WILL MONGOLIA EXPROPRIATE URANIUM MINING RIGHTS?

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000630 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM AND EEB/IFD/OIA STATE PASS USTR, DOC/ITA, EXIM, OPIC, AND EPA STATE PASS AID FOR 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 ENRG PREL KNNP TRGY PGOV MG SUBJECT: WILL MONGOLIA EXPROPRIATE URANIUM MINING RIGHTS? Reftels: (A) 07 Ulaanbaatar 483, (B) 07 Ulaanbaatar 478, (C) 06 Ulaanbaatar 870, (D) 06 Ulaanbaatar 216 SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION ¶1. (SBU) SUMMARY: An internal report by Mongolia's Ministry of Industry and Trade (MoIT) (protect) on the future of uranium mining and processing in the country suggests that the Government of Mongolia (GOM) intends to revoke uranium exploration and mining rights from current holders. The report surfaces less than three months after the GOM roiled markets and unnerved investors by moving to invalidate the exploration licenses of 18 mining companies. The MoIT report indicates that the GOM is planning to take back uranium exploration and mining rights from current holders and bundle them into three separate packages; the GOM would then presumably sell minority stakes to state-owned uranium mining firms, especially those based in Russia. Word of the controversial report is circulating around Mongolia, and holders of rights to uranium deposits are outraged, as well as those with rights to mine metals and other minerals. Post will track this issue and continue to press upon the GOM the importance of honoring its commitments to investors, including those made under the US-Mongolia bilateral investment treaty. END SUMMARY. ¶2. (SBU) Mongolia's mining sector is still reeling from the Mongolian Government's revocation of 34 exploration licenses of 18 firms without any prior warning, consultation or internal review (reftels). Following the mining industry's outcry and aggressive intervention by the Embassy, the GOM walked back from the revocation. Now, however, an internal GOM report that Post, among others, has obtained, suggests that the powerful Ministry of Industry and Trade (MoIT) is considering how to nationalize Mongolia's uranium assets. The report provides a policy overview containing many unsurprising, inoffensive provisions, including those calling for GOM oversight of all uranium exploration, production and processing; the use of environment-friendly technologies; cooperation with leading mining/processing companies; and close coordination with the IAEA. However, the policy overview also calls, controversially, for all Mongolian uranium deposits to be exploited in groups. This would mark a dramatic departure from the current practice, in which deposits are developed by licensed, individual firms headquartered, for the most part, in Australia, Canada, Russia and Mongolia. ¶3. (SBU) Most of these policy aims are not objectionable to the private rights holders. They tell us that Mongolian Government commitment to a world-class, properly regulated, environmentally sound uranium mining and processing sector would benefit all stakeholders. The problem, however, is that the GOM is taking about exploiting deposits in groups. GOM and private sources have told us that Arreva, the state-owned French uranium miner, processor, and power generator, first broached this concept with the GOM. ¶4. (SBU) Specifically, Arreva, which paid US$83 million for several uranium exploration sites in Mongolia, advised the GOM that Mongolian uranium could not be efficiently and profitably mined and processed into uranium concentrate or yellow cake by numerous private companies. It argued that the most satisfactory method would be for the GOM to nationalize the deposits, bundle them into ULAANBAATA 00000630 002 OF 005 regional firms, then tender the deposit packages to state-owned firms experienced with uranium extraction. However, the GOM would retain a minimum of 51% ownership in whatever companies evolve from the tender. Operating and management rights for the company developing the uranium deposits are not spelled out in the GOM's policy statement. (Note: Current rights holders dispute the notion that bundling prospects for state-owned firms would necessarily be more efficient, and thus more profitable, than how smaller companies might mine and process uranium into yellow cake. However, they do concede that state-owned firms may be better placed to refine yellow cake for reactors. End Note.) RUSSIANS FAVORED -------------- ¶5. (SBU) Given the current knowledge of deposits, which is admittedly incomplete and often dependent on dated Soviet-era exploration, there would be three tenders respectively for South Gobi-based uranium, eastern Mongolian uranium, and uranium located in the southeastern provinces. Of course, this condition would only apply to Kazakh, French, Chinese and Russian state-owned uranium processors, not to privately owned uranium miners. However, when the MoIT mentions likely partners on the state-owned side, France, Kazakhstan, and China are never mentioned. It is Russia that would carry out joint exploration, mining and production operations in Mongolia. SACRE BLEU! -------------- ¶6. (SBU) GOM sources tell us that the French have completely misread the GOM. The GOM was looking for evidence that state-owned operation of the uranium sector was the best approach. If the Russians, Chinese or Kazakhs had suggested such a concept, the GOM would have faced widespread public resistance to what would have seemed a return to Soviet-era economics. But if a western firm, whose practices are presumed by the Mongolians to be superior to those of Russia and China, says state-ownership is the best way to go, the concept would be easier to sell to the Mongolian public. The French obligingly supplied that information in the belief that the GOM would treat their firm(s) better than other western players. However, our sources tell us that the GOM, desiring to partner with its "old friend" Russia, has no intention of treating the French differently than other western right's holders. Consequently, the sources say, the French are being as bureaucratically hindered as the other players in attempting to access the rights for which they paid so much. GOM ACQUISITION WOULD REQUIRE PARLIAMENTARY ACTION -------------- -------------- ¶7. (SBU) Under current law, Parliament must declare a reserve "strategic" before the law allows for the GOM to acquire up to 50% of a deposit, through an investment agreement. However, the MoIT has proposed circumventing this part of the statute by changing the law so that all uranium deposits are declared strategic, and by allowing the state to acquire no less than 51% of each deposit. Sources at MoIT, private industry and the Mongolian state-owned holding company for mining assets, Erdenes MGL, tell us that GOM ULAANBAATA 00000630 003 OF 005 expectations of the bounty to come from Mongolian uranium has sparked this attempt to reclaim uranium rights for the state. First, the price of uranium spiked. In 1994, uranium sold for US$9.25 per pound; but on September 17, 2007, it hit US$90. Second, world supply tightened, making Mongolia's deposits, remote as they are, enticing to miners, processors and power generators. Third, the GOM believes that it sits on the world's last, best untapped set of reserves and that these reserves are so titanic that they will serve as the basis for a nuclear power industry based in Mongolia, feeding northeast Asia. HOW RICH ARE MONGOLIA'S URANIUM DEPOSITS? -------------- ¶8. (COMMENT: But just how good are these resources? Private and public experts note that recent research of uranium sites indicates that Mongolia's uranium holdings, while respectable, are much smaller than those of Canada, Kazakhstan, or Australia. The experts say many of these dreams are inspired by the generous promise of the Russian nuclear agency, Rosatom, to establish a nuclear power industry in Mongolia. Some Mongolian officials, recalling the age of Soviet-era mega-projects, are subject to such blandishments. However, our sources all agree that it is unlikely that Russia would set up a competing nuclear processing and power infrastructure in Mongolia. They note that the Russians intensively studied Mongolia's uranium resources when they dominated the nation and did not choose to develop them, suggesting that these resources are not as rich as the GOM seems to believe. END COMMENT.) ¶9. (SBU) High prices and high demand prompted private investors from Russia, Australia, Canada, Mongolia, and the United States, along with state-owned investors from France, China, and Russia, to acquire and explore some 130 uranium-deposit sites. But fearing that it will not get its fair share of the uranium bonanza, the GOM is moving to secure its rights. PLEASE FEED THE BEAR -------------- ¶10. (SBU) In addition to purely commercial concerns, Mongolia sees uranium as part and parcel of its regional balancing act. Sources from Erdenes MGL, MoIT, and the office of the President of Mongolia (protect) have told us that Russia has complained to the GOM that Mongolia should work with its "old friend" on coal, copper, rail, energy and other projects. Mongolia has consistently held the line against Russian domination on key copper and coal projects. However, on uranium, Mongolia has embraced Russian proposals wholeheartedly in order "to keep the bear fed," even if this means starving private firms by nullifying their rights. UP IN ARMS -------------- ¶11. (SBU) Private firms holding uranium exploration rights are understandably up in arms over the controversial policy statement, which is circulating around Ulaanbaatar. The amended Minerals Law of 2006 allowed the GOM to acquire up to 50% of strategic deposits, and uranium was specifically listed as such. Mining firms grumbled about this arrangement, but accepted it as long as its terms were ULAANBAATA 00000630 004 OF 005 implemented consistently and transparently; provided they were compensated for the share they had to surrender to the GOM; and provided they did not lose management or operating control. PRIVATE FIRMS FEAR THE WORST -------------- ¶12. (SBU) MoIT has not explained how its proposed acquisition of at least 51% squares with commitments made by the GOM to the USG and private companies regarding rights holders. Given last summer's aborted attempt to revoke 34 licenses, private firms fear that the proposed changes are nothing less than the expropriation of their rights. BUREAUCRATIC ROADBLOCKS -------------- ¶13. (SBU) In the run-up to a formal announcement on uranium policy, tentatively scheduled for December, MoIT seems to have decided to throw a series of bureaucratic roadblocks in the way of firms wishing to convert to mining licenses. When MoIT retreated from the initial revocation of the 34 licenses, it advised firms involved to convert from exploration to mining licenses. Most firms were only too happy to do so, to enhance their claims on developing the resource. However, MoIT and its regulatory arms have consistently refused to allow the intermediate steps that lead to licensing. For example, a company must register its reserve with MoIT, but MoIT's reserve committee has not met for months, despite official requests to do so. Firms must also submit specific data on their exploration tenements to convert to a mining license -- data held by the Mineral and Petroleum Authority of Mongolia (MRPAM). A month ago, the data was readily available, but now MRPAM claims that the information is classified as a state secret, preventing them from honoring requests from firms that require the data on their own holdings. COAL, COPPER RIGHTS HOLDERS ALSO CRITICAL -------------- ¶14. (SBU) Holders of other mining rights, from coal to copper, have joined their uranium brethren in criticizing the MoIT's behavior. These include Rio Tinto, which is fighting to get its copper-gold project through Parliament. RT urged uranium miners to fight aggressively for their rights, fearing that once the GOM gets a taste for "expropriating" resources, it might move in on other assets, including copper and coal. More tangibly, RT has offered moral and material support to the firms through the local mining association. It has discussed the matter privately with GOM officials at all levels, joined in this effort by other firms, including U.S.-based Peabody Energy. COMMENT -------------- ¶15. (SBU) Industry's concerns over the implications of the leaked GOM report are well-founded; the GOM's moves are increasingly heavy-handed, arbitrary and disturbing. Given that U.S. involvement in Mongolian mining is increasing, with the entry of Peabody and Phelps Dodge (not to mention Commerce Department advocacy for RT and Fluor),Post takes the GOM report seriously. In our view, the GOM ULAANBAATA 00000630 005 OF 005 should be reminded about the perils of expropriation as spelled out in the U.S.-Mongolia bi-lateral investment treaty. We will examine the proper means for such a communication and continue to report accordingly. END COMMENT. MINTON