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