WORLD

MI5’s secret star wars with Hitler revealed

NANCY MACDONALD March 17 2008
WORLD

MI5’s secret star wars with Hitler revealed

NANCY MACDONALD March 17 2008

DESERT DREAMS

Business

Robert Friedland just wants to save the world. (And maybe mine a little copper.)

JASON KIRBY

This coming June, voters in Mongolia, all 1.4 million of them, go to the polls. “Mongolia Votes 2008” may not have the same urgent ring to it as that other national horse race, but for investors in Vancouver-based Ivanhoe Mines, including the company’s temperamental founder and executive chairman, Robert Friedland, billions of dollars are on the line.

When Friedland announced in 2001 that Ivanhoe had discovered a promising copper and gold deposit in one of the most desolate places on earth, Mongolia’s Gobi Desert, skeptics were quick to dismiss it. Then, slowly, the full scope of the deposit came into focus. Oyu Tolgoi (or Turquoise Hill), as the area is known, isn’t just big, it is huge—an untapped bounty of metals that, at today’s soaring commodity prices, is estimated to be worth US$300 billion—or 35 times the size of Mongolia’s

entire economy. London-based mining giant Rio Tinto is now a crucial partner in the project. And because of Friedland, other miners have flocked to Mongolia. You could almost say Friedland struck the motherlode, except for one niggling problem: not one ounce of commercial metal has been dug out of the ground since he revealed the find.

Now Oyu Tolgoi is at the centre of a political firestorm over the future of mining in Mongolia. And Friedland, who’d wanted so desperately to bring the mine to life, has been forced into the shadows as the project faces delays and populists wage a war of rhetoric against foreigners operating in the country.

Things looked so promising just a few short months ago. Last July, Ivanhoe and Rio Tinto reached an investment agreement with the Mongolian government to develop Oyu Tolgoi, following nearly five years of talks. Mongolia would take roughly a onethird stake in the project, while Ivanhoe and Rio Tinto would control the rest. Finally, it seemed, the dream of Oyu Tolgoi would become a reality. So much for that.

In January, the government of Prime Min-

ister Sanj Bayar, faced with a public backlash, withdrew the deal from parliament where it was awaiting approval. Both Ivanhoe and Rio Tinto have warned that if delays continue, they might halt work on the project. Yet the talks continue to move at a crawl.

Mongolia may suffer from soaring unemployment, rampant poverty and an economy that hasn’t changed much since the Mongol hordes rode out to conquer the world 800 years ago, but the country has quickly awoken to the power of playing hardball with resource companies. Twenty years ago, officials anywhere in the world would have jumped at the chance to cut the ribbon on such a project. Not anymore. In an age when natural resources are seen as increasingly scarce, there are far more political points to be scored by facing down big business. Venezuela’s Hugo Chávez did it. Danny Williams did it in Newfoundland. Even Alberta’s dyed-in-the-wool free marketers are demanding oil companies cough up more in royalties. “All governments want to pluck the golden goose,” says John Ing, president and gold analyst with investment bank Maison Placements Canada. “The Mongolians see this as an opportunity to do a lot of plucking.”

Both sides have vowed to work toward a new agreement before the election. And judging from a recent run-up in Ivanhoe’s share price, some investors believe that will happen. But other observers have serious doubts. Last month, UBS Investment Research analyst Tony Lesiak lowered his target price for Ivanhoe shares over those concerns and worries that development costs are rising fast—production at the mine will likely be delayed until at least

2011 while its initial cost could jump 48 per cent to US$4 billion, he wrote in a report.

It’s a thorny situation. Any politician who signs on to a deal in the heat of the campaign risks being branded a sellout by opponents. And in a country as fiercely proud as Mongolia, that’s akin to political suicide. “Nothing is going to happen until after the election,” says Julian Dierkes, a professor at the University of British Columbia who has visited Mongolia numerous times and is following the Oyu Tolgoi situation closely. “Not with the populists saying Bob Friedland is personally going to run off with 95 per cent of your gold. People are going to resent that.”

It may be that all the attributes that make Friedland a great stock promoter are the very things that have knocked the project off the rails. The only question now is whether he, or anyone, can get it back on track in time.

FEW INDIVIDUALS in business are as polarizing as Robert Friedland. In mining and investment circles, he’s revered for his ability

Oyu Toigoi contains metals valued at $300 bin. But getting a mining agreement clone won't be easy.

to unearth new discoveries and whip markets into a frenzy. At the same time, environmentalists and human rights activists view him as a scourge to be thwarted. Friedland’s journey from hippie to stock promoter is the stuff of legend. Or make that cliché. After a stint at a Portland communal farm in the 1960s (where he lived alongside Apple Computer’s Steve Jobs) and a spiritual journey through India, Friedland gave up bohemian life for the murky world of the Vancouver Stock Exchange. His first venture, Galactic Resources and its Summitville gold mine in Colo-

rado, promised to earn him a small fortune. Instead, it earned him a reputation he’s spent the last 15 years living down.

Amid accusations by environmentalists that cyanide from Summitville was killing fish, Galactic shut down the mine in 1992. The U.S. Environmental Protection Agency went after Friedland, who eventually agreed to pay US$20 million to help clean up the site without accepting any liability. What gets less press is the fact the U.S. government later admitted no single person was responsible for the problems at the mine, and repaid Friedland’s legal bills. But the episode dogs him to this day. Even in the most distant yurts of Mongolia, people know Friedland by his unflattering sobriquet: Toxic Bob. The early controversy made a fighter out of Friedland and formed his reputation as a litigious defender of his reputation, notoriously suspicious of the press. “I’d just rather not get sued,” one analyst said in declining to be interviewed for this story. (Friedland did not grant an interview either.)

Ivanhoe bought the Mongolian property from Australian mining giant BHP in 2000. Within a year, Friedland was boasting there was far more copper and gold there than previously thought. The Ivanhoe hype machine ramped up the scale of the riches buried beneath the sands. And as with any master salesman, Friedland-branded catchphrases found their way into analyst and media reports. “Right on China’s doorstep” became the marketing slogan for Oyu Tolgoi.

But for many of his critics, the yarn he was spinning about Mongolia was too good to be

true. How could it be that a former Howe Street promoter had unearthed not one, but two world-class mineral deposits in the span of a decade? Friedland, of course, discovered the massive Voisey’s Bay nickel deposit in Labrador in the 1990s. After playing two titans of Canadian mining, Inco and Falconbridge, off against each other, he unloaded the project on Inco for $4-3 billion. It took years to make Voisey’s Bay pay off at that price, but the deal cemented Friedland’s fortune. Could lightning really strike twice?

Any lingering doubts about Oyu Tolgoi were quelled in 2006 when Rio Tinto signed on to buy a 10 per cent stake in Ivanhoe. But unlike Voisey’s Bay, Friedland insisted he had no plans to flip the project for a huge profit. Instead, he wished to see it through to the end. “We want to be the builder of Turquoise Hill, not the auctioneer,” he said in 2002. “This is not Voisey’s Bay all over again.” Associates say Friedland wants to be seen as more than a spectacular salesman. He wants to build mines and own them, like the majors do. There was only one problem: some of Friedland’s gift for exciting investors also angered his Mongolian hosts.

Things began to unravel in 2005 when Friedland took the stage at an investor conference in Florida. Operating this mine in Mongolia, he told the eager crowd, would be like hawking clothing. “You’re making T-shirts for five bucks and selling them for $100,” he said. “That is a robust margin.” To Mongolians, he sounded like another Western profiteer, ready to strip their lands and leave them with little in return. Protesters burned Friedland in effigy. And as his comments spread, they sparked the backlash that helped derail the investment agreement in January, and threw into question whether Friedland would ever make good on his dream of developing one of the world’s great mines.

AT ONE TIME Friedland donned fur hats and rode camels to promote the mine. Yet overnight he seemed to vanish. By 2006, Friedland had resigned as CEO, keeping the less public role of chairman and paving the way for current boss John Macken. Meanwhile, Rio Tinto has taken over the task of negotiating with the Mongolians. “Friedland both helped and hurt himself by making his project extremely visible,” says Charles Krusekopf, executive director for the American Center for Mongolian Studies. “He used to constantly

put himself forward. They’ve taken very deliberate steps to tone that down.”

Friedland has also tapped influential allies to help broker a deal. Former U.S. secretary of state James Baker made the trek to Mongolia on Ivanhoe’s behalf in 2006. Then in January, Trade Minister David Emerson visited Ulan Bator with a message of caution for the government: delays in approving Oyu Tolgoi are causing smaller mining companies to turn away from the country.

But even as the Oyu Tolgoi project hangs in the balance, or maybe because of it, Friedland has taken on a larger missionsaving the world. In recent speeches, he has laid out his vision for the role the mining industry can play in solving many of the world’s problems. “The only way to maintain peace is to embark on a huge project to reduce global warming and to reduce nuclear proliferation and to drive down the real price of things for the benefit of humanity,” he said at a conference in Australia last year. If anyone in attendance that day hoped to hear the Ivanhoe chairman weave a tale about Mongolian riches, they were disappointed. “I’m not here to discuss our own little business plans,” he said. “This is more of a cosmic talk.”

The idea that miners could be a force for good sends hard-core environmentalists into conniptions. Yet Friedland lays out his argument in bluntly rational terms. If emerging countries like China keep building coalfired power plants to fuel their energy needs, carbon dioxide emissions will skyrocket. The solution, Friedland says, is to immediately build as many as 10,000 nuclear power plants around the world. Meanwhile, he has slammed the U.S. government’s subsidy for cornbased ethanol as “incomprehensibly stupid” because it drives up food prices and causes human suffering. (Jatropha beans and palm oil make better biofuels, he suggests.) And Friedland argues that copper is “green gold” because it is integral to new fuel-saving technologies. “If Al Gore really wants to do something about global warming, he should be effusively praising the copper miners,” Friedland told miners in Florida last week. “After all, we’re the guys who enable you to build a Toyota hybrid car [which has more than 200 lb. of copper per car]. Or an electric car. Or the Internet. The industry has to continue to engage and say, if you’re worried about global warming, or climate change, the way out of it is through technology that reduces global warming gases and the way out of that is nuclear power and new elec-

To many Mongolians, Friedland sounded like just another Western profiteer

trical transmission systems for your grid.” This isn’t what you typically expect to hear from Friedland, and his most voracious critics will no doubt dismiss it as a public relations ploy. But if Friedland is giving himself a makeover, it has gone beyond mere words. For years, Ivanhoe held a stake in a controversial copper project in Burma, in partnership with the hard-line government. Human rights activists blasted the company for propping up the regime, an accusation to which Friedland would thumb his nose. By working with the military junta, he said, Ivanhoe was helping the people of Burma. Then last year, Ivanhoe sold its stake, and when the country’s rulers cracked down on Buddhist protesters last September, Ivanhoe expressed its disgust. “We share the revulsion of right-thinking people everywhere against

unwarranted assaults on Buddhist monks and civilians,” it said in a release.

Is this the beginning of a kinder, gentler Friedland? A Green Bob? A Human Rights Crusader Bob? Perhaps, but the more immediate question is whether it will help him win over the people of Mongolia.

TO SAY IVANHOE needs Oyu Tolgoi to succeed would be an understatement. While Rio Tinto is a behemoth that earned US$10 billion last year, Ivanhoe has nothing that

matches the excitement investors feel about Mongolia. Ivanhoe is also developing a coal project there, and the company has sunk more than $600 million into developing Oyu Tolgoi. In its most recent quarter, the company lost $83 million. At one point in January, the company had shed nearly half its stock market value in just six months. No wonder the investment community is losing interest—more than a dozen analysts covered Ivanhoe in 2005. Today, there are just five, and only two rate it an outright “buy.”

The good news for the companies is that the project is even more crucial to Mongolia. Every day the Oyu Tolgoi mine is delayed equates to $2 million in lost growth for the country. After decades under the thumb of China, and then Russia, the project offers the best way for the country to finally reassert itself, and potentially lift thousands out of abject poverty. One poll found 79-5 per cent of Mongolians want their leaders to sign an agreement for the mine, and fast.

If a deal does get done before June, as BMO Capital Markets analyst Craig Miller believes, it will no doubt be because of the country’s prime minister. Bayar may have been the one to pull the agreement off the table, but he’s also widely seen by investors as the best chance Ivanhoe and Rio Tinto have of getting a new one. “It is our duty to the next generation to use this opportunity properly. If we lose it by quarrelling with each other, the next generation will blame us,” he said in a speech in December, adding the country needs for-

eign expertise to operate the mine.

During a visit to Vancouver this week, Tom Albanese, CEO of Rio Tinto, was diplomatic. “We’ve said we need an investment agreement so we can proceed,” he told Maclean’s after a speech to a local business audience. “This project can be a quarter of Mongolia’s GDP and literally bring billions of dollars into a country that is impoverished.”

But on what terms? Under the old agreement Mongolia would own 34 per cent of the project. Ivanhoe also promised to have a copper smelter built, exempting the project from a punishing 68 per cent windfall profit tax. Yet there have been calls from populists in the country for the government to grab as much as 50 per cent of the proposed mine.

Talk like that worries Dierkes, the UBC professor, and not just because it threatens to derail the project. He believes Mongolia is already overly dependent on its mineral resources. By collecting royalties and investing them in other industries or outside the country, Mongolia could diversify its fortunes. “My bottom-line fear is that 50 years from now, when the gold is gone, they’re going to be just as poor.”

While talks drag on, Rio Tinto is clearly losing patience. The company is pouring $40 million a month into Oyu Tolgoi and warned it’s prepared to shelve the project. Adding to the pressure is BHP’s US$147-billion attempted takeover of Rio Tinto. With costs on the rise, and turmoil in the global economy, some observers think Oyu Tolgoi may be a casualty of all the uncertainty. “What happens in the mining business is you have a sweet spot in the cycle,” says Ing. “If you don’t build it then, it doesn’t get built.” Could that happen? Maybe. But analysts remain confident that the development of Oyu Tolgoi is more a matter of when, than if. The megaproject is simply too important to let it fall to pieces.

When all is said and done, the fact is Friedland’s brash style put everything at risk and may have forced the companies to accept a less favourable deal than they might have gotten. But at the same time, could anyone else take a barren patch of desert in a forgotten corner of the world and transform it into one of the most coveted assets in the mining industry? “Robert is a classic promoter who gets things done and in the process he’s been known to offend people’s sensibilities,” says Bill Cara, a financial commentator. “I think that’s what happened in Mongolia. But people should realize he’s brought more money into that country, more capital, than anybody else in the history of the country.” For now, however, the question is not how much Friedland has put into Mongolia, but whether he’ll ever get anything out. M