Mongolia Creates New State Holding Company for Government's

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000217

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
STATE FOR EAP/CM, EB/IFD/OIA, AND INR/B
USAID FOR ANE FOR D. WINSTON
MANILA AND LONDON FOR ADB, EBRD USEDS
TREASURY FOR USEDS TO IMF, WORLD BANK

E.O. 12958: N/A
TAGS: EINV PREL ETRD EMIN ENRG MG
SUBJECT: Mongolia Creates New State Holding Company for Government's
Equity in Mines

Reftels: a) UB 123 b) UB 119, c) UB 216

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION


1. (SBU) SUMMARY: The Government of Mongolia (GOM) has established a
new state-owned holding company named ERDENES-MGL to receive and
manage its equity shares of mines determined to be "strategic" under
the country's most recent mining law. The move signals the GOM's
seriousness in acquiring the anywhere from 0 to 50% stake in the
country's most prominent mining developments, as allowed under the
new legislation. The appointment of D. Zorigt, a young, well-known
and generally respected technocrat with the Ministry of Industry and
Trade, as ERDENES' Executive Director has been welcomed as a
positive development by many in the expat business and mining
communities who have recently grown pessimistic over perceptions of
GOM and populist antagonism toward foreign mining companies. Zorigt
has vowed to base his management of ERDENES on western-style best
practices and is approaching donor agencies for assistance in
setting up shop. END SUMMARY.

ERDENES: Origins, Purpose, Structure, Plans
--------------


2. (SBU) The GOM has created a state-owned company, ERDENES, to
manage the GOM's expected share of equity in mines dubbed
"strategic" by the State Great Hural (parliament). The new mineral
law enacted last year provides the government the legal right to
"take" between 0-50% of large mines. The GOM is preparing to
negotiate detailed investment agreements (formally known as
stability agreements) with international mining firms over prominent
mineral development projects in which the GOM's (non-funded) equity
share in mines could be a major sticking point.


3. (SBU) Econoff recently spoke with ERDENES' Executive Director D.
Zorigt, who said that the company is modeled after Singapore's
state-owned TEMASEK and will essentially be a wealth management
company, overseeing the intake of mining profit dividends, advising
the GOM on the selling of equity shares, and funneling income from
sales into the state budget to be reapportioned by parliament, some
of it back to ERDENES. (Note: ERDENES' roles and functions have yet
to be determined. For example, at a recent meeting between Commoff
and one of Zorigt's new staffers, the staffer related that Zorigt's
initial plan was rejected by the State Property Committee (SPC).
The staffer did not explain the SPC's reasons; however, she noted
that they sent back suggestions, in which ERDENES would function
more like a consulting firm for the GOM rather than as a wealth
manager.)


4. (SBU) When questioned over how or even whether the GOM could pay
for it controlling equity, Zorigt expressed confidence that the GOM
will ante up one way or another, either through deferred dividends
or tax breaks. Recent news of a reported investment agreement
between Rio Tinto - Ivanhoe and the GOM (ref C) over the copper-rich
Oyu Tolgoi development seem to bear this prediction out, although
details are still sketchy (subject of future septel). Zorigt said
the protracted and at times contentious negotiations with Ivanhoe
had stalled over this very issue.


5. (SBU) ERDENES' 7-member Board of Directors will be made up of
representatives from the Ministries of Justice, Industry and Trade
and Finance, a representative from the Ministr of Resources and
Petroleum Authority (MPRAM) along with three persons from the State
Property Committee. Ministry of Finance Financial Secretary (the
Ministry's senior civil servant) Ch. Khurelbaatar, number three in
the Ministry, will occupy the chair. Khurelbaatar has been the
government's lead negotiator in the Rio Tinto/Ivanhoe negotiations.


6. (SBU) A long-time civil servant, Zorigt concedes little private
sector experience, but intends to get the company off on the right
foot, creating a transparent corporate structure, an open work plan

ULAANBAATA 00000217 002 OF 002


and a proper management system. Wary of political dominance over
state-run industries, especially ones with a hand in the country's
largest money-maker, mining, he argues that the best way to shield
the company from politics is to lock in a fully transparent
organization based on western standards while the company is still
in its infancy. To that end, he has approached, or plans to
approach, the World Bank, EBRD and other donor sources for
assistance. "It would be in everyone's interest if the company were
structured and behaved like 'a normal private company'" he told
Econoff. Although he admitted such thoughts were premature, Zorigt
felt ERDENES might one day find itself listed on a major exchange,
following the example of state-owned Shinua or China Telecom.
ERDENES Executive Director Zorigt Bio Notes
--------------


7. (SBU) By way of background, ERDENES Executive Director Dashdorj
Zorigt is an up-and-coming technocrat who has proved a reliable and
reasonable USG interlocutor on state-commercial issues. From 1994
to 2004 he worked in the Ministry of Foreign Affairs, including a
stint as First Secretary at the Mongolian Mission to the UN.


8. (SBU) His appointment seems a positive step for a mining sector
dogged by GOM missteps that have eroded investor confidence. The
head of the Mongolian Mining Association proclaimed the selection
"good news," and a prominent American banker added "I've known
Zorigt for years and find him one of the promising young 'hopes' for
[Mongolia's ruling party] the MPRP". He has repeatedly expressed
concern to the DCM and others that GOM and Mongolia are gradually
losing energy and commitment with respect to market economy
principles.


9. (SBU) Since passage of the new mining law last year, the industry
has accused the GOM of thwarting sector development by imposing
extra-legal pressures, arbitrary judgments, hyper-bureaucratic
headaches and preferential treatment.(refs A and B)

Goldbeck