Identifier
Created
Classification
Origin
09ULAANBAATAR244
2009-08-26 09:09:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

Mongolian Parliament Passes Long Awaited, Absolutely

Tags:  EINV PREL ETRD EMIN ENRG PGOV MG 
pdf how-to read a cable
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RUEKJCS/SECDEF WASHINGTON DC
UNCLAS SECTION 01 OF 04 ULAANBAATAR 000244 

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
STATE FOR EAP/CM AND EEB/CBA
USAID FOR ANE FOR D. WINSTON
USDOC FOR ZHEN-GONG CROSS

E.O. 12958: N/A
TAGS: EINV PREL ETRD EMIN ENRG PGOV MG
SUBJECT: Mongolian Parliament Passes Long Awaited, Absolutely
Essential Mining Deal

ULAANBAATA 00000244 001.2 OF 004


Sensitive but Unclassified - Not for Internet Distribution. Contains
proprietary and confidential business information

UNCLAS SECTION 01 OF 04 ULAANBAATAR 000244

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
STATE FOR EAP/CM AND EEB/CBA
USAID FOR ANE FOR D. WINSTON
USDOC FOR ZHEN-GONG CROSS

E.O. 12958: N/A
TAGS: EINV PREL ETRD EMIN ENRG PGOV MG
SUBJECT: Mongolian Parliament Passes Long Awaited, Absolutely
Essential Mining Deal

ULAANBAATA 00000244 001.2 OF 004


Sensitive but Unclassified - Not for Internet Distribution. Contains
proprietary and confidential business information


1. (SBU) SUMMARY: On August 25, the Mongolian Parliament amended
four key laws, which will allow the government to sign and execute
the much anticipated agreement for the Oyu Tolgoi (OT) copper and
gold project. This immense project promises to generate tens of
billions of dollars, and finally overcomes long delays stemming from
fears of the loss of sovereignty and resource nationalism. A strong
Prime Minister and economic troubles motivated the government of
Mongolia (GOM) and Parliament to negotiate and accept a deal that
balances company revenue and operational priorities with GOM tax and
development needs. While much remains to be done over the next six
months to finalize all its terms, the deal represents a success for
U.S. commercial diplomacy and has cemented the U.S.'s position among
the key players in crafting these sorts of agreements in Mongolia.
Other donors are generally positive, but lingering concerns remain
that the GOM gave away too much in some aspects of the deal. END
SUMMARY.

Background of a World Class Copper Mine
--------------


2. (SBU) On August 25, the Parliament of Mongolia amended four key
laws, which will now allow the government of Mongolia to move
forward on signing and executing the long- delayed agreement for the
massive Oyu Tolgoi (OT) copper and gold project with Ivanhoe Mines
of Canada and Rio Tinto. Situated in the middle of the Gobi desert,
the OT deposit is world class in every dimension. With an estimated
mine life of over 100 years, the mine itself is titanic.
Construction costs alone will top USD seven billion, as the mine
will require three complex and expensive shafts and tunnels systems
be hewn out more than one kilometer below the desert surface. Over
the next forty years OT will conservatively yield 44 million tons of

copper and 1,800 tons of gold. At current market prices that equals
USD 264 billion and USD 55 billion respectively. And all this
immense activity will occur within a nation with a GDP yet to top
USD six billion annually.

World Economy Drives Mongolians to Strike a Deal
-------------- ---

3. (SBU) Negotiations have foundered for nearly six years for a
variety of reasons. Mongolian concerns about loss of sovereignty
over its territory -- specifically that the mining rights holder,
Ivanhoe Mines (or any other private firm with similar rights),would
sell the mine to China; concerns that Mongolia would not get its
fair share of the mine's output; and concerns that the firms would
ruin the land without restoration. Even the 2006 entry of Rio
Tinto, a world class miner committed to best practices, as a partner
in the mine failed to allay Mongolian fears.


4. (SBU) Two factors intervened over the last year that
fundamentally changed the game for reaching a deal. First, a
Mongolian politician with sufficient clout, Prime Minister Bayar,
made passage of OT a cornerstone of his government. Second, the
economic crisis severely crimped a Mongolian economy and government
extremely dependent on mineral revenues. Using concerns over
economic collapse, the PM and his team have spent the last year
pushing the GOM and Parliament into negotiating and approving the
deal before RT and Ivanhoe departed for greener pastures.
Significantly, Bayar formed a coalition government even though his
party held a strong majority, and backed his commitment to working
across party lines by appointing opposition party members as the
Ministers of Finance and Environment. Their leadership role
throughout the negotiations was essential to achieving yesterday's

ULAANBAATA 00000244 002.2 OF 004


result.


5. (SBU) Under current law, the GOM has the authority to strike
whatever deal it wants within the confines of existing law -- but if
the deal goes beyond the current law, then the Parliament has to
amend the law to allow the deal to move forward. In the end, it
came down to altering four main laws on roads, water, the windfall
profits tax, and corporate tax respectively before a formal signing
of the agreement. Parliament completed these amendments on the
night of August 25, and the GOM plans to sign the agreement next
week. It will then receive its first USD 100 million of a USD 250
million advance payment. Within the next six months the GOM must
fulfill other conditions precedent to activate the deal fully
(septel will describe these other conditions). If the GOM fails to
do so, the deal may once again fall into jeopardy.


6. (SBU) For reference, para 14 provides a more detailed overview of
the basics of the deal.

GOM View of the Deal
--------------

7. (SBU) GOM and Parliamentary sources expressed general
satisfaction with the deal. They are collectively representing it
as a win for Mongolia in that they have received a share of the
project for the state at no immediate cost or risk to Mongolia; gave
no special revenue grants to the companies; obtained clear
commitments from the companies to value-added activities in
Mongolia; and will receive USD 250 million in up-front monies.


8. (SBU) From a purely political perspective, the PM's adherents
claim that this success validates the PM's goals and strategies (in
particular the coalition),and they claim they will draw on this
success in the 2012 Parliamentary and 2013 Presidential elections.
It will cement these features into the next election cycle in 2012.
Regarding Mongolia's strategic-diplomatic policies, our contacts
suggest that passage of the bills should be seen as Mongolia's firm
commitment to its third neighbor policy within the realm of
commercial activities. (Note: Echoing and supporting this claim is
the signing of uranium deals between Russia's President Medvedev and
Mongolia officials that occurred at the same time as Parliament
Passed the OT bills. End Note.)

Company Perspectives on the Deal
--------------


9. (SBU) RT and Ivanhoe reps, initially jubilant about the passage,
soon lapsed into sober ponderings of the difficulties that will
attend implementation. They are satisfied that the current deal
will allow them to mine profitably, because it removes a crippling
windfall profits tax and allows the company flexibility on labor,
technology, taxes, and other issues. In addition, the deal will let
the firm recover costs more easily through adjustments to
loss-carry-forward rules and an investment tax credit. The
companies are already moving to hire more workers and re-start
long-delayed equipment purchases and contracting. By summer 2010,
company reps estimate the current 400-person workforce will hit
1,000 strong, not to mention the more controversial 2,000-strong
Chinese labor force run by U.S. contractor Fluor Corporation that
will build the adjacent open-pit mine and associated facilities.


10. (SBU) Corporate exuberance over these issues is also tempered by
concerns about the GOM's ability to fulfill all conditions precedent
within six months of the signing of the agreement. The companies
are keen for PM Bayar to designate an OT czar to shepherd the
project through the next six months and perhaps beyond. For

ULAANBAATA 00000244 003.2 OF 004


example, the companies will have to manage a grueling permit and
licensing process that will require over 6,000 licenses for the mine
and all its adjuncts.

Donor Perspectives
--------------


11. (SBU) While most donors support the OT deal, some noted that the
deal gives too much to the companies. One, which has been advising
the GOM on OT revenue provisions during the negotiations, went so
far as to say the management fee the firms will charge is
unprecedentedly high, but provided no details to substantiate the
claim. However, all agree that the deal is sufficient, workable,
and can be improved down the road.

U.S. Views of the Deal
--------------


12. (SBU) COMMENT: The deal is not perfect, but we share the opinion
of most observers that it balances state and private interests in a
way that allows all sides to claim victory. One of the key
accomplishments is that the deal will set a pattern for all sides to
follow in similar projects, the next one being the Tavan Tolgoi coal
project, in which we have both commercial and policy interests.
Commercially, the OT deal is already proving a boon to U.S.
interests, with the Department of Commerce Advocacy Recipient, the
Fluor Corporation, set to have its contract re-activated.


13. (SBU) Over the last six years, Post has steadily built up
relations with industry and the GOM that allowed both sides to avail
themselves of a player perceived of as non-partisan, reliable, and
fair. These qualities made Post the go-to Mission for verifying
respective intentions. The value of this relationship proved itself
in the last and most difficult phases of the talks, when the GOM was
plumbing the intentions of the companies and Mongolia's actual
chances to replace Western participation with Chinese or Russian
partners(among others)if the Western firms proved too intransigent.
Coordinating with other missions and the donors, we sent a clear and
credible, message to the GOM that it was in Mongolia's best
interest to work out its disputes with the Western firms, and to
the companies that the GOM was committed to reaching a deal. END
COMMENT.

Basics of the Deal
--------------


14. (SBU) The basics of the deal struck are as follows:

GOM Rights and Obligations

-- The GOM will, upon fulfillment of all conditions precedent,
receive 34 percent of the mining project, which it will purchase
through financing provided by RT and Ivanhoe. After this purchase is
complete (perhaps 10-20 years),the GOM may seek to acquire another
16 percent.
-- The GOM guarantees that the current deal will run for 30 years,
with right of two 20 year extensions.
-- The GOM undertakes to pay RT and Ivanhoe a management fee to
operate the mine.
-- The GOM will assist the project with all permits and licenses and
establish a working group of GOM and company representatives to work
out regulatory and legal hurdles, including but not limited to
customs, labor, health and safety, environment, and inspections.
-- The GOM will allow the project to build and operate roads, power
facilities, and water facilities related to the project. In addition

ULAANBAATA 00000244 004.2 OF 004


the GOM will allow the project to obtain power from China for up to
ten years so long as the project commits to local generation within
that period.
-- The GOM will revoke the current 68 percent windfall profits tax
(WPT) by 2011 and extend loss-carry-forward provisions from two to
eight years. The GOM will must also certify that the project can
take a ten percent investment tax credit allowed by law within the
next six months.
The GOM undertakes within the next six months to amend seven
currently unspecified laws affecting development of the project.

Company Rights and Obligations

-- RT and Ivanhoe will commit to an advance payment (in the form of
a loan) of USD 250 million paid in three tranches upon completion of
conditions precedent, details of which have not been fully
released.
-- RT and Ivanhoe will pay all current royalties, corporate taxes,
social insurance taxes, customs duties, and VAT taxes without
receiving special treatment.
-- RT and Ivanhoe will follow all environmental rules, labor, and
health and safety rules.
-- RT and Ivanhoe commit to adding value in Mongolia by hiring
locally wherever possible, training local labor, and to building a
smelter (upon proof of commercial viability).

MINTON