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UNCLAS SECTION 01 OF 03 ULAANBAATAR 000123 
 
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 2 of 2: The U.S. Stake in Developing Mongolia's 
Minerals 
 
REF:  Ulaanbaatar 0119 
 
Sensitive But Unclassified - Not for Internet Distribution. Contains 
proprietary and confidential business information 
 
¶1. (SBU) SUMMARY: In reftel, we described the sharply deteriorating 
investment climate for mining over the last year.  Post recommends 
raising many of those problems during the forthcoming Trade and 
Investment Framework Agreement (TIFA) talks, because the U.S. has a 
major stake in ensuring a favorable business climate for development 
of and access by U.S. firms to Mongolia's mineral sector.  As a 
friend of Mongolia's economic and political transformation since 
1990, we have an interest in ensuring that Mongolia gets right one 
of the most important issues for its economic development, and 
handles well the most important public policy challenge the country 
faces.  The mining sector also remains the most important 
opportunity for U.S. commercial interests, both through potential 
direct investments by U.S. firms, and through exports of 
mining-related goods and services.  The Embassy and USG have been 
actively attempting to foster favorable trends, and some 
international donors are also engaged.  END SUMMARY. 
 
Interest 1: Mongolia's Economic Future 
-------------------------------------- 
 
¶2. (SBU) Since Mongolia's peaceful democratic revolution in 1990, a 
key aim for U.S. policy has been to encourage and assist Mongolia's 
successful market economic transformation, and to help foster steady 
economic growth.  Development of Mongolia's mineral resources in 
years to come will be essential to ease poverty (35% of the 
population is classified as "poor") and bringing development to the 
nation.  Landlocked and sandwiched between China and Russia, 
Mongolia's only comparative advantage is in producing and selling 
natural resource commodities to its neighbors.  It has very little 
else to attract substantial foreign investment interest.  However, 
for the minerals sector to prosper, Mongolia will have to find a 
development model that balances public need with commercial 
interests and risks.  The last year has seen reversals in this 
quest. 
 
¶3.  (SBU) With the boundless optimism of a politician, President 
Enkhbayar recently stated that he believes that minerals development 
could allow Mongolian per capita incomes to rise to US$15,000 by 
2021, an almost 1,500% increase from their current official GDP 
levels. 
Even the limited mining now occurring has dramatic impacts on the 
local economy.  The tax revenue generated by the state-owned (joint 
venture with Russia) copper mine at Erdenet alone is the prime 
support for the new social spending on children and married couples. 
 Placer gold revenues pump some US$400 million into the economy (or 
at least they did before miners started withholding gold to avoid 
the Windfall Profits Tax enacted last May).  In a country of 2.6 
million people, some 12,000 workers are directly employed by mining 
firms.  In one early impact of the deteriorating climate for mining 
investments, Ivanhoe recently discharged some 1,000 workers because 
they could not obtain an investment agreement on the Oyu Tolgoi 
deposit from the GOM. 
 
Interest 2:  A Key Area for Governance 
-------------------------------------- 
 
¶4. (SBU) Since 1990, the U.S. also has sought to aid Mongolia's 
democratic transformation.  Getting mining development right is 
among the top two or three most important public policy challenge 
facing Mongolia.  Because it involves state agencies, members of the 
public and the political classes, and many foreign and domestic 
businesses, any effective and balanced mining regime is bound to 
have a salutary effect on the entire governmental, social, and 
cultural fabric of Mongolia. On the other hand, if it gets things 
wrong, Mongolia may cripple its economic future by driving away the 
most responsible foreign investors.  It may also squander government 
 
ULAANBAATA 00000123  002 OF 003 
 
 
revenues derived from mining, and witness a further upsurge in 
corruption fueled by mining wealth.  The combined effects of such 
missteps could endanger political stability and shake the faith of 
Mongolians in the wisdom of their political choice in 1990 for 
democracy and a market-oriented economy. 
 
Interest 3: Commercial Opportunities 
------------------------------------ 
 
¶5. (SBU) Finally, Mongolia's commercial profile for the U.S. is 
inextricably linked to mining; mining alone holds the prospect of 
substantial U.S. exports.  If a large U.S. or Western mining firm 
enters Mongolia, a long tail of other U.S. exports are bound to 
follow, including but not limited to heavy equipment (CAT, 
Ingersoll-Rand, John Deere, etc.), services firms (like Fluor, which 
Ivanhoe hired to start developing the Oyu Tolgoi mine, or minerals 
trading by Gerald's Metals), financial and insurance instruments, 
and the provision of expertise by U.S. consultants. 
 
¶6. (SBU) Despite the generally deteriorating investment climate, 
these desirable commercial outcomes have become more likely over the 
last year with the advent of two major U.S. players into Mongolia. 
U.S. coal and energy firm Peabody Energy and copper miner and 
processor Phelps Dodge (PD) have respectively opened official 
offices to pursue coal and copper opportunities.  Peabody, which has 
received extensive USG advocacy support, is interested in the Tavan 
Tolgoi coal project among others, while PD is involved with 
state-owned Erdenet copper mine on exploration projects.  Both firms 
have expressed the unambiguous desire to "do something" in Mongolia, 
particularly because of its proximity to China.  While expressing 
some concern about whether projects will be commercially possible in 
the current Mongolian political environment, they are confident that 
they can work in Mongolia, if the Mongolians allow their legal and 
regulatory environment for mining to mature transparently, 
predictably, and fairly.  Both firms have extensive records of using 
the best practices and working with problematic governments in tough 
locations; their involvement in Mongolia would help encourage 
responsible, uncorrupt mining, while prospective Chinese and Russian 
investors likely would have the opposite effect. 
 
¶7. (SBU) Although Mongolia's political and economic environment 
remains in turmoil, there is every reason to expect that American 
players would find varying degrees of favor with the Mongolian 
public, the GOM, and the politicians.  Most Mongolian public 
officials and politicians have expressed an unambiguous desire for 
American firms to invest into Mongolia.  National security concerns 
(with U.S. investments working to underscore Mongolia's sovereignty 
and increase bilateral ties, while avoiding economic control of 
Mongolia's mineral wealth by neighbors China and Russia), the desire 
for top technology, employment, tax revenues, and need for clean 
environment, and a belief in the good faith of Americans, are the 
stated reasons for this preference.  In short, the Mongolians see 
U.S. firms as key that might unlock to the door to their 
development. 
 
USG Efforts 
----------- 
 
¶8. (SBU) Recognizing the crucial role that U.S. firms and the USG 
might play in development of mining in Mongolia, the Embassy has 
sought to promote sensible policies on the mining sector and to 
coordinate support activities with the various players -- donors, 
businesses, and civil society and environmental NGOs.  These efforts 
have been boosted by the mining industry's newfound (albeit belated) 
willingness to speak publicly and concretely about the deterioration 
in the business climate.  Our principles are: 
 
-- First, we provide generic support for the mining industry writ 
large.  We regularly and consistently urge the Government of 
Mongolia at various levels to move forward transparently and in good 
 
ULAANBAATA 00000123  003 OF 003 
 
 
faith to strike deals following international best practices that 
balance Mongolia's needs with commercial realities and risks.  We 
will also encourage the GOM and a wider Mongolian audience to move 
prudently but expeditiously, or risk missing current opportunities 
to benefit from Mongolia's resource endowments. 
 
-- Second, we also stress the importance of good outcomes to the 
first specific major projects discussed under the revised minerals 
law -- real talks on real mining projects, most likely the Oyu 
Tolgoi copper-gold prospect or the Tavan Tolgoi coal deposit -- 
because these will undoubtedly set the model for negotiations that 
follow and provide the visible benchmark for all concerned, from 
mining companies and the Mongolian government to the Mongolian 
public.   While our focus is wider than this specific aim, we also 
provide particular advocacy efforts on behalf of firms whose 
projects are identified by our U.S. Department of Commerce as 
yielding material benefits to U.S. economic interests.  To date, DOC 
has endorsed advocacy for Peabody's efforts to be involved in 
development of Tavan Tolgoi, and has provided very helpful advocacy 
letters to senior GOM officials from Commerce Under Secretary 
Lavin. 
 
Other Foreign Efforts 
--------------------- 
 
¶9. (SBU) The World Bank (WB) and the International Finance 
Corporation (IFC) have joined with the European Bank of 
Reconstruction and Development (EBRD) to support Mongolian efforts 
to develop responsible mining in Mongolia.  The WB's Mongolia 
Country Representative recently explained the nature of the 
WB/IFC/EBRD efforts to Commoff.  The three donors have undertaken to 
produce a "Scoping Study on Mining in Mongolia," which has been 
recently released to senior GOM officials.  The study is a broad and 
deep argument that Mongolia needs to adopt a holistic approach to 
dealing with mining that accounts for the implications of specific 
projects in their industrial, local, regional, and national 
implications.  The WB Rep noted that IFC and EBRD would look after 
the commercial aspects of the technical assistance, while the WB 
funds technical assistance for all other non-commercial areas, 
including but not limited to labor issues, environment, social 
impacts, cultural implications, etc. 
 
Goldbeck