Mongolia $1.25-a-Day Labor Amid $4,500 Handbags Stirs Anger

Yuriy HumberFeb 05, 2013 1:55 am ET
(Updates with Rio mine investment in fifth paragraph.)

Feb. 5 (Bloomberg) -- Sapaar is 23 and he’s a “ninja” miner, hauling low-quality coal from a pit in the Mongolian steppes for 12 hours a day.

Sapaar’s coal is not the steel-making variety the bigger mines export to China, a trade that helped the economy expand a world-beating 17.3 percent in 2011. The boom brought luxury retailers such as LVMH Moet Hennessy Louis Vuitton SA to Ulan Bator, Mongolia’s capital, to sell $4,500 handbags. Sapaar doesn’t shop there.

As companies such as Rio Tinto Group, Mongolia’s biggest investor; Peabody Energy Corp.; and Mitsui & Co. plan to keep the momentum going by exporting more of the country’s $1.3 trillion trove of resources, about a fifth of the population of 3 million are getting by on $1.25 a day.

The explosive growth of Mongolia in just 10 years makes for a sharp disconnect between French handbag boutiques and hand- digging coal out of frozen rock. That’s raising warnings of public unrest and driving controversial renegotiation of mining deals by the government to keep a larger share of profit at home.

Rio Tinto’s $6.2 billion investment in the first phase of the Oyu Tolgoi copper and gold mine in Mongolia is the biggest test case and tensions are rising.

Most of Mongolia’s population are unhappy with the big mining projects, said Dale Choi, an Ulan Bator-based associate with Origo Partners MGL, a private equity investment firm.

“Locals don’t benefit from them directly,” Choi said. “The country as a whole benefits, the tax revenue benefits, but the people don’t feel it” and are getting more irate, he said.

‘Minegolia’ Nickname

The gold, copper and coal rush earned the nickname “Minegolia,” made the landlocked nation China’s top supplier of coking coal, and spawned sushi bars, $3,500-a-night hotel suites and Bayerische Motoren Werke AG car dealerships.

Meantime, Mongolians have flocked to Ulan Bator in search of work. About half the residents in the capital, which is home to almost 50 percent of the population, live in traditional huts known as gers without running water, and some without power. They burn coal in stoves for heat and cooking.

Mongolia’s President Tsakhia Elbegdorj said his country should have more control of Rio’s Oyu Tolgoi copper and gold mine in southern Mongolia, according to a statement on his website, referring to a discussion in parliament on Feb. 1.

“It’s important that the government takes the Oyu Tolgoi matter into its own hands,” Elbegdorj said.

Rio Considers Halt

Rio -- which owns 66 percent of Oyu Tolgoi, the world’s biggest copper mine under construction, and Mongolia the rest -- is considering a temporary halt to work on the mine to protest government demands, two people familiar with the plans said last week.

On at least two previous occasions in the last 18 months, the government has requested Rio renegotiate the terms of Oyu Tolgoi. The miner refused.

“We continue to work together with all stakeholders, including the government of Mongolia, to bring the benefits of Oyu Tolgoi to all parties,” Rio Tinto said yesterday in an e- mailed response to questions. “We are now focused on first commercial production. We are on schedule to deliver that in the first half of this year.”

Although it’s not an industrial hub, Ulan Bator “is among the cities with the worst air quality in the world,” according to a 2011 report by the World Bank that cites pollution from the ger stoves.

The circumstances have the elements for a public revolt along the lines of the “Arab Spring” in the Middle East, said Jack Weatherford, an author and anthropologist who has split his life between the U.S. and Mongolia for the last 17 years.

Property Ownership Alien

Mongolia’s broader public isn’t feeling the benefits of mining investment, said Weatherford, a professor at Macalester College, Minnesota, before he retired.

“People are not convinced it’s going to help the country to develop,” as concepts such as property ownership and land exploitation rights are literally foreign, said Weatherford, best-selling author of “Genghis Khan and the Making of the Modern World.”

“If they themselves have no tradition of owning the land, how do foreigners get to come in and own it?” Weatherford said. “Mongolians go so far and then they stand up and fight.”

Protests over the results of the 2008 parliamentary elections killed at least five people and the government invoked a four-day state of emergency.

Moving Goalposts

Mindful of growing public disquiet, the government has delayed a decision on which overseas companies will develop Mongolia’s biggest coal field. It has also proposed mining laws to give the public a broader say.

A draft of the laws released in December would give even villagers power to block exploration by miners in their areas, according to Choi of Origo Partners. That will make it tough for all but the largest to operate in the country, he said.

Rio Tinto’s Oyu Tolgoi mine, due to start up this year, will account for 30 percent of the nation’s gross domestic product once in full production. The deal took six years to complete with Mongolia’s government.

The Oyu Tolgoi accord is good for Mongolia and good for Rio, Chief Executive Officer Tom Albanese said Nov. 28, almost two months before he quit following $14 billion of writedowns in failed deals in aluminum and coal.

Disputed Billionaires

Investment has been good for some Mongolians. Odjargal Jambaljamts is chairman of Mongolian Mining Corp. and was the country’s richest man with a net worth of $2.3 billion in 2011, according to rankings by local publication Hero magazine.

Hero is “not accurate and not based on grounded information,” said Mongolia Mining spokeswoman Ariunaa Baldandorj. Rich lists compiled by U.S. media rely on facts and surveys, while local rankings are “mostly speculative,” she said.

Former Prime Minister Batbold Sukhbaatar is fifth on Hero’s list with $1 billion from stakes in Altai Holdings LLC, which runs hotels, supermarkets and cashmere outlets. Number eight is current Foreign Minister Bold Luvsanvandan with $800 million from Bodi Group, which spans banking, real estate, media and property development.

A Ministry of Foreign Affairs and Trade spokeswoman said she couldn’t comment on the rich-list rankings. Two phone calls made to the mobile phone of Batbold weren’t answered. Questions e-mailed to Altai Holdings, Bodi Group and Batbold’s personal website didn’t receive a reply.

Coal Pit

While Hero ranked politicians among the wealthiest, the fortunes of some have unraveled in the last year under the administration of Elbegdorj. Former President Nambaryn Enkhbayar was jailed for corruption along with D. Batkhuyag, the former chairman of Mongolia’s mineral resources authority.

Back at Sapaar’s pit, which is about 40-meters (131 feet) deep and has a one-meter-diameter entrance, his partner is at the bottom shoveling coal into 25-liter plastic containers. There’s a tug on the rope and Sapaar winches in the haul.

The pit is one of dozens on the steppe outside of Nailakh, a town on the outskirts of Ulan Bator where coal mining started less than a century ago.

Sapaar and his partner pick a spot, mine it every day, not stopping for holidays or the minus 30-degree Celsius (minus 22 degrees Fahrenheit) winter freeze, and when it’s exhausted, move on.

Ordinary People

“Well, this is what we do,” Sapaar said, his smile revealing a slash of white teeth against his coal-blackened shirt. “At least in winter being down there is warm. I know it’s dangerous. There are no other jobs.”

Mongolia may have between 60,000 and 100,000 subsistence miners, according to Patience Singo, manager of the Swiss state- funded SAM project that aids the workers. The figures are from the World Bank and government surveys, he said.

Sapaar’s coal travels 40 kilometers to Ulan Bator, where one customer, 50-year-old librarian Ganbaatar, uses it in a stove to heat his ger. Like many Mongolians, Ganbaatar goes by one name.

“Mongolia’s economy has grown a lot in the last few years, but it hasn’t touched the roots of the lives of ordinary people,” Ganbaatar said. “It benefits top business owners and politicians.”

Mongolia’s resource boom has made little difference to unemployment figures over the last decade, according to a November report by the International Monetary Fund. Unemployment was at 9 percent at the end of 2011, according to a World Bank report in June, based on informal labor surveys. Government figures put it at 4.4 percent in March 2012.

In 2011 the number of people living in poverty shrunk to 30 percent from 40 percent the prior year, but that was mainly due to state cash handouts, the IMF said.

Life & Death

After a string of mine accidents a few years ago, the pits where Sapaar digs were closed by the authorities, which drove up coal prices in the capital, said Singo at the SAM project. The authorities soon allowed mining to resume.

Sapaar’s coal output doesn’t register in Mongolia’s gross domestic product, yet to ger dwellers like Ganbaatar in Ulan Bator, it’s the difference between life and a freezing death as annual temperatures average below zero degrees Celsius, the world’s coldest for a capital city.

A cluster of five-star hotels and the all-glass Blue Sky Tower on the edge of Ulan Bator’s central square suggest the city is setting its sights on becoming the next Asian business hub in the mold of Hong Kong or Singapore.

An office block and mall with boutiques selling Montblanc, Ermenegildo Zegna, and Hugo Boss has opened opposite the Mongolian Stock Exchange and close to the government palace.

Ulan Island

The transformation is all in central Ulan Bator, said Weatherford.

“Today, it’s the island of Ulan Bator down here and then there’s Mongolia,” Weatherford said. The growing wealth gap adds to potential for public unrest, he said.

“Mongolians have completely overthrown the past and wiped out the elite,” Weatherford said. “These things have happened before.”

In the 1930s, when under Soviet rule and acting on Kremlin instructions, Mongolia’s Communists sought out descendants of Genghis Khan and executed them, with the final purges cutting the population by about 10 percent, Weatherford said.

“This country idolizes Khan,” he said. “Yet they killed every one of his descendants.”

Mongolia’s transformation into a democracy starting in 1990 from a Soviet satellite state began a period when those who understood mining and business could build fortunes.

Pothole Point

In 1990 there were about 450 cars in Mongolia, Weatherford said. Now, Ulan Bator alone adds 35,000 vehicles each year, the local government said in a February 2012 report. The city may have more than 210,000 cars, according to official estimates.

On weekends, Ganbaatar the librarian says he watches black SUVs zoom by on the road through his district, No. 16. The road leads to an area known as the valley of the villas where the new rich go for rest and recreation.

The road’s two crumbling, potholed lanes intersect newly painted facades of roadside buildings, beyond which the district is made up of gers and wooden huts.

“This is a main road and everyone uses it, but it doesn’t get fixed,” Ganbaatar said. “I look at them and think: ‘If you can’t fix the main road, you’re never going to fix the side streets and beyond.’”

When it rains in Ganbaatar’s district, roads between the nomad huts turn to mud. There is no garbage collection, no sewage treatment, and no hot water, he said.

The air pollution in Ulan Bator from coal-burning stoves causes respiratory and cardiovascular diseases and annual associated health costs have reached $727 million, according to the World Bank. Mongolia’s economy is worth about $10 billion.

Roy Orbison

Mortality rates from pollution in ger districts are as much as 45 percent higher than if the air quality met national standards, according to the bank. Ambient annual average particulate matter in the city is six to seven times higher than World Health Organization standards and is worse than in China, the bank said.

The World Bank started the Ulan Bator Clean Air Project to distribute more efficient, clean burning stoves to ger families. Ganbaatar said he threw his new stove away because it didn’t properly burn the coal he buys.

In the town of Nailakh near the ninja mines, pensioner Puruvdorj, 73, sits on a bench in a tree-lined alley opposite the statue of communist-era workers’ hero D. Davaajav.

Dressed in a navy blue track suit, slippers and playing with his granddaughter, his sunglasses give him a look like Roy Orbison with a crew-cut.

Rivers of Alcohol

Puruvdorj says he’s lost faith in government because he’s seen no improvement in Nailakh over the last 10 years no matter who was in power. The town, where most make a living in subsistence mining, needs new equipment as the coal reserves close to the surface are being exhausted.

Instead, the government sends cash handouts, which has only encouraged more bars and karaoke parlors, he said.

“There are rivers of alcohol, but no real development.”

Subsistence mining in Mongolia is a job of last resort, said Michael Priester, who’s been involved in the country for seven years as head of mineral resources at Projekt-Consult GmbH, a German corporate and government advisory business.

When extreme cold in the early 2000s killed off livestock, many herders either moved to Ulan Bator to find work or took up shovels to dig for coal, gold, and other minerals, he said.

Ninja Thousands

“It’s for people who don’t have other economic opportunities,” Priester said. Subsistence mining is practiced in Africa, South America, and other places and may involve as many as 10 million to 13 million people globally, far more than the professional mining industry, he said.

Mongolia’s subsistence miners got the nickname “ninja” in the early 2000s. The gold miners carried blue-green plastic washpans slung across their backs and looked like the Teenage Mutant Ninja Turtles characters in the movie, Priester said.

Ninja miners outnumber those working in large mines two-to- one and operate in 18 of Mongolia’s 21 provinces, the United Nations said in a June 2012 report. Given that they spend their earnings locally and support their families, they are estimated to support 13 percent of the national population, the UN said.

In rural Mongolia, subsistence miners account for a fifth of the economy, earning an average of $176 a month, or 57 percent more than the country’s minimum wage, according to the UN.

No Ladder

Still, ninja mining is a one-way street that doesn’t lead to better jobs with bigger companies that rely on machinery for mining, Singo, a mining engineer and a Zimbabwe native, said.

“Most of them don’t have the necessary skills to switch over,” he said.

Developing an industrial economy is problematic in other ways. The ideas of land ownership and exploitation of what lies beneath it are new concepts in Mongolian culture, according to anthropologist Weatherford. So is selling those commodities to China, a neighbor many Mongolians openly dislike, he said.

The issue came to a head in April last year when state-run Aluminum Corp. of China Ltd. offered to buy Mongolia’s coal producer SouthGobi Resources Ltd. from Ivanhoe Mines Ltd., a Canadian entity now under Rio Tinto control.

‘Just Shocked’

“They were just shocked how a foreign country can own something in Mongolia and then without asking the Mongolian people can sell it to another foreign country,” Weatherford said. “In this case, because it was a Chinese corporation, it just heightened it.”

What the China bid succeeded in doing was uniting rival lawmakers in Mongolia to draw up and pass in two months the Strategic Entities Foreign Investment Law, which scuttled the takeover. Aluminum Corp. gave up on the bid in September.

In June 2012 elections, the public voted in the Democratic Party on policies that included a fairer distribution of wealth, ousting former communists now known as the Mongolian People’s Party.

“Our party’s goal is to enable every citizen to take part in economic development,” Foreign Minister Bold said in an interview in Tokyo on Oct. 2.

The Democratic Party wants shares of state companies that own Mongolia’s main mineral deposits to be distributed to all citizens, Bold said.

As Mongolians become owners of their land and resources, there will be motivation in supporting the country’s industrial and mining development, and with it foreign investors, Bold said. “It’ll change Mongolia dramatically.”

--With assistance from Elisabeth Behrmann in Sydney and Michael Kohn in Singapore. Editors: Peter Langan, Todd White

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