Identifier
Created
Classification
Origin
07ULAANBAATAR425
2007-07-23 00:14:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

OPPOSITION GROWS AS PARLIAMENT DEBATES CONTROVERSIAL OYU

Tags:  EINV PREL ETRD EMIN PGOV ENRG MG 
pdf how-to read a cable
VZCZCXRO9301
RR RUEHGH RUEHLMC RUEHVC
DE RUEHUM #0425/01 2040014
ZNR UUUUU ZZH
R 230014Z JUL 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1316
INFO RUEHMO/AMEMBASSY MOSCOW 1833
RUEHBJ/AMEMBASSY BEIJING 5671
RUEHUL/AMEMBASSY SEOUL 2848
RUEHKO/AMEMBASSY TOKYO 2567
RUEHOT/AMEMBASSY OTTAWA 0467
RUEHML/AMEMBASSY MANILA 1406
RUEHLO/AMEMBASSY LONDON 0151
RUEHBY/AMEMBASSY CANBERRA 0144
RUEHVC/AMCONSUL VANCOUVER 0085
RUEHDN/AMCONSUL SYDNEY 0029
RUEHGH/AMCONSUL SHANGHAI 0028
RUEATRS/DEPT OF TREASURY WASHDC
RUCPODC/USDOC WASHDC 1324
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0640
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
UNCLAS SECTION 01 OF 03 ULAANBAATAR 000425 

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
STATE FOR EAP/CM AND EB/IFD/OIA
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 PGOV ENRG MG
SUBJECT: OPPOSITION GROWS AS PARLIAMENT DEBATES CONTROVERSIAL OYU
TOLGOI COPPER MINE DEAL

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. CAUTION
- CONTAINS PROPRIETARY INFORMATION.

REFTEL A) ULAANBAATAR 216 B) 06 ULAANBAATAR 773

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000425

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
STATE FOR EAP/CM AND EB/IFD/OIA
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 PGOV ENRG MG
SUBJECT: OPPOSITION GROWS AS PARLIAMENT DEBATES CONTROVERSIAL OYU
TOLGOI COPPER MINE DEAL

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. CAUTION
- CONTAINS PROPRIETARY INFORMATION.

REFTEL A) ULAANBAATAR 216 B) 06 ULAANBAATAR 773


1. (SBU) SUMMARY: The Government of Mongolia (GOM) has begun its
public roll- out of the tentative investment agreement for the
development of the Oyu Tolgoi copper mine struck between the GOM and
Ivanhoe/Rio Tinto in April (ref A). If copper's price remains at
today's high of US$7,600 per ton, Mongolia would receive US$71
billion (2006 total GDP amounted to US$2.8 billion) and Ivanhoe
Mines/Rio Tinto will get US$62 billion. Having joked privately that
"we will be lucky if only 80% of the public opposes the plan", chief
GOM negotiator Ministry of Finance State Secretary Khurelbaatar is
anxious to shepherd the deal through to cabinet and parliamentary
approval with minimal public agitation before the State Great
Hural's (parliament) summer recess at the end of July. Ivanhoe,
silenced by a non-disclosure clause in the agreement, has reacted to
perceived missteps and misstatements about the deal "with mouths
bloodied from biting our tongues so hard," according to their reps.
Although the deal has not yet produced street demonstrations on the
scale of those held in January 2006, a small but vocal groundswell
of opposition has begun to congeal, led mostly by civil society
organizations such as the Open Forum, environmental NGOs, a
scattering of MPs and, most vocally, by the self-promoting MP and
erstwhile sacked Health Minister L. Gundalai, who, in a recent
one-man press conference, called the deal "crap." END SUMMARY.


2. (U) On July 9, Ch. Khurelbaatar, State Secretary of Finance and
chief government negotiator on the investment agreement, held a
press conference to publicly present the tentative deal between
Ivanhoe/Rio Tinto and the GOM over development of what many believe

to be the world's largest copper mine; Oyu Tolgoi, in the south Gobi
desert. Seizing the initiative, Khurelbaatar and team presented the
plan in its best light before the expected pummeling it will receive
in parliamentary debates and the press over the next few weeks.
Parliament is expected to take up the debate on the Oyu Tolgoi deal
on Tuesday, July 24th. Mongolia's cabinet approved the deal on June
26th.


3. (U) Khurelbaatar stressed that the agreement will be valid for 30
years and that employment terms would force the companies to lean in
favor of local labor; 50:50 Mongolians/foreigners for the first five
years, 70/30 for the subsequent seven years, and 90:10 thereafter.
Mongolia stood to reap at least US$15.5 billion over the 30 year
span from the development if copper prices fell to a conservative
estimate of US$2,425 per ton, US$21 billion if copper averaged
US$3,000 and $31 billion if it hovered at US$4,000. If the price
were to remain at today's high of US$7,600, Mongolia would receive
US$71 billion and Ivanhoe Mines will get US$62 billion. (Note: To
provide some perspective Mongolia's total GDP last year was US$2.8
billion.)


4. (U) In an interview with the press a few days later, Minister of
Finance Bayartsaikhan noted that the investment agreement on Oyu
Tolgoi was a tremendous improvement over past agreements and would
prove to be exponentially more profitable for Mongolia. He said
Mongolia would own 34% of OT "free of charge" (Note: this is an
exaggeration as the deal would have the GOM deferring profits until
its investment share in the mine has been effectively paid for) and
explained that Ivanhoe and Rio Tinto would receive a five year
exemption from paying the Windfall Profits Tax (WPT) but that they
would pay all other taxes in accordance with Mongolian law. He
reiterated that the OT deal could drive up Mongolia's national GDP
by over 30% per year.


5. (U) Critics highlighted what they consider to be major faults
with the plan. The Open Society Forum (OSF),formerly the George

ULAANBAATA 00000425 002 OF 003


Soros Foundation, published a list of seven questions it felt the
parliament should investigate before approving the plan. OSF
questioned the "government take" figures listed by Khurelbaatar and
called for a more thorough auditing of the plan before parliament
could make an informed decision. Ivanhoe has done the analysis,
they claimed, but refused to release the information. OSF also asked
if financial or environmental assurances were provided should
Ivanhoe and/or Rio Tinto sell their shares to Chinese or Russian
mining companies. Finally, OSF said the agreement was simply an
extra-legal way to rewrite the minerals law of 2006.


6. (U) Critics are united in condemning Ivanhoe's exemption from
paying the windfall profits tax (ref B) that would levy a 68% tax on
copper profits if the international price were over US$2,600 per
ton. The agreement has Ivanhoe investing in infrastructure to s
melt copper inside Mongolia (instead of presumably shipping it to
China for smelting),thereby avoiding the WPT, but the OSF called it
a poor trade off for Mongolia. They claim that even at copper prices
well below current levels, the lost revenue from the WPT in the five
years before a smelter is built (the period in which the WPT would
apply under present law) could be several billion dollars, perhaps
twice the entire capital cost of the smelter. Mongolia, they said,
should build the smelter itself and pocket the change, although they
did not specify how Mongolia would find the needed investment funds
equivalent to a couple of year's worth of total GDP.


7. (U) OSF questioned the need to build a smelter at all in
Mongolian territory. "Smelters produce little additional employment
and can create serious environmental problems through emissions of
arsenic, sulphur dioxide, dust and carbon monoxide. Given the
hazards, Mongolia may be better served to keep its WPT and let its
market, China, bear the environmental costs of smelting." Supporters
of the plan contend that revenue from the WPT would disappear,
leaving Mongolia with nothing, if coppers prices were to fall but
that a smelter would ensure a constant flow of returns.


8. (SBU) Among the several civil movement organizations that have
expressed opposition to the OT deal, none has been more vocal (nor
more attention-seeking) than MP L. Gundalai of the "Healthy Society
Citizens Movement" and creator and head of the Mongolian Popular
Party. Gundalai, dismissed from his post as Health Minister earlier
this year because his self-promotional antics had proved an
embarrassment for the government, has been working overtime to stoke
the fires of controversy around the OT deal in hopes of resurrecting
his own faltering political prospects. He has made no secret of his
desire to become President of Mongolia. On July 18, he called a
one-man press conference where he denounced the OT deal as "crap"
and called for a sit-in strike on Sukhbaatar Square that started on
July 19th. Shortly thereafter civil movement organizations
including the Mongolian Democratic Movement declared their
willingness to join him. The first day of protests failed to
attract a large crowd. A small but violent demonstration on July 20
in front of Ivanhoe's offices resulted in angry protestors
overturning one of the company's mini-buses and hanging a sign over
it that read, "Oyu Tolgoi is public property!"

Comment: Will the GOM and Parliament Blink?
--------------


9. SBU) Comment: OT negotiations were stalled for three years,
sometimes due to Ivanhoe's missteps and sometimes because
politicians cowered before even modest protests. Recently it
appeared that momentum and popular sentiment had shifted to favor
the conclusion of a deal, as the public had heard much about
Mongolia's "vast mineral resources" and they wanted returns to begin
sooner rather than later - to get on with it. The issue is whether
Mongolia will get its "fair share," a concept open to interpretation
and exploitation by populist politicians. All eyes are now watching

ULAANBAATA 00000425 003 OF 003


to see if parliament will approve the deal within the next couple of
weeks or if opposition groups will again succeed in blocking or
delaying it. Approval could spell an unprecedented economic boon
for Mongolia as investment agreements on other mineral developments
come on-line in rapid succession using OT as the template. On the
flip side, if a vote on the agreement is pushed back into the fall
session, the odds of its survival in its current form will drop
dramatically, according to local analysts, (and hinder development
of the country's overall mining sector for years to come) as
politicians begin posturing before mid-2008 parliamentary elections.
There is also some risk that major western firms will conclude that
Mongolia is just not yet ready for "prime time," possibly abandoning
the field to unscrupulous Chinese or Russian firms. END COMMENT.

Minton




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