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North America-Mongolia Business Council Annual Meeting September 19, 2007 Keynote Address by Ambassador Mark C. Minton

Some thoughts on developing a healthy mining sector in Mongolia

Mongolia can have world class mining that benefits both citizens and investors, but Mongolia and all the companies that invest here should keep certain principles in mind in pursuing this effort:

MONGOLIA NEEDS TO DECIDE HOW IT WANTS ITS MINING SECTOR TO EVOLVE

a. The Public seems to favor progress on major deposits

b. The Government of Mongolia (GOM) seems to favor progress on projects

c.  The State Great Hural (SGH) seems to favor progress

d.  Certainly, industry favors progress

e.  In fact, few are against progress on mining projects. So, if everyone is generally for mining, what’s the hold up?

GENUINE FEARS HINDER THE PROGRESS THAT EVERYONE WANTS:

a. Whether we speak of Mongolian mining or mining elsewhere, concerns linger about corruption, about the fear that individuals, companies, and the government will act un-transparently, in illegal ways to extract minerals, leaving nothing for the people but a toxic hole in the ground and hard, bitter memories.

b. Mongolians in and out government and regular citizens are rightly concerned about securing their economic independence in the face of the economic weight of their neighbors; and so, Mongolia hesitates to decide on projects; changes laws constantly; implements regulations haphazardly; extends rights only to take them away.

c. Responding to a business climate plagued by this inconsistent and ever changing legal environment, companies withhold investment until matters settle.

d. And Mongolia’s chance to enhance its trade ties with its Third Neighbors withers, as we Third Neighbors cannot advance crucial commercial ties in a country that constantly changes the rules of the game.

e. Without a consistent, transparent, best practice system based on the rule of law, the chances for Free Trade Agreements and joint investments on key projects, jobs, and opportunities for development will become a Gobi mirage, ever receding into a fading future—limiting Mongolia’s range of possible partners and options.

f.  And so nothing gets done, and each day without progress costs Mongolia’s people jobs, taxes, programs, and the improvements to infrastructure that would come with wide-scale, responsible development of resources.
  
g. In short, we think it time to move on these projects—before too much time passes and opportunities fade and are lost to other nations.

MINING IS A COMMUNITY ENDEAVOR

While all parties will not be satisfied on every point, a good mining sector will balance

a. Solid environmental protections practiced at the best mines,

b. With a stable stream of revenues and jobs to Mongolia and her citizens,

c. With the need for companies to work in a low risk environment where the legal and regulatory framework is stable, transparent, follows best practices, and follows the rule of law and from which they can earn profits from mining activities.

d. Mongolia’s mining community—the companies, the government, the State Great Hural, and the Public—must recognize that major mining projects are really long-term marriages.  Oyu Tolgoi may well produce copper for sixty (60) years or more; and Tavan Tolgoi may well yield coal far into the 22nd century.  We are talking about creating long-term partnerships, and the only way for such marriages to work is for all parties to be open about the process for reaching a mutually beneficial tie:

e. An enduring partnership can only be created when rewards and obligations are well-understood and accepted.

Seek the best advice from local, regional, and international experts on the best practices and optimum deals on mining projects.

a. Easy to say but hard to do, because the long partnerships contemplated involve not just commercial considerations, which are certainly important to any deal—but also political, social, and cultural considerations as well.

b.  And of course, everyone is an expert on mining these days.  It’s hard to walk into any office or on to any square and not be greeted by somebody declaiming, biased or impartially, softly or too loudly, on the subject of mining.  How is one to choose among this overabundance of voices?

c. I might recommend that the SGH and the GOM turn to the World Bank (WB), which has a compelling claim to being a neutral third party.

d. The WB has offered to advise the GOM on the approaches that have worked in other jurisdictions, and on what has not worked.  The GOM has accepted.

e. We urge all parties to move as expeditiously as possible to execute this technical assistance.

In addition, Mongolia’s SGH finds itself with a huge deal, the OT Investment Agreement, before it that requires the most thoughtful parliamentary and public review.

We salute the SGH’s assuming its rightful function in a democracy of vetting such a deal.

We heard that the SGH has authorized funds to cover the costs of an expert to advise it on such mining arrangements as OT and TT.  Acquiring third party professional counsel to advise on best practices and sound development deals is a great idea that will go a long way to proving the merits or correcting the faults of the current OT deal and deals yet to be done.

• The Mongolian government, at various levels, can contribute to this effort by facilitating a calm, transparent, rational discussion at the national, regional, and local levels.
• This can be done and has been done for other recent projects of great importance to Mongolia.   The nation-wide discussion that led to the agreement on the MCC grant would serve as a good model for such a national debate. 
• Whatever the method, though, such  discussion must answer this question:

a. What legal and regulatory framework would produce the significant economic and development benefits that Mongolia’s citizens expect while ensuring a healthy free-market based mining industry that allows foreign and domestic investors/companies to make a profit?

b. The answer to this question cannot and must not be based on momentary passions, or on the needs of one mine, no matter how large, but on the long term interests of citizens of Mongolia and the investment community that will fund future operations.

c. The Government of Mongolia must also work out a clear, equitable way to allow commercial mining while protecting its sovereign interests, which include:

- Jobs for Mongolians, 

- A clean environment, 

- Value-added processing in-Mongolia (should that make commercial sense).

- Revenues—taxes and royalties

- Infrastructure development

d. And the GOM needs to keep its promises to investors and the public made under its laws and regulations. Companies are looking for stable, predictable, fair investment environments.  That does not mean that businesses get everything they want; rather, it means that the government cannot simply change the rules of the game whenever it wants, but must honor its commitments—show good faith and consistency in terms of contracts, laws, and regulations.

For example, the recent attempt to revoke the exploration rights of 18 mining companies shows a perplexing disregard for binding promises made to these companies under both the old and the newly amended Minerals Laws of Mongolia.

- Companies came in under one set of laws, only to find that set invalidated and their rights threatened after substantial investments in exploring various deposits.

- Standard practice the world over is not to invalidate rights granted under an older set of laws but to allow those older rights to run their course; or to find a way to compensate the holders for the loss of rights.

- Although the Mineral Resources Authority of Mongolia reversed the revocation, the lack of a formal process for reviewing and executing policy among the responsible agencies led to decisions that tarnished Mongolia’s reputation among investors.

- Consequently, these investors, and their governments, the U.S. Government among them, have come to think that Mongolia might not be a dependable place to conduct normal commercial activities.

- The much quoted Fraser Study of 2007 placed Mongolia a dismal 63^rd place in preferred locales for mining projects.  Just a few years ago, Mongolia was among the top ten locales.  Now, it barely hovers above Zimbabwe.

- Mongolia cannot afford to let this perception become the accepted opinion among investors just when it needs investor confidence in its business environment the most.

- Again, these concepts regarding government relations with mining companies and development are not rocket science; they have been used in Chile, in Canada, Australia, and elsewhere; and can certainly be used in Mongolia.

f. However, the GOM needs to recognize that people and businesses engage in such activities as mining to earn livings and make profits.  Whatever else it might be or become, mining in Mongolia, like any commercial activity undertaken any where in the world, must be profitable for all parties involved.

- The deposit, the resource in the ground, is not the mine.  The mine is everything that companies need to get that deposit into a form from which a product can be sold profitably.  Mega-mining projects, such as Oyu Tolgoi and Tavan Tolgoi, involve billions of dollars in investment on the mines themselves and on the supporting infrastructure that will support the mine. 

- A considerable risk for all involved, but one which the companies are willing to undertake if they can make an acceptable level of profit from the activity.

- Now if a government in Mongolia or elsewhere wants to share in that profit, that government will have to share in the risk; will have to invest in the enterprise itself, through whatever financial mechanism makes the most economic sense to that government and its partners in the enterprise.  But a government must shoulder the burdens of a partner, if it expects to share in financial returns that might come from mining in Mongolia or elsewhere.

- Because no investment that can produce long term benefits without an equitable distribution of the costs and risks among all those who share in the profits. 

THE GOM’S OBLIGATIONS ARE CLEAR, BUT MINING COMPANIES HAVE OBLIGATIONS, TOO

- Mine cleanly while the mine operates; reclaim the land for use after mining has ended.

- Commit to operate the mines with Mongolian labor, and that means committing to vocational and other types of training.

- Conduct value-added processing in Mongolia where and when that makes commercial sense.

- Transfer and employ the best technologies where and when appropriate.

- Generate revenues—taxes and royalties

- Develop the appropriate infrastructure

Mining companies have to demonstrate two things:

- First, that the existing legal environment or best practices used in other countries significantly benefit Mongolians economically.

- Second, that the radical proposals suggested by some NGOs and public figures would only drive both foreign and domestic investment out of the country at the expense of the Mongolian people and their economic development and their natural environment.

- We believe that a compelling argument for western miners can be made: Western companies in general and American companies in particular have a proven track record of respecting local laws and regulations and customs; of providing jobs; of bring the best technologies; of paying taxes; and of protecting the environment.

b. I would also add that these companies can be held to account for failure to live up to their obligations in western courts and in the court of public opinion, which matters greatly to our western companies.

c. In short, our companies have track records for being partners in projects that will last years or even generations; rather than seeing developments as colonial possessions to be quickly and uncleanly exploited.

d. We also call up western companies to defend their records and their approaches to working with host nations in partnership on mining.

e. As for the role of governments, I think I speak for my fellow diplomatic representatives in saying that if our companies commit to these best practices, they will find the U.S. government and government representatives from their respective nations supporting their activities before the GOM.

FINALLY, DO NOT FORGET THE MOST IMPORTANT PARTY IN THIS EFFORT: THE MONGOLIAN PEOPLE.

- The people have a responsibility to think through all the information on mining policy.  In doing so, we’d suggest they demand that any group, person or business pushing a particular position, make its case with facts and reasoned arguments not emotions and not—to quote an old Mongolian proverb--promises to give the sun (Mongolian/Russian Proverb). 

- But it is enormously important, as Mongolia deliberates and decides these issues, that it is a functioning democracy.  That means that no matter how rough-and-tumble the process, mining in Mongolia will be thoroughly discussed (even debated) in the public forum.  In the end, this should lead to transparent decisions, the rooting out of bad ideas and hidden interests, and broad public support for the solutions reached.

- I’m not saying the process will be smooth – there will be frustrations and mistakes made – but I believe the interests of prospective partners will be well-served by a commitment to partnership with Mongolians as they work through these complicated matters.  

CONCLUSION:

1. A short year in Mongolia has brought home to me that mining is the most important investment for Mongolia’s future. 

- Oyu Tolgoi alone will dramatically impact Mongolia’s economy, perhaps raising Mongolia’s GDP by 50%; but more importantly, developments at OT and other sites will lead Mongolia’s key infrastructure developments in water, power, roads, rail, and aviation for years to come; not to mention that most of the capital flows, investments, insurance, and other financial services will be tied into OT and other developments.

- These mines will become the vital heart of Mongolia’s economy; and so will profoundly affect the conduct of this nation’s politics and democracy.

2. For Mongolia then the choice of how it moves forward, when, and with whom on its mining projects are questions of vital commercial, political, and social import for all of us.

- For the United States, which already has a solid security and aid relationship with Mongolia, the question is equally important. Celebrating our 20th anniversary of relations with Mongolia, we are contemplating how to enhance an already rich and deep relationship.

- But let’s face it, security and aid relations take you only so far, but the rewards of a solid trade relationship easily match those other facets of our bi-lateral relationship with Mongolia.

- Today, the realm of commercial relations remains, like many of Mongolia’s mining assets, largely un-explored; but holds great potential for bringing  Mongolia into closer partnership with  fellow democracies and market economies.

- A thriving commercial relationship is the doorway to stronger bi-lateral relationships with the U.S. and the other third neighbors; and mining, because it touches on so many of these commercial possibilities, is the key to that door.

- U.S. businesses and investors are among the best diplomats for Mongolia.  The more they have at stake here, the more likely they will carry their views and concerns to the ears of other interested parties, many of whom are quite eager to explore, support, and perhaps invest in Mongolia.

- And the U.S. Government pays attention to its business community, and when that community says take a look, have care, we often do—as seen in our trade agreements with,  and support given to,  many of Mongolia’s other third neighbors before key international trade forums.

- But such possibilities depend on progressing forward on major projects.  Americans and other westerners, the government, and the people of Mongolia, all of whom want to be partners in these endeavors, need to open this door to developments so crucial to Mongolia’s future.

- And so, let the GOM move forward on assessing strategic investments for review by the SGH.

- And let the State Great Hural proceed expeditiously but thoroughly; let it, with expert advice, craft balanced arrangements that will work for decades for all sides.

- Then we and the citizens of Mongolia can walk through that door as partners in a long, fruitful marriage.

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