VZCZCXRO0531
RR RUEHC
DE RUEHUM #0652/01 3230849
ZNR UUUUU ZZH    RETRANMIT PER SVC 1592
R 190849Z NOV 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1667
INFO RUEHUL/AMEMBASSY SEOUL 3038
RUEHBJ/AMEMBASSY BEIJING 5857
RUEHMO/AMEMBASSY MOSCOW 1972
RUEHTA/AMEMBASSY ASTANA
RUEHEK/AMEMBASSY BISHKEK 0066
RUEHNT/AMEMBASSY TASHKENT 0025
RUEHDBU/AMEMBASSY DUSHANBE
RUEHML/AMEMBASSY MANILA 1535
RUEHLO/AMEMBASSY LONDON 0227
RUEHKO/AMEMBASSY TOKYO 2734
RUEHBK/AMEMBASSY BANGKOK 1626
RUEHOT/AMEMBASSY OTTAWA 0546
RUEHBY/AMEMBASSY CANBERRA 0201
RUEHSH/AMCONSUL SHENYANG 0375
RUEHVK/AMCONSUL VLADIVOSTOK 0179
RUEHOK/AMCONSUL OSAKA KOBE 0054
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUCPODC/USDOC WASHDC 1419
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000652 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EB/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: ENRG EMIN PREL SENV ELTN ETRD MG
SUBJECT: DEEP IN GOBI DESERT, NO-FRILLS COAL MINING 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
¶1. (SBU) SUMMARY: Emboffs accompanied Peabody Energy geologists on a 
helicopter trip deep into Mongolia's Gobi desert on November 2 to 
reconnoiter the Little Tavan Tolgoi (LTT) coal mine, a rudimentary 
facility that has warmed Mongolians for 41 years.  LTT is part of 
the larger Tavan Tolgoi (TT) deposit, which Peabody hopes to develop 
in partnership with the Mongolian Government.  LTT, marked by two 
large open pits, lacks power lines, pipes and other key aspects of 
sophisticated mining, but operates around the clock.  Once the 
coal-and-rock soil is scraped from the ground it is not "washed" to 
remove impurities but loaded directly onto trucks, most of which are 
then driven to China, spilling black coal dust and contaminating 
sheep and goats along the way.  Safety precautions are lacking.  30% 
of workers are Chinese, although the mine's managers insist it's 
10%.  Post provides advocacy support on Peabody's behalf, in line 
with Commerce Department guidance.  END SUMMARY. 
 
¶2. (SBU) Commercial Officer and Econ/Pol Chief joined Peabody Energy 
geologists on a November 2 helicopter trip to the Gobi desert to 
visit the Little Tavan Tolgoi (LTT) coal mine, which according to 
official statistics generates 30% of Mongolia's annual coal output. 
LTT is situated within the substantially larger TT coal deposit, 
which is still under exploration.  Peabody's aim was to quickly 
reconnoiter the site to get a better sense of the development 
problems that Peabody may face if it were to become the operator of 
the larger TT deposit. 
 
"IT WOULD HAVE TO BE BUILT FROM SCRATCH" 
---------------------------------------- 
 
¶3. (SBU) From the air, a sea of empty Gobi scrub and rocky sand 
passes before LTT comes into view, appearing as a dirty, coal-black 
island.  Immediately visible are two open pits and a large mountain 
of waste rock, built from four decades of mining.  Scores of trucks 
head in and out of the mine, not far from a camp with a microwave 
tower.  Conspicuously lacking, however, are power lines, pipes, or 
any other sign of sophisticated infrastructure development.  As one 
of Peabody's geologists commented: "It doesn't get more 'green 
field' than this."  Peabody's specialists noted that everything from 
roads to power, and water to food, would have to be built from 
scratch or transported in - an expensive and time-consuming 
proposition. 
 
30% OF NATIONAL COAL OUTPUT 
---------------------------------- 
 
¶4. (SBU) LTT is owned by a joint venture company consisting of the 
Omengobi Aimag provincial government (51%) and a private consortium 
led by local Parliamentarian Bat-Erdene, of the opposition 
Democratic Party.  The mine is divided into two pits.  LTT managers 
and local provincial officials told us that Pit 1 provides 400,000 
metric tons per year of thermal coal for domestic users at a price 
of 6000 Mongolian Tugriks, or US$5.11 per ton.  They said Pit 2 
provides some 2 million tons of coking (aka metallurgical) coal for 
export to China at a stated export price of US$10.71 per ton.  Put 
in perspective, LTT generates 30% of Mongolia's official output of 
eight million tons mined annually, both for domestic consumption and 
for export to China. 
 
PEABODY UNIMPRESSED WITH OPERATION 
 
ULAANBAATA 00000652  002 OF 003 
 
 
---------------------------------- 
 
¶5. (SBU) Peabody's specialists were clearly unimpressed with the 
operation of LTT, but said it holds promise, not least of all 
because of the high concentration of coal in the soil.  (NOTE: At 
most sites, the ratio of rock to coal is around 8:1, a Peabody 
official explained, while at LTT the ratio was roughly 1:1.  END 
NOTE.)  The TT deposits, including LTT, are suitable for open cast 
mining using drag lines, an efficient, productive method employed at 
most of Peabody's current operations.  However, the LTT pit is mined 
by excavators loading several hundred 90-ton trucks 24 hours per 
day, seven days a week.  From LTT, trucks carry the coal some 150 km 
to the Mongolia-China border, and then to a China-based railhead 
from which it is shipped an additional 200 km for end use in the 
Inner-Mongolian steel complex at Baotou.  As Peabody explained, the 
current system has too many seams -- too many starts and stops -- to 
maximize efficiency and productivity (and thus profits). 
 
20% OF TRUCKED PRODUCT IS DEAD WEIGHT 
-------------------------------------------- 
 
¶6. (SBU) The six relatively small excavators we counted can only 
fill up one truck at a time, and as each truck is filled another 
must take its place.  Each pit has only one entrance, thereby 
compounding delays.  Once the coal reaches the surface, it is not 
subjected even to a minimal washing process but is shipped straight 
to China.  As a result, anywhere from 10% to 20% of the material 
trucked to China is dead-weight rock or dirt.  The managers 
acknowledged these imperfections, but noted they still make a 
profit. 
 
DISCREPANCIES OVER PRICE OF COAL 
-------------------------------- 
 
¶7. (SBU) LTT managers said the mine is operated by the Omengobi 
provincial government, with shipping services provided by a company 
owned and operated by the minority private owner, Bat-Erdene.  The 
managers declined to explain how a contract with a government entity 
was awarded to one of the private holders of LTT.  Regarding the 
pricing of the coal, the managers claimed not to know what coking 
coal was fetching in China, but finally came up with the figure of 
US$10.71 per ton. (NOTE: Later, Commoff consulted with the bank that 
services LTT's accounts.  The bank's CEO said the US$10.71 figure 
was inaccurate; the actual sale price received at the China railhead 
is US$15 per ton, and the price paid by the end-user at Baotou is 
US$25-30.  The CEO added that there are occasional discrepancies 
between what the mine operators say they received from Chinese 
buyers and the cash they repatriated into Mongolia via the bank. 
END NOTE.) 
 
SAFETY, ENVIRONMENTAL CONCERNS 
------------------------------ 
 
¶8. (SBU) Safety and environmental precautions at LTT leave much to 
be desired.  The steep pit walls are not roped off, nor are there 
embankments to prevent trucks, cars or people from taking a one-way 
plunge.  Nearby roads appear asphalt-paved, but closer inspection 
reveals the mine's heavy environmental toll.  These roads are, in 
fact, dirt tracks topped with coal dust spilled from countless 
trucks.   Mine managers confirmed that the black-dust roads extend 
from LTT to the Chinese border 150 km away.  They also conceded that 
 
ULAANBAATA 00000652  003 OF 003 
 
 
GOM officials and local herders have complained about this 
pollution.  Herders' concerns are well-founded for sheep, goats and 
other animals near the roads; coal dust has blackened both their 
meat and their coats, they claim. 
 
CHINESE LABOR FIGURES A MOVING TARGET 
------------------------------------- 
 
¶9. (SBU) Mongolian law requires business to hire no less than 90% 
Mongolian workers, although waivers are allowed if skills are not 
locally available.  LTT officials initially told us that the mine 
employs some 2,400 workers, and that 90% of them are Mongolians. 
The rest, they said, are Chinese, mostly from Inner Mongolia, and 
work mainly as drivers trucking the coal to China.  These figures 
were called into question after we spoke with two on-site Chinese 
truckers.  Asked for a clarification, LTT managers then revised 
their estimate, saying about 20% of the workforce is Chinese. 
However, an LTT employee we bumped into at the site confided that 
the actual figure is 30%, most employed as truckers and excavator 
operators.  The employee said he is aware that LTT is not in 
compliance with the law, but pointed out that labor inspectors had 
never bothered LTT.  (NOTE: Many foreign-invested businesses have 
reported being harassed by the GOM after they hired even one 
additional non-Mongolian worker.  END NOTE.) 
 
MINTON 
 
 
 
 
5