Identifier
Created
Classification
Origin
07ULAANBAATAR630
2007-11-06 00:34:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

WILL MONGOLIA EXPROPRIATE URANIUM MINING RIGHTS?

Tags:  EMIN ENRG PREL KNNP TRGY PGOV MG 
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VZCZCXRO8558
RR RUEHDBU RUEHLMC RUEHVK
DE RUEHUM #0630/01 3100034
ZNR UUUUU ZZH
R 060034Z NOV 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1627
INFO RUEHUL/AMEMBASSY SEOUL 3013
RUEHMO/AMEMBASSY MOSCOW 1951
RUEHTA/AMEMBASSY ASTANA
RUEHEK/AMEMBASSY BISHKEK 0061
RUEHNT/AMEMBASSY TASHKENT 0020
RUEHDBU/AMEMBASSY DUSHANBE
RUEHBJ/AMEMBASSY BEIJING 5834
RUEHML/AMEMBASSY MANILA 1509
RUEHLO/AMEMBASSY LONDON 0221
RUEHFR/AMEMBASSY PARIS 0061
RUEHKO/AMEMBASSY TOKYO 2712
RUEHBK/AMEMBASSY BANGKOK 1602
RUEHOT/AMEMBASSY OTTAWA 0529
RUEHBY/AMEMBASSY CANBERRA 0193
RUEHBS/USEU BRUSSELS
RUEHSH/AMCONSUL SHENYANG 0364
RUEHVK/AMCONSUL VLADIVOSTOK 0168
RUEHOK/AMCONSUL OSAKA KOBE 0049
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0766
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
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

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