| "I'll make
a note."
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.
Mongolia
also serves to debunk the essence of politically correct ecology arguments.
Which is to say that the world would be wealthier, and generally better
off, with lots of undeveloped resources, lots of open space, and very few
people. Of course we'd all like the world to be nothing but a big nature
park for the personal amusement of ourselves and a few friends. But it's
easy to forget the standard of living would quickly regress to medieval
levels as a result. Mongolia has enough open space for Ralph Nader and
Barry Commoner to get lost and die in, and immense natural resources to
be shared among only 2.7 million well-educated people. But the place is
desperately poor.
I love birds
and bunnies as much as the next person-- probably more-- but, philosophically,
I'm all for paving the planet. There are billions more planets where this
one came from, and the answer is to develop the technology to go out and
get them. A first step to doing so (certainly for a poor country) is to
go out and play in the dirt. And placer mining is an easy way to get started
in that activity.
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.
The MSE is
not really a venue for raising capital; the word "stock" here is usually
proceeded by the word "live." Some of these companies may offer value,
but it's impractical to try to invest in them from outside the country--
even if information was available. Which it's not.
In any event,
excepting special situations, all the world’s stock markets tend to
move more-or-less together. And I see them all moving down significantly
over the next few years. Obscure markets like this one can actually get
some interest during boom times; a few speculators with spare cash may
decide to take a look. But when the going gets rough, places like this
get tossed off the troika without a thought; people have too much going
on in the real world to clutter their minds with what amounts to trivia.
Still, I regret
missing an opportunity to check out something weird; I'll redouble my efforts
next time.
A discussion
of Mongolia can be considered complete with a reference to its stock exchange.
But not, I think, without a few words about Genghis Khan.
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.
The
Mongol armies were ideal fighting machines for the time. If Genghis Khan
had come on the scene 200 years later, however, he wouldn't have succeeded,
because the world had learned to use gunpowder effectively.
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.
In any event,
the iron pellets Savage River markets now go for about $27 a tonne, a price
where it appears they lose money; if they go up significantly, no problem.
But, as a bear on the world economy, I don't see it.
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.
Positives--As
I've pointed out several times in the past, just to replace current copper
usage, we have to find x mines of x billion pounds of contained copper
yearly. And it just isn't happening. Demand is likely to continue growing
simply because China alone, not to mention India and other Third world
countries that are on the runway, will be building millions of cars, houses,
and air conditioners for many years to come, regardless of economic conditions
in the West.
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.
Recently a
high-ranking Canadian federal official characterized Bush as “a moron.”
for his hard-line stance on Iraq at the current NATO meeting in Prague.
Canadian stupidity experts now say that may be a correct assessment.
“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.
I've always
had plenty to say about the accelerating collapse of personal freedoms
in the US. Relatively few people seem to care, even if they're aware of
it. It's literally one thing after another; the only safeguard left is
the government's innate inertia and stupidity. So I was gratified to see
the editorial William Safire wrote about the Defense Department’s “Total
Information Awareness” project on Nov 14. It's excellent, and much
scarier than anything Stephen King has done. I urge you to go to www.dougcasey.com,
and read it under the Hot Topic section.
Here's a shock.
Russia's Norilsk Nickel is buying a 51% interest in Stillwater Mining (SWC,
US$5.58), at $7.50 a share, and is paying for it with $100 million in cash,
plus 876,000 ounce of palladium, worth another $241 million. I find this
interesting from several points of view. First, is that Russians are buying
a US public company, putting the shoe on the other foot. Second, is that
they're doing so mostly with the metal, not cash.
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.
The Australian
is that country's leading newspaper; it's not great, but I read it when
I'm in Oz. They did however, publish (Nov 24) most of an original interview
they conducted with Malaysia's PM, Mahathir Mohammed, which was quite interesting
and, I suspect, not widely reported elsewhere. As you know (see IS x and
xx), I'm no fan of the man, but I think his views here reflect those of
most Muslims. As such, they are worth drawing to your attention.
"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.
It's funny
how things change, and how they stay the same. I refer to the War of 1812
in some of its aspects. James Madison pumped for a declaration of war against
the British for two main reasons: First, they were seizing American
ships bound for French ports, and occasionally conscripting Americans
born in Britain. Second, they weren't preventing traders in Canada from
selling guns to Indians, who sometimes killed Americans.
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."
Edward Gibbon,
Decline and Fall of the Roman Empire, Chapter 4
"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 |
