the thermals that were euphemistically called “economic growth”.  And away their charges (literally, in each sense of the word) flew.  Daedalus had King Minos – both patron and prison warden – to escape.  FDR’s great experiment had the petro-dollar as both patron and prison warden.  Both end in heartbreak when the children fly too close to the sun. 

The melting wax in our metaphor is the growing illiquidity of the great promises that were made a generation ago.  In the past few years, we’ve seen Portugal, Italy, Greece, Syria, Spain, Venezuela, Japan and Brazil struggle with the fact that social promises unkept lead to social and political upheaval.  To date, these countries have had incremental albeit inconsequential impact on the global stage courtesy of Central Bank manipulation.  However, as the U.S. social security illiquidity comes due in 2017 (first hitting the elderly and the indigent) and as other economies follow suit in close proximity, the reduction in “growth” will rapidly accelerate into a paroxysm far more destabilizing than 2008.  Not to worry, we could have Donald Trump as President so we should be just fine… ummm…. maybe I should consider moving now! 

Now these impending challenges are just that.  Challenges.  We created them and we can resolve them.  But it takes a healthy dose of optical physics and courage to get a view of the solutions. 

First: parallax.  Parallax is the optical illusion in which objects closer seem to be larger and more mobile than objects seen at a distance.  Bretton Woods was a great example of the error in reality created by confusing parallax for objective reality.  Just because the “other” was further away didn’t mean that we could ignore “them”.  And now that “they” – countries like India, China, Brazil, and much of the African nations – have become increasingly economically engaged – “they” are closer meaning that their size and movement appears more consequential.  China, for example, always mattered.  But now that they appear to be larger and move more nimbly, they’re suddenly deemed important.  “They” were always important.  And when “they” was a euphemism for “cheap” and “enslavable” “we” didn’t care.  But know that “they” are “we”, we have to care. 

Second: aperture.  Aperture is the process of selective narrowing and collimating of a reflected field of view to achieve depth of view and focus.  When one limits one’s perspective, it’s easy to find monolithic solutions.  When one opens perspective to include a wider range of inputs, pluralistic reality becomes much more evident and requires more actors to be fully informed and engaged.

To weather the coming economic storm and achieve more of a dive than a cataclysmic fall into the watery abyss, we need to bring ourselves into closer proximity to each other and we need to expand our informed engagement!  That requires a commitment to learn, stretch our awareness, and lessen our dependence on paternalistic systems that were built not to care for us but to disintermediate our care for our neighbor.  As we enter 2016, make a commitment to share your wealth, compassion, and industry with someone you didn’t include in your circle in 2015.  And, with any luck, we’ll find a more reliable way to fly.