VZCZCXRO7384
RR RUEHLMC
DE RUEHUM #0227/01 1400920
ZNR UUUUU ZZH
R 190920Z MAY 08
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 2169
INFO RUEHBJ/AMEMBASSY BEIJING 6166
RUEHUL/AMEMBASSY SEOUL 3366
RUEHKO/AMEMBASSY TOKYO 3041
RUEHMO/AMEMBASSY MOSCOW 2258
RUEHOT/AMEMBASSY OTTAWA 0628
RUEHBY/AMEMBASSY CANBERRA 0286
RHEHAAA/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 03 ULAANBAATAR 000227 
 
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 
INTERIOR FOR BLM 
 
E.O. 12958: N/A 
TAGS: EMIN EINV PREL ECON EFIN PGOV MG
SUBJECT: EMBASSY SUPPORTS PEABODY IN MEETINGS WITH PRESIDENT, PM; 
REVIEWS MINING CONCERNS 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. 
 
¶1. (SBU) SUMMARY: Visiting Peabody Energy President for Northeast 
Asia, accompanied by the Charge and Peabody reps, met separately 
with Prime Minister Bayar on May 8 and President Enkhbayar on May 9. 
 They underscored Peabody's continued interest in doing business in 
Mongolia and delivered draft recommendations for a framework for the 
development of Mongolia's coal industry, which President Enkhbayar 
had requested during his October 2007 visit to the U.S.  PM Bayar 
was seized with addressing differences between MPs regarding two 
mining amendments - one that proposes a 51% government equity share 
in strategic deposits, and another that envisions a production 
sharing contract (PSC).  Bayar considered the former too problematic 
and the latter more workable and politically tolerable.  (Note: 
Parliament's regular session closed Friday, May 15, with no action 
on either amendment, though the MPs may yet return to discussions 
before campaigning begins officially at month's end for June 29 
national parliamentary elections. End Note.)  Bayar concluded that 
Mongolians share a common desire to develop mining, but lack a 
consensus on how to do so.  President Enkhbayar noted Mongolians' 
only experience with mining was with the 100%-government-owned 
Erdenet copper mine, a joint venture with the Soviets/Russians.  He 
explored various permutations of the 51% idea:  51% government 
equity, 51% of the profits, and at some future point, owning a 
controlling interest of 51% of the physical property to ensure 
Mongolia's sovereignty over its own territory.  Enkhbayar suggested 
deposits might be distinguished by the sources of exploration 
funding between those discovered by government-funded exploration, 
such as the Tavan Tolgoi coal deposit, versus those found privately, 
such as the Oyu Tolgoi copper/gold deposit discovered by Ivanhoe, a 
Canadian mining firm (and now partnered with Rio Tinto).  At both 
meetings, the Charge supported Peabody's efforts and reviewed 
concerns voiced by American mining firms.  END SUMMARY. 
 
PEABODY REPS VISIT 
------------------ 
 
¶2. (SBU) A visiting Peabody Energy delegation led by Peabody's 
President for Northeast Asia, Mr. Tahir Tayeb, accompanied by the 
Charge and Peabody reps, held separate meetings with Prime Minister 
Bayar on May 8 and President Enkhbayar on May 9.  The purpose of 
their visit was to underscore Peabody's continued interest in doing 
business in Mongolia, and to deliver a study, requested by the 
President, providing recommendations for a framework for the 
development of the Mongolian coal industry. 
 
USG SUPPORTS PEABODY; AMENDMENT CONCERNS NOTED 
--------------------------------------------- - 
 
¶3. (SBU) In both meetings following Peabody's presentations, the 
Charge intervened to stress that the USG supports Peabody as a world 
leader in coal development with cutting-edge technology, noting that 
Peabody has been a exemplary model of high standards for local 
community support and environmental protection.  The Charge said 
U.S. firms speak for themselves as to the specifics of given 
proposals, but that many firms had advised the USG that the 
proposed amendment requiring an unfunded 51% government equity share 
would make mining commercially unviable.  The Charge also noted that 
the uncompensated "taking" of such a government share in an existing 
investment could trigger U.S. anti-expropriation laws and provisions 
under the existing US-Mongolian Bilateral Investment Treaty (BIT). 
Of the mining amendment proposals currently on the table, the 
production sharing contract seemed to have the flexibility needed by 
investors while also meeting Mongolia's sovereignty and domestic 
political needs - that the contract contained no new "redline 
deal-breakers."  (Note: After each meeting, Peabody reps expressed 
appreciation for accompanying them and supporting Peabody, as well 
as for delivering these important points.  End Note.) 
 
PM: MONGOLIANS SHARE A COMMON DESIRE TO 
DEVELOP MINING BUT NO CONSENSUS ON HOW TO DO IT 
--------------------------------------------- --- 
 
 
ULAANBAATA 00000227  002 OF 003 
 
 
¶4. (SBU)  During a cordial 70-minute meeting, PM Bayar thanked Tayeb 
for the framework document and noted that the Mongolian public 
shared a common desire to develop its mineral resources, but lacked 
a consensus on how to do so.  At the moment, two proposals were 
before the Parliament, one enshrining a 51% government equity share 
in any strategic mineral development, and the second proposing a 
"production sharing contract" (PSC).  He thought the former was 
essentially unpassable, given differences between the ruling 
Mongolian People's Revolutionary Party (MPRP) and the opposition 
Democratic Party (DP), while the latter might still provide 
sufficient flexibility to meet Mongolian  interests and those of 
potential mining investors.  He thought passage of either would be 
difficult, given the lack of clarity on the issues and because there 
was little time before Parliament would recess so MPs could focus on 
the June 29 Parliamentary elections. 
 
PRESIDENT AMPLIFIES VIEWS ON MINING 
----------------------------------- 
 
¶5. (SBU)  During a May 9 meeting that lasted nearly 90 minutes, 
President Enkhbayar reviewed the evolution of Mongolian thinking on 
government participation.  Enkhbayar noted that Mongolia's mining 
experience was dominated by its 70-year relationship with the Soviet 
Union, during which state ownership was 100%, and Mongolia's only 
real experience stemmed from the joint ownership with Russia of the 
Erdenet copper mine.  Mongolians did not understand the distinction 
between 100% national ownership of the mineral resources in the 
ground and less than that in the mining investment, development, and 
production process.  He opined that MPs, who visited major U.S. 
mines in Wyoming and Utah in 2007, drew the wrong conclusions, 
equating 100% USG ownership of underground mineral resources with 
equity participation in development, which is not the case.  (Note: 
These MPs have willfully misrepresented what they heard while 
reviewing Peabody's Powder River Basin coal operations in Wyoming. 
They subsequently informed the Mongolian public that the USG owned 
and operated coal mines.  Rather, the USG owns the minerals in the 
ground, but does not operate any mines.  Specifically, they were 
told that the USG owns the minerals in the ground (which is the same 
world over), that they license extraction of these minerals to 
private operations in which the USG had no ownership, financial or 
managerial role.  The MPs, for unknown reasons, did not convey this 
truth to their colleagues or the Mongolian public, claiming instead 
that the USG owned and operated coal mines.  End Note.)  The 
President also offered a lengthy explanation of the history of the 
concept of royalties. 
 
51% GOVERNMENT SHARE CONFUSION 
------------------------------ 
 
¶6. (SBU) Over the course of the conversation, Enkhbayar indicated 
that he supported a 51% government equity share in strategic 
deposits, but then shifted to say he meant 51% of the profits, and 
later stressed the importance of Mongolia ending up at some future 
point owning a controlling interest of 51% of the property, so that 
it was ultimately assured of sovereignty over its own territory. 
Tayeb replied that there were many other options available to ensure 
Mongolia's sovereign control, citing as an example the USG's 
controls exercised through its regulatory authority.  Enkhbayar also 
mentioned the possibility of "right of first refusal" provisions or 
"golden shares" as other options.  Enkhabayar stressed that Mongolia 
needed a stable, predictable regime if it hoped to attract needed 
investment to make mining possible.  He was concerned that the PSC 
would each require separate negotiations, opening up the process to 
more government and parliamentary meddling.  (Comment: Post believes 
this waffling on 51% reflects Enkhbayar's early support for the 
ill-defined and problematic concept.  Exactly what he was referring 
to was never articulated -- whether that meant the mine's physical 
plant or the corporate entity conducting the operation or something 
else, a confusion commonly shared among most GOM interlocutors and 
the Mongolian public in general.  Enkhbayar has yet to find a 
suitable formula for distancing himself from his earlier 
pronouncements and has taken to castigating the PSC, perhaps in part 
because it is the preferred political solution of the Prime 
 
ULAANBAATA 00000227  003 OF 003 
 
 
Minister, a political rival of the President.  End Comment.) 
 
WHO FUNDS EXPLORATION? 
---------------------- 
 
¶7. (SBU) The President suggested that another approach to answering 
the question would be to distinguish between those resources 
discovered by government-funded exploration, such as the Tavan 
Tolgoi coal deposit, versus that found through private investment, a 
la the Oyu Tolgoi copper/gold deposit discovered by Ivanhoe, a 
Canadian mining firm (and now partnered with Rio Tinto).  (Comment: 
In Post's view, this is a spurious argument for several reasons. 
First, earlier exploration may have been government-funded, but the 
government did not act, usually using the services of Soviet/Russian 
geologists to conduct exploration.  When the GOM issued exploration 
and mining licenses, it issued the licenses with no mention of 
future share/ownership rights for GOM on these properties.  However, 
the exploration firms were and are required to reimburse the GOM for 
its exploration expenses, the precise calculation of which remains 
problematic, as in many cases the exploration was conducted between 
20 and 50 years ago.  As many companies have reimbursed the GOM for 
its past expenses, they often wonder how the GOM can make a claim on 
deposit based on past expenses for which it has been compensated. 
Furthermore, much of the exploration was done by the Soviets using 
outdated technology, and firms say they had to do much of it again 
themselves to verify reliability.  End Comment.)  Enkhbayar 
expressed confusion about the Powder River Basin approach in which 
an exploration firm, which invested its own funds, also had to 
participate in a tender, and was not assured of the recovery of its 
exploration costs. 
 
¶9. (SBU) The President asked for further information and examples of 
how the transfer of ownership of mineral rights was handled in the 
U.S. and elsewhere.  He said he was interested in "power-sharing" 
issues and processes. (Note: Mongolian experts and officials in the 
Ministry of Industry and Trade have suggested that we conduct a 
series of DVC's among our Bureau of Land Management, Parliament MPs, 
and senior Mongolian officials, such as President Enkhbayar, to 
clarify our U.S. practices.  BLM has already held several events 
with Mongolian counterparts, providing information at the mid- to 
department-chief level.  However, our colleagues at MIT have 
reported that senior officials and parliamentary decision makers 
doubt what their advisors are telling them because it varies with 
what the traveling MPs have said; and although they doubt the MPs, 
senior Mongolian officials and MPs feel the need to hear what the 
U.S. does directly from the BLM source. End Note.) 
 
GOLDBECK