Enough is Enough: Firms Complain Mining License Freeze

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000080 SIPDIS SENSITIVE SIPDIS STATE PASS USTR, USTDA, OPIC, AND EXIMBANK STATE FOR EAP/CM AND EB/IFD/OIA USAID FOR ANE FOR D. WINSTON MANILA AND LONDON FOR ADB, EBRD USEDS TREASURY FOR USEDS TO IMF, WORLD BANK E.O. 12958: N/A TAGS: EINV PREL ETRD EMIN ENRG MG SUBJECT: Enough is Enough: Firms Complain Mining License Freeze Amounts to "Creeping Expropriation" Reftel: (a)06 Ulaanbaatar 0870, (b) 06 Ulaanbaatar 0875 Sensitive But Unclassified - Not for Internet Distribution. Contains proprietary and confidential business information ¶1. (SBU) SUMMARY AND COMMENT: In the wake of Mongolia's new 2006 Minerals Law, foreign and domestic mining firms report considerable disarray in the Government of Mongolia's (GOM) regulatory apparatus. At this point, industry insiders tell us that GOM processing of exploration and mining licenses has all but ceased. They and GOM sources claim that Ministry of Industry and Trade (MIT) Minister Jargalsaikhan (just sacked February 6 for this and other problems, septel) has illegally used his position over the past several months to embargo license processing. Fears of losing their licenses have led mining firms to describe GOM behavior as "creeping expropriation," and they have threatened to drag Mongolia into local and international courts if the problems are not fixed. However, even if the GOM corrects MIT's improprieties with licenses, the new law allows for a wide array of regulatory mischief. These realities could tarnish Mongolia's reputation as a good place to do business just as it hopes to capitalize on large scale mining investments, potentially hindering longer-term economic development. END SUMMARY. ¶2. (SBU) COMMENT: Mongolia has faced challenges in international courts before and won, but in none of those cases was evidence for the seizure of property, in this case licenses, so clear on its face. However, the current problem is the tip of the iceberg. Even if the GOM repudiates (now ex-) Minister Jargalsaikhan's actions, the new Minerals Law offers too much room for mischievous discretion on the part of government officials. For example, the vague concept of "strategic deposits" might allow the GOM to seize any and all mining rights without compensation (ref B). Collectively, all this uncertainty threatens Mongolia's international reputation as a good place to do business. Mongolia benefits from branding itself as a sane and honest place to invest in a region filled with largely bad players. But if Mongolia follows the expropriation model adopted by some of its North East Asian brethren, quality western investors, such as mining giants Peabody Energy, Rio Tinto, and BHP Billiton, may join Anglo-American Gold and flee Mongolia. Such flight could hurt Mongolia's long-term prospects. END COMMENT. Miners' Misery -------------- ¶3. (SBU) GOM management of Mongolia's mining sector is in disarray. Foreign miners have complained to Emboffs that the Mineral Resources and Petroleum Authority of Mongolia (MRPAM) has refused to process any exploration or mining licenses since the new Minerals Law passed in early July 2006. Post's own sources at both MRPAM and the Ministry of Industry and Trade (MIT) confirm that MIT Minister Jargalsaikhan has ordered cronies at MRPAM to halt all licensing activities, despite the fact that neither the old nor the new law grants authority to any minister to interfere in the licensing process. ¶4. (SBU) Adding to miners' misery, the new law forces firms to temporarily surrender titles to explore and mine so that the old licenses can be put into the new format required by the 2006 law. In practice, this process requires miners to give back original documents to MRPAM, which should automatically reissue them in the new format within two weeks of submission. Unfortunately Minister Jargalsaikhan's embargo on processing has prevented miners from completing these regulatory requirements, and the two weeks has extended into five months for most miners. (Note: On February 6, 2007, Mongolia's parliament voted 34 to 13 to dismiss Jargalsaikhan as Minister of Industry and Trade.) Mining Firms Restive and Increasingly Vocal Claim ULAANBAATA 00000080 002 OF 002 MIT's Actions Tantamount to Creeping Expropriation -------------- -------------- ¶5. (SBU) On January 31, in a rare display of public rancor and growing impatience, foreign and domestic mining firms described the Minister's actions as creeping expropriation. (Note: DCM and CommOff attended the meeting to underscore USG interest. Post is considering what other actions, if any, it should take on this issue.) Ivanhoe, a heavily invested Canadian firm with substantial copper and coal assets, claimed that its formal, legal requests to transfer its coal licenses from Ivanhoe's copper company to a new firm have been consistently blocked by Minister Jargalsaikhan. Ivanhoe reps privately say their claims for damages incurred may amount to tens of millions of dollars.(Note: Ivanhoe's current investment in exploration in Mongolia has exceeded US$ 450 million dollars.) ¶6. (SBU) Ivanhoe's legal council has told CommOff on several occasions that Minister Jargalsaikhan had openly told the firm that he will never transfer coal licenses to the new company no matter what the law requires. Ivanhoe's letters to, and meetings with, the Prime Minister have yielded no results despite the PM's promises to rein in his wayward Minister. Failure to move on the licenses has led to Ivanhoe's recent firing of 1,000 employees (ref B). Ivanhoe had hoped that these firings would send a clear message that the GOM needs to resolve the dispute, but there are still no signs of GOM movement. Most recently, Ivanhoe's reps have told CommOff that they consider the GOM actions expropriatory, and they say they are ready to file a claim in international court against Mongolia. They really do not want to cross this Rubicon but are running out of options. ¶7. (SBU) Asia Gold, which over the last four years has invested over US$15 million into Mongolian exploration, reports that it has yet to get back exploration licenses held in common with mining titan BHP Billiton. After five months the licenses have yet to resurface, and there is no way to proceed on exploration without these documents. With its 2007 multi-million USD exploration plan suspended and possibly cancelled for good, Asia Gold-BHPB are considering whether to pursue court and arbitration actions against Mongolia. Asia Gold reps also say their claims may amount to tens of millions of dollars. ¶8. (SBU) At a business-leader's dinner for visiting EAP the DAS Tom Christensen on January 30, BHPB's country director discussed licensing troubles with MRPAM and MIT. He echoed Asia Gold and Ivanhoe's exasperation with GOM misbehavior, noting that BHPB might depart from Mongolia for a generation if the GOM did not mend its ways. Facing conflicts over coal and copper rights, mining giant Rio Tinto echoed BHPB's sentiments at same the dinner. Minton