Hong Kong-listed Companies as Major Acquirers of Resource Assets in Mongolia. Over the last 12 months, Mongolia has become an attractive investment destination for the companies listed on the Hong Kong Stock Exchange (HKEx). Attracted by the country’s huge mineral resources, the HKEx-listed companies have become the biggest acquirers of Mongolia resource assets since the second half of 2009 ($966mn worth of M&A deals or over 90% of total).

Asset Injections

All recent Mongolia M&A deals in which Hong Kong companies were involved have been completed through injections of resource assets into the existing publicly listed companies. Before acquisitions, these companies engaged in a diverse range of activities and industries including agriculture, waterworks, IT, clean tech, plastic products and even manufacturing of toys and gifts.  Following acquisitions, these below HKEx-listed  companies are now primarily Mongolia-focused resource companies:

• Bestway International Holdings (0718:HK), an investment holding company engaged in trading of plastic products, has acquired two tungsten mines in Mongolia for HK$940mn (US$121mn) in July 2009
• North Asia Resources Honldings Ltd (0061:HK), formerly known as Green Global Resources Ltd. acquired 100% of North Asia Resources Group Ltd., a private resource company in Mongolia, for HK$1.76bn (US$227mn) in December 2009
• Kiu Hung Energy Holdings Ltd (0381:HK), an investment holding company with businesses in energy, gift and toy industries, acquired coal assets in Mongolia from First Dean Holdings Ltd for HK$1.4bn (US$180mn) in March 2010
• Solartech International Holdings Ltd (1166:HK), a manufacturer of cables, wires, connectors and terminals, has acquired a 87.9% stake in Sun Progress Ltd which owns copper-gold-silver mine in Mongolia for US$193mn in May 2010
• Ming Hing Waterworks Holdings Ltd (402:HK), engaged in waterworks, technology, engineering acquired a number of coal, gold and copper mining and exploration licenses in Mongolia for HK$1.94bn (US$245mn) in June 2010
• Mongolia Energy Corp (0276:HK), formally New World CyberBase Ltd was the first HKEx-listed company to acquire a resource asset in Mongolia through asset injection. It paid HK$1.2bn (over US$150mn) for a coal mine in January 2007.

Overpaid Deals

In our view, most of these companies have overpaid for these earlier stage resource assets. Poor post-acquisition share price performance only underscores investor concerns (Solartech is down 75% since May 2010 deal announcement). Owners of target companies with Mongolian assets (primarily mainland Chinese and Hong Kong private investors) are clear winners as they have disproportionally benefited from these deals.

More asset injections to come amid zeal for “Mongolia resource play”.

We expect more Hong Kong-listed companies to pursue M&A deals in Mongolia through asset injections in a quest to transform into “resource play”. Some small-cap companies may find too tempting to acquire resource assets in Mongolia in order to revive their sagging fortunes and join the growing league of Mongolia-focused resource companies at the HKEx. At the same time, the private owners of resource companies in Mongolia would target small-sized HKEx-listed companies in their effort to seek “back-door listing” through lucrative reverse takeovers.

To read full research note in English and Chinese please visit www.eurasiac.com

Sensitive financial issues were discussed at a “secret” meeting on Monday attended by members of the Standing Committee on the Economy, and representatives of the International Monetary Fund, the MongolBank, and the National Statistics Office. They talked mainly about the budget deficit and the threat of inflation.

The Finance Ministry has proposed revisions to the 2010 budget following the increase in the price of copper and gold. If this has meant MNT 364.2 billion in extra revenue, the decision to increase the salary of civil servants by 30 percent, and reinstatement of the child allowance will lead to more expenses. Some new public projects have also been proposed. Taken together, these will take the budget deficit beyond the proposed 5% of GDP as stipulated by the IMF.

The resultant inflation may nullify the 30 percent increase in salary.  The Government’s hopes of keeping inflation under six percent have been belied. It has already reached 10 percent and many analysts predict an even darker future with inflation hovering around 27 percent by the end of the year.

The IMF, which has lent money to keep the budget deficit within manageable limits, is strongly recommending austerity measures. There seems to be rethinking in the Finance Ministry and Parliament seems to have suspended further discussion on the revised budget. These are likely to resume on Monday, after MPs will have considered what was discussed at the meeting.

Source: english.news.mn; highlighted in the weekly BCM Newswire by Business Council of Mongolia

Few days ago, we posted an article on Fraser Institute’s Mining Survey as obtained from the NAMBC newsletter:  Mongolia Drops in Annual Fraser Institute Mining Survey.  In this post, we will attempt to break down what it exactly means.

Mongolia Mongolia’s ranking dropped in the Fraser Institute’s Mining Survey – what exactly does it mean?

The “drop in Mongolia’s ranking” was in the “Policy potential index”, which aims to be “a ‘report card’ to governments on the attractiveness of their mining policies”.  Please see image below.

As shown above, Mongolia is ranked at the bottom, near countries such as Bolivia, DRC (Congo), Zimbabwe, Philippines, Equator, and Venezuela.

The report revealed that Mongolia ranked near bottom in the following categories (bottom 10 or 15):

• Uncertainty concerning the adminstration, interpretation,and enforcement of existing regulations
• Regulatory duplication and inconsistencies
• Taxation regime
• Infrastructure (includes access to roads, power availability, etc.)
• Political stability
• Labor regulations/employment agreements
• Geological Database (includes quality and scale of maps, ease of access to information, etc.)
• Supply of labor skills

To download the survey, go to Survey of Mining Companies 2009/2010

Survey Background

Since 1997, The Fraser Institute has conducted an annual survey of metal mining and exploration companies to assess how mineral endowments and public policy factors such as taxation and regulation affect exploration investment.  Survey results represent the opinions of executives and explo ration managers in mining and mining consulting companies operating worldwide. The survey now covers 72 jurisdictions around the world, on every continent except Antarctica, in clud ing sub-national jurisdictions in Canada, Australia, and the United States.

Mongolia has dropped from 55^th place to 67^th place out of 72 jurisdictions in the annual Survey of Mining Companies 2009/2010, released on April 15 by the Fraser Institute, one of Canada’s leading public policy think-tanks.

This is Mongolia’s lowest ranking since 2006.  Mining industry executives rate Quebec as the world’s most attractive jurisdiction for mineral exploration and development for the third straight year

In the “policy potential index,” Mongolia was in the bottom 10 of 72 jurisdictions rated. Countries rated lower than Mongolia were the Congo (DRC), Zimbabwe, the Philippines, Ecuador and Venezuela.  In 2008/2009, Mongolia ranked 55^th out of 71, in 2007, 61^st of 68, and in 2006-2007, 62^nd of 65.  California was also in the bottom 10 this year, ranked below Indonesia.

To download the survey, go to Survey of Mining Companies 2009/2010

As we had speculated in an earlier NAMBC newsletter, Mongolia’s rank may have been adversely affected by the fact that global questionnaires sent to mining experts were being filled out last year after the passage of the Nuclear Energy Law (with its provision for uncompensated expropriation) but before the signing of the final agreement on Oyu Tolgoi.

The Fraser Institute’s annual survey represents the opinions of 670 mining executives and managers worldwide on the policy and mineral endowment of 72 jurisdictions on all continents except Antarctica. Companies participating in the survey reported exploration spending of US$2.9 billion in 2009 and of US$3.6 billion in 2008.

Last year’s survey showed significant international pessimism towards new mining investment, but this year’s survey reveals a strong rebound in optimism. Almost twice as many miners plan to increase investment as hold it steady or decrease it, with 83 per cent of miners saying mining prices will rise and 20 per cent expecting substantial increases.

Source: NAMBC Newsletter April 30, 2010.  Visit NAMBC website here: North America Mongolia Business Council.

Below is Press Release from Khan Resources.  Two related posts on our Mongolia Business Blog (MBB) website are Dornod Uranium, Khan Resources, ARMZ, Russia, & Mongolia and Khan Rebuts All Charges Based on “Inaccurate Information”.  On the day of the press release, the stock price of Khan Resources on the Toronto Stock Exchange dropped from 85 cents to 67 cents and then to 57 cents (33% drop).

TORONTO, ONTARIO, April  13, 2010 – Khan Resources Inc. (TSX:KRI) (“Khan”) announced today that its 58%-owned Mongolian joint venture subsidiary, Central Asian Uranium Company, LLC (“CAUC”) and its 100%-owned Mongolian subsidiary, Khan Resources LLC (“Khan Mongolia”) have received notice from  the Mongolian Nuclear Energy Agency (the “NEA”) stating that CAUC’s mining license 237A (the “Mining License”) and Khan Mongolia’s exploration license 9282X (the “Exploration License”) have been invalidated. The invalidations purport to be effective as of October 8, 2009 and purport to be based on a failure by CAUC and Khan to address violations of Mongolian law stemming from a July 2009 report issued by an inspection team appointed by the Mongolian State Specialized Inspection Agency (the “SSIA”) in respect of the Mining License.

Khan continues to believe that it and its Mongolian subsidiaries have always operated and continue to operate in compliance with all applicable Mongolian laws, including the Nuclear Energy Law, and there is no legal basis for the NEA invalidation notices.  Khan intends to challenge the NEA’s actions through all legally available means.  In Khan’s view, the actions by the NEA are a clear violation of Khan’s rights and interests under the laws and Constitution of Mongolia, and are in breach of Mongolia’s obligations under international law.  Khan and its legal counsel intend to vigorously defend its rights and interests, and to pursue all available rights and remedies in the Canadian and Mongolian courts and, if necessary, in international arbitration.

Background

Khan believes that in order to understand the  latest action by the NEA, it is necessary to understand the background and recent history.

As previously announced by Khan, in July 2009 CAUC was informed by the Mineral Resources Authority of Mongolia (“MRAM”) that the Mining License (and only the Mining License) had been temporarily suspended due to CAUC’s alleged violation of applicable laws cited by inspectors from the SSIA based on their visit to the Dornod site in mid-April, 2009.  The principal violation was that CAUC had not registered its deposit reserves with the State Integrated Registry for approval by the Minerals Professional Council.  In fact, CAUC had submitted the deposit reserves and resource calculation for registration in 2007, but the Minerals Professional Council had never (and to this  day has never) held the requisite meeting to consider the calculation and prepare the requisite report.  Following receipt of such notice, CAUC met and communicated with SSIA representatives on several occasions and responded to each of the alleged violations cited by  the SSIA and continued to work cooperatively to resolve any allegations surrounding the Mining License or CAUC’s activities in Mongolia.  CAUC also brought a legal action in Mongolia against MRAM challenging the temporary suspension.  In January, 2010, CAUC reached a settlement with MRAM in which the temporary suspension was terminated, which was announced by Khan on January 14, 2010.  Khan viewed this settlement as having finally resolved the July 2009 suspension of the Mining License.

Also in July 2009, the Government of Mongolia passed the new Nuclear Energy Law which became effective on August 15, 2010.  Under the Nuclear Energy Law, all holders of uranium licenses were required to submit formal applications to re-register their licenses in compliance with the new legislation.  On October 8, 2009, CAUC and Khan received notices (the “October 8 Notices”) which stated that in connection with  the implementation of the Nuclear Energy Law, the existing Mining License and Exploration License should be considered invalidated, and that CAUC and Khan should not undertake any activities under the licenses until they obtain new licenses from the NEA under the new law.  Khan inquired as to the grounds and consequences of such invalidations, and was informed by the NEA  that all licenses held by all uranium license holders in Mongolia had been temporarily suspended in October 2009, pending re-registration of such licenses under the Nuclear Energy Law.  Accordingly, Khan interpreted the October 8 Notices as an administrative matter which meant  only that its licenses, like those of all other license-holders in Mongolia, were in limbo pending re-registration under the new law.  In November 2009, CAUC and Khan submitted lengthy and detailed applications for the re-registration of the Mining License and the Exploration License.  The applications were in compliance with the requirements of the new legislation, including the requirement to state that the license holder accepted the ability of the Mongolian State to take an ownership interest in the license-holder without compensation.  Although this expropriation provision of the Nuclear Energy Law has been challenged by the Mongolian Mining Association and others, Khan and CAUC made a decision to accept it and to work cooperatively with the Mongolian State-owned uranium company MonAtom LLC (“MonAtom”) on a basis that gave MonAtom a 51% ownership interest in the entities that own the Mining License and Exploration License.

Indeed, on January 25, 2010, Khan announced that it had entered into a non-binding memorandum of understanding (the “MOU”) with MonAtom, which sought to establish the principal elements of a joint venture transaction which would finalize the ownership structure surrounding the Dornod Uranium Project and create a framework for developing the project and bringing it into operation as expeditiously  as possible.  Among other things, the MOU contemplated MonAtom acquiring a 51% interest in each of CAUC and Khan Mongolia in accordance with the Nuclear Energy Law and also contemplated re-registration of the Mining License and the Exploration License within 7 days of signing the MOU.  This latter condition to the MOU was never fulfilled and, accordingly, despite Khan’s efforts to cooperate with the Government of Mongolia, the transactions contemplated under the MOU were not pursued further.  Additional details concerning the MOU can be found in Khan’s January 25, 2010 press release.

Despite the fact that the Nuclear Energy Law stipulates that exploration licenses must be re-issued within 3 months and mining licenses with 6-12 months, the license re-registrations of Khan are still pending.  Khan has made repeated requests for an official update as to the status of these applications and its licenses, however, until now, Khan had not yet received any official response from the NEA.

The latest notices from the NEA came in response to Khan’s latest attempt, in a letter dated April 9, 2010 to the NEA, to seek official confirmation as to the status of its licenses.  Although Khan is aware of several news stories in the Mongolian and Russian press which have suggested that Khan’s licenses had been annulled, this is the first time that  Khan has received any official confirmation to this effect.

Indeed, as recently as March 29, 2010, representatives of CAUC and Khan met with a committee of the SSIA to discuss various renewed allegations of non-compliance identified by the SSIA subsequent to receiving the October 8 Notices  based on another inspection conducted by the SSIA in March 2010, which Khan understood would form the basis of a future decision regarding the licenses.  In several instances, the alleged violations had already been the subject of previous investigations by the SSIA and previously responded to.  In any event, Khan believes that the alleged violations are not an appropriate or legal basis upon which the NEA could properly make a decision to invalidate the licenses or not to re-register them under the Nuclear Energy Law. At the end of these meetings with the SSIA committee, SSIA Chairman Sodbaatar indicated that further audit and inspection would be undertaken and, following a preparation of a report on the results of that further audit and inspection, only  then would a decision, if any, be made with respect to the licenses by the SSIA.  He also indicated that the matter may be elevated for discussion and consideration by higher-level Government authorities.  Khan had not received any further communication from the Mongolian Government since the March 29 meeting with the SSIA, until now.

Khan finds the basis upon which the invalidation notices purport to be issued highly troubling. Notwithstanding the assurances received from  the NEA in October 2009 that the October 8 Notices were common to all license holders and  the suspensions were temporary in nature pending re-registration of licenses under the new law, the NEA is now, several months later, alleging that the October 2009 invalidations of the licenses were actually on the basis of the violations cited in the July 2009 SSIA report.  This stated rationale is in direct contrast to the October 8 Notices themselves and to the assurances received at that time from the NEA as to the scope and purpose of the October 8 Notices.  It is also in direct contrast to the inspection efforts of the SSIA, which were still ongoing as of March 29, 2010 and, Khan understands, continue to be ongoing.

Khan notes that rumours and allegations as to the status of its licenses in Mongolia have appeared in the Mongolian and Russian press and posted on various websites in Mongolia and Russia since late February.  Indeed, when Atomredmetzoloto JSC (“ARMZ”), a subsidiary of the Russian state-owned nuclear energy company Rosatom, allowed its unsolicited take-over bid for Khan to expire on March 1, 2010 in the face of a superior bid from CNNC Overseas Uranium Holding Ltd., its stated reason for doing so was a report by a working group established by the Security and Foreign Policy Standing Committee of the Mongolian Parliament which recommended that a number of uranium exploration and mining licenses in the Dornod province should be invalidated based on alleged and unspecified violations  of Mongolian law.  Although Khan was not mentioned in this report, allegations that Khan’s licenses had been annulled based on this report were repeated by Rosatom officials in the Russian media.

Martin Quick, President and CEO of Khan, said: “It is entirely unclear and completely non-sensical as to why the SSIA would continue to inspect the Dornod licenses and engage in communications and discussions with Khan and  its subsidiaries concerning the Dornod licenses with a view to coming to a formal decision at some point in the future, if in fact that licenses were invalidated in October 2009, as the NEA now alleges.”  Mr. Quick added, “We view the NEA decision to invalidate the Dornod licenses as without any legitimate or legal foundation and may be politically motivated.  The NEA’s intention appears to be to invalidate our licenses, as well as potentially those held by other foreign companies operating in the region, with a view to transferring all of the mineral rights and interests in the entire Dornod uranium region to a ‘Dornod Uranium joint venture’ that is purportedly being established between the Russian and Mongolian Governments, with complete disregard to Khan’s rights and interests.”

Additional details regarding the background to the recent NEA actions are set out in more detail in Khan’s directors’ circular dated December 14, 2009 issued in response to the unsolicited take-over bid for Khan by ARMZ.  The circular can be found at www.sedar.com.

As mentioned above, Khan intends to take all legally available steps to protect its interests, including by pursuing all available rights and  remedies in the Canadian and Mongolian courts and, if necessary, international arbitration. Khan has instructed its legal counsel to immediately begin preparations for a legal challenge to NEA’s actions.

Khan will provide further updates as information becomes available.

Khan Resources Inc. (TSX:KRI) is a Canadian company engaged in the acquisition, exploration and development of uranium properties. Its current activities are focused on the Dornod area in northeastern Mongolia, the site of a former Russian open-pit uranium mine. Khan holds interests in the Main Dornod Property and in the Additional Dornod Property.    Khan’s website is www.khanresources.com.

Forward-Looking Statements and Information

This press release may contain forward-looking  statements and forward-looking information, which are subject to certain risks, uncertainties and assumptions.  Forward-looking statements and information are characterized by words such as “will”, “plan”, “expect”, “project”, “intend”, “believe”, “anticipate”, “forecast”, “schedule”, “estimate” and similar expressions, or statements that certain events or conditions “may” or “will” occur.  Forward-looking statements and information are not historical facts and are based upon a number of estimates and assumptions and are inherently subject to significant business, social, economic, political, regulatory, competitive and other risks and uncertainties, contingencies and other factors, including the impact of International, Mongolian and Canadian laws, trade agreements and regulatory requirements on the offer by CNNC Overseas Uranium Holding Ltd. (“CNNC”) and Khan’s business, properties, licenses, operations and capital structure, Khan’s ability to re-register or re-instate the Dornod licenses, regulatory uncertainty and obtaining governmental and regulatory approvals for the offer by CNNC, legislative, political, social, regulatory and economic developments or changes in jurisdictions  in which Khan and CNNC carry on business, the speculative nature of exploration and development, risks involved in the exploration, development and mining business, changes in market conditions, changes or disruptions in the securities markets and market fluctuations in prices for Khan securities,  the existence of third parties interested in purchasing some or all of Khan’s shares or assets, the satisfaction or waiver of the conditions to the CNNC offer, the extent to which holders of shares determine to tender their shares to the CNNC offer, the anticipated benefits of the CNNC offer, litigation and other legal proceedings, the method of funding and availability of potential alternative strategic transactions involving Khan, including those transactions that may produce superior strategic value to shareholders, the need to obtain and maintain licenses and permits and comply with national and international laws, regulations, treaties or other similar requirements, and uncertainty in the estimation of mineral reserves and resources.  In addition, a number of other factors could cause actual results to differ materially from the results discussed in such statements and information, and there is no assurance that actual results will be consistent with them.  For further details, reference is made to the risk factors discussed or referred to in Khan’s annual and interim management’s discussion and analyses and Annual Information Form on file with the Canadian securities regulatory authorities and available on SEDAR at www.sedar.com.  Such forward-looking statements and information are made or given as at the date of this news release, and

Khan assumes no obligation to update or revise them, either publicly or otherwise, to reflect new events, information or circumstances, except as may be required under applicable securities law.

Investor Relations Contacts:

Martin Quick
Khan Resources Inc.
President & CEO
Office: 416.360.3405
mquick@khanresources.com

Jonathan Buick
The Buick Group
Office: 416.915.0915, Ext. 302
Toll Free: 1.877.748.0914
jbuick@buickgroup.com

Editor’s note: I found this article online today.  It gives an overview of events involving the Dornod Uranium mines.  The players include Khan Resources, ARMZ, Russian Government, and Mongolian Government…

Despite the potentially huge profits, it can be difficult to do business in a former communist country — particularly one that is in Asia. Western companies have learned this the hard way.

One current example is in Mongolia, involving a Canadian company, Khan Resources, and a rapid chain of events that put the company on the verge of losing vast amounts of money and essentially being kicked out of Mongolia. In the end, however, Khan Resources would have the last say.

In early 2009, Khan Resources, which Richard Lockhart describes as a “minor, Toronto-listed uranium explorer” owned a 58 percent interest in the Central Asia Uranium Company (CAUC), with the remaining 42 percent split evenly between the Mongolian government and ARMZ, “which is an arm of Rosatom and ultimately part of Russia’s state-owned nuclear conglomerate.”

Lockhart is an editor at Newsbase, a British-based news service that publishes reports on the international energy sector, including on conventional fuels and alternative energy resources.

Both those partners wanted a greater share in CAUC, which mines the Dornod uranium deposit in northeastern Mongolia. Dornod contains at least 28,000 tons of uranium, and Russian experts in particular believe further and better exploration could uncover twice that amount.

The Russian government gave its support to ARMZ. Prime Minister Vladimir Putin visited Mongolia in May 2009 for talks with Mongolian officials that focused on Russian participation in mining Mongolian uranium.

According to Lockhart, in July 2009 the “Mongolian government changed the law saying now that Mongolia has to take at least a 51 percent stake in such ventures.”

Khan responded that it was hoping for a “reasonable accommodation” with Mongolia’s government, but threatened to take Mongolia to international arbitration court. Both parties eventually started talks on a compromise.

Russian Pressure

In late August, Russian President Dmitry Medvedev arrived in Ulan Bator accompanied by Rosatom chief Sergei Kiriyenko.

As Putin had done in May, Medvedev and Kiriyenko met with Mongolian officials to discuss the participation of Russian companies in uranium mining on the territory of its former communist ally. The two sides signed agreements that promised greater Russian participation in extracting Mongolia’s uranium.

In September, the head of ARMZ, Vadim Zhivov, said the Mongolian government was reviewing Khan Resource’s contract and announced that “all the licenses” for the Dornod site had been temporarily “suspended.”

Things got even worse for Khan Resources a month later, when a hostile bid was made for the Canadian company’s CAUC shares. “This was obviously one way by the Russians to cement their control” of CAUC, Lockhart says, “and ultimately of the Dornod deposit in eastern Mongolia.”

The Russians offered 65 Canadian cents per share (about 35 million U.S. dollars) for Khan’s CAUC stake, which it “refused point blank saying that their assets there were worth much more,” Lockhart says. “Khan refused ARMZ’s offer and refused it not only because of its low value but Khan has also accused ARMZ of negotiating with the Mongolian government without recognizing Khan’s interest in the deposit.”

Lockhart says ARMZ accused Khan Resources of negotiating with the Mongolian government over the Russian company’s interests in Dornod.

A White Knight?

At the start of 2010, Khan Resources’ situation seemed hopeless. The company’s license to work at the Dornod site was suspended and ARMZ would not withdraw its hostile bid despite Khan’s refusal to accept it.

The Mongolian government lifted the suspension in January, but the Russian bid remained on the table and Khan was still at risk of losing at least half its share in CAUC. Khan and the Mongolian government signed a new memorandum of understanding in late January.

But the beleaguered Canadian company received another bid in February. “Khan accepted a rival offer from the Chinese at 96 cents [Canadian], so that’s a considerable premium over the Russian’s offer,” Lockhart says.

The bid came from CNNC Overseas Uranium Holding, a Hong Kong-registered unit of the China National Nuclear Corporation, China’s main state-owned nuclear company. Khan had found a buyer that could stand up to the pressure by the Mongolian government and the Russian company and disburse some 53 million U.S. dollars.

ARMZ simply said it was leaving its bid open, but according to Lockhart, the company chose not to renew it when a March 9 deadline arrived. By then, Khan had accused ARMZ of “opaque political maneuvering and unsubstantial allegations without recognizing the rights of Khan or its shareholders.”

Endless War Of Words

So is the matter finally settled? Not at all. Khan’s agreement to sell its shares to CNNC is not finalized and there are already objections to that deal.

“Since the CNNC put this offer on the table, I understand the offer is valid until mid-April,” Lockhart says. “The Mongolian government has also said that any deal selling Khan’s interest in Dornod to the Chinese would require the Mongolian government’s approval, and Khan Resources denies this.”

ARMZ, Khan Resources, and the Mongolian government continue to trade accusations about breaches of their agreement. The Mongolian government has also opened an investigation into the legality of Khan Resources’ licenses in Mongolia.

Khan fired off an open letter on March 26, saying the company found it “difficult to understand why only the Canadian partner should be investigated when there are two other partners in the joint venture. Are they to be investigated as well?”

The letter said “inaccurate information” was being fed to the public and media, and that Khan was “surprised and disappointed that the ARMZ has made speculative and unsubstantiated comments about the events that could take place in regard to the uranium licenses in Mongolia.”

In the document, Khan accused the Russian company of releasing false information and “telling the government of Mongolia what to do and what not to do.”

Source: Canadian Mining Company Faces Troubles In Mongolia
by Radio Free Europe Radio Liberty (www.rferl.org)

In an open letter to MP Z. Enkhbold, Khan Resources has clarified its point of view about certain conclusions and recommendations recently made by the working group led by him after its visit to Dornod uranium district last summer.

The company notes that the license it holds was not included in the list of licenses whose legality was sought to be investigated. Reiterating that the company has been fully cooperating with Government officials, Khan says it would be pleased to provide all relevant documents to the working group if asked to do so. Expressing confidence that Khan has fulfilled all its obligations towards Central Asia Uranium Corporation (CAUC), the company says it is difficult to understand why only it should be investigated when there are two other partners in the joint venture. “It is most unfortunate that inaccurate information has been delivered…through recent official and unofficial sources that suggests that only Khan may have been in breach of the law,” the letter says.

It traces the full history of the operations of Khan Resources in Mongolia “in compliance with all laws and regulations”, and asserts that the company intends to work “according to international standards”, even though some of the measures “will be more costly”, in keeping with Khan’s strong belief “in putting health, safety, and environment protection as a number one priority, and well ahead of profits”.

The letter details the course of events that led to the conclusion of a Memorandum of Understanding on January 22 between MonAtom LLC, the representative of the Mongolian Government, and Khan, “whereby Khan agreed to transfer 51% of the shares of Khan Resources Co., Ltd to MonAtom free of charge”, in “clear acknowledgment by Khan of the Mongolian right to own a majority of the Dornod uranium deposit and thereby comply with the Nuclear Energy law”.  The Russian partner (ARMZ) in CAUC “did not respond to this request and abstained from voting”.

Khan says “ARMZ did not obtain any approval from the NEA (Nuclear Energy Agency)” when it made a hostile take-over bid to purchase all of the common outstanding shares of Khan Resources. The NEA broke its silence only when it issued a statement “a day before the expiration of the ARMZ take-over bid” saying that the MoU had “violated Mongolian laws and should not be implemented”. Khan says “this would have led to a drop of the share price of KRI, and would have allowed” ARMZ to purchase them for low value. It was at this time that CNNC of China made an offer to acquire all shares of KRI, and “KRI had no other option than to accept the CNNC offer under such circumstances”.

The letter expresses surprise and disappointment that the ARMZ has made “speculative and unsubstantiated comments” and has been “releasing information about actions that have not taken place and appears to be telling the Government of Mongolia what to do and what not to do”. Then it explains how in a market economy a publicly traded company cannot dictate who buys its shares, and in this regard the Khan management “has no power to prevent investors purchasing its shares, whether they be Russian, Chinese or any other third party… (as) only shareholders make the final decision”.   That final decision on the CNNC offer is yet to be made “and it is too early to predict” what it will be. Thus, “obtaining prior approval from the NEA of a deal which is not yet complete and one in which we cannot predict, does not make any sense to us.

More importantly we cannot find any regulations demanding such approval before the deal is completed.” Besides, the Mongolian law stipulates that “the license holder must obtain approval if it intends to sell, pledge or transfer its shares to others”. In this case, “a third party has made an offer to purchase all outstanding common shares of the Canadian parent company” and this “potential sale will not change the ownership of shares of the company holding licenses in Mongolia”. Khan clarifies “that no amendments were made into the ownership of Khan Resources Co., Ltd and CAUC holding licenses in Mongolia and, if there were indeed any changes to the ownership of these two companies, we would have obtained approval in accordance with the law”.

The letter says “the claim by certain NEA officials that Khan ‘violated’ the law, and did not get the Dornod uranium deposit reserve approved, is simply not true and is completely misleading”. It details how time and again Khan “has been asking to conclude the Dornod deposit pre-mining agreement since 2007 in accordance with the new Mineral Law requirements, but Government agencies would simply ask it to wait”.
The letter concludes by appealing “to all parties to study the facts, and to present to the public accurate and objective information, and then to make decisions in conformity with the laws and regulations”.

Source: Khan Resources; highlighted in the BCM Newswire by Mongolia Business Council

A coalition of environmental protection movements in the country has sent a report to the President, the Parliament Speaker, the Prime Minister, and the Ministers of Minerals and Energy, Finance, and Labor and Social Welfare detailing “illegal activities” by Petro-China Dachin Tamsag and demanded an inquiry into how the company has been allowed to violate Mongolian laws, pollute the environment, and harm local communities in several ways.

Petro-China has been working in three oil fields in Dornod aimag since 2005 on the basis of a product sharing agreement with the Government. Petro-China has refused to make available to the coalition a copy of the agreement, as also of its performance and monitoring reports, even though the NGOs have a constitutional right to the information.  Petro-China says these are “company secrets that cannot be disclosed to a third party”.

The coalition has referred in its report to the numerous cases of violations and improprieties in the company’s working revealed during inspections by the National Audit Office and the Specialized General Inspection Agency. Petro-China has consistently refused to take corrective measures.  The coalition now wants a detailed enquiry into specific terms of the agreement which, it says, violate several Mongolian laws.  It also wants to know why the contents of the agreement are not made public.

The coalition also seeks a clarification from the Mongolian state authorities on if it is tenable for the Petroleum Authority to defend and justify Petro-China’s actions by saying, as it has done, that “Chinese rules, procedures, and standards are being observed as the Chinese workforce follows Chinese technique and technology”.  The Authority has also accepted the Petro-China argument that an “evaluation of its work and future plans was made in China” and that this should be sufficient.

Petro-China employs 3,620 Chinese nationals, all of whom are exempted from paying the required fees to the Mongolian Government.

Source: Udriin Sonin newspaper; translated and delivered via the BCM Newswire by Mongolia Business Council

Goldman Sachs is believed to have filed a case against Mongolia in an international arbitration court in matters relating to Mongol Gazar and the Olon Ovoot mines.  This news comes in the wake of unconfirmed but strong reports that the Mongolian Government has lost the case against the Russian-owned Altan Dornod.

Mr. B.Lhagvasuren, director of the Inspection Department at the Central Bank, has denied any information about Goldman Sachs filing any case
Mr. Ts. Myanganbayar, a business magnate, mortgaged the Olon Ovoot gold mine license to several banks and to Goldman Sachs to borrow a total of MNT 210 billion. Of this, Zoos Bank, now known as State Bank, gave him MNT 60 billion, Anod MNT 30 billion, and Goldman Sachs MNT 15 billion.

Goldman Sachs is a global investment banking and securities firm but is not registered in Mongolia, nor does it have any accredited representative here. Accordingly, it may not have the legal right to enter into any commercial transaction in the country.  A man with only a visiting card is said to have been representing the company to meet Mongolian officials.  Nobody knows anything more about him, or what position, if any, he holds at the company.

It is believed that the Olon-Ovoot license was mortgaged to a company calling itself Goldman Sachs International.  The Mineral Department agreed to the mortgage but this is now being contested as mining licenses can be mortgaged only to banks or non-banking financial organizations and they have to be legal entities in Mongolia.

Source: Ardin Erkh newspaper; translated and delivered via the BCM Newswire by Mongolia Business Council

Mr. Eric de SEZE, General Director & CEO of Areva Mongolia, “Nuclear Energy and Uranium” “PART TWO of BCM Meeting Highlights”

On Monday, December 7, 2009, Business Council of Mongolia (BCM) held its last meeting of the year.  Guest speakers Mr. B. Enhuyag, First Deputy Governor of Bank of Mongolia and Mr. Eric de SEZE, General Director & CEO of Areva Mongolia discussed “Views on Current Macro-Economics and Mongolia’s Banking Sector” and “Nuclear Energy and Uranium”, respectively.

Rather than spit out their presentations verbatim, I will highlight points that I found interesting.

Please note these highlights are written NOT written verbatim; they are written in my own words and, in some cases, there may be quite big errors.  Personally, I did not even anticipate that I might post some highlights online for view of the public at large.  Please bear with me.

Mr. Eric de SEZE, General Director & CEO of Areva Mongolia, “Nuclear Energy and Uranium”

• 97-98% of enriched uranium can be recycled.
• Uranium is typically found at 1-2.5% and enriched is considered at 3%.
• Everything has radiation, including the water we drink.  The question is the level or radiation.  Radiation experienced by an average person is 2.4 mSv (per year?) while a radiation experienced by a person living at 1,500m altitude is 3.6 mSv
• On Uranium pricing, the media tends to focus on the volatile spot price of Uranium, but the industry insiders and traders focus on contract pricing.  Example pricing showed spot pricing at $42.50/lb and contract pricing at $65/lb.
• Dornod & Dulaan Uul uranium reserve could propel Mongolia to #4 in the world (in term s of uranium mining?).
• Rio Tinto mines 18% of Uranium in the world
• Mongolia’s “almost neighbor“ Kazakhstan could become world’s #1 uranium mining country in either 2009 or 2010
• There are three basic mining methods: rock 65%, sand 25%, by product 10%
• Although Mongolia has two or three large uranium mining deposits, the methods needed will be at least two completely different methods.  The mining north will be the more standard “rock” mining, whereas the deposits in Gobi or to the South, will require “sand” mining techniques, which is completely different in exploration and mining methods from the former.
• World reserve for uranium mining is 4.5M tU, which is enough to use for 70 years.  However, this number stays roughly the same year after year because more are found as more are used.
• Mongolia is officially #14 in determined uranium reserve, which is basically the same as India, a country which has been doing uranium mining and using nuclear energy for decades now
• Mongolia’s reserve is roughly twice that of China and 1/3 that of Russia
• Uranium is two times heavier than lead.  1 Cubic Liter of Uranium will weigh 19+ times more than water… almost 20 kilos per cubic liter!