VZCZCXRO9795
PP RUEHLMC RUEHVC
DE RUEHUM #0118/01 0792349
ZNR UUUUU ZZH
P 192349Z MAR 08
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 1971
INFO RUEHBJ/AMEMBASSY BEIJING 6041
RUEHUL/AMEMBASSY SEOUL 3234
RUEHKO/AMEMBASSY TOKYO 2919
RUEHMO/AMEMBASSY MOSCOW 2135
RUEHOT/AMEMBASSY OTTAWA 0590
RUEHML/AMEMBASSY MANILA 1663
RUEHLO/AMEMBASSY LONDON 0290
RUEHBY/AMEMBASSY CANBERRA 0248
RUEHVC/AMCONSUL VANCOUVER 0125
RUEHGV/USMISSION GENEVA 0380
RHEHNSC/NSC WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000118 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR, USTDA, OPIC, USGS, AND EXIMBANK 
STATE PASS DOI/BLM FOR TESS BENNINGTON 
STATE FOR EAP/CM AND EB/IFD/OIA 
USDOC FOR ITA 
USAID FOR ANE FOR D. WINSTON 
 
E.O. 12958: N/A 
TAGS: ETRD PREL EAID ECON EFIN PGOV MG
SUBJECT: MPs Buying Votes by Nationalizing Mongolia's "Strategic" 
Mining Assets? 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. 
 
¶1. SUMMARY AND COMMENT: Mongolia's Parliament and Prime Minister S. 
Bayar's administration  have, in post's view and that of western 
mining firms, embraced a decidedly anti-business set of mining 
amendments, likely to be passed during an upcoming recess session of 
Parliament. The amendments are poorly drafted, contain hints of 
possible expropriation and emerged through an exceptionally 
un-transparent process.  Faced with the selective nationalization of 
key mining assets (vaguely defined "strategic" assets), several 
foreign and domestic mining firms have chosen to slow, suspend or 
cancel their operations in Mongolia.  Aware of these impacts but 
facing re-election in June, MPs from both the ruling Mongolian 
People's Revolutionary Party (MPRP) and the opposition Democratic 
Party(DP) have apparently decided that they can't oppose populist 
legislation and survive the elections.  So, they believe proving 
their love for Mongolia might be the ticket to electoral success. 
Post and mining firms have engaged in quiet efforts to lay the 
groundwork for a more market-oriented approach following the 2008 
Parliamentary/2009 Presidential election cycle. END SUMMARY AND 
COMMENT. 
 
KEY CONTROVERSIAL PROVISIONS 
---------------------------- 
¶2. (SBU) An extraordinary session of Mongolia's Parliament will be 
convened on March 25 to consider a set of amendments to the 
controversial 2006 Law on Mineral Resources.  The new amendments 
contain provisions that have generated intense concern among all 
stakeholders.  The provisions are as follows.  (Although the wording 
is rendered in tortured English, Post is loathe to change the text 
lest we alter the legislative drafters' intent.) 
 
-- A. A "mineral deposit of strategic importance" means a deposit 
with "exceptional impact on national security, independence, economy 
and social development considering its reserve quantity, location, 
economic benefits and mineral classification." 
 
-- B. "If the Mongolian Government, (a) Mongolian legal person or 
Mongolian citizen mines a mineral deposit of strategic importance in 
cooperation with a foreign legal entity, the foreign company's 
ownership percentage shall not exceed 49% of the equity." 
 
-- C. "In its capacity as the owner of the deposit, and when 
granting mineral mining licenses, the State shall take in advance 
its percentage of the value of the deposit, according to the 
feasibility study on the deposit and the conditions of an 
agreement." 
 
-- D. "To establish a National Council consisting of representatives 
of the State and civil-society organizations in order to have 
transparent mining operations on strategic deposits under public 
control, provide advice and assistance on agreements related to 
deposits of strategic importance, and to undertake independent 
monitoring on mining and tendering of such deposits; and to approve 
the National Council Charter." 
 
-- E. "To grant companies that have operated no less than 15 years 
the preemptive right to conduct their activities in areas adjacent 
to the deposits mined by such companies." 
 
INDUSTRY VEHEMENTLY OPPOSED 
-------------------------- 
 
¶3. (SBU) Western mining companies and many domestic mining firms 
have not been shy in conveying to Post their vehement, angry 
opposition to these amendments.  They argue that the amendments are 
poorly drafted and unclear.  For example, Provision A does not 
clearly define what would or would not be considered "strategic," 
 
ULAANBAATA 00000118  002 OF 005 
 
 
giving the GOM and Parliament almost unlimited authority to declare 
any sort of deposit "strategic" -- meaning that the state gets 51% 
right off the top.  Mining companies ask: What constitutes a 
national-security issue as far as a mining asset is concerned?  What 
sort of social and (or) economic impact would trigger a strategic 
designation?  These questions have lingered since the concept was 
first included in the 2006 Law, and the latest amendments fail to 
clearly define the concept in a way that would enable investors to 
gauge the likelihood of the state making a claim on a deposit. 
 
¶4. (SBU) Adding to the complexity, Provision B seems to provide for 
non-state majority ownership of strategic deposits as long as the 
owner is Mongolian: GOM, Mongolian legal entity, or Mongolian 
citizen.  However, as local attorneys have pointed out, current law 
requires all mining-license holders to be Mongolian legal entities, 
and allows foreign firms to register as Mongolian legal entities for 
this purpose.  These amendments do not disqualify any Mongolian 
legal entity from owning a strategic deposit, no matter nationality 
of the ultimate owner, which seems to fly in the face of the intent 
to assure Mongolian control over the mining asset. (Note: A reliable 
Embassy contact explained that this provision represents something 
of an uneasy compromise between the ruling party and the opposition, 
both of which have agreed to support the legislation at the 
Parliament session that opens on March 25.  The opposition 
Democratic Party (DP)  favors majority non-state 
involvement/ownership, so long as it is Mongolian citizen or legal 
entity involvement.  Given the past behavior of Mongolian mining 
interests in complying with existing laws and regulations, the 
ruling Mongolian People's Revolutionary Party (MPRP) is less 
confident about allowing private Mongolian interests a seat at the 
table, and believes that state interests are better secured through 
direct state involvement. End Note.) 
 
NO REFLECTION OF BEST PRACTICES 
------------------------------- 
 
¶5. (SBU) According to international investors, the amendments do not 
reflect commercial best practices in any way, shape or form.  Most 
Mongolian mineral deposits lack even the most basic infrastructure, 
forcing rights holders to expend significant resources to extract 
any deposit.  The GOM relies on mining companies to supply 
much-needed resources and expertise, but at the same time seems 
determined to limit their rights.  Some GOM sources tell us that 
mining companies will be expected to finance the GOM's investment, 
but will not receive operational or managerial control commensurate 
with their contribution.  Furthermore, companies have pointed out 
the GOM's inherent conflict of interest in regulating and enforcing 
mining, tax, environment, health and safety laws, while being the 
majority owner of an ongoing operation.  Western firms have rejected 
the 51% claim outright as absolutely unworkable in its current form, 
claiming that they will not enter into any agreement under such 
conditions. 
 
ADJACENT PROPERTIES 
------------------- 
 
¶6. (SBU) Mining companies have also taken exception with the 
amendments' granting of exploration and mining rights on adjacent 
properties to holders of strategic deposits.  They argue that this 
new power would give special rights to the holders of strategic 
deposits -- which under the proposed law could be a state-owned firm 
or a Mongolian-owned firm -- to take expropriate whatever land it 
wanted near any strategic deposit.  GOM officials have been publicly 
asked by the business community whether adjacent holdings were at 
risk, and have stated categorically that exploration rights have 
been formally delineated and are not for the GOM's taking.  This 
provision seems to contradict such statements. 
 
 
ULAANBAATA 00000118  003 OF 005 
 
 
OPAQUE PROCESS 
-------------- 
 
¶7. (SBU) The entirely un-consultative and un-transparent nature of 
the amendment process has come under heavy criticism.  Both Post and 
businesses have gotten their hands on updated revisions of the 
amendments, but only in the strictest confidence from key contacts 
on the GOM minerals law working group who fear retribution from the 
GOM if their activity became public knowledge.  Given the 
atmosphere, it has been impossible to verify whether the information 
we have been receiving is up to date and complete.  As one long-time 
Mongolia-based mining expert noted, there still is no requirement 
that Mongolian legislation be publicly vetted. 
 
COMPANIES DISCOURAGED; A FEW MINOR PLAYERS EXIT 
--------------------------------------------- -- 
 
¶8. (SBU) Many mining companies say these amendments have had the 
most discouraging impact on their investments to date.  Generally, 
those already on the ground have not pulled out, but they have 
limited their exploration and development investments until matters 
clarify. Some prospective western players have decided to forego 
entry for now.  One western equity investor told Commoff that it had 
cancelled plans to invest US$100 million in a coal prospect because 
of this amendment process.  The mine did not seem to be a strategic 
deposit, but with the amendments so vague and the GOM so 
inconsistent, the risk was too high.   A few firms  (Blue Rock and 
Fortress -- strictly protect) are selling out and departing for 
good. 
 
RIO TINTO: 51% GOM STAKE A DEAL-KILLER 
-------------------------------------- 
 
¶9. (SBU) For major players like Rio Tinto (RT), a 51% GOM stake 
would kill any deal, but RT tells us that rather than pulling out 
altogether now, they will move to care and maintenance operation 
(CMO) -- no mining activity, just barebones development -- until or 
unless the GOM provides terms that reflect commercial realities.  RT 
tells us it has already canceled US$400 million in contracts for 
equipment to be used at the massive Oyu Tolgoi (OT) copper and gold 
deposit,  and that other cancellations will occur in upcoming 
months.  This will cost RT and its partners sizable financial 
deposits in advance of fabrication and, more importantly, RT's place 
in the manufacturing cue.  It may be two or three years for the 
firms to get their places back in line, at which point costs will 
almost surely have risen.  For U.S. export interests, these 
cancellations may cost US$200 million up front.  Another victim of 
this amendment process is employment; the number of RT's OT-based 
jobs has dropped from 1,500 employees a year ago to a 600-person 
skeleton crew. 
 
LEGAL DEFENSE BEING PREPARED 
---------------------------- 
 
¶10. (SBU) Although Mongolian law and the current amendments seem to 
allow for a CMO, RT and others fear that demagogic and populist 
politicians might use a CMO as an excuse to expropriate RT's mining 
licenses.  Consequently, RT is preparing legal defenses allowed 
under their right to seek international adjudication and under the 
current Bi-lateral Investment Treaty between the U.S. and Mongolia. 
 
¶11. (SBU) Rio Tinto's approach has been to talk softly in public, 
showing all due respect for Mongolian laws and customs, but to make 
clear in private that any mine must operate according to 
international best practices, which the GOM has said it wants to 
institute in Mongolia.  As a carrot, if some solution could be 
found, RT has indicated a willingness to deliver advance payments to 
the GOM, in lieu of future revenues in the neighborhood of US$120 
 
ULAANBAATA 00000118  004 OF 005 
 
 
million.  The GOM, Parliament and the various parties have already 
promised voters rewards from mining, and the advance payments would 
certainly be needed to honor election commitments (a point not lost 
on any of those involved in this dispute). 
 
"LARGE AND IN CHARGE" 
--------------------- 
 
¶12.  (SBU) The GOM and Parliament,  and particularly powerful 
officials of the ruling MPRP, are anxious to show voters that when 
it comes to mining, they are "large and in charge."  All regular 
Embassy contacts at the Ministry of Industry and Trade, the State 
Property Committee and the Prime Minister's Office have been blunt, 
emphatic, and consistent about the Bayar Government's aims in the 
run-up to the June 29 parliamentary elections: 
 
-- Pass legislation that shows that this Government is decisive on 
issues of special interest to the public: mining, taxes, alcohol 
sales, etc.; 
 
-- Prove that the MPRP loves the nation and will protect its 
interests against acquisitive foreign interests, especially those in 
the resource-extraction sectors; 
 
¶13. (SBU) Consequently, our sources say, even if the GOM officials 
think a piece of legislation is poorly drafted and/or too 
nationalistic for commercial success, the MPRP will ram it through 
Parliament, regardless of immediate consequences to investors, 
public interest, or the long-term impacts on the sector, because it 
wants to win and thinks this sort of legislative activity is the 
path to electoral success.  The sources add that this populist 
agenda is driven, in part, by the very real fear that without it, 
Mongolia's sovereignty would be jeopardized by China or Russia. 
 
MPRP, DP REACH CONSENSUS 
------------------------ 
 
¶13. (SBU) The amendment debate has brought the MPRP and DP to a 
bipartisan commitment to pass the amendments in the upcoming 
Parliament  session.  During the week of March 10, DP Chief 
Elbegdorj appeared on TV with PM Bayar, and both announced that 
their parties would join forces to pass the mining amendments.  This 
agreement headed off what could have been a murderous debate in 
Parliament.  MPs might otherwise compete against each other to woo 
voters with offers of cash and development (while hurling charges 
that their opponents were selling out the nation) .  Seasoned 
observers of Mongolian politics noted that regardless of whether the 
uncommon bipartisanship favored one party or the other, it was 
probably better for both sides to show that on this issue, they 
could work together for Mongolia rather than rehash charges that 
might inspire voters to curse both parties. 
 
SOME DP MPS MIGHT NOT PLAY BALL 
------------------------------- 
 
¶14. (SBU) However, post has received information from a dissident 
element within the DP, who claims that not all members will support 
Allegory's bipartisan approach.  They apparently do not like ceding 
leadership on mining to the MPRP, which Elbegdorj seems to have done 
by agreeing to support Bayar's amendments.  In addition, they 
believe that the 51% figure is anti-business and un-workable, and 
want to find a way to short-circuit next week's legislative process. 
 They have apparently not spoken out against the bill for fear of 
being labeled as traitors to Mongolia's national interests.  They 
say their strategy will be to question each and every word, figure 
and sentence, consuming so much time that the bill will not be able 
to pass during the session. 
 
 
ULAANBAATA 00000118  005 OF 005 
 
 
COMMENT 
------- 
 
¶15. (SBU) 'Tis the (election) season, and the GOM and Parliament 
seem hell-bent on getting the amendments passed.  We see no 
indication that any amount of criticism from mining companies or the 
diplomatic corps would deter the MPs from the swift completion of 
their appointed rounds.    For the international community, post 
believes the proper course would be to encourage the GOM and 
Parliament to proceed with great care and caution - following 
international norms and best practices, but the sad political 
reality is that the current climate favors reckless speed, rather 
than thoughtful consideration.  When the subject has been raised 
with GOM and Parliamentary interlocutors, Post has calmly but firmly 
noted that the inequitable, anti-business  path down which 
Mongolia's mining sector is headed will not yield the development 
and revenues that Mongolian so desperately needs. In addition, post 
has been working with GOM and Parliament officials, providing 
information on how the USG deals with similar issues in its own 
mining sector.  Although post has not sought out opportunities to 
comment on these amendments, we believe when asked we can not remain 
silent but reflect back what the business community has said about 
risks and damage done to international corporate perceptions of 
Mongolia's business climate.  One component of this approach has 
been efforts by the Department of Interior's Bureau of Land 
Management (BLM) to consult with those Mongolians charged with 
crafting the amendments.  These expert-to-expert consultations (via 
Digital Video Conferencing hosted by post) have gone some way toward 
correcting the willful mischaracterizations of USG  mining practices 
used by some Mongolian officials and politicians to justify these 
amendments.  (Post thanks BLM for these efforts and for future 
support.) Post will leverage these and other consultations to create 
relationships with those Mongolians whose opinions have affected 
this set of amendments and will likely affect future legislation and 
regulation, laying the groundwork for reconsideration of a more 
commercially-based approach to regulating the sector after the 
2008/2009 political season.  END COMMENT. 
Minton