Interest Rises in Mongolian Uranium Deposits

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000238

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG PREL SENV EMIN EINV ETRD KNNP MG
SUBJECT: Interest Rises in Mongolian Uranium Deposits

REFS: (A) 06 Ulaanbaatar 870 (NOTAL),(B) Ulaanbaatar 216 (NOTAL)

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION


1. (SBU) SUMMARY: Current estimates, mostly based on Soviet era
surveys, place Mongolia's current commercial recoverable reserves of
yellowcake at some two million metric tons, but Mongolian officials
believe that the actual totals may be much higher. Rising prices
for uranium have reignited interest in Mongolia's resources. With
other partners, an American company says it hopes to begin producing
yellowcake in two years. Russia has recently attempted to reenter
Mongolia by offering possible exploration, processing, and power
generation rights. The GOM believes that Western miners would best
ensure uranium mining will be environmentally sensitive and offer
value-added returns to Mongolia. Miners are concerned about the
GOM's desire to take an equity share of uranium prospects. A
disorganized administrative structure that atomizes regulatory and
administrative responsibilities among competing agencies complicates
matters. Although the GOM recognizes its non-proliferation
obligations under the numerous conventions and treaties to which it
is a signatory, the GOM has yet to formally consider the practical
implications of these obligations as they apply to the wide-scale
production of uranium products in Mongolia. This report offers a
preliminary snapshot of Mongolia's uranium prospects and existing
regulations and controls. END SUMMARY.

Status and Amounts of Uranium Deposits
--------------


2. (U) While Mongolia's world class copper, gold, and coal deposits
have received much attention, the number of uranium prospects (i.e.,
exploration sites) is also significant. Currently, uranium reserves
are known in the eastern province of Dornod and some possible
deposits in the south Gobi desert region. Based primarily on
Russian assessments from the mid-1960s through late 1980s, the GOM
estimates total Dornod eastern steppe reserves may reach some
500,000 MT of yellowcake. The same studies suggested that the South
and Central Gobi Regions might contain some 1.5 million MT of
yellowcake. However, Mongolian officials assert that only 30% of
Mongolia's territory has been surveyed for uranium and that these
studies were Soviet era surveys using obsolete technology. In fact,
some Mongolian officials think that Mongolia might have 10% of the
world's supply of uranium within its borders.


3. (U) The best studied region is the eastern steppe zone extending
through Khenti, Sukhbaatar, and Dornod provinces. Results indicate
that choicest deposits are found in Dornod, especially in the
northern tier of the province in Dashbalbar soum (county). Specific
totals for the most likely and currently best explored sites in
Dornod: 1) Mardai - 56,000mt; 2) Gurvanbulag - 16,000mt; 3) and
Mardain Gol - 10,000mt.

A Short History of Uranium Mining in Mongolia
--------------


4. (U) Mongolia has had on-and-off uranium exploration for four
decades. The early phase, 1966-1990, was typified by the Soviet
Union's need to secure Mongolian resources for its own purposes.
The Soviet Union initiated basic exploration for uranium in Mongolia
in 1966. These initial studies led to extensive radiometric surveys
of Mongolia from 1974-74. These surveys uncovered the promising
Mardai deposit and led to a massive 15-year long exploration program
that included a substantial drilling along the northern tier of
Mongolia's North Eastern border with Russia. In 1988, the Soviets
started production at the Mardai site from the only deposit amenable
to open pit mining. This uranium output was transported north by
rail and milled at a Siberian factory. The Dornod town of Mardai was
created to support this complex of exploration, development and
production. Mardai's population peaked at 26,500 around 1990,
making it Mongolia's fourth largest city at that time. To service
the mine, the Soviets built a new rail branch line, several power
lines from Russia, and provided a large, standby diesel-fuelled
generating plant at the town site.


5. (U) The collapse of the Soviet Union and the withdrawal of all
Russian support ended all exploration and mining activities for

ULAANBAATA 00000238 002 OF 005


uranium by 1991. For all intents and purposes between 1991-2003
Mongolia's uranium resources simply vanished from the face of the
earth. Both Russia and the GOM decided to mothball Mardai, and
nothing happened at the site, except the gradual striping of such
resources as could be sold as scrap to the Chinese. Despairing of
this situation, the GOM decided to find a buyer for Mardai who would
bring it back into production and restore the jobs and prosperity
that had once visited the area. In 1997, the GOM prevailed on the
Russians to join with them to sell a piece of their stake in Mardai
--some 58% of the firm, with the Russians and the GOM retaining 21%
each.

Current Exploration and Development Plans
--------------


6. (U) The majority holding in this mine, according to press
reports, was purchased by American uranium processor and miner
Wallace Mays, which held it in a joint venture with the Government
of Mongolia and the Russian State-owned Priagunsky Company, which
remains under the control of the Russian Ministry for Atomic Energy
(MinAtom). Before Mays acquired Mardai, the deposit had been
producing yellowcake through an in situ leach process. However,
this deposit had played out and Mays would have to move to another
open pit deposit located on the Mardai site, estimated to have seven
years of production at a commercially viable rate. Collapse of
uranium prices in the late 90s made investment in the new site
unviable, but the steady rise of uranium prices has rekindled
interest in Mardai. In order to get investment for bringing Mardai
on line (and after nearly ten years in mothballs and pillaging,
Mardai is a ruin),Mays joined with Canadian and other American
companies to form Khan Resources (http://www.khanresources.com).
Although the creation of Khan Resources has generated legal battles
among the various shareholders, the firm is committed to mining
uranium and producing Mardai yellowcake within the next two years.


7. (U) In addition to Khan Resources, several other western firms
are actively engaged in exploring Mongolian uranium resources,
although none of them have as ripe an asset as Khan Resources'
Mardai. Among these firms are

-- Canadian Western Prospector with key prospects in the Dornod
area;

-- Australian Mega Uranium with exploration sites in the south and
central Gobi region;

-- French Areva (formally Cogma) through its 70% Mongolian JVC
Cogegobi with Gobi exploration assets;

-- Canadian Dennison Mines(which recently acquired merged with the
International Uranium Corporation, a Mongolian-Russian-American
JVC),is actively pursuing prospects in the south-central Gobi
region. Dennison is initiating a pilot mining project to test if a
particular in situ leaching process can yield product economically.
(Note: Negative experiences with chemical mining processes,
including livestock die-offs, have raised environmental concern
among authorities. Mongolian inspectors have little training and
ability to control activities in many of these remote mining sites,
often relying on firms to follow such laws and regulations as are on
the books. In the case of Dennison, the company has drilled
holes/wells into which they will pour chemicals that will allow them
to study underground water flow patterns to ensure that their leach
facility does not harm vital desert groundwater supplies.)


8. (U) Since 1991 the Russians have not engaged in any organized,
wide scale exploration or development of Mongolia's uranium
resources, leaving the field to western competitors. However, in
line with Moscow's recent efforts to re-assert some control over
developing Mongolia's resources, the Russians have recently signaled
to the GOM that they want back in. On April 13, Director of
Russia's Federal Atomic Energy Agency (FAEA) Sergei Kiriyenko met
with senior Mongolian officials, including President Enkhbayar, and
signaled unambiguously that Russia would be delighted to cooperate
with Mongolia. Such cooperation might include mining and uranium
production facilities, and even nuclear power plants. As with other
recent lavish Russian offers (the US$2 billion promise to restore

ULAANBAATA 00000238 003 OF 005


the Mongolian rail system in return for mining rights, for example),
the Mongolians have yet to sign any binding agreement.


9. (SBU) Chinese activities in the uranium field are murky. Local
contacts in the mining sector have related how Chinese firms,
including those associated with China's state nuclear authorities,
have contacted them about acquiring uranium prospects. Our sources
relate that these offers have come to nothing so far, but as
companies may be concealing their beneficial owners, it is hard to
tell in some cases who is actually buying.

The Legal and Policy Environment
--------------


10. (U) The recently amended minerals law of Mongolia has
dramatically altered the environment for extracting uranium (ref A).
The law specifically singles our uranium as a "strategic" mineral,
mines of which the state may acquire up to 50% equity. The uranium
exploration firms are aware of this provision, are not particularly
comfortable with it, but agree that, if the GOM compensates them for
what it takes, they will comply without too much struggle. GOM
policy on uranium, much like its policy on other mining activities,
is intended to ensure that Mongolia benefits from resource
extraction.


11. (SBU) One impediment to development is the GOM's disorganized
approach to regulating nuclear products production. The Ministry of
Industry and Trade is charged with mining and extraction issues, but
any production a product for power generation -- yellowcake and
beyond -- is apparently the purview of the Ministry of Fuel and
Energy. However, MIT and MFE both claim dominion over regulation,
as they also do with coal. The Ministry of Nature and Environment
and the State Special Inspection agencies are just beginning to
consider their roles in regulating such an industry.
Environmentally, the legal and regulatory environment has a long way
to go to be able to administer this part of the mining sector. Laws
and rules remain obsolete or nonexistent, and the Mongolians
routinely ask for guidance on how they can regulate this and other
complex mining operations with their low resource base. Of course,
the Mongolian National Security Council (President, Speaker and
Prime Minister) will have its say, too. Any potential miner would
have to knock on many doors and would undoubtedly have to mediate
conflicts among each GOM entity that wanted to add some bit of
uranium to its portfolio. There seems no inherent impediment for
untying this bureaucrat tangle, just attention from senior GOM
politicos to order it done.


12. (U) In addition, to the environmental imperative, the GOM is
committed to down-stream, valued added processing in Mongolia. As
FAEA Director Kiriyenko tacitly recognized in discussing in-country
processing, there is no question that the Mongolians expect to move
up the value chain and plan to make doing so part of any investment
agreement they make (as they did with the recent Oyu Tolgoi copper
mine agreement - ref b).


13. (SBU) Some government officials have noted that Russian offers
to take all of Mongolia's uranium off-take may be nothing more than
a trick to control and undercut a competitor for uranium products,
but they also wonder where any Mongolia-based firm, public or
private, will sell its off-take: If not to Russia, then who can and
will buy? And how to get it to market? Wallace Mays has often told
us that he would like to sell Mardai's output to India, but this
raises the issue of transshipment. The GOM tells us that the
Russians have signaled that they would be loathe to allow shipment
of uranium that they did not control, and the Chinese have made
clear that they will not let uranium pass through their territory,
unless it is bound for Chinese facilities.

GOM Attitude on Proliferation Issues
--------------


14. (SBU) In response to post's question regarding the GOM's
current understanding and cooperation on proliferation issues, the
GOM re-iterated the position set out in its 2004 letter to the UN,
"National report of the Government of Mongolia pursuant to Security
Council resolution 1540 (2004)" (full text below). Despite the

ULAANBAATA 00000238 004 OF 005


GOM's sincere commitment to be a good nuclear citizen, it seems
clear to us that the GOM has not yet institutionally considered the
implications that producing uranium products and possibly generating
power from the same might have on their non-proliferation
commitments. However, some Mongolian officials have begun to
consider and discuss the proliferation, political, and economic
implications of uranium for Mongolia. (Note: The U.S. recently told
Mongolia that we are interested in extending them assistance to help
improve their ability to comply with UNSCR 1540, in response to
Mongolia's request to the Security Council. Mongolia's request was
largely focused on screening equipment at border points.)


15. (SBU) Mr. Daavadorj, who has been nominated to become the new
Minister for Industry and Trade, told us that, given the heavy
political baggage that uranium mining carries, he was eager to see
U.S. involvement in the uranium extraction industry in Mongolia if
only to ensure that international community recognized that Mongolia
was being above board about potential yellowcake exports. He also
expressed great hope for the economic return on uranium exports,
saying that unlike copper and gold, which are expected to decrease
in price over the medium term, the West's determination to shake its
addiction to oil would mean increasing prices for the element
critical for fueling nuclear energy into the foreseeable future.


16. (U) Text of "National report of the Government of Mongolia
pursuant to Security Council resolution 1540 (2004)"

Mongolia continues to fully implement its obligations under the
relevant multilateral agreements, such as the Treaty on the
Non-Proliferation of Nuclear Weapons, the Biological and Toxic
Weapons Convention, the Chemical Weapons Convention, the
Comprehensive Nuclear Test-Ban-Treaty, etc. In particular, it is
committed to the objective of eliminating the risk that non-State
actors may acquire, develop, traffic in or use nuclear, chemical and
biological weapons and their means of delivery. It has also
undertaken necessary control measures aimed to prevent illicit
trafficking in weapons of mass destruction, including the adoption
of legislative measures and enforcement of appropriate sanctions for
the violation of such measures. Furthermore, as a strong advocate
of nuclear-weapon-free zones, Mongolia declared its territory a
nuclear-weapon-free zone in 1992 and is now working to further
institutionalize its international nuclear-weapon-free status.

Mongolia has welcomed the UNSC resolution 1540 (2004) and is
committed to its implementation. The Government of Mongolia,
therefore, wishes to provide the following information.

Mongolia does not provide any form of support to non-State actors
that attempt to develop, acquire, manufacture, possess, transport,
transfer or use nuclear, chemical or biological weapons and their
means of delivery. Such support would conflict with Mongolia's
national legislation, its international obligations, and the foreign
policy it pursues on the international arena.

Mongolia does not possess facilities for manufacturing or producing
weapons and ammunition. It has never developed, produced, acquired,
possessed or stockpiled, or otherwise had control over nuclear,
chemical or biological weapons and their means of delivery.

These obligations are covered by the following legislative acts:


1. Law on Protection against Toxic Chemicals (1995) and the
amendment thereto of 8 April 2000;


2. Law on Mongolia's nuclear-weapon-free-status (2000);


3. The Criminal Code of Mongolia (2002);


4. Law on Combating Terrorism (2004);

Mongolia fully complies with its obligations under the following
international treaties and conventions pertaining nuclear, chemical
and biological weapons, and advocates attainment of their
universality and strengthened effectiveness.

-- Treaty Banning Nuclear Weapon Tests in the Atmosphere, in Outer

ULAANBAATA 00000238 005 OF 005


Space and under Water (since
1963).
-- Protocol for the Prohibition of the Use in War of Asphyxiating,
Poisonous or other Gases, and of Bacteriological Methods of Warfare
(since 1968).
-- Treaty on the Non-Proliferation of Nuclear Weapons (since 1969).
-- Treaty on the Prohibition of the Emplacement of Nuclear Weapons
and other Weapons of Mass Destruction on the Sea-bed and the Ocean
Floor and in the Subsoil thereof (since 1971).
-- Convention on the Prohibition of the Development, Production and
Stockpiling of Bacteriological (Biological) and Toxin Weapons and on
their Destruction (since 1972).Mongolia fully supports the
elaboration of an additional protocol to the Convention that will
ensure effective legally binding verification of compliance with the
Convention.
-- Convention on the Physical Protection of Nuclear Material (since
1986).
-- Convention on the Prohibition of the Development, Production,
Stockpiling and Use of Chemical Weapons and on their Destruction
(since 1995).A National Inter-Ministerial Task Force was set up to
monitor and enforce implementation of the Convention. Refer to
paragraphs 2 and 3 for the legislation and regulations adopted in
the follow-up to Mongolia's accession to the CWC.
-- Comprehensive Nuclear Test-Ban Treaty (since 1997).

End text

Goldbeck