VZCZCXRO8558
RR RUEHDBU RUEHLMC RUEHVK
DE RUEHUM #0630/01 3100034
ZNR UUUUU ZZH
R 060034Z NOV 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1627
INFO RUEHUL/AMEMBASSY SEOUL 3013
RUEHMO/AMEMBASSY MOSCOW 1951
RUEHTA/AMEMBASSY ASTANA
RUEHEK/AMEMBASSY BISHKEK 0061
RUEHNT/AMEMBASSY TASHKENT 0020
RUEHDBU/AMEMBASSY DUSHANBE
RUEHBJ/AMEMBASSY BEIJING 5834
RUEHML/AMEMBASSY MANILA 1509
RUEHLO/AMEMBASSY LONDON 0221
RUEHFR/AMEMBASSY PARIS 0061
RUEHKO/AMEMBASSY TOKYO 2712
RUEHBK/AMEMBASSY BANGKOK 1602
RUEHOT/AMEMBASSY OTTAWA 0529
RUEHBY/AMEMBASSY CANBERRA 0193
RUEHBS/USEU BRUSSELS
RUEHSH/AMCONSUL SHENYANG 0364
RUEHVK/AMCONSUL VLADIVOSTOK 0168
RUEHOK/AMCONSUL OSAKA KOBE 0049
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0766
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000630 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/IFD/OIA 
STATE PASS USTR, DOC/ITA, EXIM, OPIC, AND EPA 
STATE PASS AID FOR 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 ENRG PREL KNNP TRGY PGOV MG
SUBJECT: WILL MONGOLIA EXPROPRIATE URANIUM MINING RIGHTS? 
 
Reftels: (A) 07 Ulaanbaatar 483, (B) 07 Ulaanbaatar 478, 
(C) 06 Ulaanbaatar 870, (D) 06 Ulaanbaatar 216 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
¶1. (SBU) SUMMARY: An internal report by Mongolia's Ministry of 
Industry and Trade (MoIT) (protect) on the future of uranium mining 
and processing in the country suggests that the Government of 
Mongolia (GOM) intends to revoke uranium exploration and mining 
rights from current holders.  The report surfaces less than three 
months after the GOM roiled markets and unnerved investors by moving 
to invalidate the exploration licenses of 18 mining companies.  The 
MoIT report indicates that the GOM is planning to take back uranium 
exploration and mining rights from current holders and bundle them 
into three separate packages; the GOM would then presumably sell 
minority stakes to state-owned uranium mining firms, especially 
those based in Russia.  Word of the controversial report is 
circulating around Mongolia, and holders of rights to uranium 
deposits are outraged, as well as those with rights to mine metals 
and other minerals.  Post will track this issue and continue to 
press upon the GOM the importance of honoring its commitments to 
investors, including those made under the US-Mongolia bilateral 
investment treaty.  END SUMMARY. 
 
¶2. (SBU) Mongolia's mining sector is still reeling from the 
Mongolian Government's revocation of 34 exploration licenses of 18 
firms without any prior warning, consultation or internal review 
(reftels).  Following the mining industry's outcry and aggressive 
intervention by the Embassy, the GOM walked back from the 
revocation.  Now, however, an internal GOM report that Post, among 
others, has obtained, suggests that the powerful Ministry of 
Industry and Trade (MoIT) is considering how to nationalize 
Mongolia's uranium assets.  The report provides a policy overview 
containing many unsurprising, inoffensive provisions, including 
those calling for GOM oversight of all uranium exploration, 
production and processing; the use of environment-friendly 
technologies; cooperation with leading mining/processing companies; 
and close coordination with the IAEA.  However, the policy overview 
also calls, controversially, for all Mongolian uranium deposits to 
be exploited in groups.  This would mark a dramatic departure from 
the current practice, in which deposits are developed by licensed, 
individual firms headquartered, for the most part, in Australia, 
Canada, Russia and Mongolia. 
 
¶3. (SBU) Most of these policy aims are not objectionable to the 
private rights holders.  They tell us that Mongolian Government 
commitment to a world-class, properly regulated, environmentally 
sound uranium mining and processing sector would benefit all 
stakeholders.  The problem, however, is that the GOM is taking about 
exploiting deposits in groups.  GOM and private sources have told us 
that Arreva, the state-owned French uranium miner, processor, and 
power generator, first broached this concept with the GOM. 
 
¶4. (SBU) Specifically, Arreva, which paid US$83 million for several 
uranium exploration sites in Mongolia, advised the GOM that 
Mongolian uranium could not be efficiently and profitably mined and 
processed into uranium concentrate or yellow cake by numerous 
private companies.  It argued that the most satisfactory method 
would be for the GOM to nationalize the deposits, bundle them into 
 
ULAANBAATA 00000630  002 OF 005 
 
 
regional firms, then tender the deposit packages to state-owned 
firms experienced with uranium extraction.  However, the GOM would 
retain a minimum of 51% ownership in whatever companies evolve from 
the tender.  Operating and management rights for the company 
developing the uranium deposits are not spelled out in the GOM's 
policy statement. (Note: Current rights holders dispute the notion 
that bundling prospects for state-owned firms would necessarily be 
more efficient, and thus more profitable, than how smaller companies 
might mine and process uranium into yellow cake.  However, they do 
concede that state-owned firms may be better placed to refine yellow 
cake for reactors.  End Note.) 
 
RUSSIANS FAVORED 
---------------- 
 
¶5. (SBU) Given the current knowledge of deposits, which is 
admittedly incomplete and often dependent on dated Soviet-era 
exploration, there would be three tenders respectively for South 
Gobi-based uranium, eastern Mongolian uranium, and uranium located 
in the southeastern provinces.   Of course, this condition would 
only apply to Kazakh, French, Chinese and Russian state-owned 
uranium processors, not to privately owned uranium miners. However, 
when the MoIT mentions likely partners on the state-owned side, 
France, Kazakhstan, and China are never mentioned.  It is Russia 
that would carry out joint exploration, mining and production 
operations in Mongolia. 
 
SACRE BLEU! 
----------- 
 
¶6. (SBU) GOM sources tell us that the French have completely misread 
the GOM.  The GOM was looking for evidence that state-owned 
operation of the uranium sector was the best approach.  If the 
Russians, Chinese or Kazakhs had suggested such a concept, the GOM 
would have faced widespread public resistance to what would have 
seemed a return to Soviet-era economics.  But if a western firm, 
whose practices are presumed by the Mongolians to be superior to 
those of Russia and China, says state-ownership is the best way to 
go, the concept would be easier to sell to the Mongolian public. 
The French obligingly supplied that information in the belief that 
the GOM would treat their firm(s) better than other western players. 
 However, our sources tell us that the GOM, desiring to partner with 
its "old friend" Russia, has no intention of treating the French 
differently than other western right's holders.  Consequently, the 
sources say, the French are being as bureaucratically hindered as 
the other players in attempting to access the rights for which they 
paid so much. 
 
GOM ACQUISITION WOULD REQUIRE PARLIAMENTARY ACTION 
--------------------------------------------- ----- 
 
¶7. (SBU) Under current law, Parliament must declare a reserve 
"strategic" before the law allows for the GOM to acquire up to 50% 
of a deposit, through an investment agreement.  However, the MoIT 
has proposed circumventing this part of the statute by changing the 
law so that all uranium deposits are declared strategic, and by 
allowing the state to acquire no less than 51% of each deposit. 
Sources at MoIT, private industry and the Mongolian state-owned 
holding company for mining assets, Erdenes MGL, tell us that GOM 
 
ULAANBAATA 00000630  003 OF 005 
 
 
expectations of the bounty to come from Mongolian uranium has 
sparked this attempt to reclaim uranium rights for the state. 
First, the price of uranium spiked.  In 1994, uranium sold for 
US$9.25 per pound; but on September 17, 2007, it hit US$90.  Second, 
world supply tightened, making Mongolia's deposits, remote as they 
are, enticing to miners, processors and power generators.  Third, 
the GOM believes that it sits on the world's last, best untapped set 
of reserves and that these reserves are so titanic that they will 
serve as the basis for a nuclear power industry based in Mongolia, 
feeding northeast Asia. 
 
HOW RICH ARE MONGOLIA'S URANIUM DEPOSITS? 
----------------------------------------- 
 
¶8. (COMMENT: But just how good are these resources? Private and 
public experts note that recent research of uranium sites indicates 
that Mongolia's uranium holdings, while respectable, are much 
smaller than those of Canada, Kazakhstan, or Australia.  The experts 
say many of these dreams are inspired by the generous promise of the 
Russian nuclear agency, Rosatom, to establish a nuclear power 
industry in Mongolia.  Some Mongolian officials, recalling the age 
of Soviet-era mega-projects, are subject to such blandishments. 
However, our sources all agree that it is unlikely that Russia would 
set up a competing nuclear processing and power infrastructure in 
Mongolia.  They note that the Russians intensively studied 
Mongolia's uranium resources when they dominated the nation and did 
not choose to develop them, suggesting that these resources are not 
as rich as the GOM seems to believe.  END COMMENT.) 
 
¶9. (SBU) High prices and high demand prompted private investors from 
Russia, Australia, Canada, Mongolia, and the United States, along 
with state-owned investors from France, China, and Russia, to 
acquire and explore some 130 uranium-deposit sites.  But fearing 
that it will not get its fair share of the uranium bonanza, the GOM 
is moving to secure its rights. 
 
PLEASE FEED THE BEAR 
-------------------- 
 
¶10. (SBU) In addition to purely commercial concerns, Mongolia sees 
uranium as part and parcel of its regional balancing act.  Sources 
from Erdenes MGL, MoIT, and the office of the President of Mongolia 
(protect) have told us that Russia has complained to the GOM that 
Mongolia should work with its "old friend" on coal, copper, rail, 
energy and other projects.  Mongolia has consistently held the line 
against Russian domination on key copper and coal projects. 
However, on uranium, Mongolia has embraced Russian proposals 
wholeheartedly in order "to keep the bear fed," even if this means 
starving private firms by nullifying their rights. 
 
UP IN ARMS 
---------- 
 
¶11. (SBU) Private firms holding uranium exploration rights are 
understandably up in arms over the controversial policy statement, 
which is circulating around Ulaanbaatar.  The amended Minerals Law 
of 2006 allowed the GOM to acquire up to 50% of strategic deposits, 
and uranium was specifically listed as such.  Mining firms grumbled 
about this arrangement, but accepted it as long as its terms were 
 
ULAANBAATA 00000630  004 OF 005 
 
 
implemented consistently and transparently; provided they were 
compensated for the share they had to surrender to the GOM; and 
provided they did not lose management or operating control. 
 
PRIVATE FIRMS FEAR THE WORST 
---------------------------- 
 
¶12. (SBU) MoIT has not explained how its proposed acquisition of at 
least 51% squares with commitments made by the GOM to the USG and 
private companies regarding rights holders.  Given last summer's 
aborted attempt to revoke 34 licenses, private firms fear that the 
proposed changes are nothing less than the expropriation of their 
rights. 
 
BUREAUCRATIC ROADBLOCKS 
----------------------- 
 
¶13. (SBU) In the run-up to a formal announcement on uranium policy, 
tentatively scheduled for December, MoIT seems to have decided to 
throw a series of bureaucratic roadblocks in the way of firms 
wishing to convert to mining licenses.  When MoIT retreated from the 
initial revocation of the 34 licenses, it advised firms involved to 
convert from exploration to mining licenses.  Most firms were only 
too happy to do so, to enhance their claims on developing the 
resource.  However, MoIT and its regulatory arms have consistently 
refused to allow the intermediate steps that lead to licensing.  For 
example, a company must register its reserve with MoIT, but MoIT's 
reserve committee has not met for months, despite official requests 
to do so.  Firms must also submit specific data on their exploration 
tenements to convert to a mining license -- data held by the Mineral 
and Petroleum Authority of Mongolia (MRPAM).  A month ago, the data 
was readily available, but now MRPAM claims that the information is 
classified as a state secret, preventing them from honoring requests 
from firms that require the data on their own holdings. 
 
COAL, COPPER RIGHTS HOLDERS ALSO CRITICAL 
----------------------------------------- 
 
¶14. (SBU) Holders of other mining rights, from coal to copper, have 
joined their uranium brethren in criticizing the MoIT's behavior. 
These include Rio Tinto, which is fighting to get its copper-gold 
project through Parliament.  RT urged uranium miners to fight 
aggressively for their rights, fearing that once the GOM gets a 
taste for "expropriating" resources, it might move in on other 
assets, including copper and coal.  More tangibly, RT has offered 
moral and material support to the firms through the local mining 
association.  It has discussed the matter privately with GOM 
officials at all levels, joined in this effort by other firms, 
including U.S.-based Peabody Energy. 
 
COMMENT 
------- 
 
¶15. (SBU) Industry's concerns over the implications of the leaked 
GOM report are well-founded; the GOM's moves are increasingly 
heavy-handed, arbitrary and disturbing.  Given that U.S. involvement 
in Mongolian mining is increasing, with the entry of Peabody and 
Phelps Dodge (not to mention Commerce Department advocacy for RT and 
Fluor), Post takes the GOM report seriously.  In our view, the GOM 
 
ULAANBAATA 00000630  005 OF 005 
 
 
should be reminded about the perils of expropriation as spelled out 
in the U.S.-Mongolia bi-lateral investment treaty.  We will examine 
the proper means for such a communication and continue to report 
accordingly. END COMMENT. 
 
MINTON