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.  

1 comment:

  1. I deeply appreciate your articles about Mongolia and Bougainville. They reveal insights about strategies used by various vested interests to take advantage of certain situation, and expose the devastating impact on local people and local environments. Our industrialized lifestyle is intimately linked to these events--it's just not widely perceived or mentioned.

    Since seeing the videos of the two wonderful lectures you gave at UVA on development-related topics, and posts such as this, I am more aware of both historical and current goings-on that many principal players probably hoped to keep out of public view. While it's not a pretty sight, it's better for these things to be visible. How can those affected develop more constructive approaches or counter-strategies if no one speaks up about what is actually going on?

    Thanks for this post. I hope you'll continue to share your insight on similar topics and locations.


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave