DEEP IN GOBI DESERT, NO-FRILLS COAL MINING

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000652

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EB/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: ENRG EMIN PREL SENV ELTN ETRD MG
SUBJECT: DEEP IN GOBI DESERT, NO-FRILLS COAL MINING

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION


1. (SBU) SUMMARY: Emboffs accompanied Peabody Energy geologists on a
helicopter trip deep into Mongolia's Gobi desert on November 2 to
reconnoiter the Little Tavan Tolgoi (LTT) coal mine, a rudimentary
facility that has warmed Mongolians for 41 years. LTT is part of
the larger Tavan Tolgoi (TT) deposit, which Peabody hopes to develop
in partnership with the Mongolian Government. LTT, marked by two
large open pits, lacks power lines, pipes and other key aspects of
sophisticated mining, but operates around the clock. Once the
coal-and-rock soil is scraped from the ground it is not "washed" to
remove impurities but loaded directly onto trucks, most of which are
then driven to China, spilling black coal dust and contaminating
sheep and goats along the way. Safety precautions are lacking. 30%
of workers are Chinese, although the mine's managers insist it's
10%. Post provides advocacy support on Peabody's behalf, in line
with Commerce Department guidance. END SUMMARY.


2. (SBU) Commercial Officer and Econ/Pol Chief joined Peabody Energy
geologists on a November 2 helicopter trip to the Gobi desert to
visit the Little Tavan Tolgoi (LTT) coal mine, which according to
official statistics generates 30% of Mongolia's annual coal output.
LTT is situated within the substantially larger TT coal deposit,
which is still under exploration. Peabody's aim was to quickly
reconnoiter the site to get a better sense of the development
problems that Peabody may face if it were to become the operator of
the larger TT deposit.

"IT WOULD HAVE TO BE BUILT FROM SCRATCH"
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3. (SBU) From the air, a sea of empty Gobi scrub and rocky sand
passes before LTT comes into view, appearing as a dirty, coal-black
island. Immediately visible are two open pits and a large mountain
of waste rock, built from four decades of mining. Scores of trucks
head in and out of the mine, not far from a camp with a microwave
tower. Conspicuously lacking, however, are power lines, pipes, or
any other sign of sophisticated infrastructure development. As one
of Peabody's geologists commented: "It doesn't get more 'green
field' than this." Peabody's specialists noted that everything from
roads to power, and water to food, would have to be built from
scratch or transported in - an expensive and time-consuming
proposition.

30% OF NATIONAL COAL OUTPUT
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4. (SBU) LTT is owned by a joint venture company consisting of the
Omengobi Aimag provincial government (51%) and a private consortium
led by local Parliamentarian Bat-Erdene, of the opposition
Democratic Party. The mine is divided into two pits. LTT managers
and local provincial officials told us that Pit 1 provides 400,000
metric tons per year of thermal coal for domestic users at a price
of 6000 Mongolian Tugriks, or US$5.11 per ton. They said Pit 2
provides some 2 million tons of coking (aka metallurgical) coal for
export to China at a stated export price of US$10.71 per ton. Put
in perspective, LTT generates 30% of Mongolia's official output of
eight million tons mined annually, both for domestic consumption and
for export to China.

PEABODY UNIMPRESSED WITH OPERATION

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5. (SBU) Peabody's specialists were clearly unimpressed with the
operation of LTT, but said it holds promise, not least of all
because of the high concentration of coal in the soil. (NOTE: At
most sites, the ratio of rock to coal is around 8:1, a Peabody
official explained, while at LTT the ratio was roughly 1:1. END
NOTE.) The TT deposits, including LTT, are suitable for open cast
mining using drag lines, an efficient, productive method employed at
most of Peabody's current operations. However, the LTT pit is mined
by excavators loading several hundred 90-ton trucks 24 hours per
day, seven days a week. From LTT, trucks carry the coal some 150 km
to the Mongolia-China border, and then to a China-based railhead
from which it is shipped an additional 200 km for end use in the
Inner-Mongolian steel complex at Baotou. As Peabody explained, the
current system has too many seams -- too many starts and stops -- to
maximize efficiency and productivity (and thus profits).

20% OF TRUCKED PRODUCT IS DEAD WEIGHT
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6. (SBU) The six relatively small excavators we counted can only
fill up one truck at a time, and as each truck is filled another
must take its place. Each pit has only one entrance, thereby
compounding delays. Once the coal reaches the surface, it is not
subjected even to a minimal washing process but is shipped straight
to China. As a result, anywhere from 10% to 20% of the material
trucked to China is dead-weight rock or dirt. The managers
acknowledged these imperfections, but noted they still make a
profit.

DISCREPANCIES OVER PRICE OF COAL
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7. (SBU) LTT managers said the mine is operated by the Omengobi
provincial government, with shipping services provided by a company
owned and operated by the minority private owner, Bat-Erdene. The
managers declined to explain how a contract with a government entity
was awarded to one of the private holders of LTT. Regarding the
pricing of the coal, the managers claimed not to know what coking
coal was fetching in China, but finally came up with the figure of
US$10.71 per ton. (NOTE: Later, Commoff consulted with the bank that
services LTT's accounts. The bank's CEO said the US$10.71 figure
was inaccurate; the actual sale price received at the China railhead
is US$15 per ton, and the price paid by the end-user at Baotou is
US$25-30. The CEO added that there are occasional discrepancies
between what the mine operators say they received from Chinese
buyers and the cash they repatriated into Mongolia via the bank.
END NOTE.)

SAFETY, ENVIRONMENTAL CONCERNS
--------------


8. (SBU) Safety and environmental precautions at LTT leave much to
be desired. The steep pit walls are not roped off, nor are there
embankments to prevent trucks, cars or people from taking a one-way
plunge. Nearby roads appear asphalt-paved, but closer inspection
reveals the mine's heavy environmental toll. These roads are, in
fact, dirt tracks topped with coal dust spilled from countless
trucks. Mine managers confirmed that the black-dust roads extend
from LTT to the Chinese border 150 km away. They also conceded that

ULAANBAATA 00000652 003 OF 003


GOM officials and local herders have complained about this
pollution. Herders' concerns are well-founded for sheep, goats and
other animals near the roads; coal dust has blackened both their
meat and their coats, they claim.

CHINESE LABOR FIGURES A MOVING TARGET
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9. (SBU) Mongolian law requires business to hire no less than 90%
Mongolian workers, although waivers are allowed if skills are not
locally available. LTT officials initially told us that the mine
employs some 2,400 workers, and that 90% of them are Mongolians.
The rest, they said, are Chinese, mostly from Inner Mongolia, and
work mainly as drivers trucking the coal to China. These figures
were called into question after we spoke with two on-site Chinese
truckers. Asked for a clarification, LTT managers then revised
their estimate, saying about 20% of the workforce is Chinese.
However, an LTT employee we bumped into at the site confided that
the actual figure is 30%, most employed as truckers and excavator
operators. The employee said he is aware that LTT is not in
compliance with the law, but pointed out that labor inspectors had
never bothered LTT. (NOTE: Many foreign-invested businesses have
reported being harassed by the GOM after they hired even one
additional non-Mongolian worker. END NOTE.)

MINTON




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