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UNCLAS SECTION 01 OF 03 ULAANBAATAR 000425 
 
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 PGOV ENRG MG
SUBJECT: OPPOSITION GROWS AS PARLIAMENT DEBATES CONTROVERSIAL OYU 
TOLGOI COPPER MINE DEAL 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. CAUTION 
- CONTAINS PROPRIETARY INFORMATION. 
 
REFTEL A) ULAANBAATAR 216  B) 06 ULAANBAATAR 773 
 
¶1. (SBU) SUMMARY: The Government of Mongolia (GOM)  has begun its 
public roll- out of the tentative investment agreement for the 
development of the Oyu Tolgoi copper mine struck between the GOM and 
Ivanhoe/Rio Tinto in April (ref A). If copper's price remains at 
today's high of US$7,600 per ton, Mongolia would receive US$71 
billion (2006 total GDP amounted to US$2.8 billion) and Ivanhoe 
Mines/Rio Tinto will get US$62 billion. Having joked privately that 
"we will be lucky if only 80% of the public opposes the plan", chief 
GOM negotiator Ministry of Finance State Secretary Khurelbaatar is 
anxious to shepherd the deal through to cabinet and parliamentary 
approval with minimal public agitation before the State Great 
Hural's (parliament) summer recess at the end of July.  Ivanhoe, 
silenced by a non-disclosure clause in the agreement, has reacted to 
perceived missteps and misstatements about the deal "with mouths 
bloodied from biting our tongues so hard," according to their reps. 
 Although the deal has not yet produced street demonstrations on the 
scale of those held in January 2006, a small but vocal groundswell 
of opposition has begun to congeal, led mostly by civil society 
organizations such as the Open Forum, environmental NGOs, a 
scattering of MPs and, most vocally, by the self-promoting MP and 
erstwhile sacked Health Minister L. Gundalai, who, in a recent 
one-man press conference, called the deal "crap."  END SUMMARY. 
 
¶2. (U) On July 9, Ch. Khurelbaatar, State Secretary of Finance and 
chief government negotiator on the investment agreement, held a 
press conference to publicly present the tentative deal between 
Ivanhoe/Rio Tinto and the GOM over development of what many believe 
to be the world's largest copper mine; Oyu Tolgoi, in the south Gobi 
desert.  Seizing the initiative, Khurelbaatar and team presented the 
plan in its best light before the expected pummeling it will receive 
in parliamentary debates and the press over the next few weeks. 
Parliament is expected to take up the debate on the Oyu Tolgoi deal 
on Tuesday, July 24th. Mongolia's cabinet approved the deal on June 
26th. 
 
¶3. (U) Khurelbaatar stressed that the agreement will be valid for 30 
years and that employment terms would force the companies to lean in 
favor of local labor; 50:50 Mongolians/foreigners for the first five 
years, 70/30 for the subsequent seven years, and 90:10 thereafter. 
Mongolia stood to reap at least US$15.5 billion over the 30 year 
span from the development if copper prices fell to a conservative 
estimate of US$2,425 per ton, US$21 billion if copper averaged 
US$3,000 and $31 billion if it hovered at US$4,000. If the price 
were to remain at today's high of US$7,600, Mongolia would receive 
US$71 billion and Ivanhoe Mines will get US$62 billion. (Note: To 
provide some perspective Mongolia's total GDP last year was US$2.8 
billion.) 
 
¶4. (U) In an interview with the press a few days later, Minister of 
Finance Bayartsaikhan noted that the investment agreement on Oyu 
Tolgoi was a tremendous improvement over past agreements and would 
prove to be exponentially more profitable for Mongolia. He said 
Mongolia would own 34% of OT "free of charge" (Note: this is an 
exaggeration as the deal would have the GOM deferring profits until 
its investment share in the mine has been effectively paid for) and 
explained that Ivanhoe and Rio Tinto would receive a five year 
exemption from paying the Windfall Profits Tax (WPT) but that they 
would pay all other taxes in accordance with Mongolian law.  He 
reiterated that the OT deal could drive up Mongolia's national GDP 
by over 30% per year. 
 
¶5. (U) Critics highlighted what they consider to be major faults 
with the plan.  The Open Society Forum (OSF), formerly the George 
 
ULAANBAATA 00000425  002 OF 003 
 
 
Soros Foundation, published a list of seven questions it felt the 
parliament should investigate before approving the plan.  OSF 
questioned the "government take" figures listed by Khurelbaatar and 
called for a more thorough auditing of the plan before parliament 
could make an informed decision.  Ivanhoe has done the analysis, 
they claimed, but refused to release the information. OSF also asked 
if financial or environmental assurances were provided should 
Ivanhoe and/or Rio Tinto sell their shares to Chinese or Russian 
mining companies.  Finally, OSF said the agreement was simply an 
extra-legal way to rewrite the minerals law of 2006. 
 
¶6. (U) Critics are united in condemning Ivanhoe's exemption from 
paying the windfall profits tax (ref B) that would levy a 68% tax on 
copper profits if the international price were over US$2,600 per 
ton.  The agreement has Ivanhoe investing in infrastructure to s 
melt copper inside Mongolia (instead of presumably shipping it to 
China for smelting), thereby avoiding the WPT, but the OSF called it 
a poor trade off for Mongolia. They claim that even at copper prices 
well below current levels, the lost revenue from the WPT in the five 
years before a smelter is built (the period in which the WPT would 
apply under present law) could be several billion dollars, perhaps 
twice the entire capital cost of the smelter. Mongolia, they said, 
should build the smelter itself and pocket the change, although they 
did not specify how Mongolia would find the needed investment funds 
equivalent to a couple of year's worth of total GDP. 
 
¶7. (U) OSF questioned the need to build a smelter at all in 
Mongolian territory. "Smelters produce little additional employment 
and can create serious environmental problems through emissions of 
arsenic, sulphur dioxide, dust and carbon monoxide.  Given the 
hazards, Mongolia may be better served to keep its WPT and let its 
market, China, bear the environmental costs of smelting." Supporters 
of the plan contend that revenue from the WPT would disappear, 
leaving Mongolia with nothing, if coppers prices were to fall but 
that a smelter would ensure a constant flow of returns. 
 
¶8. (SBU) Among the several civil movement organizations that have 
expressed opposition to the OT deal, none has been more vocal (nor 
more attention-seeking) than MP L. Gundalai of the "Healthy Society 
Citizens Movement" and creator and head of the Mongolian Popular 
Party.  Gundalai, dismissed from his post as Health Minister earlier 
this year because his self-promotional antics had proved an 
embarrassment for the government, has been working overtime to stoke 
the fires of controversy around the OT deal in hopes of resurrecting 
his own faltering political prospects.  He has made no secret of his 
desire to become President of Mongolia. On July 18, he called a 
one-man press conference where he denounced the OT deal as "crap" 
and called for a sit-in strike on Sukhbaatar Square that started on 
July 19th.  Shortly thereafter civil movement organizations 
including the Mongolian Democratic Movement declared their 
willingness to join him. The first day of protests  failed to 
attract a large crowd. A small but violent demonstration on July 20 
in front of Ivanhoe's offices resulted in angry protestors 
overturning one of the company's mini-buses and hanging a sign over 
it that read, "Oyu Tolgoi is public property!" 
 
Comment:  Will the GOM and Parliament Blink? 
-------------------------------------------- 
 
¶9. SBU) Comment:  OT negotiations were stalled for three years, 
sometimes due to Ivanhoe's missteps and sometimes because 
politicians cowered before even modest protests.  Recently it 
appeared that momentum and popular sentiment had shifted to favor 
the conclusion of a deal, as the public had heard much about 
Mongolia's "vast mineral resources" and they wanted returns to begin 
sooner rather than later - to get on with it.  The issue is whether 
Mongolia will get its "fair share," a concept open to interpretation 
and exploitation by populist politicians.  All eyes are now watching 
 
ULAANBAATA 00000425  003 OF 003 
 
 
to see if parliament will approve the deal within the next couple of 
weeks or if opposition groups will again succeed in blocking or 
delaying it.  Approval could spell an unprecedented economic boon 
for Mongolia as investment agreements on other mineral developments 
come on-line in rapid succession using OT as the template.  On the 
flip side, if a vote on the agreement is pushed back into the fall 
session, the odds of its survival in its current form will drop 
dramatically, according to local analysts, (and hinder development 
of the country's overall mining sector for years to come) as 
politicians begin posturing before mid-2008 parliamentary elections. 
 There is also some risk that major western firms will conclude that 
Mongolia is just not yet ready for "prime time," possibly abandoning 
the field to unscrupulous Chinese or Russian firms.  END COMMENT. 
 
Minton 
 
 
 
 
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