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A Trump-Kim Summit Could Unfreeze Mining Riches on the Korean Border UN sanctions have hurt minerals businesses where China meets North Korea. The talks could change that.

A Trump-Kim Summit Could Unfreeze Mining Riches on the Korean Border
UN sanctions have hurt minerals businesses where China meets North Korea. The talks could change that.

By Dexter Roberts | March 14, 2018
From Bloomberg Businessweek

Sun Hongtao, the youthful-looking president of Sino-Mining International Ltd., is in a funk, sitting in a cold, empty office in the Chinese town of Changbai in Jilin province. Two miles from where he sits, across the border in North Korea, is the huge Hyesan Youth Copper Mine. Sun’s company has invested more than $123 million in upgrading equipment at the mine with the aim of tapping its rich reserves. But for more than a year, because of United Nations sanctions imposed in 2016 targeting North Korean minerals, all production at the mine has stopped. “What can we do?” Sun asks. “We can’t just leave all our equipment and the money we’ve invested behind in North Korea.”

President Trump and North Korea’s Kim Jong Un are considering holding what would be an unprecedented summit meeting. A critical goal for North Korea is ending economic sanctions imposed to punish the country for developing nuclear weapons. An end to sanctions would transform the largely dormant 880-mile-long China-North Korea border. Towns such as Changbai could become key players in a huge new mineral business. They could also host trade in textiles, shoes, and other light goods, lifting North Korea’s economic prospects and helping integrate the country into the world. “These border towns are the main channels supplying the North Korean economy,” says Kim Byung-Yeon, an economics expert on North Korea at Seoul National University in Seoul. “They have great potential for development.”

Changbai is surprisingly quiet. There are few cars on the road that runs along the Yalu River, which marks the border with North Korea, and the town has a sleepy feel. A red-and-gold banner warns against taking photographs of China’s impoverished neighbor and other “provocative behavior.” Bundled up against the cold and watched over by a North Korean soldier, North Korean women wash clothes through a hole broken in the river ice. Behind them is Hyesan, a city marked by dilapidated, one-story houses surrounded by wooden fences and dirt roads. Taller buildings that appear in better condition are maintained only because they face China, says Li Jianhua, a former cross-border lumber trader. On a hill sits a huge statue of a North Korean flag, with replicas of soldiers at its base, commemorating a victory against the Japanese in 1937.

Only two trucks cross the border bridge, which extends for 148 meters (486 feet) across the river, on a recent afternoon in early March. Chinese traders drive little mechanized pallet vehicles carrying bananas and oranges into North Korea, with food imports still allowed under the raft of UN and U.S. sanctions. A shop in Changbai sells banned-in-China bottles of liquor made with tiger bone, as well as North Korean cigarettes—the brand favored by Kim Jong Un, the female clerk says. Outside the Chinese customs office in town, a sign in Korean and Chinese admonishes: “Warning: Sheltering those who illegally cross the border and trafficking women and children is strictly forbidden.”

Across the river in Hyesan, unemployment is high and methamphetamine addiction is common, the former lumber trader says. In recent years as much as 90 percent of North Korea’s households have survived outside the collapsing state economy by buying and selling everything from smuggled DVDs of South Korean soap operas to Chinese-made rice cookers in small private markets, says Kim, the economist. But with the export of key minerals such as copper and iron stopped by sanctions, the country’s foreign exchange reserves are shrinking. “The economy survives through its trade with China,” he says. The sanctions “have hit the Achilles’ heel of North Korea.”

Less than a decade ago, the prospects of North Korea’s mineral industry appeared to be improving. The country’s rich reserves of gold, copper, zinc, coal, magnesite, and molybdenite (estimated to be worth as much as $6 trillion) lured big Chinese companies. China Minmetals, Liaoning Machinery Group Holding, and Tangshan Iron & Steel Group invested billions of dollars in equipment and infrastructure to modernize mines and ensure more regular power supplies, according to the Open Source Center of the CIA. These companies usually accepted promises from their North Korean state-owned partners of eventual payment in resources rather than cash. By 2011, Chinese companies made up three-quarters of the more than 350 joint ventures operating in North Korea, with the majority in mineral extraction.

In September 2011, Wanxiang Resources, part of the Hangzhou, Zhejiang-based private auto parts giant Wanxiang Group Corp. and parent company of Sino-Mining, held a ceremony with North Korean officials in Hyesan to celebrate the start of mining operations. With an estimated 250,000 tons of reserves, the Hyesan mine is the largest copper mine in North Korea; the plan was for it to produce 2,000 tons a day, all of it going to China, Wanxiang Resources announced. The deal was a sign North Korea was “becoming more open,” said Wanxiang Group founder Lu Guanqiu in an interview several months after the ceremony. “North Korea is a great commercial opportunity for us,” said John Zhang, then chief investment officer at Wanxiang Resources, in the same interview.

Wanxiang Group, which has invested in dozens of U.S. auto-related companies, including an electric vehicle maker and a lithium ion battery maker, earlier sold its holdings in Sino-Mining because it was worried about blowback from doing business in North Korea, Sun says. A recent bond filing by Wanxiang says it still has a relationship with Sino-Mining through a “close family member.” Wanxiang, which confirms it sold Sino-Mining before 2015, says it can’t comment on the mining company’s present ownership.

Since the clampdown on the mineral trade, Sun has reduced his staff from about 60 people to only two in Changbai—a nervous, chain-smoking office manager and his assistant. Sun, who visits for a few days each month from company headquarters in Shanghai, says he comes “to make sure my employees here are OK.” On his desk are a half-dozen bags of edible tree fungus, a local specialty, which he will take back to Shanghai for gifts.

If the Trump-Kim talks take place, and if they are successful (two huge “ifs”), Changbai will be well positioned to benefit. Local officials have already built infrastructure for a newly restarted mineral trade, including an economic zone directly across from the border crossing, with office buildings for mining development companies. An almost 5,000-meter-long tunnel through a nearby mountain connects the town with a network of provincial highways and railways. Sino-Mining has installed much of the equipment necessary to quickly start digging copper ore from Hyesan. Still, Sun isn’t getting his hopes up. “Who knows if Kim will ever really be willing to give up his nuclear weapons,” he says. “For now, I just wait.”

—With Michael Smith and Dandan Li


BOTTOM LINE - With infrastructure in place, mining in Changbai, China, on the North Korean border, is well positioned to take off if there are successful talks between Kim and Trump.