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PP RUEHLMC RUEHVC RUEHVK
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P 120842Z FEB 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0782
INFO RUEHMO/AMEMBASSY MOSCOW 1682
RUEHBJ/AMEMBASSY BEIJING 5395
RUEHUL/AMEMBASSY SEOUL 2621
RUEHKO/AMEMBASSY TOKYO 2350
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RUEHML/AMEMBASSY MANILA 1299
RUEHLO/AMEMBASSY LONDON 0084
RUEHBY/AMEMBASSY CANBERRA 0095
RUEHVC/AMCONSUL VANCOUVER 0034
RUEHSH/AMCONSUL SHENYANG 0243
RUEHHK/AMCONSUL HONG KONG 0786
RUEHVK/AMCONSUL VLADIVOSTOK 0065
RUEATRS/DEPT OF TREASURY WASHDC
RUCPODC/USDOC WASHDC 1168
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0465
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000091 
 
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: Financial "Mongol-Philia": An Investment Debutante Emerges 
on the International Stage? 
 
REF:  Ulaanbaatar 0080 
 
Sensitive But Unclassified - Not for Internet Distribution. Contains 
proprietary and confidential business information 
 
¶1. (SBU) SUMMARY AND COMMENT: Mongolia has recently become a minor 
investment "phenom" among the Pacific Rim investment community.  One 
local bank has gone from being unable to get long-term 
debt-financing to having access to more than it can use, for 
example.  The odd handful of Mongolian IPO's and bond issues are now 
hot prospects for JP Morgan, Citibank, and Dutch ING.  Experienced 
and reliable Mongol hands attribute this new found passion to the 
fact that mining giant Rio Tinto made a US$300 million buy-in 
investment into the Mongolia mining sector, a move interpreted as a 
financial housekeeping seal of approval for this developing nation. 
However, experts express concern that this financial "Mongol-philia" 
may be leading normally prudent investors, who apparently hope to be 
early beneficiaries, to imprudently ignore and forgo standard due 
diligence procedures. If this is so, and there are many reasons to 
believes it is, then passion for Mongolia may dissipate as quickly 
as it rose in the face of a financial reverse or two, and investors, 
even though they may have only themselves to blame, will hold 
Mongolia at fault and withhold much needed long-term investment 
funds.  END SUMMARY AND COMMENT. 
 
$$Ka Ching$$ 
------------ 
 
¶2. (SBU)  An American banker of a Japanese-owned and U.S.-operated 
Khan Bank, told CommOff of amazing, unprecedented offers for cash 
from extremely reliable funding sources.  A year ago the bank could 
not get long-term debt dollars, Euros, or yen at interest rates it 
could afford.  But in late December and early January, the bank 
found itself the recipient of tremendous attention.  Citibank's Hong 
Kong office contacted the banker and asked him if he'd be amendable 
to taking on US$25 million in debt at almost acceptable rates. JP 
Morgan offered much the same deal. Several unnamed Japanese 
financial institutions made similar offers. 
 
¶3. (SBU) The World Bank's International Finance Corporation (IFC) 
and the European Bank of Reconstruction and Develop (EBRD) were also 
willing to pony up long-term financing, too .  The banker stated 
that collectively the offers totaled up to over US$135 million. 
Will the bank bite?  The banker says no, because the interest rates 
are still a bit high, but he believes these initial offers 
constitute a starting point from which the bank might be able to 
negotiate a good deal. 
 
¶4. (SBU) Other signs point to Mongolia having become an increasingly 
acceptable destination for foreign investment, albeit on a 
relatively small scale compared to other venues.  Both JP Morgan and 
Citibank have told EmbOffs that they could easily loan the GOM 
US$500 million, assuming likely projects exist.  Merrill-Lynch's 
Hong Kong Office is busy mobilizing several  hundred million dollars 
for a proposed Ulaanbaatar casino-resort project aimed at the North 
China market.  JP Morgan's Hong Kong IPO specialists have recently 
joined with a controversial Mongolian miner to float a gold issue on 
the Hang Seng.  Finally, banking and institutional investors from 
South East Asia snapped up some US$75 million in high-yield bonds 
peddled by the Trade and Development Bank of Mongolia and Dutch 
banking giant ING. 
 
¶5. (SBU) Although small in relative terms, the banker notes that the 
new money has warped Mongolia into a true investment destination for 
Western dollars.  The banker attributes the change to the coming of 
mining giant Rio Tinto to Mongolia. According to the banker, few 
knew about Mongolia and what little was known was not encouraging: 
 
ULAANBAATA 00000091  002 OF 002 
 
 
Mongolia was an emerging post-communist state with more sheep than 
finance.  But Rio invested some US$300 million in a major but 
controversial South Gobi copper-gold project (ostensibly when 
cash-strapped Canadian mining firm Ivanhoe was unable to conclude a 
stability agreement with the Government of Mongolia (GOM)), with 
plans to invest an additional US$900 million.  As the banker noted, 
real money from the world's second largest mining company-in spite 
of a controversial windfall profits tax and a problematic new mining 
law--brands Mongolia, on its face, as a viable investment 
destination. (Note: Rio's continued investment is conditional on 
striking a commercially viable deal with the GOM.  Negotiations are 
currently hung up over Mongolia's wind fall profits tax on gold and 
copper and GOM demands for an uncompensated equity stake of some 34% 
in the project.) 
 
¶6. (SBU) Other observers of the Mongolian scene concur with the 
banker's assessment.  EBRD's country director noted that Rio's real 
dollars are big housekeeping seal of approval for Mongolia.  An 
Australian mining consultant noted that Rio's announcement 
stabilized share values on Mongolian mining firms in bourses 
specializing in mining ventures, which had been forced down by 
shareholder worries about the windfall profits tax and the new 
mining law, as well as recent mining license shenanigans (reftel) 
and the GOM's inability to conclude a stability or investment 
agreement despite three year's of negotiations with Ivanhoe. 
 
Love's Dark Side 
---------------- 
 
¶7.  (SBU) However, the banker and others worry that this financial 
"Mongol-philia," modest as it is in relative terms, may be leading 
some investors to throw caution to the wind.  We and our local 
experts note that normally shrewd investors seem to be shirking or 
short-cutting due diligence.  While the banker was tickled at the 
availability of funds, he noted that all the institutions seemed 
more than willing to lend without much scrutiny of the bank.  JP 
Morgan's IPO for the Mongolian mining firm Mongol Gazar raised 
eyebrows here as its client is reportedly notorious in Mongolia for 
duping its partners on deals.  One American firm had to spend 
several years in Mongolia's courts to recover losses from a 
fraudulent leasing deal gone bad.  Yet JP Morgan's representatives 
did not consult with post or apparently others about the problematic 
factual record of their new client before, during, or after the deal 
was done. 
 
¶8. (SBU) Rio Tinto told CommOff that Mongol Gazar had stung Rio 
Tinto, but Morgan did not talk with Rio.  The bank has had some sour 
experiences with Mongol Gazar as well, and the banker is a 
touchstone for investors coming to Mongolia; and yet Morgan, which 
has visited him on other occasions, did not ask him about this 
deal. 
 
¶9. (SBU) The banker and Rio expressed concern that these investors 
seem willing to let their Mongolian partners slide on some basic 
prudential provisions, consequently exposing the foreign investors 
to financial reverses.  Our interlocutors are worried that this new 
passion for potentially volatile and brittle Mongolia could easily 
dissipate in the face of a perceived stock fraud or bond default, 
once again relegating Mongolia to the financial wilderness - or at 
least until this recent experience fades from memory.  The banker 
and others argue that this time, however, Mongolia will have a track 
record for failure, for which Mongolia will no doubt be blamed, even 
though her failure was abetted by the arguably shoddy due diligence 
of the foreign investors. 
 
Minton