MONGOLIAN GOVERNMENT'S REVOCATION OF MINING RIGHTS ROILS

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000478

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EB/IFD/OIA
STATE PASS USTR, EXIM, OPIC, AND EPA
STATE PASS AID/ANE D. WINSTON
MILLENNIUM CHALLENGE CORP WASHDC FOR F. REID
TREASURY PASS USEDS TO IMF, WORLD BANK
MANILA AND LONDON FOR USEDS TO ADB, EBRD

E.O. 12958: N/A
TAGS: ELTN ETRD PREL PGOV MG
SUBJECT: MONGOLIAN GOVERNMENT'S REVOCATION OF MINING RIGHTS ROILS
INVESTMENT CLIMATE

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION


1. (SBU) SUMMARY AND COMMENT: Late last week the Government of
Mongolia (GOM) revoked the exploration licenses of 18 firms on 34
sites without prior warning, consultation, or any internal review of
the action. The GOM claims that revocation is allowed under the
newly amended minerals law. Charging that the GOM has acted against
the letter and spirit of the law, firms and their legal advisors
call the act "expropriation" of their rights and a complete
violation of the GOM's explicit commitment to follow best practices
and the rule of law. In any case the revocation has severally
damaged Mongolia's reputation among many international investors,
and some now question whether the GOM can act in good faith on any
deal. At the March 2007 USG/GOM Trade and Investment Framework
Agreement (TIFA) talks the GOM explicitly committed to support a
best practice regime for mining in the face of industry and USG
criticism of abuses under former Minister of Industry and Trade B.
Jargalsaikhan. This latest action, expropriatory in nature, causes
us to question that commitment. At this point, post will ask senior
officials at the Ministry of Trade and Industry (MIT),the Mineral
Resources and Petroleum Authority of Mongolia (MRPAM),and other
relevant GOM agencies to: (a) explain the legal and regulatory basis
of this decision, (b) emphasize the potential and real damage done
to Mongolia's reputation among mining firms and equity investors,
and, (c) encourage the GOM to find a way to walk back from a policy
that has deeply disturbed investors and capital markets and which
risks triggering U.S. expropriation sanctions. While much damage
has been done to Mongolia's reputation, there are legal remedies
available should the GOM not reverse its course. Post will continue
to monitor the situation and report. END SUMMARY AND COMMENT.

What The GOM Did
--------------


2. (SBU) On Thursday, August 16, the Cadastral Office, which
registers mining licenses and exploration rights and which is under
the direct Authority of the Mineral Resources and Petroleum
Authority of Mongolia (MRPAM),issued letters to 18 foreign and
domestic firms revoking the exploration rights on 34 separate
properties. These exploration rights covered uranium, coal, gold,
potash, copper, and molybdenum deposits. For two Canadian firms
with rights to uranium prospects in eastern Mongolia, the
termination of rights, which they call expropriation, has been an
unmitigated disaster. Both firms, listed on the Toronto Stock
Exchange (TSX),have lost significant shareholder value, with one,
Khan Resources, suffering a 60% drop in share value or US$150
million in market capitalization. They doubt that they can recover
the lost value, because future investors will turn away from
Mongolia as too unstable and unreliable.

Impact Immediate - Turmoil
--------------


3. (SBU) The fallout from this decision is already harming
Mongolia's reputation. Commoff has spoken with several in-bound US
investors, among them Peabody Energy and Oaktree Capital, who have
been spooked by actions they consider expropriatory or close to it.
Investors from other nations are telling post the same thing. As
one private equity firm noted, the action could not come at a worse
time for Mongolia, just at the very moment that they and other firms
were seriously considering investing hundreds of million of dollars
into resource extraction.


ULAANBAATA 00000478 002 OF 003


GOM's Explanation...
--------------


4. (SBU) The Cadastral Office justified its seizure, citing a report
produced by the State Audit Committee (SAC) for the Ministry of
Industry and Trade (MIT) in which the SAC criticized MIT for
allowing firms exploration rights on deposits which socialist era
exploration had made resource estimates. The SAC referred to a
provision of the recently amended Minerals Law of Mongolia (2006),
Article 60. Article 60 states that the GOM shall not issue an
exploration license for land on which the state has (1) conducted
exploration in the past and (2) registered reserves with the State
Mineral Reserve Register administered by MIT. SAC argued that any
exploration rights should be immediately terminated, with the rights
reverting to the GOM which could dispose of them by tender. The SAC
report criticized MRPAM and MIT for not terminating these rights.
Upon receiving this critique, unknown officials at MIT apparently
ordered MRPAM's Cadastral Office to revoke the rights with immediate
effect, which the office did.

... Falls Short On Law and Logic
--------------


4. (SBU) Lawyers familiar with Article 60 criticized the SAC
interpretation of the provision and MIT and MRPAM's handling of the
event as against both the letter and spirit of the amended law.
First, they noted that they had these exploration rights long before
the law was amended and that Mongolia should honor its prior
commitments. Failing that, they argue the GOM should honor the
spirit and letter of the provisions, which was not void rights but
to encourage mining at sites that the GOM believed to be
sufficiently explored to go into production without further
exploration. On such deposits, Article 60 would allow a firm to
convert an exploration license to a mining license immediately.
Although disagreeing with the GOM about the quality of past
exploration and reserve estimates, firms and their legal advisors
signaled that they could live with such a provision, which they
argue is a far cry from SAC determination that the provision allows
for immediate confiscation of rights.


5. (SBU) Firms and their legal advisors also noted that MRPAM's
action flies in the face of every commitment the GOM has made to
have an open and transparent system consistent with international
best practices and the rule of law. There was no public review or
comment of the SAC audit. There is no indication that MIT or MRPAM
consulted any legal opinion regarding SAC's views or that the SAC
consulted any expert in or out of the GOM about its interpretation
of Article 60. No one responsible for this decision has been
available for comment or explanation. MRPAM' senior officers are
not answering their phones, nor are officials from MIT.

Snatch and Resell?
--------------


6. (SBU) Adding to the confusion is a fear that elements within the
GOM are consciously abusing the system to despoil one set of right's
holders so that they can turn around and sell those rights to
others. One attorney reported to post that immediately after the
revocation letters went out to clients, calls came from Kazakhstan
businessmen about whether the clients were interested in selling
their proprieties to them. The attorney noted that the Kazakhs had
precise details on the exploration rights, which they could only
have got from MRPAM or MIT. (Note: President Enkhbayar visited

ULAANBAATA 00000478 003 OF 003


Kazakhstan the previous week. Septel to follow.)

Bottom Line: Damage Done But Remedies Remain
--------------


7. (SBU) The firms have not given up hope for restoration of their
rights. First, the decision is subject to grievance through the
MRPAM Chair; however, this gentleman left for Germany at the same
time the decision was rendered by his Cadastral Office, delaying any
grievance procedure. Second, if MRPAM fails to reverse its
decision, the firms have recourse to the court system, which of late
has been highly critical of GOM decisions related to mining,
overturning GOM actions on the grounds that they are inconsistent
with the law and regulation controlling mining.

MINTON



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