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RR RUEHLMC RUEHVC RUEHVK
DE RUEHUM #0068/01 0370149
ZNR UUUUU ZZH
R 060149Z FEB 08
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1886
INFO RUEHOT/AMEMBASSY OTTAWA 0574
RUEHUL/AMEMBASSY SEOUL 3171
RUEHMO/AMEMBASSY MOSCOW 2086
RUEHTA/AMEMBASSY ASTANA
RUEHAH/AMEMBASSY ASHGABAT 0041
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RUEHNT/AMEMBASSY TASHKENT 0042
RUEHDBU/AMEMBASSY DUSHANBE
RUEHBJ/AMEMBASSY BEIJING 5979
RUEHML/AMEMBASSY MANILA 1624
RUEHLO/AMEMBASSY LONDON 0264
RUEHKO/AMEMBASSY TOKYO 2867
RUEHBK/AMEMBASSY BANGKOK 1703
RUEHBY/AMEMBASSY CANBERRA 0235
RUEHSH/AMCONSUL SHENYANG 0450
RUEHVK/AMCONSUL VLADIVOSTOK 0218
RUEHOK/AMCONSUL OSAKA KOBE 0071
RUEHON/AMCONSUL TORONTO 0009
RUEHMT/AMCONSUL MONTREAL 0018
RUEHVC/AMCONSUL VANCOUVER 0111
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHMFIUU/HQ EPA WASHINGTON DC 0044

UNCLAS SECTION 01 OF 07 ULAANBAATAR 000068 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EAP/CM, EB/ESC, AND EB/IFD/OIA 
STATE PASS USTR, USGS, DOC/ITA, EXIM, OPIC, AND EPA 
STATE PASS AID/ANE D. WINSTON 
COMMERCE FOR ITA FOR ZHEN GONG CROSS 
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 CA MG
SUBJECT: 2007 Mining Sector Wrap Up: One Step Forward, 
Two Steps Back 
 
REF:  A. 07 Ulaanbaatar 216 
 
  ¶B. 07 Ulaanbaatar 478 
  ¶C. 07 Ulaanbaatar 483 
  ¶D. 07 Ulaanbaatar 080 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET 
DISTRIBUTION 
 
¶1. (SBU) SUMMARY: MongoliaQs mining sector took a wild 
ride in 2007 as alarming setbacks overshadowed 
promising advances made earlier in the year.  Major 
achievements included a deal on a stability agreement 
with Ivanhoe/Rio Tinto to develop the promising Oyu 
Tolgoi copper mine, and the appointment of a respected 
technocrat to run the state-owned company that will 
manage the governmentQs equity in strategic mines. 
Setbacks included regulatory mischief surrounding 
mining license issuances and revocations; ParliamentQs 
failure to approve the Ivanhoe/Rio Tinto deal; 
sluggish progress toward a deal on the world-class 
Tavan Tolgoi coal mine; and new amendments to the 
Minerals law that would allow the GOM to take a 
minimum of 51% strategic stake in important mines. 
The installation of a new Government in November 
promised movement on many of these issues, but there 
has so far been little to show for it.  With 
Parliamentary elections nearing, many experts believe 
the chance to settle these matters will be delayed 
indefinitely.  However, Mongolia cannot afford to wait 
much longer in responding to serious offers to develop 
its mining sector.  And it must learn that constantly 
changing laws and regulations will only scare off 
investors.  END SUMMARY. 
 
Despite Early Optimism, Movement On Mining Slows 
--------------------------------------------- --- 
 
¶2. (SBU) Throughout early 2007, relations between the 
GOM and mining investors were moving in a positive 
direction following dust-ups related to passage of 
amendments to the Minerals Law and the widely scorned 
Windfall Profits Tax, both adopted in 2006.  But the 
optimism quickly dissipated as deals became 
increasingly unlikely on the Oyu Tolgoi and Tavan 
Tolgoi deposits, and regulatory shenanigans sparked 
investor fear of "creeping expropriation" by the GOM. 
 
¶3. (SBU) The GOMQs failure to reach agreements on two 
of the countryQs preeminent mining deposits -- the 
copper-rich Oyu Tolgoi and the world-class coal 
deposit Tavan Tolgoi, both located in the south Gobi 
Desert not far from the Chinese boarder -- have proven 
bitterly disappointing for international investors. 
 
ULAANBAATA 00000068  002 OF 007 
 
 
These two projects alone could transform Mongolian 
infrastructural development for years to come in the 
areas of power, water, roads, rail, and aviation. 
 
Oyu Tolgoi Deal Stalls 
---------------------- 
 
¶4. (SBU) Mongolia and Rio Tinto/Ivanhoe broke through 
a four-year long negotiating logjam to reach a deal 
that would allow development of the Oyu Tolgoi copper 
mine that.  Once operational, it could raise 
MongoliaQs GDP by 50% from the current US$ 2 billion 
to perhaps US$ 3 billion (Reftel A).  The deal called 
for the Government to get 34% of the mine equity, to 
be paid for out of the GOMQs share of the mine profits 
and tax exemptions. (Note: Post has been engaged in 
advocacy for Rio Tinto on the deal.  End Note.) 
 
¶5. (SBU) Unfortunately, Parliament has so far balked 
at approving an agreement it believes is overloaded 
with tax exemptions that deny Mongolia badly needed 
revenue.  The GOM did not properly present the 
agreement to the public or Parliament, which fed 
misconceptions and fears about the deal.  Now, 
populist members of the opposition Democratic Party 
are calling for Rio Tinto to give the GOM an 
additional 17% of the Oyu Tolgoi mine for free.   If 
Rio Tinto refuses, the DP threatens to nationalize the 
property.  (Note: Some Democrats believe their party 
is in a strong position to win the June Parliamentary 
elections. End Note.) 
 
¶6. (SBU) Rio Tinto has resisted, arguing that this 
expropriation of their rights would render the mine 
unprofitable.  With little likelihood of parliamentary 
approval before the elections, Rio Tinto has decided 
to wait until conditions settle, and has begun to 
mothball the project.  (It is reducing the high level 
of current monthly expenditure to a sustainable level, 
and by the end of March, will have slashed the 
Mongolian and expat workforce by 900 employees.) 
 
¶7. (SBU) Mining industry insiders believe that failure 
to move on the Oyu Tolgoi deal will signal the end of 
current efforts to bring world-class mining to 
Mongolia for five to 10 years.  This would subject 
Mongolia to three stresses.  First, it would deny 
Mongolia revenue needed for development and to sustain 
social spending obligations over the short and medium 
-term.  Second, Mongolia is lacking in capital and 
expertise.  If it fails to attract qualified western 
mining firms, it may have to turn to Russian and 
Chinese state-owned firms with terrible environmental 
 
ULAANBAATA 00000068  003 OF 007 
 
 
records and a proven lack of respect for third-country 
laws and regulations regarding mining.  Third, without 
western firms (and their Governments) to counter- 
balance Chinese and Russian influences, Mongolia would 
essentially have to cede its economic independence to 
whichever neighbor gained control of the asset and the 
rights to operate it. 
 
¶8. (SBU) The GOM intends to have the current deal 
reviewed by a reputable Western firm expert in 
evaluating such deals, and for the evaluation to be 
presented to the public and Parliament.  The 
recommendation would presumably either approve of the 
deal in its current form or call for its renegotiation. 
(Delays and political realities may require complete 
re-negotiation to account for changing costs and 
commodity markets.  Unfortunately, neither the GOM nor 
Parliament seems to appreciate this fact of commercial 
life.) 
 
Tavan Tolgoi Bogged Down in Negotiations 
---------------------------------------- 
 
¶9. (SBU) After taking office in November, Prime 
Minister S. Bayar said that on national security 
grounds, his Government would take full control of 
mining licenses covering the coking and thermal coal 
deposit at Tavan Tolgoi.  The GOM made clear that 
private rights holders would be compensated.  The 
GOMQs intentions seem sincere, but negotiations 
quickly became bogged down over price and are 
currently suspended until after the Lunar New Year. 
It is now thought that it might take a while to sort 
out the local ownership, the government share, and the 
share of foreign companies -- many of which are 
beating on the government's door to do a deal. 
 
¶10. (U) Post has been actively engaged in advocacy 
efforts for US-based Peabody Energy, the world's 
largest private coal mining company, in its bid to 
become part of a consortium to develop Tavan Tolgoi. 
(The latterQs reserves are conservatively estimated at 
6 billion metric tons.) 
 
The New Government Faces Old Obstacles 
-------------------------------------- 
 
¶11. (U) The formation of a new Government in late 2007 
has generally been seen as positive by the mining 
industry and the public, as the Bayar Government seems 
intent on moving mining issues forward, and has said 
as much publicly and privately to various stakeholders. 
Specific steps taken include recalling both the Oyu 
 
ULAANBAATA 00000068  004 OF 007 
 
 
Tolgoi and Tavan Tolgoi projects from parliamentary 
consideration so that the GOM could reform and re- 
present the agreements, after having subjected them to 
professional review and renegotiation. 
 
¶12. (U) But the current GOM has less than six months 
before the next parliamentary elections to accomplish 
something substantive on mining.  In the meantime, the 
opposition has no interest in allowing the current 
Government to claim success on any score and will 
resist.  This would raise questions about the 
legitimacy of any major project, which would seem to 
require bilateral support from both leading parties 
(the DP and the ruling Mongolian PeopleQs 
Revolutionary Party, or MPRP). 
 
U.S. Interests 
-------------- 
 
¶13. (U) The Department of Commerce, through its 
Advocacy Center, has granted advocacy support to both 
Peabody and Rio Tinto, recognizing that their 
involvement at Tavan Tolgoi and Oyu Tolgoi, 
respectively, offers substantial, long-term export 
potential for U.S. manufacturers, as well as promoting 
U.S. free-market and democratic goals for Mongolia. 
In addition, there are other opportunities for exports 
of goods and services to the mining sector.  The 
Mongolians are extremely interested in sourcing clean- 
coal technologies from U.S. suppliers.  Caterpillar, 
for instance, has done well in supplying this sector. 
General Electric is ideally placed to sell the 
locomotives that will pull the coal and ore trains, 
and U.S. expertise at setting up efficient coal-rail 
systems will be in demand. 
 
Regulatory Mischief 
------------------- 
 
¶14. (SBU) In September, Mongolia's reputation as safe 
place to invest suffered serious damage when officials 
from the GOMQs MRPAM (Mineral Resources and Petroleum 
Authority) attempted to revoke the exploration rights 
of 18 mining companies, some of which had American 
equity invested.  This completely ignored promises 
made to these companies under both the old and the 
newly amended Minerals Laws of Mongolia (reftel B, C). 
Although another official from the same agency 
reversed the revocation a few weeks later, the lack of 
a formal process for reviewing and executing policy 
among the responsible agencies led to decisions that 
tarnished MongoliaQs reputation among investors, many 
of whom labeled the GOMQs moves as "creeping 
 
ULAANBAATA 00000068  005 OF 007 
 
 
expropriation" and a complete violation of the GOM's 
explicit commitment to follow best practices and the 
rule of law. 
 
¶15. (SBU) It didnQt help that the move came six months 
after foreign and domestic mining complained to Post 
that GOM processing of exploration and mining licenses 
had all but ceased (reftel D).  They accused the 
former Ministry of Industry and Trade (MIT) Minister 
Jargalsaikhan (later sacked) of illegally using his 
position to embargo license processing.  Fearing the 
loss of their licenses, the companies threatened to 
drag Mongolia into local and international courts. 
The episode helped expose serious flaws in the revised 
Minerals Law that allowed for a wide array of 
regulatory mischief. 
 
Appointment of Zorigt 
--------------------- 
 
¶16. (U) In March, the GOM established the state-owned 
Erdenes-MGL (UB 217) to receive and manage its equity 
shares of "strategic" mines.  The appointment of D. 
Zorigt, a young, well-known and respected technocrat 
previously with the Ministry of Industry and Trade, 
was welcomed.  Zorigt has been working with 
international consultants to create a company that is 
transparent, free from government interference and 
based on western best practices. 
 
New Amendments to the Minerals Law 
---------------------------------- 
 
¶17. (SBU) Recent calls by certain MPs for all 
"strategic" deposits to require a minimum of 51% 
participation/equity for the GOM highlight the 
haphazard, constant threat to change recently amended 
mining law of Mongolia, regardless of the commercial 
issues or capacity of the GOM to pay for what it plans 
to take from firms (let alone invest in building the 
mine). 
 
¶18. (SBU) Needless to say, MPs do not consider whether 
the GOM can execute its function as regulator of a 
mine in which it might have a financial interest. 
Experience at mines currently operated by the state 
indicates that the GOM lacks both the capacity and 
will to balance health, worker safety, environmental 
and other concerns, while meeting the need to generate 
revenue.  Mining firms report that although they can 
craft deals that may be commercially viable under a 
variety of circumstances, the constant change in laws 
or regulations, and the constant threat of fundamental 
 
ULAANBAATA 00000068  006 OF 007 
 
 
alterations in existing laws, fuels the perception 
that Mongolia may be too unstable to invest in. Big 
players like Peabody, RT, BHPB, etc., have no plans to 
depart, but tell Post that they will wait till matters 
settle before concluding deals. 
 
¶19. (U) The seventh annual Fraser Institute Survey of 
Mining Companies recently listed Mongolia as 62nd out 
of 65 countries in attractiveness for mineral 
exploration, down from 33rd the previous year.  The 
drop was attributed to regulatory problems and a lack 
of openness.  It places Mongolia just above Zimbabwe 
and Venezuela. 
 
Comments and Conclusions 
------------------------ 
 
¶20. (SBU) Mining of MongoliaQs mineral, metal 
resources and hydrocarbon resources is crucial to 
MongoliaQs development.  Because mining activities 
touch on so many facets of Mongolian life -- economic, 
human-resource development, environmental, health and 
safety, infrastructure, foreign relations, etc. -- it 
remains a challenge for all parties affected to craft 
and implement a workable, reasonable legal and 
regulatory framework for mining. 
 
Mongolia Must Decide 
-------------------- 
 
¶21. (SBU) Mongolia needs to decide how it wants mining 
to proceed.  The GOM has been presented with serious 
offers by reputable mining firms on projects, not 
least of all Oyu Tolgoi, that will profoundly affect 
Mongolian development.  It is incumbent on Mongolia to 
respond to these offers in a timely and serious manner. 
A measure of the maturity of the Mongolian political 
system will be its ability to render a decision -- 
positive or negative -- on mining developments.  Much 
of the support that Mongolia has received from donors 
and investors is predicated on a maturing of its 
market-oriented democracy.  Aid projects, among them 
MCC, are seen as stepping stones along a path that 
will lead to the private sector leading economic 
development, not the Government or some external donor. 
And Mongolia has come to the point where the private 
sector seems ready to assume this leading role in the 
mining sector, but Mongolia hesitates; donor faith 
wanes; commodity prices fall; and interest turns 
elsewhere, leaving Mongolia as a might-have-been. 
 
Constantly Shifting Regs Scare Off Investors 
-------------------------------------------- 
 
ULAANBAATA 00000068  007 OF 007 
 
 
 
¶22. (SBU) Our paramount concern, and the root of many 
problems, is the lack of a stable, fair, transparent 
legal and regulatory system in Mongolia - one country, 
one legal system, and one body of unified law and 
regulation applied consistently and fairly to all 
players.  Constantly shifting laws and regulations, or 
the continual threat to change mining-related laws and 
regulations, is scaring off foreign and domestic 
investors.  The adoption of democracy and a market 
economy has brought about tremendous legal change and 
challenges in Mongolia.  Mongolian legislators will 
have to develop a system in which investors, citizens 
and others can gain a clear picture of what is 
expected of them. 
 
GOM Should Avail Itself to World Bank Assistance 
--------------------------------------------- --- 
 
¶23. (SBU) Regarding the overall regulatory framework, 
we recommend that the GOM avail itself of assistance 
offered by the World Bank.  In our view, the World 
Bank has correctly diagnosed the challenges facing 
MongoliaQs mining sector in the position paper 
prepared on behalf of the Donors for the DonorQs 
Technical Meeting held in Mongolia on January 2008. 
Regarding advice on specific mining projects, we agree 
with the GOM that it should seek out expert advice 
from a world-class firm qualified to evaluate and 
advise on current and future mining projects, in a 
timely fashion. 
 
¶24. (SBU) The USG has not asked Mongolia, nor will it 
seek special treatment for U.S. companies based on 
political considerations.  Given a level playing field, 
based on best practices and the rule of law, and our 
firms and investors can compete with those from other 
nations, offering terms that will satisfy both 
investorsQ commercial concerns and Mongolian domestic 
expectations for mining. 
 
ZAPPIA