Identifier
Created
Classification
Origin
07ULAANBAATAR507
2007-09-07 08:06:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

Mongolian Mining Exec: Promise, Peril Surround Sector

Tags:  EMIN EINV PREL PGOV ELTN MG 
pdf how-to read a cable
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PP RUEHLMC RUEHVK
DE RUEHUM #0507/01 2500806
ZNR UUUUU ZZH
P 070806Z SEP 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 1441
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 5745
RUEHOT/AMEMBASSY OTTAWA PRIORITY 0499
RUCPODC/USDOC WASHDC PRIORITY 1375
RUEHUL/AMEMBASSY SEOUL 2919
RUEHMO/AMEMBASSY MOSCOW 1890
RUEHTA/AMEMBASSY ASTANA
RUEHML/AMEMBASSY MANILA 1451
RUEHLO/AMEMBASSY LONDON 0185
RUEHKO/AMEMBASSY TOKYO 2630
RUEHBK/AMEMBASSY BANGKOK 1533
RUEHBY/AMEMBASSY CANBERRA 0168
RUEHSH/AMCONSUL SHENYANG 0315
RUEHVK/AMCONSUL VLADIVOSTOK 0150
RUEHOK/AMCONSUL OSAKA KOBE 0043
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0696
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 ULAANBAATAR 000507 

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: EMIN EINV PREL PGOV ELTN MG

SUBJECT: Mongolian Mining Exec: Promise, Peril Surround Sector

Reftel: Ulaanbaatar 0217

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000507

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: EMIN EINV PREL PGOV ELTN MG

SUBJECT: Mongolian Mining Exec: Promise, Peril Surround Sector

Reftel: Ulaanbaatar 0217

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION


1. (SBU) SUMMARY: The Ambassador discussed Mongolia's promising but
politically-charged mining sector on September 4 with Dashdorj
Zorigt, CEO of Erdenes MGL, a new mining-asset holding company that
is state-owned. Over an informal dinner, discussion flowed on the
status and future of Erdenes (EM),which Zorigt said is working with
international consultants to create a company that is transparent,
free from government interference and based on western best
practices. The CEO said political jockeying and showmanship before
the June 2008 elections are threatening to scuttle the Oyu Tolgoi
deal. He added that with enough provocation, western firms might
pull up stakes and leave Mongolia, creating a vacuum that the
Russians and Chinese would quickly fill. Such an outcome would have
disturbing implications for Mongolia's economy and democracy. END
SUMMARY.


2. (SBU) The Ambassador, joined by Econoff and Commoff, hosted
Erdenes MGL CEO D. Zorigt for dinner on September 4. The Ambassador
congratulated Mr. Zorigt on his selection as his company's first
CEO. Zorigt observed that pity -- not congratulations -- might be
in order, given the political, economic and social consequences of
running a company that might well control assets worth billions of
USD. Zorigt then launched into a detailed review of the firm's
current status and future plans.

JOB ONE: MANAGING MINING ASSETS
--------------


3. (SBU) The GOM set up EM in early 2007 to serve as a holding
company to manage mining assets that Mongolia might acquire under
the recently amended Minerals Law of Mongolia (reftel),which allows
the state to acquire up to 50% of shares in strategic projects.
(Note: "Strategic" is loosely defined as having some large-scale
impact on the Mongolian economy or society. However, there is no

official definition. End Note.)


4. (SBU) According to Zorigt, the GOM created the company primarily
to generate revenue for direct cash transfers to the people of
Mongolia: welfare payments to children, new mothers, newly married
couples, etc. The firm will also manage and invest the mineral
revenues of Mongolia for long-term wealth generation, investment and
development, along the lines of the Norwegian or Alaskan models.
EM's founders envision the company as a mining giant, similar to
such state-owned mining firms as Brazil's CVRD or French uranium
miner Arreva (formally COGEMA).

LEARNING FROM THE PROS
--------------


5. (SBU) Zorigt admits that these are heady ambitions for a firm
that currently lacks assets, a formal business plan, a clear
corporate structure, or an explicit mandate from the GOM. Zorigt
laid out his strategy for achieving these ends. First, Zorigt and
his team are in the process of acquiring the services of such
professional consultancies as John Thornton, McKenzie, and JP Morgan
Chase. Seeking funding from the World Bank, Zorigt intends Thornton
to advise on a business plan; McKenzie to craft EM's corporate
structure; and JP Morgan Chase to advise EM and the GOM on
negotiating specific mining deals and organizing tenders for
state-owned assets.


ULAANBAATA 00000507 002 OF 003



6. (SBU) Zorigt wants a legal framework and a corporate structure
that allow EM to function as a commercial entity, without the
political interference that has plagued other state-owned firms in
Mongolia. This approach is necessary, he argues, because EM must
not be run by GOM bureaucrats or local Mongolian business people
whose narrow, local interests will always trump fiduciary
responsibilities to the shareholders: the people of Mongolia.


7. (SBU) Drawing on his consultations with the U.S. firms, Zorigt
has drafted legislation that is slowly making its way through the
GOM and Parliament. His bill would create a board of directors
independent from direct state control, which would specifically
exclude GOM bureaucrats (or at least statutorily deny GOM officials
a majority of seats on the board). The enacting legislation would
also require that senior executives be retained through an
international search and be compensated at an international level.
Zorigt recognizes that this legislation will be a hard sell, but
believes he has sufficient support for it among an effective voting
majority. He hopes for passage in fall 2007.

MINING DEBATE TURNS SOUR
--------------


8. (SBU) Regarding the politics of mining in Mongolia, Zorigt
worries about the "de-evolution" of the debate over mining and its
implications for the long-term security of Mongolia's democracy and
economy. He noted that the Democratic Party has placed itself in
firm opposition to approving the Oyu Tolgoi Investment Agreement in
its current form. Zorigt agrees in principle with some of the
Democrats' arguments against the existing deal, noting that several
tax exemptions could be scaled back without scuppering the entire
deal. However, Zorigt noted that demands that the private rights
holders give up additional equity to the GOM, so that the GOM will
have 51% of the multi-billion dollar project, is a non-starter as
far as the rights holders - mining giant Rio Tinto and Ivanhoe Mines
- are concerned.


9. (SBU) Zorigt said parliamentary insistence on this 51% threatens
the entire deal, and raises the ugly suspicion that certain MPs are
putting politics ahead of national interest or worse, dealing in bad
faith. Zorigt claimed that the Democratic Party (DP) is loathe to
see the current MPRP-led government garner any success; and so,
rather than work with the current government to craft a deal more
favorable to the GOM, and share some credit, the opposition would
rather throw the entire deal out, claiming that it is defending
Mongolia's honor. In other words: go for the dramatic,
nationalistic punch in the run-up to the June 2008 elections for
Parliament, rather than share moderate credit for key developments
with the MPRP.


10. (SBU) We asked what would happen to the Oyu Tolgoi deal if the
DP successfully stalled the deal until after the elections. Would
the DP attempt to pass it if it comes to power, as some political
observers expect? Zorigt thinks the DP might, but that it would
encounter significant resistance from a unified MPRP opposition
bloc, which would never allow the DP to pass a deal that the MPRP
had first proposed. For this reason, he said, development on Oyu
Tolgoi and other key developments would languish and Mongolia would
not profit in any way.

POLITICS THREATENS TO CHASE AWAY WESTERN FIRMS
-------------- -


11. (SBU) Zorigt said he took his concerns to MPs who are leading

ULAANBAATA 00000507 003 OF 003


Parliament's review of the Oyu Tolgoi deal, noting that Ivanhoe and
Rio Tinto, as well as other western firms, would mothball projects
and wait. The Democratic members countered that they would simply
change the law to take the mining rights from the private holders
and look for other investors. However, Zorigt said he thinks it
will be nearly impossible for Mongolia to garner investment from any
western source after violating the rights of Rio Tinto and other
firms.


12. (SBU) If that is the case, we asked, who would finance the
development? The Russians? The Chinese? Given public fears of
domination by either state, we questioned how any MP could get away
with proposing to convey these "national assets" to Russia or China.
Zorigt argued that if the Democratic opposition succeeds in
wrecking the Oyu Tolgoi deal, politicians might be willing to sell,
either to profit from Chinese or Russian enticements or to avoid the
wrath of an angry Mongolian public.

DEVELOPMENT COULD BRING HUGE BENEFITS...
--------------


13. (SBU) Zorigt said development of the Oyu Tolgoi site alone would
have a dramatic impact on Mongolia's economy, perhaps raising
Mongolia's GDP by 50%. But more importantly, he said, developments
at OT and other sites would lead to huge improvements in key
Mongolian infrastructure areas such as water, power, roads, rail and
aviation for years to come. He added that most of the capital
flows, investments, insurance and other financial services would be
tied to OT and other developments. These mines, he said, will
become the heart of Mongolia's economy and have a profound effect on
political and democratic developments.

... BUT DANGERS ALSO LURK
--------------


14. (SBU) But what if, Zorigt asked, these mines fall into Chinese
or Russian hands? Those nations and their miners would then gain a
stranglehold on Mongolia's economy and -- by extension -- national
security. Mongolia would have little recourse in the face of such
powerful neighbors, who could effectively "turn off the water or
power" until Mongolia complied with their demands. Zorigt concedes
that although Mongolian politicians' fear of China and Russia steers
them toward western investment as a counterweight, it is not a
foregone conclusion that national interest will trump short-term
political gain and short-sighted self-interest.

COMMENT
--------------


14. (SBU) Zorigt's concerns about Mongolia's far larger neighbors
has a factual basis. China has, on occasion, shut down access to
Mongolia's most essential railway, to signal its disapproval of
Mongolia's policy on the Dali Lama. Russia, for its part, often
cuts its supply of electricity to western Mongolia if bills are not
paid on time.

Minton




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