VZCZCXRO0719
PP RUEHLMC RUEHVK
DE RUEHUM #0508/01 2500834
ZNR UUUUU ZZH
P 070834Z SEP 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 1444
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 5748
RUEHOT/AMEMBASSY OTTAWA PRIORITY 0502
RUCPODC/USDOC WASHDC PRIORITY 1378
RUEHUL/AMEMBASSY SEOUL 2922
RUEHMO/AMEMBASSY MOSCOW 1893
RUEHTA/AMEMBASSY ASTANA
RUEHML/AMEMBASSY MANILA 1454
RUEHLO/AMEMBASSY LONDON 0188
RUEHKO/AMEMBASSY TOKYO 2633
RUEHBK/AMEMBASSY BANGKOK 1536
RUEHBY/AMEMBASSY CANBERRA 0171
RUEHSH/AMCONSUL SHENYANG 0318
RUEHVK/AMCONSUL VLADIVOSTOK 0153
RUEHOK/AMCONSUL OSAKA KOBE 0046
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0699
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000508 
 
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: EMIN EINV PREL PGOV ELTN MG
 
SUBJECT: Mongolian Mining Exec: Promise, Peril Surround Sector 
 
Reftel: Ulaanbaatar 0217 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
¶1. (SBU) SUMMARY: The Ambassador discussed Mongolia's promising but 
politically-charged mining sector on September 4 with Dashdorj 
Zorigt, CEO of Erdenes MGL, a new mining-asset holding company that 
is state-owned.  Over an informal dinner, discussion flowed on the 
status and future of Erdenes (EM), which Zorigt said is working with 
international consultants to create a company that is transparent, 
free from government interference and based on western best 
practices.  The CEO said political jockeying and showmanship before 
the June 2008 elections are threatening to scuttle the Oyu Tolgoi 
deal.  He added that with enough provocation, western firms might 
pull up stakes and leave Mongolia, creating a vacuum that the 
Russians and Chinese would quickly fill.  Such an outcome would have 
disturbing implications for Mongolia's economy and democracy.  END 
SUMMARY. 
 
¶2. (SBU) The Ambassador, joined by Econoff and Commoff, hosted 
Erdenes MGL CEO D. Zorigt for dinner on September 4.  The Ambassador 
congratulated Mr. Zorigt on his selection as his company's first 
CEO.  Zorigt observed that pity -- not congratulations -- might be 
in order, given the political, economic and social consequences of 
running a company that might well control assets worth billions of 
USD.  Zorigt then launched into a detailed review of the firm's 
current status and future plans. 
 
JOB ONE: MANAGING MINING ASSETS 
------------------------------- 
 
¶3. (SBU) The GOM set up EM in early 2007 to serve as a holding 
company to manage mining assets that Mongolia might acquire under 
the recently amended Minerals Law of Mongolia (reftel), which allows 
the state to acquire up to 50% of shares in strategic projects. 
(Note: "Strategic" is loosely defined as having some large-scale 
impact on the Mongolian economy or society.  However, there is no 
official definition.  End Note.) 
 
¶4. (SBU) According to Zorigt, the GOM created the company primarily 
to generate revenue for direct cash transfers to the people of 
Mongolia: welfare payments to children, new mothers, newly married 
couples, etc.  The firm will also manage and invest the mineral 
revenues of Mongolia for long-term wealth generation, investment and 
development, along the lines of the Norwegian or Alaskan models. 
EM's founders envision the company as a mining giant, similar to 
such state-owned mining firms as Brazil's CVRD or French uranium 
miner Arreva (formally COGEMA). 
 
LEARNING FROM THE PROS 
---------------------- 
 
¶5. (SBU) Zorigt admits that these are heady ambitions for a firm 
that currently lacks assets, a formal business plan, a clear 
corporate structure, or an explicit mandate from the GOM.  Zorigt 
laid out his strategy for achieving these ends.  First, Zorigt and 
his team are in the process of acquiring the services of such 
professional consultancies as John Thornton, McKenzie, and JP Morgan 
Chase.  Seeking funding from the World Bank, Zorigt intends Thornton 
to advise on a business plan; McKenzie to craft EM's corporate 
structure; and JP Morgan Chase to advise EM and the GOM on 
negotiating specific mining deals and organizing tenders for 
state-owned assets. 
 
 
ULAANBAATA 00000508  002 OF 003 
 
 
¶6. (SBU) Zorigt wants a legal framework and a corporate structure 
that allow EM to function as a commercial entity, without the 
political interference that has plagued other state-owned firms in 
Mongolia.  This approach is necessary, he argues, because EM must 
not be run by GOM bureaucrats or local Mongolian business people 
whose narrow, local interests will always trump fiduciary 
responsibilities to the shareholders: the people of Mongolia. 
 
¶7. (SBU) Drawing on his consultations with the U.S. firms, Zorigt 
has drafted legislation that is slowly making its way through the 
GOM and Parliament.  His bill would create a board of directors 
independent from direct state control, which would specifically 
exclude GOM bureaucrats (or at least statutorily deny GOM officials 
a majority of seats on the board).  The enacting legislation would 
also require that senior executives be retained through an 
international search and be compensated at an international level. 
Zorigt recognizes that this legislation will be a hard sell, but 
believes he has sufficient support for it among an effective voting 
majority.  He hopes for passage in fall 2007. 
 
MINING DEBATE TURNS SOUR 
------------------------- 
 
¶8. (SBU) Regarding the politics of mining in Mongolia, Zorigt 
worries about the "de-evolution" of the debate over mining and its 
implications for the long-term security of Mongolia's democracy and 
economy.  He noted that the Democratic Party has placed itself in 
firm opposition to approving the Oyu Tolgoi Investment Agreement in 
its current form.  Zorigt agrees in principle with some of the 
Democrats' arguments against the existing deal, noting that several 
tax exemptions could be scaled back without scuppering the entire 
deal.  However, Zorigt noted that demands that the private rights 
holders give up additional equity to the GOM, so that the GOM will 
have 51% of the multi-billion dollar project, is a non-starter as 
far as the rights holders - mining giant Rio Tinto and Ivanhoe Mines 
- are concerned. 
 
¶9. (SBU) Zorigt said parliamentary insistence on this 51% threatens 
the entire deal, and raises the ugly suspicion that certain MPs are 
putting politics ahead of national interest or worse, dealing in bad 
faith.  Zorigt claimed that the Democratic Party (DP) is loathe to 
see the current MPRP-led government garner any success; and so, 
rather than work with the current government to craft a deal more 
favorable to the GOM, and share some credit, the opposition would 
rather throw the entire deal out, claiming that it is defending 
Mongolia's honor.  In other words: go for the dramatic, 
nationalistic punch in the run-up to the June 2008 elections for 
Parliament, rather than share moderate credit for key developments 
with the MPRP. 
 
¶10. (SBU) We asked what would happen to the Oyu Tolgoi deal if the 
DP successfully stalled the deal until after the elections.  Would 
the DP attempt to pass it if it comes to power, as some political 
observers expect?  Zorigt thinks the DP might, but that it would 
encounter significant resistance from a unified MPRP opposition 
bloc, which would never allow the DP to pass a deal that the MPRP 
had first proposed.  For this reason, he said, development on Oyu 
Tolgoi and other key developments would languish and Mongolia would 
not profit in any way. 
 
POLITICS THREATENS TO CHASE AWAY WESTERN FIRMS 
--------------------------------------------- - 
 
¶11. (SBU) Zorigt said he took his concerns to MPs who are leading 
 
ULAANBAATA 00000508  003 OF 003 
 
 
Parliament's review of the Oyu Tolgoi deal, noting that Ivanhoe and 
Rio Tinto, as well as other western firms, would mothball projects 
and wait.  The Democratic members countered that they would simply 
change the law to take the mining rights from the private holders 
and look for other investors.  However, Zorigt said he thinks it 
will be nearly impossible for Mongolia to garner investment from any 
western source after violating the rights of Rio Tinto and other 
firms. 
 
¶12. (SBU) If that is the case, we asked, who would finance the 
development?  The Russians?  The Chinese?  Given public fears of 
domination by either state, we questioned how any MP could get away 
with proposing to convey these "national assets" to Russia or China. 
 Zorigt argued that if the Democratic opposition succeeds in 
wrecking the Oyu Tolgoi deal, politicians might be willing to sell, 
either to profit from Chinese or Russian enticements or to avoid the 
wrath of an angry Mongolian public. 
 
DEVELOPMENT COULD BRING HUGE BENEFITS... 
---------------------------------------- 
 
¶13. (SBU) Zorigt said development of the Oyu Tolgoi site alone would 
have a dramatic impact on Mongolia's economy, perhaps raising 
Mongolia's GDP by 50%.  But more importantly, he said, developments 
at OT and other sites would lead to huge improvements in key 
Mongolian infrastructure areas such as water, power, roads, rail and 
aviation for years to come.  He added that most of the capital 
flows, investments, insurance and other financial services would be 
tied to OT and other developments.  These mines, he said, will 
become the heart of Mongolia's economy and have a profound effect on 
political and democratic developments. 
 
... BUT DANGERS ALSO LURK 
------------------------- 
 
¶14. (SBU) But what if, Zorigt asked, these mines fall into Chinese 
or Russian hands?  Those nations and their miners would then gain a 
stranglehold on Mongolia's economy and -- by extension -- national 
security.  Mongolia would have little recourse in the face of such 
powerful neighbors, who could effectively "turn off the water or 
power" until Mongolia complied with their demands.  Zorigt concedes 
that although Mongolian politicians' fear of China and Russia steers 
them toward western investment as a counterweight, it is not a 
foregone conclusion that national interest will trump short-term 
political gain and short-sighted self-interest. 
 
COMMENT 
------- 
 
¶15. (SBU) Zorigt's concerns about Mongolia's far larger neighbors 
has a factual basis.  China has, on occasion, shut down access to 
Mongolia's most essential railway, to signal its disapproval of 
Mongolia's policy on the Dali Lama.  Russia, for its part, often 
cuts its supply of electricity to western Mongolia if bills are not 
paid on time. 
 
Minton 
 
 
 
 
6