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FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0547
INFO RUEHMO/AMEMBASSY MOSCOW 1623
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RUEHUL/AMEMBASSY SEOUL 2531
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RUEHDN/AMCONSUL SYDNEY 0021
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RUEATRS/DEPT OF TREASURY WASHDC
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RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0395

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000832 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS DOC/FLAVIN/ AND ITA, USTR, USTDA, OPIC, AND EXIMBANK 
STATE FOR EAP/CM, EB/TPP, OES/IHA 
USAID FOR ANE CALISTA DOWNEY 
 
E.O. 12958: N/A 
TAGS: EINV PREL ETRD EMIN ENRG MG
SUBJECT: U.S.-Based Peabody Moves Toward Coal Investments With USG 
Help 
 
 
Sensitive But Unclassified - Not for Internet Distribution. 
CAUTION--Contains proprietary business information. 
 
¶1. (SBU) SUMMARY AND COMMENT: A Department of Commerce advocacy 
letter, and post-arranged meetings with senior Mongolian officials, 
have boosted the efforts of U.S.-coal mining giant Peabody Energy to 
be involved in development of a 6.5 billion ton coal deposit.  Last 
week, Peabody's China-based officials met with senior Mongolian 
officials -- including the President, Speaker and Prime Minister -- 
who all reacted very positively to a possible role for the firm. 
There are several international companies interested in a piece of 
the Tavan Tolgoi coal deposit, and China and Russia have applied 
political pressure to get their firms in on the expected consortium. 
 Peabody would bring strong technical and financial advantages to a 
consortium, but it also will win major points for its U.S. origin. 
Mongolia's "third neighbor" policy of developing strong links with 
outsiders, and especially the U.S., exists precisely so Mongolia 
will not be at the mercy of its two huge neighbors. 
 
¶2. (SBU)  However, the way forward is far from clear.  Lack of 
infrastructure will require large investments, and politics as well 
as commercial factors will cause sharp maneuvering over the 
consortium.  Moreover, populist amendments passed this summer to the 
minerals law will allow the government a 50% equity share in the 
mine, but it remains unclear whether the government would fairly pay 
for such a stake or ante up its share of development expenses. 
Wrong answers may cause international investors, including Peabody, 
to lose interest in major mining projects in Mongolia.  END SUMMARY 
AND COMMENT. 
 
Bringing Peabody to Mongolia 
---------------------------- 
 
¶3. (SBU) Peabody Energy has been coming to Mongolia off and on for 
nearly two years, but it has intensified its efforts in the last six 
months. Peabody is particularly interested in the superb 6.5 billion 
ton metallurgical (coking coal) and thermal coal deposit at the 
South Gobi site of Tavan Tolgoi (TT). Mining licenses for the Tavan 
Tolgoi are held by a group of Mongolian investors -- many of them 
politicians or politically well-connected -- joined together as 
"Energy Resources."  To gain access to TT's coal, Peabody will have 
to be invited to join the consortium Energy Resources is putting 
together to provide the capital and expertise to develop the 
project, then have the consortium be successful in passing 
government hurdles (more on the latter below).  While Energy 
Resources has not yet shown its cards on the consortium, Peabody's 
discussions with it and individual Mongolian investors have been 
very positive. 
 
¶4. (U) In August, Peabody applied to the Department of Commerce's 
Advocacy Center for USG advocacy support for the Tavan Tolgoi 
project, a request which was granted.  This allowed post to move 
beyond the advisory role previously played.  Post worked with the 
Department of Commerce's Advocacy Center to obtain a letter of 
support for Peabody from Commerce Under Secretary for International 
Trade Frank Lavin.  U/S Lavin wrote separate letters to the 
Ministers of Industry and Trade, Nature and Environment, and 
Finance, all of which have joint statutory authority to negotiate 
investment agreements between Mongolia and mining firms.  Copies of 
these letters were sent under cover of an ambassadorial letter to 
the President, Prime Minister, and Speaker. Post would like to 
extend a special thanks to the Advocacy Center team for its support 
on this project. 
 
¶5. (U) From November 6-9, senior officials of Peabody's China office 
visited Mongolia for meetings with government officials and Energy 
Resources investors.  Because of the top-down and politically-driven 
nature of Mongolian decision making, and the flux this year on 
mining policy issues, post advised Peabody that any major entrant 
needed to start at the top and then work down through the 
bureaucracy.   Consequently, we arranged meetings with the most 
senior figures in the Mongolian government and political arenas. 
The meeting requests generally met little resistance; in fact, Prime 
Minister Enkhbold's foreign policy advisor, hearing that Peabody 
would be in town, contacted us to ask for a meeting.  In addition to 
 
ULAANBAATA 00000832  002 OF 002 
 
 
the PM, the Peabody officials (usually accompanied by the 
Ambassador) met with:  President Enkhbayar; Speaker Nyamdorj; 
Minister of Industry and Trade Jargalsaikhan; Democratic Party head 
Ts. Elbegdorj; Democratic MP and Chair of Standing Committee for 
 
SIPDIS 
Defense and Foreign Affairs Gonchigdorj; former President Ochirbat; 
and former President Bagabandi. 
 
¶6.  (SBU) The meetings began with a brief introduction by the 
Ambassador, in which he stated USG support for Peabody's coming to 
Mongolia and possible investment in Tavan Tolgoi, and noted the 
firm's outstanding record in the U.S. and elsewhere.  The Peabody 
officials introduced the firm and provided briefing materials in 
English and Mongolian.  The response of Mongolian officials was very 
positive at all the meetings.  All officials expressed hope that 
Peabody would find Mongolia a good place to conduct business.  In 
comments echoed by other officials, Speaker Nyamdorj: advised 
Peabody to know and abide by local laws, including the newly-amended 
mining law; use a local office to reach out to a wide range of 
politicians and government officials to establish bona fides; and 
not just mine coal, but add value in Mongolia in order to increase 
jobs and new technology.  (Note: Peabody is in the process of 
establishing a local representative office.  Peabody tells us they 
are willing to consider these approaches if they make commercial 
sense, a point post has passed on to the GOM and private firms.) 
 
 
The Promise and Perils of the Mongolian Coal to Peabody 
--------------------------------------------- ---------- 
 
¶7.  (SBU) While TT's geographic proximity to resource hungry Chinese 
market is alluring, development of the coal deposit, and Peabody's 
possible investment, face a number of severe hurdles.  First, 
virtually all mine sites lack infrastructure, requiring large 
capital investments to develop the mine and get the coal (or 
coal-produced electricity) to customers in China.  Second, Mongolia 
is facing strong political pressure from both its neighbors (Russia 
and China) to have their firms cut in on development of TT. 
Pressure from China, the presumptive customer of the coal or 
electricity from TT, is particularly problematic.  Peabody has 
established a good working relationship with Shenhua, the Chinese 
firm with PRC government support to be involved in developing TT. 
There are at least 14 international firms pursuing some role in TT, 
including Japanese firm Mitsui and Australian firm BHP Billiton. 
The GOM is reportedly floating the idea of an international 
consortium composed of the GOM, the Mongolian rights holders, 
Peabody (or another western firm), a Chinese firm, and a Russian 
company. Peabody has told us that they accept such an idea in 
concept and are basically interested in running the mine, and maybe 
a mine-mouth power plant, if the project has a clear commercial 
basis. 
 
¶8.  (SBU) In addition, TT's prospective development will take place 
in a troubled political environment.  Civil movements have alleged 
widespread corruption in the awarding of exploration and mining 
licenses for much of Mongolia in the last few years, and questioned 
why foreigners should be allowed to profit from Mongolia's resources 
while many Mongolians remain poor and jobless.  Populist pressures 
-- and populist sentiment among MPs themselves -- led to a windfall 
profits tax on copper and gold in May, and significant amendments to 
the minerals law in July.  The new law allows the GOM to claim up to 
50% of mining assets classified as "strategic deposits" (a list is 
pending approval by Parliament, and is expected to include TT) which 
were explored with state funds and 34% of assets of such deposits if 
they were explored with private funds.  Tavan Tolgoi falls into the 
50% category.  The GOM has not explained what the right to take 
state equity will mean in practice:  Will the government pay a fair 
market value for its share?  Will it contribute to capital needs to 
develop the mine?  What role will it have in management of the mine? 
 At this point, the answers to these questions are unknown as 
regulations are developed.  Unsatisfactory answers to these 
questions may make TT and other "strategic deposits" e commercially 
unattractive to companies like Peabody that would be expected to 
invest significant money. 
 
MINTON