VZCZCXRO7548
PP RUEHLMC RUEHVK
DE RUEHUM #0478/01 2350008
ZNR UUUUU ZZH
P 230008Z AUG 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 1399
INFO RUEHUL/AMEMBASSY SEOUL 2898
RUEHMO/AMEMBASSY MOSCOW 1870
RUEHTA/AMEMBASSY ASTANA
RUEHBJ/AMEMBASSY BEIJING 5724
RUEHML/AMEMBASSY MANILA 1436
RUEHLO/AMEMBASSY LONDON 0175
RUEHKO/AMEMBASSY TOKYO 2610
RUEHBK/AMEMBASSY BANGKOK 1515
RUEHOT/AMEMBASSY OTTAWA 0489
RUEHBY/AMEMBASSY CANBERRA 0161
RUEHSH/AMCONSUL SHENYANG 0304
RUEHVK/AMCONSUL VLADIVOSTOK 0136
RUEHOK/AMCONSUL OSAKA KOBE 0036
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0679
RUCPODC/USDOC WASHDC 1358
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000478 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EB/IFD/OIA 
STATE PASS USTR, EXIM, OPIC, AND EPA 
STATE PASS AID/ANE D. WINSTON 
MILLENNIUM CHALLENGE CORP WASHDC FOR F. REID 
TREASURY PASS USEDS TO IMF, WORLD BANK 
MANILA AND LONDON FOR USEDS TO ADB, EBRD 
 
E.O. 12958: N/A 
TAGS: ELTN ETRD PREL PGOV MG
SUBJECT: MONGOLIAN GOVERNMENT'S REVOCATION OF MINING RIGHTS ROILS 
INVESTMENT CLIMATE 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
¶1. (SBU) SUMMARY AND COMMENT: Late last week the Government of 
Mongolia (GOM) revoked the exploration licenses of 18 firms on 34 
sites without prior warning, consultation, or any internal review of 
the action.  The GOM claims that revocation is allowed under the 
newly amended minerals law.  Charging that the GOM has acted against 
the letter and spirit of the law, firms and their legal advisors 
call the act "expropriation" of their rights and a complete 
violation of the GOM's explicit commitment to follow best practices 
and the rule of law.  In any case the revocation has severally 
damaged Mongolia's reputation among many international investors, 
and some now question whether the GOM can act in good faith on any 
deal. At the March 2007 USG/GOM Trade and Investment Framework 
Agreement (TIFA) talks the GOM explicitly committed to support a 
best practice regime for mining in the face of industry and USG 
criticism of abuses under former Minister of Industry and Trade B. 
Jargalsaikhan. This latest action, expropriatory in nature, causes 
us to question that commitment.  At this point, post will ask senior 
officials at the Ministry of Trade and Industry (MIT), the Mineral 
Resources and Petroleum Authority of Mongolia (MRPAM), and other 
relevant GOM agencies to: (a) explain the legal and regulatory basis 
of this decision, (b) emphasize the potential and real damage done 
to Mongolia's reputation among mining firms and equity investors, 
and, (c) encourage the GOM to find a way to walk back from a policy 
that has deeply disturbed investors and capital markets and which 
risks triggering U.S. expropriation sanctions.  While much damage 
has been done to Mongolia's reputation, there are legal remedies 
available should the GOM not reverse its course. Post will continue 
to monitor the situation and report.  END SUMMARY AND COMMENT. 
 
What The GOM Did 
---------------- 
 
¶2. (SBU) On Thursday, August 16, the Cadastral Office, which 
registers mining licenses and exploration rights and which is under 
the direct Authority of the Mineral Resources and Petroleum 
Authority of Mongolia (MRPAM), issued letters to 18 foreign and 
domestic firms revoking the exploration rights on 34 separate 
properties. These exploration rights covered uranium, coal, gold, 
potash, copper, and molybdenum deposits.   For two Canadian firms 
with rights to uranium prospects in eastern Mongolia, the 
termination of rights, which they call expropriation, has been an 
unmitigated disaster.  Both firms, listed on the Toronto Stock 
Exchange (TSX), have lost significant shareholder value, with one, 
Khan Resources, suffering a 60% drop in share value or US$150 
million in market capitalization.  They doubt that they can recover 
the lost value, because future investors will turn away from 
Mongolia as too unstable and unreliable. 
 
Impact Immediate - Turmoil 
-------------------------- 
 
¶3. (SBU) The fallout from this decision is already harming 
Mongolia's reputation.  Commoff has spoken with several in-bound US 
investors, among them Peabody Energy and Oaktree Capital, who have 
been spooked by actions they consider expropriatory or close to it. 
Investors from other nations are telling post the same thing.  As 
one private equity firm noted, the action could not come at a worse 
time for Mongolia, just at the very moment that they and other firms 
were seriously considering investing hundreds of million of dollars 
into resource extraction. 
 
 
ULAANBAATA 00000478  002 OF 003 
 
 
GOM's Explanation... 
------------------- 
 
¶4. (SBU) The Cadastral Office justified its seizure, citing a report 
produced by the State Audit Committee (SAC) for the Ministry of 
Industry and Trade (MIT) in which the SAC criticized MIT for 
allowing firms exploration rights on deposits which socialist era 
exploration had made resource estimates. The SAC referred to a 
provision of the recently amended Minerals Law of Mongolia (2006), 
Article 60.  Article 60 states that the GOM shall not issue an 
exploration license for land on which the state has (1) conducted 
exploration in the past and (2) registered reserves with the State 
Mineral Reserve Register administered by MIT. SAC argued that any 
exploration rights should be immediately terminated, with the rights 
reverting to the GOM which could dispose of them by tender.  The SAC 
report criticized MRPAM and MIT for not terminating these rights. 
Upon receiving this critique, unknown officials at MIT apparently 
ordered MRPAM's Cadastral Office to revoke the rights with immediate 
effect, which the office did. 
 
... Falls Short On Law and Logic 
------------------------------ 
 
¶4. (SBU) Lawyers familiar with Article 60 criticized the SAC 
interpretation of the provision and MIT and MRPAM's handling of the 
event as against both the letter and spirit of the amended law. 
First, they noted that they had these exploration rights long before 
the law was amended and that Mongolia should honor its prior 
commitments. Failing that, they argue the GOM should honor the 
spirit and letter of the provisions, which was not void rights but 
to encourage mining at sites that the GOM believed to be 
sufficiently explored to go into production without further 
exploration.  On such deposits, Article 60 would allow a firm to 
convert an exploration license to a mining license immediately. 
Although disagreeing with the GOM about the quality of past 
exploration and reserve estimates, firms and their legal advisors 
signaled that they could live with such a provision, which they 
argue is a far cry from SAC determination that the provision allows 
for immediate confiscation of rights. 
 
¶5. (SBU) Firms and their legal advisors also noted that MRPAM's 
action flies in the face of every commitment the GOM has made to 
have an open and transparent system consistent with international 
best practices and the rule of law.  There was no public review or 
comment of the SAC audit.  There is no indication that MIT or MRPAM 
consulted any legal opinion regarding SAC's views or that the SAC 
consulted any expert in or out of the GOM about its interpretation 
of Article 60. No one responsible for this decision has been 
available for comment or explanation.  MRPAM' senior officers are 
not answering their phones, nor are officials from MIT. 
 
Snatch and Resell? 
------------------ 
 
¶6. (SBU) Adding to the confusion is a fear that elements within the 
GOM are consciously abusing the system to despoil one set of right's 
holders so that they can turn around and sell those rights to 
others.  One attorney reported to post that immediately after the 
revocation letters went out to clients, calls came from Kazakhstan 
businessmen about whether the clients were interested in selling 
their proprieties to them.  The attorney noted that the Kazakhs had 
precise details on the exploration rights, which they could only 
have got from MRPAM or MIT.  (Note: President Enkhbayar visited 
 
ULAANBAATA 00000478  003 OF 003 
 
 
Kazakhstan the previous week.  Septel to follow.) 
 
Bottom Line: Damage Done But Remedies Remain 
-------------------------------------------- 
 
¶7. (SBU) The firms have not given up hope for restoration of their 
rights.  First, the decision is subject to grievance through the 
MRPAM Chair; however, this gentleman left for Germany at the same 
time the decision was rendered by his Cadastral Office, delaying any 
grievance procedure.  Second, if MRPAM fails to reverse its 
decision, the firms have recourse to the court system, which of late 
has been highly critical of GOM decisions related to mining, 
overturning GOM actions on the grounds that they are inconsistent 
with the law and regulation controlling mining. 
 
MINTON 
 
 
 
5