EMBASSY SUPPORTS PEABODY IN MEETINGS WITH PRESIDENT, PM;

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000227

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E.O. 12958: N/A
TAGS: EMIN EINV PREL ECON EFIN PGOV MG
SUBJECT: EMBASSY SUPPORTS PEABODY IN MEETINGS WITH PRESIDENT, PM;
REVIEWS MINING CONCERNS

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: Visiting Peabody Energy President for Northeast
Asia, accompanied by the Charge and Peabody reps, met separately
with Prime Minister Bayar on May 8 and President Enkhbayar on May 9.
They underscored Peabody's continued interest in doing business in
Mongolia and delivered draft recommendations for a framework for the
development of Mongolia's coal industry, which President Enkhbayar
had requested during his October 2007 visit to the U.S. PM Bayar
was seized with addressing differences between MPs regarding two
mining amendments - one that proposes a 51% government equity share
in strategic deposits, and another that envisions a production
sharing contract (PSC). Bayar considered the former too problematic
and the latter more workable and politically tolerable. (Note:
Parliament's regular session closed Friday, May 15, with no action
on either amendment, though the MPs may yet return to discussions
before campaigning begins officially at month's end for June 29
national parliamentary elections. End Note.) Bayar concluded that
Mongolians share a common desire to develop mining, but lack a
consensus on how to do so. President Enkhbayar noted Mongolians'
only experience with mining was with the 100%-government-owned
Erdenet copper mine, a joint venture with the Soviets/Russians. He
explored various permutations of the 51% idea: 51% government
equity, 51% of the profits, and at some future point, owning a
controlling interest of 51% of the physical property to ensure
Mongolia's sovereignty over its own territory. Enkhbayar suggested
deposits might be distinguished by the sources of exploration
funding between those discovered by government-funded exploration,
such as the Tavan Tolgoi coal deposit, versus those found privately,
such as the Oyu Tolgoi copper/gold deposit discovered by Ivanhoe, a
Canadian mining firm (and now partnered with Rio Tinto). At both
meetings, the Charge supported Peabody's efforts and reviewed
concerns voiced by American mining firms. END SUMMARY.

PEABODY REPS VISIT
--------------


2. (SBU) A visiting Peabody Energy delegation led by Peabody's
President for Northeast Asia, Mr. Tahir Tayeb, accompanied by the
Charge and Peabody reps, held separate meetings with Prime Minister
Bayar on May 8 and President Enkhbayar on May 9. The purpose of
their visit was to underscore Peabody's continued interest in doing
business in Mongolia, and to deliver a study, requested by the
President, providing recommendations for a framework for the
development of the Mongolian coal industry.

USG SUPPORTS PEABODY; AMENDMENT CONCERNS NOTED
-------------- -


3. (SBU) In both meetings following Peabody's presentations, the
Charge intervened to stress that the USG supports Peabody as a world
leader in coal development with cutting-edge technology, noting that
Peabody has been a exemplary model of high standards for local
community support and environmental protection. The Charge said
U.S. firms speak for themselves as to the specifics of given
proposals, but that many firms had advised the USG that the
proposed amendment requiring an unfunded 51% government equity share
would make mining commercially unviable. The Charge also noted that
the uncompensated "taking" of such a government share in an existing
investment could trigger U.S. anti-expropriation laws and provisions
under the existing US-Mongolian Bilateral Investment Treaty (BIT).
Of the mining amendment proposals currently on the table, the
production sharing contract seemed to have the flexibility needed by
investors while also meeting Mongolia's sovereignty and domestic
political needs - that the contract contained no new "redline
deal-breakers." (Note: After each meeting, Peabody reps expressed
appreciation for accompanying them and supporting Peabody, as well
as for delivering these important points. End Note.)

PM: MONGOLIANS SHARE A COMMON DESIRE TO
DEVELOP MINING BUT NO CONSENSUS ON HOW TO DO IT
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4. (SBU) During a cordial 70-minute meeting, PM Bayar thanked Tayeb
for the framework document and noted that the Mongolian public
shared a common desire to develop its mineral resources, but lacked
a consensus on how to do so. At the moment, two proposals were
before the Parliament, one enshrining a 51% government equity share
in any strategic mineral development, and the second proposing a
"production sharing contract" (PSC). He thought the former was
essentially unpassable, given differences between the ruling
Mongolian People's Revolutionary Party (MPRP) and the opposition
Democratic Party (DP),while the latter might still provide
sufficient flexibility to meet Mongolian interests and those of
potential mining investors. He thought passage of either would be
difficult, given the lack of clarity on the issues and because there
was little time before Parliament would recess so MPs could focus on
the June 29 Parliamentary elections.

PRESIDENT AMPLIFIES VIEWS ON MINING
--------------


5. (SBU) During a May 9 meeting that lasted nearly 90 minutes,
President Enkhbayar reviewed the evolution of Mongolian thinking on
government participation. Enkhbayar noted that Mongolia's mining
experience was dominated by its 70-year relationship with the Soviet
Union, during which state ownership was 100%, and Mongolia's only
real experience stemmed from the joint ownership with Russia of the
Erdenet copper mine. Mongolians did not understand the distinction
between 100% national ownership of the mineral resources in the
ground and less than that in the mining investment, development, and
production process. He opined that MPs, who visited major U.S.
mines in Wyoming and Utah in 2007, drew the wrong conclusions,
equating 100% USG ownership of underground mineral resources with
equity participation in development, which is not the case. (Note:
These MPs have willfully misrepresented what they heard while
reviewing Peabody's Powder River Basin coal operations in Wyoming.
They subsequently informed the Mongolian public that the USG owned
and operated coal mines. Rather, the USG owns the minerals in the
ground, but does not operate any mines. Specifically, they were
told that the USG owns the minerals in the ground (which is the same
world over),that they license extraction of these minerals to
private operations in which the USG had no ownership, financial or
managerial role. The MPs, for unknown reasons, did not convey this
truth to their colleagues or the Mongolian public, claiming instead
that the USG owned and operated coal mines. End Note.) The
President also offered a lengthy explanation of the history of the
concept of royalties.

51% GOVERNMENT SHARE CONFUSION
--------------


6. (SBU) Over the course of the conversation, Enkhbayar indicated
that he supported a 51% government equity share in strategic
deposits, but then shifted to say he meant 51% of the profits, and
later stressed the importance of Mongolia ending up at some future
point owning a controlling interest of 51% of the property, so that
it was ultimately assured of sovereignty over its own territory.
Tayeb replied that there were many other options available to ensure
Mongolia's sovereign control, citing as an example the USG's
controls exercised through its regulatory authority. Enkhbayar also
mentioned the possibility of "right of first refusal" provisions or
"golden shares" as other options. Enkhabayar stressed that Mongolia
needed a stable, predictable regime if it hoped to attract needed
investment to make mining possible. He was concerned that the PSC
would each require separate negotiations, opening up the process to
more government and parliamentary meddling. (Comment: Post believes
this waffling on 51% reflects Enkhbayar's early support for the
ill-defined and problematic concept. Exactly what he was referring
to was never articulated -- whether that meant the mine's physical
plant or the corporate entity conducting the operation or something
else, a confusion commonly shared among most GOM interlocutors and
the Mongolian public in general. Enkhbayar has yet to find a
suitable formula for distancing himself from his earlier
pronouncements and has taken to castigating the PSC, perhaps in part
because it is the preferred political solution of the Prime

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Minister, a political rival of the President. End Comment.)

WHO FUNDS EXPLORATION?
--------------


7. (SBU) The President suggested that another approach to answering
the question would be to distinguish between those resources
discovered by government-funded exploration, such as the Tavan
Tolgoi coal deposit, versus that found through private investment, a
la the Oyu Tolgoi copper/gold deposit discovered by Ivanhoe, a
Canadian mining firm (and now partnered with Rio Tinto). (Comment:
In Post's view, this is a spurious argument for several reasons.
First, earlier exploration may have been government-funded, but the
government did not act, usually using the services of Soviet/Russian
geologists to conduct exploration. When the GOM issued exploration
and mining licenses, it issued the licenses with no mention of
future share/ownership rights for GOM on these properties. However,
the exploration firms were and are required to reimburse the GOM for
its exploration expenses, the precise calculation of which remains
problematic, as in many cases the exploration was conducted between
20 and 50 years ago. As many companies have reimbursed the GOM for
its past expenses, they often wonder how the GOM can make a claim on
deposit based on past expenses for which it has been compensated.
Furthermore, much of the exploration was done by the Soviets using
outdated technology, and firms say they had to do much of it again
themselves to verify reliability. End Comment.) Enkhbayar
expressed confusion about the Powder River Basin approach in which
an exploration firm, which invested its own funds, also had to
participate in a tender, and was not assured of the recovery of its
exploration costs.


9. (SBU) The President asked for further information and examples of
how the transfer of ownership of mineral rights was handled in the
U.S. and elsewhere. He said he was interested in "power-sharing"
issues and processes. (Note: Mongolian experts and officials in the
Ministry of Industry and Trade have suggested that we conduct a
series of DVC's among our Bureau of Land Management, Parliament MPs,
and senior Mongolian officials, such as President Enkhbayar, to
clarify our U.S. practices. BLM has already held several events
with Mongolian counterparts, providing information at the mid- to
department-chief level. However, our colleagues at MIT have
reported that senior officials and parliamentary decision makers
doubt what their advisors are telling them because it varies with
what the traveling MPs have said; and although they doubt the MPs,
senior Mongolian officials and MPs feel the need to hear what the
U.S. does directly from the BLM source. End Note.)

GOLDBECK