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Mongolia In late October I spent over a week in this obscure country, wedged in between Russia and China, on the high plains of east central Asia. It wasn't perhaps the best time to visit, but it was either then or wait until at least May. And anyway, my travel plans (insofar as such things exist) call for me to be in Iran and Somalia in May. On the bright side, the cold of late October did serve to decrease the number of tourists. I didn't see all of the country; that would have been tough, since it's about the size of Alaska. In fact, the northwest, an area about the size of France, even looks like Alaska, with lots of lake, rivers and mountains. I didn't get there, but I did see the capital, Ulan Bator (UB to the cognoscenti), and hours and hours worth of territory to the south, in and around the Gobi. Eighty percent of the country is steppe, desert and semi-desert; unless you're a geologist on an Easter egg hunt, believe me, it all looks the same. Of course I did a bit of the tourist thing, going to museums (which, ironically, were themselves decrepit enough to look like they belonged in museums), and art galleries (some art here is quite weird and innovative, and quite cheap). I spent an evening listening to Mongolian throat singing and watching contortionists in a private performance. And most of a Sunday watching Mongolian wrestling, the national sport, featuring contestants as big as the guys in the WWF. Mongolians are genetically inclined to size, nothing like the generally small, rice-eating Chinese to their south. Horseback riding and archery are the other big national pastimes here but, regrettably, I was unable to explore them. All very National Geographic, I can assure you. As are the yurts. Yurts The official statistic is that 61%
of Mongolians still live in yurts. That means almost everyone out on the
steppes and in the forests. But even in UB you'll see plenty of them. It's
understandable, once you've visited the alternative dwelling choices, namely
gawdawful Soviet era apartments, the kind with tiny rooms, cracked plaster,
leaking plumbing, broken windows, and one electrical outlet.
Let me give you some other stuff to get romantic about. Some Local Color A local paper, the weekly Ulan Bator Post, gives, ironically and inadvertently, I'm sure, a very telling view of life in Mongolia today. Don't be surprised at the existence of an English language periodical here, in the middle of nowhere. Everybody with anything on the ball, everywhere except the American inner cities, is learning English posthaste. Headline: "Squirrel Skins Confiscated." 460 of the pelts were discovered by Customs officials, an amount further described as "a disturbing increase." Headline: "Horse Rustler Shot Dead." Two Mongols stole eight horses from Russia. One gave up after a warning shot, the other tried to escape. Police fired again, bringing his mount down. The rustler, one Erdenebat, took cover behind the animal and returned fire, but was killed in the exchange. In a longer story, one Erdene-Ochir was freed by the Supreme Court after seven years of serving time in what the paper described as "notoriously harsh" prisons. It seems that he was out on the steppes in Dec. 1995, helping relatives slaughter livestock for the winter, when he discovered a saddled, but riderless, horse among the herd. He brought it in, was accused by the herdsman of killing his son, and was arrested, tried and convicted. Erdene-Ochir's father had to liquidate nearly all his livestock, as well as his silver cup, silver knife and silver saddle to help in proving he didn't do it. These are not stories you'll find in the New York Times. Some Foreign Color I reflexively associate with the
locals, and go out of my way to avoid most other Americans when I travel.
But one almost can't help running into various US government employees
when you're in a city like UB; they're thick under foot. While at an Internet
cafe, I met one who introduced herself as Sue. She was bouncy and freshly
scrubbed but, like so many Americans, at least 30% overweight. I asked
her what she was doing; she said she was here with the State Department
"to improve the schools." My ready quip was "That's interesting. I didn't
know the State Department was capable of improving anything." Anyway, she
must have thought I was joking, and continued babbling on long enough to
assure me that she was a complete imbecile.
"Oh, you should visit the Commercial
Attache at the Embassy. He's very smart."
"Well, I don't know," she burbled,
"I do know he's been with State for six years, and before that he graduated
from Ball State, which is a pretty good school."
Years ago I actually used to stop by US Consulates in Third World countries because, at first, I naively thought it might be a shortcut to knowing my way around. Later, it was just to confirm that my early impressions were right. I don't know how the State Department does it, but they have somehow developed the ability to recruit people who probably couldn't even make the cut at your local DMV. Your tax dollars are at work enabling them to impart all manner of wisdom to locals, including helping bureaucrats improve the economy and the schools. It's like watching the blind leading the doubly dismembered. The Mongol Economy Insofar as you care at all about Outer Mongolia, I presume what you're interested in isn't stuff you can read on a government website; you want to know how it really is. And maybe how you can profit from it, although that thought makes better cocktail party conversation than reality—unless you want to totally upend your life. Added to the observations I've already made, the bottom line is that, for most of the roughly 2.7 million Mongols, things are (relative to our cushy standards in America) pretty tough, although much better than they used to be. Someone with a "good" job-- a translator, a bureaucrat, a secretary-- might make US$100 per month. Someone with lesser skills, like a laborer or a waitress, might make about US$60—before the 10% withholding tax. That's assuming you live in an urban area and have a job, since statistics indicate there's 20% unemployment. But, although people don't make much money today, at least it's real money (well, kind of, with the Tugrik at about 1100 to the dollar), and they no longer have to play the Soviet game of "They pretend to pay us, and we pretend to work." Mongolians may not have much today, but they had a lot less of it in Soviet times. The biggest department store in UB resembles a supersized 7-11, and since most things are imported, they're not particularly cheap. If you're a typical Mongol, you don't make enough to rent an apartment, so you share one with far too many other people. Although in the summer you've got fresh local fruit and vegetables to supplement some cheap cuts of mutton, in the winter you eat cheap cuts of mutton. Period. For entertainment you go to a bar and drink. On the bright side, women wear a miniskirt and high heels just about everywhere. And there are enough cars on the streets to cause serious traffic jams twice a day, whereas before 1990 there was only the odd truck, or broken down Lada. Until I made a discovery described below, it was a great mystery how all the cars got paid for with wages being what they are. Looking at the official figures was no help at all. The published figures show that Mongolia has a GDP of about US$1 billion. Entirely apart from the fact it isn't much--less than that of most counties in the US-- it doesn't mean much either, as I explained in IS XXII/10. Be that as it may, the government reports it took in the equivalent of US$262 million last year, and spent US$328 million—a $66 million, or roughly 25% deficit. The county's imports were US$614 million, and its exports were $466 million—a $148 million, or roughly 30% deficit. Big percentage numbers. We know how this is possible, at least for a while, in a country like the US: The US has a reserve currency it can export, and it has an immense amount of capital to dissipate. Mongolia has neither of those advantages, so it makes do entirely with foreign borrowing (roughly $760 million of government debt), and about $200 million of foreign aid per year. I consider numbers like these to be unsustainable, especially as the world economy heads down in the years to come. That doesn't have to be a bad thing. In fact, if I were advising the government, I'd urge them to default on their debt now, because they will eventually. And the sooner they can get the burden off taxpayers’ backs, the better. But any progress will, I fear, be slow. The statistics show that about 2/3 of Mongolia's exports and 30% of GDP are from mining. Some of that is placer gold, which I'll discuss below. But most of it is from the giant Erdenet copper mine to the northwest of UB. The mine was built in the Soviet manner, which is to say the object wasn't to produce efficiently (i.e., profitably), but to employ the maximum number of workers and peasants, and crank out copper at any cost. Which was pretty easy because, since socialist economies don't have free market prices, they can't calculate costs. Hence, they have no way of knowing whether they're creating, or consuming wealth by cranking out copper, or anything else. In any event, the mine (which apparently still has a resource of about 1.7 billion tonnes of .62% material-- one of the largest in the world), employs about 7,000 people, and a whole city has grown up around it. The mine likely would be quite profitable if the work force was cut by over 90% and modern technology used. But now it's just a welfare scheme for the employees-- and a source of hard currency. The intelligent thing to do would be to sell it to the highest bidder, and let them figure out what to do with it. But what to do with the adjacent city, which would then serve no useful purpose? Well, the answer is that the region would have to experience a depression, as distortions and misallocations of capital caused by the political process are liquidated. At that point, standards of living could start to improve again. But, just as the political process caused the problem, the political process is unwilling to cure it. So a huge asset gradually depletes, to no ones benefit. I'm not, incidentally, ragging on Mongolia; I find it a really appealing place, notwithstanding the remnants of Stalinist architecture which, incidentally, you're reminded of every time you even climb stairs. Every single staircase in the country has completely unpredictable treads and risers; it's as if the Ministry of Stairs had a slapstick sense of humor, and liked to see people stumble. Or, perhaps, had some Marxist scheme to cleanse the gene pool of those who weren't on constant alert. There's no question, however, that things have gotten much better here since 1987, when Mongolia started shedding Soviet attitudes. The Soviets started withdrawing troops in 1989 (keep in mind the Berlin Wall only fell in November 1989). Free elections, for what that's worth, took place in July 1990, after which the country stopped calling itself a "People's Republic." This last, however, gives me a semantic tinge of regret, in that the ridiculous moniker always amused me. Education? Open Space? More Than Enough Another odd remnant of Soviet times
is the high degree of literacy. All the old People's Republic's had a thing
about educating the Workers and Peasants; whether to better indoctrinate
them, or simply to keep them busy, is unclear to me. Theoretically, the
roughly 98% literacy rate, even including herdsmen in the boondocks, should
have resulted in higher productivity, marvelous innovations, and all kinds
of other good things education is supposed to bring. Well, it hasn't. And
here I have to digress momentarily to debunk the false link between mass
education and economic progress. There's much more to be said about this
but, in brief, what causes progress isn't education, it's the accumulation
of capital. That's done by producing more than one consumes, and saving
the difference. After that's done for long enough (especially if the savings
are invested wisely), then one has the leisure for educational pursuits.
Going to school doesn't make you rich; being rich gives you the luxury
of going to school. Of course education can be very valuable, but intellectuals
have always confused cause and effect. And Mongolia, which is overrun with
university students, illustrates that point well. If education automatically
resulted in a high standard of living, then UB would look like Hong Kong.
Placer Gold One answer to where the money comes from to buy the cars and fill the bars in UB is: gold. Especially since the metal last moved over $300, it turns out there's been a placer mining boom in Mongolia. The word is that about 100,000 people, or over 5% of the country’s entire economic population, are engaged in illegal placer mining-- which is to say going to a stream and panning, the way it's been done for millennia. Estimates are that their number is going up rapidly. That makes sense to me in a country where there's so little economic activity. And that's in addition to people working the streams legally. Mongolia has legal placer production of about 500,000 ounces a year, worth about US$150 million, or roughly 15% of official GDP. The way an EU consultant figures it (probably accurately) is that each of the 100,000 illegal miners produce, on average, one gram per day, which totals up to 100 kilos a day, or a tonne (31,000 ounces, or about $10 million) every 10 days. The illegal placer business is probably about the same size as the legal one. Of course the miners can only work half the year, since this place gets unbelievably cold. But US$150 million, even divided among 100,000 people, is $1,500--which means that each of the miners is making considerably more in six months than a top paid person could make all year. I'd say there are going to be a lot more Mongolians hitting the field next year. The EU consultant, incidentally, says he disapproves of the boom because "there are issues of the environment, human health, infrastructure, law and order, gender, human rights, legislation, statistics, and the erosion of livestock rearing." You've got to hate busybodies like that who come in and pontificate. Absolutely none of these things are issues, except to PC busybodies. In fact, each of these things, and a bunch more he failed to mention, are actually improved as a result of an informal mining boom. What he's basically saying is that these incredibly poor people have to be licensed, regulated, and taxed. Attitudes like that are typical of Europeans in general, and European bureaucrats in particular. And they're why his grandchildren will be working as houseboys and maids for a Chinese family. Mongolian Stock Exchange It's my custom to visit the local
bourse whenever possible, but now I have to admit my negligence in UB.
I don't, however, think I (or you, indirectly) missed much in this instance.
The Mongolian Stock Exchange was formed in 1993 as an after market for
the shares of newly privatized state enterprises, and domestic government
debt. Privatized state enterprises are almost always bereft of capital,
criminally or incompetently managed, and in sunset industries.
Mongol Military Tactics Starting with Genghis Khan, who ruled from 1207-1227, the Mongols created what was, at least in land area, one of the largest empires in history. How was it possible that relatively primitive nomads, coming out of the desert, could conquer not just one, but every more advanced civilization they encountered? From my research, I'm not convinced anyone knows the answer for sure. For the Macedonians, it was an exceptional general. In the case of the Muslims, perhaps it was a unifying ideology. The Romans, organization. But here are a few elements that fit into the picture. One element in their success was technology, in the form of the composite bow, and silk garments. The Mongols constructed their bows from strips of horn, leather, wood and bone that were recurved and glued together. The result was a short, but extremely powerful weapon that was both particularly convenient for use on horseback, and effective out to 250 yards. Other armies simply couldn't close with them, while the Mongols had what is known today as "stand-off" capability. Another advantage was the extensive use of silk in their armor. Silk is a very light but extremely strong fiber, about as close as you can come to Kevlar among natural materials. It's use considerably reduced Mongol casualties. Most important were their tactics, however. The Mongols were a 100% mounted force. All of their enemies had relatively limited cavalry, and it was mainly an adjunct to the infantry. Horses were largely a method of transport for the nobility who, in any event, mostly kept their martial arts skills to themselves; it wouldn't do to have peasants too proficient in fighting, in case they revolted. Nonetheless, peasant foot soldiers made up the vast bulk of their armies, and they were accustomed to fighting only other peasant foot soldiers. Worse, they marched slowly, in the absence of roads. And they had to be supplied. That meant hauling grain in carts dragged by oxen, which not only slowed them down further, but limited their range. The Mongols, on the other hand, literally
lived on their tough, short (typically 13 to 14 hands) ponies. The horses
lived on grass, the men lived on meat and the milk and blood of the horses
(acquired through opening a vein), supplemented by the products of camel,
sheep and goat herds that came with them. They were not only extremely
mobile, but entirely self-contained.
Absorption of Culture Military conquest is one thing, and it has immense long term consequences. If it's followed up by political conquest, the consequences are even greater. Cultural conquest is greater yet, even though it's completely non-violent. America is often accused of "cultural imperialism." Well, McDonalds has never tried to subjugate the natives. And even if the US Marines did, there was no conspiracy to insinuate ad-bearing T-Shirts, baseball caps, and Hollywood movies into the farthest reaches of the planet. But it happened, and American culture has overwhelmed the rest of the world. The most definitive type of conquest, however, is demographic. And it's also the most problematic, because it can't be undone. What do you do if you own, or thought you owned, a place like Kosovo, and millions of people from a different culture wind up living there? How can you get rid of them? The answer is that you can't-- short of what has come to be called "ethnic cleansing." Actually, ethnic cleansing is mankind's most time-honored solution to the rather intractable problem of what you do with the recalcitrant locals you just don't want to deal with. In primeval times, the most certain way to deal with the outsiders you couldn't use as slaves was simply to kill them. It made some sense in a world where resources were looked on as a zero-sum game, where the fewer people there were to share with, the better off you were. That, and it made no sense to keep around the friends and relatives of people you killed, because they might resent it, and return the favor, with extreme prejudice. What Hitler did to the Jews was actually no different from what conquerors have always done with people who didn't accommodate themselves to the newest world order. He's viewed as a special devil mainly not because his actions were unusual, but because they were an unwelcome anachronism in modern capitalistic times. In pre-industrial times, people who kept their own customs and resisted integration were likely to be ethnically cleansed. Fortunately, in modern, secular, urban, capitalistic societies they are, or should be, a non-problem. Today's society makes it easy for people to associate (or not) with whom they wish, intermarry, and even open restaurants with strange cuisines to profit from outsiders. So I'm optimistic that, notwithstanding its historic advantages, ethnic cleansing will be less of a problem as the world becomes richer. Genghis Khan, and Tamurlane (1336-1405), were notorious for ethnic cleansing. But the Chinese have perfected an even better way of spreading and perpetuating their genes-- which is probably the basic reason people go in for this kind of thing. The Mongolians may have conquered the Chinese militarily, and then politically; but the Chinese conquered the Mongolians demographically. The Chinese don't cleanse an area, they submerge it in humanity. Everyone in human rights circles is outraged about the Chinese conquest of Tibet in the early 50s. OK, that wasn't very nice, but it was completely unexceptional; that's what countries do. But what made it different than most conquests, as well as permanent and irretrievable, is that Beijing caused millions ethnic Han to populate Tibet. And they're never going home, because most of Tibet's residents are now Han who have been born there, and they substantially outnumber the "natives." The human rights types never mention that exactly the same thing happened in Manchuria and Inner Mongolia, I presume because it's so far in the past it's pointless to protest. "Mongolia" used to be one place, until the mid-1600s, when the distinction between "Inner" (which is today just a province of China) and "Outer" (which is the independent country we're discussing) was first made. The Mongolians have attempted to regain the lost territory, but when you're dealing with demographic immersion, resistance is futile-- unless you're both incredibly powerful and ruthless. Incidentally, there's a lesson here for America, one that I've commented on before. Even today, there are a half-dozen states (prominently including California and Texas) that are closing in on less than 50% Anglo populations. There's no reason why that trend is likely to change (more likely accelerate); within most people's lifetimes Hispanics will be majorities. Personally, I have no problem with it. In fact, from a strictly historical perspective, you can see it as the Hispanics retaking territory that was originally theirs; Anglos only really started laying claim to the southwest in the 1830s, well within the lifetimes of two long-lived individuals. Of course I see all these arguments about "our" land as spurious and ridiculous to start with; the land belongs to the individuals that own it, and their race is academic. But I recognize that's not the way most people see it, so there will likely be problems of every type you can imagine as Hispanic, and other non-European cultures, demographically capture large portions of the US in the decades to come. I actually expect we'll see an "Inner" and an "Outer" Texas; Americans will get to feel like the Mongols. A solution? Well, assuming it actually a problem, the only solution I can figure is one that the Chinese wholly approve of: Make sure you're wealthy enough to avoid being adversely affected by whatever happens. Incidentally, the Mongolians are no fans of the Chinese, not least because of this history. It's no accident that it's quite hard for a Chinese to get a visa to enter Mongolia. ******** Ivanhoe Mining The reason I went to Mongolia was to conduct a site visit to Oyu Tolgoi and Kharmagtai, the two primary Mongolian properties of Ivanhoe Mining (IVN.T, C$3). Like most junior mining companies, IVN's story has been in a constant state of flux since Day One; it used to be called Indochina Goldfields. The company has a number of other assets that may or may not turn out to be of significant value. But its main focus now, by far, is Mongolia Mongolia IVN controls mineral exploration rights to approximately about 82,000 sq/km of Mongolia, a land package bigger than most countries. But to mention that is mostly arm-waving; it will takes millions of dollars of work to see if it's good for anything but Bactrian camel pasture. IVN currently has two known deposits, Oyu Tolgoi and Kharmagtai, and close to a dozen excellent prospects in its land package. Don't let your eyes glaze over if you're not geologically active; there's much more of interest. And this company, more than most, isn't so much about the rocks, but the people. Meaning Robert Friedland, who's more interesting and colorful than the Grand Canyon, forget about some rocks in the Gobi. Oyu Tolgoi -- Oyu Tolgoi contains five distinct zones within an area of about 10 sq/km To date, the best estimate of what they have (an Inferred Resource) is 821 million tonnes of material grading .38% copper and .52 grams gold, using a cutoff of .30% copper equivalent. The gives a contained resource of 13.8 million ounces of gold, and 6.9 billion pounds of copper, worth about $4.4 billion in gold, and $4.8 billion in copper, a total of $9.2 billion. These numbers are for the Southwest, the discovery zone, alone. Enough drilling has been done on two other zones, in addition, to generate some real excitement. On the Central zone, holes have included 84m of 1.24% copper and 1.3g/t gold, and 136m of 1.19% copper and .49g/t gold. On the Far North zone, results have included 638m of 1.61% Cu and .07g/t Au, and 368m of 1.91% Cu and .09g/t Au. These are spectacular grades and lengths. One brokerage firm’s geologist estimated that the total resource at Oyu Tolgoi, from all three zones, would likely be about 600 million tonnes of open-pittable material grading .52% Cu (6.6 mm tne) and .43g/t Au (7.9 mm oz), and another 300 million tonnes of material grading 1.16% Cu (totaling 7.8 billion pounds), and .61g/t Au (equaling 6 million oz). That totals nearly 14 million ounces of gold and 14.5 billion pounds of copper-- but, very importantly, using a .50% Cu equivalent cutoff. That totals about $14 billion of in situ resource, 900 million tonnes of roughly $13 rock. Let's say those are fair numbers, which I'm inclined to do since this project is still developing. In fact, they'll probably prove conservative as more drill holes hopefully disclose more material. But is it economic? And, if it is, what should you pay for it? The best copper/gold mine in the world is Freeport’s Grasberg, in Indonesia, where they have something like 2.7 billion tonnes of ore, grading 1.1% Cu, 1.04g/t gold, and 3.4g/t silver-- rock worth about $27.50 a tonne. That mine was actually one of the engineering wonders of the world to build, and is currently in a bad neighborhood. But it's built, pays dividends, and is a totally known quantity. You can buy it for $x billion. Brokers who have done reports on this project, using NPV discounted by varying interest rates and metals prices, come up with all kinds of numbers, ranging from $200 million to a billion. (Three firms have done extensive reports in the last month: HKBC, Griffiths McBurney and Union Securities. You should be able to access them on Ivanhoe's website, www.ivanhoemines.com). But they are naturally inclined towards optimism, as almost all brokers reports are; I should hope it's sincere optimism, as they've raised a lot of money for Ivanhoe. The fact is that, as good as the project looks, nobody knows anything for sure until at least the pre-feasibility study is done in about a year, at a cost of perhaps $5 million. The bankable feasibility study will follow in 2004. And, assuming everything goes right, production will start in 2007 at the earliest. I tend towards cynicism about projections on mining projects. I don't recall ever seeing a feasibility study that accurately gauged the costs, foresaw all the problems, plus guessed right on metals prices and interest rates. When the reality is discovered, it's never as good as the projection. So, assuming that we do have at least $14 billion of metal waiting to be sold, what needs to happen? Well, first we'll have to raise some serious capital for a project this size. There's no way it could be less than $400 million, and maybe as much as a billion. That's not easy in the best of times. Nor will be paying the interest on the loan portion of it. Plus a 2.5% royalty (before regular income taxes) to the Mongolian Government, plus a 2% royalty to BHP, from whom the property was purchased. Building the mine won't be a piece of cake, because there's no infrastructure whatsoever within hundreds of miles. That means building a large electric plant, and mining the coal to fire it. Piping in huge quantities of water (every tonne of ore processed requires about a half tonne of new water, not counting what is recycled, and this mine will probably have to run at 100,000 tonnes per day to get adequate economies of scale). Building a crusher, concentrator, and a self-sufficient industrial operation to process 100,000 tonnes of material daily. Plus building a railroad (or else using road trains) to ship out concentrate. It's an intimidating task. That's not to say it isn't done all the time. And I'm sure these problems will be academic, anyway; the name of the tune with a project this size is to flip it to a major. It's just a question of price. Kharmagtai -- I also visited this property, in the flat, cold Gobi, only 120 km (but a three hour drive) north of Oyu Tolgoi. Extensive trenching on the property has uncovered considerable copper mineralization on the surface. More important, the surface results have been confirmed by some drill holes to be even better than those at Oyu Tolgoi, including one hole with 64 meters of 2.49 g/t gold and 1.21% Cu, another with 82 meters of 1.48 g/t Au, and .85% Cu. The potential exists for this property to be as good, or better, than the Oyu Tolgoi. Other Stuff The market gives relatively little weight to IVN's other assets right now, even though those assets were mostly the basis of the company raising scores of millions of dollars in the past. But let's take a look. Tasmania -- Here we have the Savage River, what was a closed-down an iron mine when Robert acquired it personally in 1997, from the government for a deferred payment of A$13 million. It probably cost hundreds of millions to construct; and with at least 20 years of reserves at historic mining rates of about 2 million tonnes per year, no doubt it seemed like a fantastic bargain. Basically free. Since then about US$90 million has
gone into improving it, but it's been a money pit. This would be no more
than an interesting anecdote underlining how risky the mining business
is, except for the fact Robert vended it into IVN for approximately 50
million shares, plus (it appears, but the notes in the financial statements
are obscure) an option for another 30+ million at $0.28). Was the asset
worth that much? These things are hard to determine from the annuals. I
find it off-putting when a note (#4, on pg 18 of the financial statements)
accounts the fair value of the acquisition as totaling $43 million, including
a debit of $21.5 million "due to related parties," and $12.2 million of
"other liabilities," with no further explanation. I absolutely hate reports
that make trying to figure out Who Shot John unnecessarily confusing. One
shouldn't have to be a forensic accountant, a detective, and a semanticist
to understand how a company got to where it is.
Korea -- In August 2002 IVN started production at the Eusan, its small (maximum annual production of 50,000 ounces of gold, and 118,000 ounces of silver) mine in South Korea. This project has limited life, but was placed into production cheaply, is run profitably, and gives the company valuable operating experience, and exploration potential. But it's not a significant asset. Burma -- In a stroke of daring that is one of Robert's fortes, going where nobody else is, he ventured into Burma in 1996 and cut a deal with the generals to develop the S&K copper project at Monywa (apprx. 250 million tonnes of .38% Cu), 50/50 with one of the State mining companies. IVN raised $138 million in capital, including a $90 million loan, to place Monywa in production starting in Nov 1998. Since then the mine has been producing roughly 25,000 tonnes p/a at a cash cost averaging $0.35 a pound, showing profits, and repaying the project debt. It's a successful operation. A much larger deposit nearby, the Leptadaung (over 800 million tonnes of .43% Cu), is slated for production at 125,000 tonnes of cathode p/a, but that will necessitate raising about $800 million in capital. Whether it happens is largely dependant on the copper price; see below. Kazakhstan -- Since 1996, IVN has held 70% (the government holds 30%) of the Bakyrchik Gold Mine in eastern Kazakstan. Once again, what the mine cost to acquire and maintain is obscure from the recent financials, but it's been a highly problematical investment for IVN. Bakyrchik was explored and mined by the Soviets sporadically for the past 40 years, despite the fact it never made money. The good news is that it has a resource of 13.2 million ounces of fairly high grade (6.6 g/t) gold. The bad news is that the vast majority of the ore is extremely complex and refractory, meaning it's probably not worth thinking about mining until at least $400 gold. That, and the Kazak government is not proving easy to deal with. IVN is, nonetheless, putting a pilot plant into production on a small oxide portion of the deposit. The mine has little current value, and actually incurs costs for care and maintenance, but it amounts to a call on gold. When gold turns, IVN will be able to claim a gold reserve north of 10 million ounces from this source alone. Miscellaneous -- There are lots of other things in IVN. A gold exploration property in China, another in Burma. Significant shareholdings in three juniors (Emperor Mines, EMP.ASX, A$0.61; Olympus Pacific, OYM.V, C$0.38; Pacific Minerals, PMZ.V, C$0.90). But, when we're looking at a stock with a market cap of US$400 million, they're all trivial. At this point IVN is trading on its results, past and anticipated, in Mongolia. And on it's Chairman and controlling shareholder, Robert Friedland. But first, a word on copper because, at least right now, Ivanhoe is a copper and iron play, much more than a gold play. Copper I hate to make a guess about the
direction of copper prices, and here's why.
Negative-- While the growth in copper usage will be from China, the vast bulk of consumption is from the West. And if the economy gets anywhere near as bad as I suspect, consumption is going down. And so will prices. On the supply side, the biggest single negative overhanging the copper market is what will happen if the situation in Katanga ever normalizes--- which it will, after things there get desperate enough. We're talking about billions of tonnes of ore, grading up to 10%, with enough cobalt credits to offer negative costs of production. There's a lot more to be said in both directions. I prefer not to have an opinion unless I feel strongly, and I don't. But I do think it's a mistake to build a copper mine in anticipation of higher prices. In fact, I wouldn't want to build one unless I was sure I was going to make money at much lower prices. The brokerage reports I reference all posit their rosy scenarios around $.85 copper, which is entirely possible, but impresses me at a mistake with the metal now trading at $0.76. Robert Assessing whether you should buy the shares of IVN wouldn't be an easy task even if you could guess right on all the variables and unknowables. It becomes much harder yet when you consider Robert Friedland. None of the brokers' reports discuss Robert, other than to retail a brief, and thoroughly inadequate, canned bio. In the Seven P's (see IS XXIII/3 for a definitive discussion), the section on People starts out "This comes first because it's probably more important than all the other elements put together." In the case of any of Robert's companies, you can take that number to about 75%. Robert and I have been friends since abut 1979 and I'm not about to cross over a line between business and friendship. But we have to talk about Robert because, both as a legal matter of shareholding and pure weight of personality, he is the company. This is not to underrate IVN's dozens of first-rate managers and employees. And they actually are first-rate. Early on, Robert's modus operandi became to hire the best people away from the majors. It was smart, and easy. Give them somewhat more money, but a lot more freedom, and lots of stock options. Plus the unique experience of associating with Robert. Which is definitely an attraction. Robert is at once a force of nature, and a Man of the People. He likes to chat up the lowest paid hourly workers, and they love him. At the same time he almost makes it a point to be arrogant, petulant, insulting, and extremely mercurial towards peers and immediate subordinates, which is much less endearing. Although I'm a great believer in insulting people who deserve it, I find Robert entirely too promiscuous in that regard. It's a bad habit that will inevitably come back to bite him at an inconvenient moment. Something to remember about Robert stocks in a bear market. Robert has many virtues to counter these faults, however. He's extraordinarily intelligent, clearly in the top .0001 percentile—although his detractors like to call him an evil genius. He has a first rate memory, and is a sponge for information of any description; so his knowledge of the academic (as opposed to practical) aspects of geology and mining is better than that of many professionals. He's charmingly flamboyant; everyone has heard the story about his taking off his shoe and pounding it on the table like Khrushchev, at the board meeting where he was negotiating the buyout of Diamonfield's Voisey's Bay property with Inco's brain dead management. He's extremely outgoing, and has a great sense of humor, which makes him great company. On the other hand, he feels chronically under appreciated, which tends to make him rather misanthropic. That also has implications for investors. IVN has a market cap of nearly C$600 million. That's huge in this market. It's there because Robert is who he is. At his 50th birthday party a couple years ago I gave a brief speech. I found myself describing him as "the best promoter in the world"; all the other speakers after me did the same. I thought about it later, and was sorry I didn't go further, because a promoter is only a portion of what Robert has the potential to be. It's regrettable he's stuck in that mode, even though he's literally the best in the world at it, the equivalent of Michael Jordan in basketball or Albert Einstein in physics. Even though it's the reason Robert is closing in on being a billionaire, and although it's a perfectly honorable profession, I believe he's very unhappy at being perceived as a promoter. He resents the fact Richard Branson gets to be a "financier," but that he's still a "promoter." That's part of the reason he has just a couple of relatively large companies in his stable, instead of dozens of deals. That's good, since it greatly reduces the chances he'll walk away from IVN. But a "financier" uses mostly his own money for ventures. A "promoter" uses mostly other people's money. One problem he always has to confront is raising money, incessantly. IVN may have $35 million in the bank, but G&A could take $8 million, and exploration another $20-25 million in the next year alone, not counting extraordinary expenses, acquisitions, and operating losses. That means he's got to be constantly thinking about rounding up fresh buyers for stock, or the company is in trouble. That applies constant pressure, making it hard for him to be the affable ex-hippie he once was. I'm glad I don't have to do it. Fortunately Robert is extremely good at it. He builds arguments and tells the story of his deals in such a compelling way that you feel like you have to own the stock. And even if you don't buy the story, you're totally sure everyone else will, taking the stock higher-- so you buy for that reason. Something to remember about Robert stocks in a bull market. Robert owns about 101 million of the 205 million outstanding shares of IVN. That's good insofar as his interests are theoretically aligned with those of the other shareholders. But it also means the board serves strictly at Robert's pleasure. And if anything were to happen to Robert, the question is what would become of the company? And who would want those 101 million shares at anything like the current price? On the other hand, the shares are worth that much now because Robert is who he is. The fact is that Ivanhoe can claim control of upwards of 25 million ounces of gold, and 30+ billion pounds of copper-- which is most impressive for a company with a US$400 million market cap. Could the shares go to C$5, or C$10, or C$30? Absolutely. The last thing you want to do is short Robert. It's just that I always feel… safer… buying his stocks before he's actually on a roll. Notes There's a lot of controversy over just how smart, or stupid, George W. Bush actually is. Although not in this publication. I'm convinced he's actually a person of marginal raw intelligence, fortified by very little general knowledge. My friend Victor Niederhoffer, who actually has a genius level IQ, disagrees. He thinks that because Bush has a Harvard MBA, and graduated in the top half of his class, that is de facto evidence of an IQ north of 130. I would counter that Harvard is notorious for graduating people once they gain admission, and admission can be a highly political process. Entirely apart from the possibilities presented by cheating, grades in school don't necessarily indicate either high or low IQ. Look at Teddy Kennedy, another Harvard man. The Baby Bush would have taken batteries
of intelligence tests throughout his school career, and the results are
still in existence—unless his father, exercising foresight, arranged for
them all to be "misplaced." He should release them, and clear up the controversy.
Then the argument could be productively refocused on his lack of wisdom,
or shallowness of character, or phony moral veneer.
“Technically, a moron is someone who is stupid but looks normal,” said Albert Nerenberg, the film director who is completing a documentary titled Stupidity. “Much has been said recently about Bush arriving at a point where he looks presidential. What’s intriguing about morons is that they can pass as just about anyone, but inside they’re still morons.” The film is being commissioned by the Documentary Channel and the CBC, and features interviews with Noam Chomsky, John Cleese, Bill Maher and former Bush speechwriter David Frum. A trailer for Stupidity can be found at www.trailervision.com. *********************
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Some years ago I got involved in a placer mining deal which paid dividends in gold, not cash. It made all the sense in the world, in that if they sold the gold to pay a cash dividend, they'd have had to pay taxes. By paying in kind, taxes aren't due until the gold is sold. I've long wondered why US majors didn't do the same with their dividends. Not only would it cut down the net tax bill, but it would tend to keep just that much more gold off the market, which further depresses the metal's price. The fact that US mining companies don't pay dividends in specie, but spend money promoting gold as jewelry, instead of treating it like money, is evidence of how brain dead the industry's management is. ******************
"I don't think the US is winning (the war on terror). I don't think so because this is the kind of war that can last for ages." And, of course, he's quite correct. The current so-called War on Terror is really just the latest episode in the what started with the First Crusade in 1096. He goes on to say that Muslims feel "it's not a campaign against terrorists, but against Muslim terrorists." Regarding the root of the problem, Mahathir says: "The Palestinian issue is basic but of course the decision of the US to keep its troops in Saudi Arabia after the Gulf War was the direct cause of bin Laden's actions." My opinion is still that Saudi Arabia will probably see a revolution, and that those troops will be a direct cause of it. Although the US government will, perversely, see them as a cure. *************************************
At the time, many, if not most, Americans felt these were trivial reasons to go to war. If you didn't want your ship confiscated, you shouldn't trade with France; some merchant’s indiscretion shouldn't drag everybody into a war. The enterprising westward moving colonists had many virtues, but respect for the property rights of the Indians who already lived there wasn't among them. The British/Canadians simply wanted to trade for the Indians furs, but the influx of American colonists was destroying the fur trade; of course the Indians wanted to defend themselves. Madison got the Congress to declare war, but couldn't get them to raise taxes to fund it. Today, of course, a declaration of war is an academic exercise, and funding can always be found from somewhere in the Defense Departments $396 billion budget. He then tried to recruit 50,000 citizens to invade and conquer Canada, but only succeeded in garnering an army of 5,000, which was roundly defeated-- but only after they burned the Parliament buildings in Toronto. It was mainly in retribution that the British burned the white House the next year. Their expeditionary force was, however, noted for its good manners, and the fact they didn't damage any private property. Few history books, and none that you'll find in the schools, recount the depth of actual hatred Americans in Washington, DC evidenced towards Madison as the British closed in on the city, since they correctly attributed the pointless war to him. One young lady was noted for stopping her carriage in front of the White House, loosening her very long tresses, and saying "I pray that I may have the privilege of parting with this hair, in order to make a noose for Mr. Madison." I find the story exceptional, because if someone even intimated feeling like that today, they'd be arrested, and charged with any number of crimes. It's known that Dolley Madison was actually afraid that her husband might be lynched by those opposing the war. Also little known is the fact that Dolley had to leave most of her personal possessions in the White House before it was burned simply because she couldn't round up sufficient carriages to carry them away; there was a shortage in DC, since all her neighbors were doing likewise. I think it's charming that, in those days, the perpetrator of a deed could expect to suffer its consequences directly. In today's National Security state, high government officials have legions of servants to whisk them to safety, and spare them even an inconvenience in the process. Perversely, they're the ones least likely to suffer any adverse consequences of their actions Endquote A few more thoughts on the value of "education" from Gibbon and Mencken, both completely accurate, and even understated, in my view. Think about it before investing a bundle to send a kid off to college. " …the power of instruction is seldom
of much efficacy, except in those happy dispositions where it is almost
superfluous."
"The average American college fails...to achieve its ostensible ends.One failure...of the colleges lies in their apparent incompetence to select and train a sufficient body of intelligent teachers. Their choice is commonly limited to second-raters, for a man who really knows a subject is seldom content to spend his lifetime teaching it: he wants to function in a more active and satisfying way, as all other living organisms want to function. There are, of course, occasional exceptions to this rule, but they are very rare, and none of them are to be found in the average college. The pedagogues there incarcerated are all inferior men--men who really know very little about the things they pretend to teach, and are too stupid or too indolent to acquire more. Being taught by them is roughly like being dosed in illness by third-year medical students." HL Mencken, Minority Report, pg 51,
Knopf, 1956
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