VZCZCXRO5661
PP RUEHLMC RUEHVC
DE RUEHUM #0119/01 0540810
ZNR UUUUU ZZH
P 230810Z FEB 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0837
INFO RUEHMO/AMEMBASSY MOSCOW 1693
RUEHBJ/AMEMBASSY BEIJING 5425
RUEHUL/AMEMBASSY SEOUL 2635
RUEHKO/AMEMBASSY TOKYO 2379
RUEHOT/AMEMBASSY OTTAWA 0384
RUEHML/AMEMBASSY MANILA 1302
RUEHLO/AMEMBASSY LONDON 0086
RUEHBY/AMEMBASSY CANBERRA 0097
RUEHVC/AMCONSUL VANCOUVER 0036
RUEATRS/DEPT OF TREASURY WASHDC
RUCPODC/USDOC WASHDC 1192
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0473
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC

UNCLAS SECTION 01 OF 06 ULAANBAATAR 000119 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR, USTDA, OPIC, AND EXIMBANK 
STATE FOR EAP/CM AND EB/IFD/OIA 
USAID FOR ANE FOR D. WINSTON 
MANILA AND LONDON FOR ADB, EBRD USEDS 
TREASURY FOR USEDS TO IMF, WORLD BANK 
 
E.O. 12958: N/A 
TAGS: EINV PREL ETRD EMIN ENRG MG
SUBJECT: Part 1 of 2: Investment Climate in Mongolia's Mining Sector 
Deteriorated Sharply in 2006 
 
Ref: (A) 06 Ulaanbaatar 773, (B) 06 Ulaanbaatar 875 
 
Sensitive But Unclassified - Not for Internet Distribution. CAUTION: 
Contains proprietary and confidential business information 
 
¶1. (SBU) SUMMARY:  Nationalist and populist politics on mineral 
resources have led to a sharp deterioration of the investment 
climate in the mining industry over the last year.  With support 
from both major political parties, the legislature abruptly passed a 
confiscatory Windfall Profits Tax on copper and gold last May, and 
enacted a major revision in July to what here-to-fore had been 
hailed as a model, investor-friendly Mining Law.  Foreign and 
domestic miners recently took the unusual step of publicly airing a 
long litany of problems they have encountered since passage of the 
new law.  Moreover, the new law provides the government the legal 
right to "take" between 34-50% of large mines, representing a major 
conceptual reversal from what had been an ever-shrinking state share 
since 1990 in the market economy.  Based on the first negotiation on 
a new mining investment, it seems that the state would like to pay 
nothing at all for its mining stakes, a stance which will make 
commercially sensible deals difficult or impossible for some 
prospective investors.  In our second cable in this series, we 
describe the U.S. stake in Mongolia's mineral development.  END 
SUMMARY. 
 
Mining Politics: Nationalism and Populism 
----------------------------------------- 
 
¶2. (SBU) Mining is the core topic of discussion among the Mongolian 
public and political classes with respect to future prospects for 
Mongolia's economic development.  While tourism and agriculture have 
also done well in recent years, the reality is that over 90% of 
Mongolia's exports last year were minerals, a share which has risen 
sharply (against an admittedly small base) in recent years as 
commodity prices have hit record highs and a few new mines have come 
on stream.  For better or for worse, Mongolia's future development 
will largely depend on extraction and processing of its rich mineral 
resources.  On the one hand, the Mongolian public writ large accepts 
this need to develop its mines and wants responsible mining to 
occur.  In practical terms, "responsible" means: (a) royalties and 
taxes paid; (b) the best environmental and reclamation practices 
used; (c) Mongolians trained and employed; and (d) downstream 
processing capacity (meaning more value added for Mongolia) for 
mineral and hydrocarbon resources developed.  Most of post's 
interlocutors would recognize that the best way to obtain these 
results is to work with the best commercial operators, who happen to 
be largely from the West. 
 
¶3. (SBU) On the other hand, these same interlocutors -- from 80-year 
old grandmothers to the westernized business people -- believe that 
Mongolia is being robbed of its resources by rapacious miners bent 
on selling its treasures to China without Mongolia getting its fair 
share of the benefits.  The visceral dislike of almost all 
Mongolians for China complicates the politics of mining, since 
Mongolian's booming neighbor to the south is the obvious customer 
for the most of the minerals, and an intensely interested potential 
investor.  A popularized image of this rape of Mongolia is the 
Chinese-operated Tumurtiin Ovoo zinc mine in Mongolia's south east. 
The mine is a joint venture company (JVC) between a Chinese state 
owned enterprise (SOE) (49%) and the GOM (51%), where mostly Chinese 
laborers work.  There seems to have been no attempt to protect or 
environmentally reclaim any of the land so far, and the state, aimag 
(province) or soum (county) appear to be getting little revenue. 
The mine operators have reputedly refused to provide any support to 
the local soum or country.  An extra irritant: China's flag flies 
over the mine site. 
 
¶4. (SBU) Sensationalized, true, or somewhere in-between, politicians 
from all parties have increasingly criticized perceived "poor" 
mining, demanding that Mongolia get its fair share.  A proliferating 
 
ULAANBAATA 00000119  002 OF 006 
 
 
set of relatively small new civil society movements have often 
further pushed the public discussion of the issue in nationalist 
directions -- even though the movements seem to muster at most 300 
adherents for rallies.  Those politicians who do not agree with the 
nationalist tenor of debate and legislation on the mining sector 
find it politically unwise to voice such reservations in public. 
Privately, members of the minority Democratic Party (DP) and the 
ruling Mongolian People's Revolutionary Party (MPRP) assure post 
that their respective parties have no deep-seated antagonism against 
mining as such.  Indeed, they say they would love to have American 
firms lead the way for Mongolia's mining sector, but opine that 
Mongolian public needs, rather than shared commercial returns and 
risks, must be considered first. 
 
¶5. (SBU) This d%gMQ 
\ is the 
ongoing negotiation between the government and Ivanhoe/Rio Tinto 
(RT) on the copper-gold prospect at Oyu Tolgoi.  Rio Tinto-Ivanhoe 
officials have told CommOff that negotiations are hung up on the 
GOM's instance that it must receive its 34% share as a "free carry," 
with no exemptions on taxes, fees, other requirements to compensate 
the commercial miner for giving up the slice.  RT's rep suggests the 
state has painted itself into a political corner: The GOM must claim 
that it stuck it to the foreign investors, or risk being savaged by 
its political opponents as selling out Mongolia.  RT wonders if the 
state can negotiate in good faith, burdened as it is with this 
threat of political annihilation.  Nevertheless, Ivanhoe is under 
considerable pressure to reach a deal, having spent $400 million on 
OT so far, but needing a further $1 billion it doesn't have and 
three years before any minerals are produced.  In its deal with 
Ivanhoe last October, Rio Tinto left itself a conspicuous out, with 
a large additional investment in Ivanhoe contingent on striking a 
satisfactory deal with the Mongolian government on Oyu Tolgoi. 
 
Text of Miners' Letter of Complaint 
----------------------------------- 
 
¶16. (U) Begin text of MNMA/MMDF letter: 
 
Mr. Ts. Nyamdorj, Chairman of the State Great Hural 
 
Although it has not been a long time since the adoption of the 
Minerals Law, lately, our economic entities and organizations have 
been continuously filing complaints and vehemently expressing 
concerns with respect to the unlawful actions of the relevant 
Ministry (of Industry and Trade), its Agencies and local 
administrative organizations from the first day of effect of that 
Law.  In summary, complaints include the unjustified use of improper 
pressures beyond legal jurisdiction, arbitrary judgments, decisions 
being delayed without any grounds and bureaucratic, preferential 
treatment.  This is resulting in the emergence of an environment 
conducive to corruption and bribery. 
 
Indicative complaints are: 
 
¶1. Exceptionally slow progress to renew licenses to special permit 
certificates and many are not being renewed without clear legal 
grounds.  In some cases Cadastral Office officials are explaining to 
the license holders that the refusal for the renewal of licenses is 
on the basis of a verbal decision of the Minister for Trade and 
Industry; 
 
¶2. License transfer applications for some entities have had to wait 
for 6 months, instead of 5 days, as prescribed by the Law.  That 
type of practice is continuing as of this date; 
 
ULAANBAATA 00000119  003 OF 006 
 
 
out the non-discretionary obligations required of both the GOM 
regulators and the miners. 
 
¶10. (SBU) The new minerals law substantially changed the regulatory 
environment for mining investments, drastically altering the process 
and timelines for regulatory steps.  It also featured the vaguely 
defined concept of a "strategically important deposit," in which the 
Government of Mongolia has claims a right to obtain up to a 50% 
share of any mine explored with state funds and up to 34% of 
deposits explored with private funds.  The amended law defines a 
"mineral deposit of strategic importance" as "a mineral 
concentration where it is possible to maintain production that has a 
potential impact on national security, economic and social 
development of the country at national and regional levels or 
deposits which are producing or have potential of producing above 5% 
of total GDP per year."  Ultimately, the power to determine what is 
or is not a strategic deposit is finally vested in the SGH, which 
has the authority to name, and therefore take a share, of any 
deposit it wants.  In February, the SGH ratified an initial list of 
17 "strategic deposits," which contained both Oyu Tolgoi and Tavan 
Tolgoi, the two largest commercially exploitable deposits currently 
under consideration for development.  The GOM had asked the 
parliament to designate 49 deposits as "strategic." 
 
Miners Object to Abuses After New Law 
------------------------------------- 
 
¶11. (SBU) The new mining law has created two different sets of 
problems.  The first is that the GOM has extended new legal 
discretionary powers to itself in regard to the conduct of mining, 
but has not attempted to balance these powers to prevent abuses. 
The actions of recently dismissed Minister of Industry and Trade 
Jargalsaikhan demonstrate this key weakness.  The former minister 
ordered, without any legal basis, that all licensing be halted.  The 
law provided no check on this improper order.  There was and is no 
intervening government agency or authority to review and sign off on 
the decisions of this ministry, the MRPAM or of the countless 
provincial and municipal regimes that have a say over mining.  There 
is no formal process to even appeal the decision to the Cabinet or 
the Prime Minister, and Cabinet discipline is conspicuously absent. 
To all accounts, on the rare occasions Prime Minister Enkhbold 
sought to order Jargalsaikhan to do anything on any subject, the 
minister flatly rejected the PM's requests.  As a result, the only 
miners had in response to abuses is a lengthy and problematic 
recourse to Mongolia's courts. 
 
¶12. (SBU) Throwing off what had been a deep reticence to speak 
publicly about industry problems, miners recently sent a letter of 
complaint about the implementation of the new mining law sent to the 
SGH Speaker and Prime Minister (full text of the letter in final 
para).  Widely publicized, this letter summarizes and frankly 
conveys the industry's collective "pull-no-punches" view of the 
situation: "In summary, complaints include the unjustified use of 
improper pressures beyond legal jurisdiction, arbitrary judgments, 
decisions being delayed without any grounds and bureaucratic, 
preferential treatment.  This is resulting in the emergence of an 
environment conducive to corruption and bribery." 
 
¶13.  (SBU) The letter was sent by The Mongolian National Mining 
Association (MNMA) and its foreign funded think tank, the Mongolian 
Mining Development Foundation (MMDF), which represent the interests 
of the largest foreign and domestic mining firms in Mongolia.  With 
the letter being the first salvo, the MNMA/MMDF has embarked on an 
aggressive program, which in words of the MMDF Executive Director is 
intended to "claw back from the hands of the politicians the mining 
environment." 
 
Mines for Free 
-------------- 
 
 
ULAANBAATA 00000119  004 OF 006 
 
 
¶14.  (SBU) The other problem created by the new mining law is the 
prospect of the state taking equity stakes in key mines, a step 
which represents a major retreat from the privatization of assets 
since the advent of the market economy in 1990, but which is 
endorsed by both of Mongolia's major political parties.  There is no 
explanation so far regarding how the GOM plans to pay for its share 
of the substantial mine cost and investments needed to produce a 
working mine.  The MPRP-led Cabinet has created a government holding 
company to administer and control all the returns from mining, which 
it promises will go to the people.  DP Party Chief Elbegdorj has 
stated that Mongolians must be given stock or regular payouts.  To 
some, the new law does not go far enough.  Just before Tsagaan Sar, 
President Enkhbayar called for changed the Minerals Law so that the 
state can take more than 50% of Tavan Tolgoi, and thus allegedly 
bring even more benefits to the people.  In addition, the President 
said, the state should take the maximum it can on any and all 
deposits. 
 
¶15. (SBU) A real question exists as to whether foreign mining 
companies can any time soon strike commercially viable agreements 
with the government on mining investments.  The first test is the 
ongoing negotiation between the government and Ivanhoe/Rio Tinto 
(RT) on the copper-gold prospect at Oyu Tolgoi.  Rio Tinto-Ivanhoe 
officials have told CommOff that negotiations are hung up on the 
GOM's instance that it must receive its 34% share as a "free carry," 
with no exemptions on taxes, fees, other requirements to compensate 
the commercial miner for giving up the slice.  RT's rep suggests the 
state has painted itself into a political corner: The GOM must claim 
that it stuck it to the foreign investors, or risk being savaged by 
its political opponents as selling out Mongolia.  RT wonders if the 
state can negotiate in good faith, burdened as it is with this 
threat of political annihilation.  Nevertheless, Ivanhoe is under 
considerable pressure to reach a deal, having spent $400 million on 
OT so far, but needing a further $1 billion it doesn't have and 
three years before any minerals are produced.  In its deal with 
Ivanhoe last October, Rio Tinto left itself a conspicuous out, with 
a large additional investment in Ivanhoe contingent on striking a 
satisfactory deal with the Mongolian government on Oyu Tolgoi. 
 
Text of Miners' Letter of Complaint 
----------------------------------- 
 
¶16. (U) Begin text of MNMA/MMDF letter: 
 
Mr. Ts. Nyamdorj, Chairman of the State Great Hural 
 
Although it has not been a long time since the adoption of the 
Minerals Law, lately, our economic entities and organizations have 
been continuously filing complaints and vehemently expressing 
concerns with respect to the unlawful actions of the relevant 
Ministry (of Industry and Trade), its Agencies and local 
administrative organizations from the first day of effect of that 
Law.  In summary, complaints include the unjustified use of improper 
pressures beyond legal jurisdiction, arbitrary judgments, decisions 
being delayed without any grounds and bureaucratic, preferential 
treatment.  This is resulting in the emergence of an environment 
conducive to corruption and bribery. 
 
Indicative complaints are: 
 
¶1. Exceptionally slow progress to renew licenses to special permit 
certificates and many are not being renewed without clear legal 
grounds.  In some cases Cadastral Office officials are explaining to 
the license holders that the refusal for the renewal of licenses is 
on the basis of a verbal decision of the Minister for Trade and 
Industry; 
 
¶2. License transfer applications for some entities have had to wait 
for 6 months, instead of 5 days, as prescribed by the Law.  That 
type of practice is continuing as of this date; 
 
ULAANBAATA 00000119  005 OF 006 
 
 
 
¶3. Whilst in the process of the re-registration, some licenses were 
not renewed because of the historical late license fee payments in 
previous years; 
 
¶4. In addition, there have been illegal demands to present a tax 
clearance certificate from the Taxation Authority; 
 
¶5. Coordinates of the areas were altered during the re-registration 
process. 
 
¶6. The Minerals and Petroleum Authority of Mongolia (MRPAM) is 
refusing to conclude Confidentiality Agreements, as specified in the 
Law; 
 
¶7. It has become impossible to get approved environmental and 
geological survey plans by the relevant authorities within 30 days, 
as provided for in the Law, because of the delay of issuing 
certificates for new licenses by the MRPAM.  Meanwhile, the State 
Professional Supervision Authority and district Governor's Offices 
impose huge penalties and fines for these delays in the approval of 
the plans; 
 
¶8. It has become customary for Soum and Aimag Governors to place 
pressure and to be unsupportive to the applicants' re-registration, 
unless the applicants satisfy their demand for huge donations and 
grants.  For instance, you are asked to pay 250,000 MNT per license 
for support by Dornod Aimag, and Khovd Aimag imposes a 20 MNT per 
hectare "donation"; 
 
¶9. It is becoming common procedure for Aimag and local state 
institutions to abuse their power and designate large areas for 
exclusive local needs.  They are then using this as leverage for 
obtaining unjustified and illegal payments, donations, grants, and 
eventually bribery; 
 
¶10. Soum and Aimag governors do not reimburse environmental 
reclamation deposits when the area has undergone environmental 
reclamation and is returned with full certification; 
 
¶10. In addition, the Cadastral Office of the Minerals and Oil 
Authority acts slowly with regard to its official duties, such as an 
extension of license; partial return; registration of payment as 
required by the Law.  In fact the Ministry of Trade and Industry has 
not developed or approved Regulations to the Law, which creates an 
extremely difficult situation for entities to function normally and 
in accordance with the requirements of the Law. 
 
The above mentioned complaints are just a few examples of the 
illegitimate actions of the minerals sector and are a clear 
demonstration of the distortions and deviations from the principles 
of transparency of State activities. 
 
These illegitimate actions impact upon Mongolia's international 
image and reputation and create uncertainty and doubts amongst 
foreign investors regarding future investment in our country. 
 
Therefore, I earnestly request you to terminate those illegitimate 
actions of the State government institutions and local 
administrative organizations by urgently setting up a Joint Working 
Group of relevant Standing Committees.  I request you to execute the 
monitoring duty bestowed by the Law of the State Great Hural, in 
order to facilitate an opportunity for the consistent implementation 
and enforcement of Laws and Regulations of Mongolia. 
 
Respectfully, 
 
 
¶D. Ganbold 
President 
 
ULAANBAATA 00000119  006 OF 006 
 
 
 
CC: 
Chairman of the Standing Committee for Economic affairs; 
Chairman of the Standing Committee for Legal Affairs; 
Chairman of the Standing Committee for State Structure 
 
Copy to: 
Embassy: the USA, Germany, Japan, PRC, Great Britain, Russian 
Federation 
 
End text of letter 
 
Goldbeck