Share By Melissa Pistilli-Exclusive to Uranium Investing News

In August of this year, Uranium Investing News reported on the climate of political risk for Canadian miners taking shape in resource-rich Mongolia.

Canadian miners were reporting seemingly unwarranted licensing suspensions by the Mineral Resources Authority of Mongolia. One of those Canadian miners was Toronto-based Khan Resources [TSX: KRI], which holds a 58 per cent interest in the Dornod Uranium Property located along the Dornod uranium deposit in northeastern Mongolia. The remaining interest is held by Russian uranium producer Atomredmetzoloto JSC (ARMZ) subsidiary Priargunsky (21 per cent) and the Mongolian government (21 per cent).’

Khan Resources has been embroiled in a dispute with ARMZ over who controls the exploration license for the deposit, which was formerly a Russian open-pit uranium mine, and now that dispute has turned into a hostile takeover with ARMZ making an all-cash offer valued at C$35.1 million or 65 cents per share.

ARMZ is the world’s fifth-largest uranium producer and a subsidiary of the Russian state-owned nuclear energy corporation, Rosatom. In August of this year, Russia signed a joint-venture agreement with Mongolia on the Dornod uranium deposit. This surprisingly bad news for Khan came after the Mongolian government enacted a new nuclear law giving more control of uranium reserves to the state.

The Dornod uranium deposit is very important because it reportedly holds over 50,000 tonnes of reserves. A P&E Mining Consultants study pegs the expected mine life at 15 years with an annual production rate at an estimated 3 million pounds.

The takeover would give ARMZ control of Khan’s exploration licence and its 58 per cent control of the mining license on the Dornod deposit.

This latest chapter in the Dornod saga for Khan Resources is probably no great surprise to Khan’s management given the events of the past few years and the quagmire of problems Ivanhoe encountered trying to do business in Mongolia.

But, I bet the following comment from ARMZ CEO Vadim Zhirov is a bitter pill to swallow and has Khan shaking its collective fist:

“We believe the offer represents full and fair value for the Khan shares and provides Khan shareholders with an opportunity to receive liquidity at a significant premium to the current market as well as value certainty today, relative to the significant political and licensing risks associated with the development of the Dornod property in Mongolia.”

It’s this last part of Zhirov’s statement (emphasis mine) that I find almost hilarious and oh so ironic. I’m sure Khan’s management is not so amused.

The “significant political and licensing risks” he’s speaking of were created in large part by Russia’s push to become top dog in the uranium market and Mongolia’s cowering in the shadow of its stronger neighbour, who it has become financially dependent upon.

Mongolia is teetering on the edge of economic disaster and has become reliant on $1 billion in foreign loans. Moscow is using Mongolia’s struggling economic situation and its dependence upon Russian financial aide to get its hands on Mongolia’s abundant resources, including its uranium deposits.

Russia is Mongolia’s second major trading partner behind China and bilateral trade has tripled from $593 million in 2006 to 1.3 billion in 2008. Roughly 90 per cent of Mongolia’s oil imports and nearly all its wheat imports come from Russia.

In 2003, Russia forgave close to all of Mongolia’s outstanding Soviet-era debts. Moscow subsidizes the oil and wheat imports and earlier this year made a $300 million loan to Mongolia’s failing agricultural industry.

In April 2008, Russia and Mongolia entered into an agreement for Russian specialists to aid in exploration, extraction, production and reprocessing of uranium in Mongolia and Moscow has agreed to help build the country’s first nuclear power plant as well.

With 65,000 tonnes of proven uranium resources in the ground, Mongolia has the potential to become one the world’s largest uranium producing nations. If Russia can gain control over Mongolia’s uranium resources, combined with its current holdings Moscow would have control of nearly half the world’s uranium enrichment market.

Khan Resources has become a victim of Russia’s designs for dominance in the world’s uranium and nuclear markets. Its circumstances highlight the risks western miners face when operating in nations plagued with political and financial uncertainties. As resources in domestic and more mining-friendly foreign states begin to be bought up or dry up, western miners will be looking to more politically risky, but resource rich nations and Khan’s current predicament will become much more common.

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