VZCZCXRO9317
RR RUEHCN RUEHGH
DE RUEHUM #0038/01 0400430
ZNR UUUUU ZZH
R 090430Z FEB 10
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 3390
RUEHOO/CHINA POSTS COLLECTIVE
RUEHUL/AMEMBASSY SEOUL 4060
RUEHKO/AMEMBASSY TOKYO 3690
RUEHMO/AMEMBASSY MOSCOW 2859
RUEHVK/AMCONSUL VLADIVOSTOK 0520
RUEHOT/AMEMBASSY OTTAWA 0176
RUEHBY/AMEMBASSY CANBERRA 0531
RUEHTA/AMEMBASSY ASTANA 0291
RUEHDBU/AMEMBASSY DUSHANBE 0030
RUEHEK/AMEMBASSY BISHKEK 0168
RUEHAH/AMEMBASSY ASHGABAT 0126
RUEHNT/AMEMBASSY TASHKENT 0021
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000038 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR, USTDA, OPIC, AND EXIMBANK 
STATE FOR EAP/CM AND EEB/CBA 
USAID FOR ANE FOR D. WINSTON 
USDOC FOR ZHEN-GONG CROSS 
 
E.O. 12958: N/A 
TAGS: EINV PREL ETRD EMIN ENRG MG
SUBJECT: Mongolia's Failed Uranium Mining Policy 
 
Ref: 07 UB 238 
 
ULAANBAATA 00000038  001.2 OF 005 
 
 
¶1. (SBU) SUMMARY:  On February 1, 2010, Canadian uranium exploration 
company Khan Resources (KR) announced its intent to accept an offer 
from the Chinese National Nuclear Corporation (CNNC) to buy 
controlling interest in KR through the purchase of shares.  If 
consummated, CNNC's buyout would give this Chinese state-owned 
company ownership of Mongolia's two key uranium deposits. This turn 
of events has caught the government of Mongolia (GOM) flat footed, 
because the GOM assumed a recently passed 2009 law regarding uranium 
resources and nuclear power gave it total control over these assets. 
 However, the law, which was passed in an exceptionally 
non-transparent fashion, actually weakened GOM control over these 
assets, leaving Mongolia with few options to balance Chinese 
state-owned interests. From Post's perspective, this statutory and 
policy debacle clearly shows the urgent need to continue to push for 
more transparency and public review of the legislative and 
regulatory process.  END SUMMARY. 
 
--------------------------------------------- - 
A New Nuclear Energy Law Trims Investor Rights 
--------------------------------------------- - 
 
¶2. (SBU) Passed in early summer 2009 with no public comment or 
stakeholder review, Mongolia's Nuclear Energy Law severely 
restricted private development of uranium deposits within Mongolia. 
In fall 2009, Mongolian People's Revolutionary Party (MPRP) and 
Democratic Party (DP) Members of Parliament publicly discussed the 
legislative process applied to the Law before mining industry forum. 
MP's O. Chuluunbat and E. Bat-Uul explained that a small group of 
nuclear and national security experts under the direct guidance of 
then-Prime Minister Bayar controlled the drafting process.  These 
MPs reported, and separate sources confirmed, that Bayar and senior 
Mongolian political leaders from both parties explicitly instructed 
their respective MPs to pass the draft quickly with a minimum of 
debate and review.  Senior political leaders argued to Parliament 
that national security concerns related to the mining of uranium and 
nuclear power required immediate passage, and that the MPs needed to 
trust that Mongolia's national security and nuclear experts 
effectively crafted a bill that protected national interests. 
Consequently, within a week of introduction, Parliament passed a 
bill that most members did not even bother to read.  The two MPs 
opined that they and many others would not have passed the bill if 
they had scrutinized it more thoroughly, and would not give senior 
leaders such an easy pass again. 
 
¶3. (SBU) Four provisions have particularly concerned current rights 
holders of uranium assets, which include two American-involved 
firms, Peabody Energy and Dennison Mines: 
 
-- Immediately revokes all current uranium exploration and mining 
licenses and then requires all holders to register these licenses 
with the Nuclear Regulatory Agency(NRA), for a fee. 
 
-- Requires investors to accept that the Mongolian state has an 
absolute right to take -- without compensation -- at least 51 
percent of the company that will develop the mine (as opposed to 
just the deposit) as a condition for being allowed to develop any 
uranium property. 
 
-- Creates a uranium-specific licensing and regulatory regime 
independent of the existing regulatory and legal framework for 
developing mineral and metal resources.  Prior to the Uranium Law, 
exploration licenses gave their respective holders the rights to 
discover and develop any and all mineral and metal resources 
discovered within that license area.  (This did not include 
petroleum resources, which are governed separately.)  According to 
GOM officials, this new provision means that the state can issue a 
distinct license for uranium exploration on a property otherwise 
 
ULAANBAATA 00000038  002.2 OF 005 
 
 
dedicated to other mineral and metals exploration. 
 
-- Requires firms to obtain GOM approval for sales and purchases of 
shares in uranium exploration and mining firms on both domestic and 
foreign exchanges. 
 
--------------------------------------------- -- 
Policy Aims Driving Adoption of the Nuclear Law 
--------------------------------------------- -- 
 
¶4. (SBU) Our contacts have been exceptionally frank about what the 
GOM intended to accomplish with this law.  Uranium (and other 
mineral and hydrocarbon resources for that matter) is first and 
foremost viewed as a tool to balance Mongolia's political relations 
among Russia, China, and "third neighbors" (as the GOM puts it) such 
as the United States. Under this policy, revenues from mining, rule 
of law, or best practices, are secondary or even tertiary 
considerations. Mineral assets are not allocated based on what 
company can best develop the resource for the benefit of 
shareholders and the Mongolian people; rather, they become part of a 
strategic calculation. Thus, uranium to Russia, copper to western 
Rio Tinto, coal to U.S Peabody Energy, and some share of each to 
China keeps key nations involved in Mongolia without letting one 
single country dominate, balancing relations while also securing 
Mongolia's sovereignty. From this perspective, the law's intent is 
to stop firms from developing and disposing uranium assets in ways 
that might upset the balance that the GOM seeks to achieve among its 
first, second and third neighbors. 
 
¶5. (SBU) The GOM's second goal was to create a value-added nuclear 
power sector within Mongolia. As explained to emboffs, value-added 
industrial activities does not mean a well-planned set of 
developments based on either regional or international market 
conditions and costs of production; rather, the GOM wants a massive, 
world-class uranium-processing industrial development that involves 
the  latest in nuclear technology.  Because such structures embody 
the highest hallmarks of development, anything less diminishes 
Mongolia in the eyes of other states and in the eyes of Mongolians 
themselves -- or so our sources claim, without providing any proof 
that the Mongolian public at large shares in this vision. 
 
¶6. (SBU) In the case of uranium, the GOM claims, without much 
technical proof, that Mongolia holds at least 10 percent of the 
world's undiscovered uranium.  The government argues that so vast a 
"supply" justifies GOM demands that value-added processing go beyond 
the "mere" concentration of ore into yellow cake (uranium oxide) as 
a precondition for access to Mongolia's assumed extensive uranium 
resources.  This value-added vision ranges from advanced nuclear 
research facilities to nuclear power plants to enrichment facilities 
-- all costing untold billions of dollars.  In this respect, the law 
would allow the state to strip private firms, such as Canadian 
exploration junior partner Khan Resources (KR), of their rights 
because these companies are not committed to such high-end 
processing; those rights would instead be invested in players from 
Russia, France, China, or the U.S. that, at least theoretically, are 
more likely to be in a position to help Mongolia pursue its 
uranium-based ambitions. 
 
¶7.  (SBU) COMMENT: Long-time observers of Mongolia's uranium assets 
consistently criticize these "value-addled" ambitions, arguing that 
the GOM has never subjected them to any independent analysis. 
Mongolia claims that it has 10 percent of the world's untapped 
uranium.  However, all experts point to proven reserves that 
consistently hover around one percent, which might be increased to 
three percent with more expensive and financially risky exploration, 
exploration that Western firms are unlikely to do under current law. 
 Privately, most observers dismiss the notion that Mongolia can or 
should consider power plants and processing facilities anytime soon. 
 Setting aside the fact that Mongolia woefully lacks any capacity, 
 
ULAANBAATA 00000038  003.2 OF 005 
 
 
the economics of power plants and enrichment facilities are so 
daunting that even well-endowed uranium states such as Kazakhstan 
and Australia have declined to establish them. See reftel for 
current description of Mongolia's uranium resources.  END COMMENT) 
 
¶8. (SBU) The GOM has sought to achieve these policy aims by 
controlling the sale of both exploration and mining licenses and of 
companies holding Mongolian uranium assets. The law forces companies 
and other entities to surrender control over both the rights to the 
deposit and the operational entity that would mine.  The GOM has 
taken this additional step on operational entities to prevent one 
firm from selling itself to another firm, thus circumventing control 
over the selling and transfer of licenses themselves.  In an effort 
to limit further the ability to transfer these assets, the law also 
empowers the GOM to control share sales on any foreign or domestic 
stock exchange.  In fact, as written, the law seems to require any 
company owning Mongolian uranium assets to seek GOM approval 
whenever it sells more than seven percent of the shares of any 
company that a respective firm might hold whether that sale is 
related to Mongolian uranium assets or not. Just how the GOM would 
enforce such a provision has yet to be spelled out in the 
regulations. (NOTE: This latter provision came in response to the 
Chinese National Nuclear Corporation's (CNNC) purchase of 
outstanding shares of a Canadian uranium firm in spring 2009, which 
circumvented existing laws regarding the disposition of exploration 
and mining licenses.  END NOTE.) 
 
------------------------------------- 
Russian Uranium Ambitions in Mongolia 
------------------------------------- 
 
¶9.  (SBU) Mongolian policy aims were directly and indirectly 
influenced by apparent Russian interest in gaining control over key 
Mongolian uranium resources.  Our Mongolian interlocutors candidly 
described Russian involvement with the law. Most of the Mongolian 
technical experts advising senior leaders received their nuclear 
energy training in Russia or were the protgs of Russian trained 
experts.  For this reason, it surprised no one when these advisors 
and the GOM turned to Russia for support and models for Mongolia's 
nascent uranium mining and nuclear power sectors.  As our contacts 
related, the Russians were generous: promising support to develop 
research and training facilities; mining operations; basic 
processing of ore; and, down the road, nuclear power generation and 
fuel enrichment.  In return for fulfilling Mongolia's isotope 
dreams, Russia asked Mongolia to expropriate the mining rights from 
KR and others in eastern Mongolia and vest them in a new state-owned 
company jointly owned by Russia and Mongolia, but managed and 
controlled by Russia.  The Russians had hoped to complete this 
process by August 2009, just in time for President Medvedev to sign 
a new cooperative agreement with Mongolia during his visit. (NOTE: 
Russia explored Mongolia's uranium resources from the 1960s through 
the late 1980s and is well aware that Mongolia's eastern province of 
Dornod holds the best of Mongolia's limited uranium resources. END 
NOTE.) 
 
¶10.  (SBU) As explained to us, from Russia's perspective, gifting 
expertise and material upon Mongolia would have the benefit of 
fencing out western and Chinese interlopers, making  the nearby 
Chinese in particular beholden to Russia for their nuclear supplies. 
 While Mongolia might ordinarily prefer not to have its third 
neighbors disengage, it might accept their departure if doing so 
hindered China. 
 
----------------------------------- 
Intended Consequences of a Bad Law: 
Western Investment Driven Away 
----------------------------------- 
 
¶11.  (SBU) From the perspective of private western firms, the new 
 
ULAANBAATA 00000038  004.2 OF 005 
 
 
uranium law has been both a disappointment and a disaster.  Faced 
with a blatantly expropriatory law, firms engaged in costly and 
highly speculative exploration activities saw their share values 
collapse and investment resources dry up.  Consequently, these 
companies have been forced to sell out to larger firms, mostly 
state-owned entities from France and China, to recoup a part of 
their investments.  More broadly, Mongolia has taken a hit among 
international investors, who continue to shy away from investing 
here because they fear that expropriation in the uranium sector sets 
a precedent for other sectors. 
 
¶12. (SBU) However, the GOM has expressed no particular concern about 
these departures and the corresponding damage to its commercial 
credibility.  On the contrary, it rather appears to express 
satisfaction that uranium assets are slowly but surely being 
acquired by state-owned or multi-national entities able (if not 
necessarily willing) to promote value-added processing and seemingly 
willing to suffer through the indignities of the law.  This group 
includes France's Areva and China's CNNC as well as Peabody Energy 
from the U.S.  Ironically, Russia seems to have become 
the odd man out. 
 
--------------------------------------------- -- 
Russia Rebuffed: An Example of a Hoisted Petard 
--------------------------------------------- -- 
 
¶13. (SBU) The negative impact on Russian ambitions in Mongolia's 
uranium sector has surprised most observers, particularly as it was 
the Russians who initially seemed to have motivated much of the 
legislation that was later used to deny them their prize.  By all 
reports, including from some of those who participated in the August 
2009 sessions involving senior Russian officials, the Russians 
pressed for strict terms for their investment.  They demanded 
exclusive control over all entities mining uranium in northeastern 
Mongolia, not arguing for 50/50 ownership but insisting on 51 
percent for Russian and 49 percent for Mongolia.  Nuclear power 
plants and enrichment facilities were off the table.  Russia would 
mine the raw uranium ore, ship it to facilities in the Russian Far 
East, process it, and pay the Mongolians a royalty and a share of 
the profits.  As for nuclear research and training faculties, that 
was also off the table, although Mongolians were offered the 
opportunity to study and train in Russia. 
 
¶14. (SBU) The Mongolians rejected Russia's offer, noting that the 
new law strictly prohibited Mongolia's entering into such an 
arrangement.  The Mongolians then insisted on the original Russian 
offer for in-country research, processing, and power facilities, 
adding that the Russians would have to accept 49 percent and pay for 
everything.  The Mongolian response floored the Russians, who had 
not anticipated that Mongolia would apply this law to them.  Some 
Western observers thought the Russians might punish the Mongolians 
by cutting power or petroleum.  However, the Russians apparently 
took no major or even minor punitive actions.  At this point, the 
Russians have been left with their current holdings in two ongoing 
uranium exploration projects retained from the socialist era and no 
obvious, easy entry into other projects. 
 
------------------------------------ 
Unintended Consequence of a Bad Law: 
China Trumps Mongolia 
------------------------------------ 
 
¶15. (SBU) While Mongolia was generally satisfied that the new law 
would constrain Western and Russian ambitions, it apparently did not 
anticipate China's response.  Much of the law was specifically aimed 
at halting firms from "flipping" Mongolian uranium assets by selling 
licenses, companies, and shares. For their part, the Chinese 
appeared to respond by simply ignoring it. In the case of KR, the 
CNNC decided to acquire KR's shares without consulting the GOM.  KR, 
 
ULAANBAATA 00000038  005.2 OF 005 
 
 
a Canadian company, has the right to sell shares in Canada on the 
Toronto Exchange or those privately held; CNNC has the right to buy 
these shares from any exchange or venue where they are legally 
tendered -- and in these circumstances Mongolian law and policy is 
irrelevant.  At this point, CNNC is well on its way to owning the 
very uranium holdings that the Russians craved and that the 
Mongolian government wanted to make the heart of their ambitious 
nuclear infrastructure. 
 
------- 
Comment 
------- 
 
¶16. (SBU) So far,   the GOM has not yet responded publicly. 
However, given the long-held GOM concern about its southern 
neighbor, the GOM is very likely gnashing its teeth, wondering how 
the Chinese outmaneuvered both the GOM and Russian attempts to gain 
control over these uranium assets.  For their part, the Chinese have 
been neither subtle nor mysterious; CNNC has acted like any business 
in terms of seizing an opportunity.  Seeing distressed but valuable 
assets, it made an attractive offer to owners who had for too long 
suffered nothing but losses at the hands of the GOM. However, unlike 
a private business, the CNNC, having gotten the uranium rights 
within its grasp, will fall back on its relationship with the 
Chinese state, tacitly daring the Mongolians to deny them their 
rights. 
 
¶17. (SBU) Ironically, all of the GOM's regulatory sleights of hand 
and statutory stratagems were aimed at keeping uranium assets under 
Mongolian control.  Such aims would certainly have been easier if 
pliable, privately owned Western firms sensitive to local laws and 
policy goals were developing the properties.  However, it is these 
firms that have now been driven away.  Nor can the Mongolians simply 
turn to the Russians, who having been rebuffed, may not be eager to 
save Mongolia from its hasty and poorly conceived policy on terms 
that Mongolia can easily accept.  Inadvertently, the GOM is faced 
with a situation in which a Chinese state-owned firm holds the high 
ground on Mongolia's choicest uranium assets.  In every respect, GOM 
policy has failed to achieve what its original sponsors had hoped. 
 
¶18. (SBU) From post's perspective, one of the most encouraging 
aspects of this statutory and policy debacle is the very public 
nature of the attacks against both the process of passing this law 
and its implementation. Normally discreet when discussing disputes 
and irritations, our sources have been very open about their disdain 
for this law. Members of Parliament, bureaucrats from the Nuclear 
Regulatory Agency, Minerals and Energy officials, and the mining 
industry representatives joined in open debates in print and other 
fora, analyzing in detail the failings of this law and its negative 
implications for both Mongolia's national security and its 
investment climate.  Largely reflecting the assessment provided in 
this cable, the practical effect of this discussion within Mongolia 
is to clearly underscore the urgent need to continue to push for 
more transparency and public review of the legislative and 
regulatory process.  Viewed from a more long term perspective, it 
also underscores the importance of what post, USTR and the GOM have 
been undertaking in our mutual effort to negotiate a transparency 
agreement between the U.S. and Mongolia.  END COMMENT. 
 
ADDLETON