UPDATE: Khan wades through Mongolia’s murky waters

After the market punished Khan Resources (KRI-T) and Western Prospector (WNP-V) shares on news that some exploration licences for uranium projects in Mongolia were being revoked, both companies caught some bounce on speculation that things may not be as dire as first thought.

On Aug. 17 Khan announced the exploration licence covering its 100% owned Additional Dornod project had been declared invalid by a branch of the government known as the Mineral and Petroleum Resources Authority of Mongolia (MRPAM).

The news sent it shares down as much as 63% to $1.06 from the previous day close of $2.79.

But just five days later, on Aug. 23, the company saw its stock jump 41% to $1.88 after issuing a release saying discussions with the government clarified that instead of the licence actually being declared invalid, instead it may be declared invalid in the future.

Im not sure they actually meant it, says Martin Quick, Khans president and chief executive. Were trying to sort out what they meant. Right now the licence has not been invalidated. Were still waiting to find out what it is we have to do.

A report put out by Phoenix-based Casey Researchs senior investment strategist Marin Katusa, argues the impetus behind MRPAMs move was not to take away the projects but to extract more money from companies and push development along.

From what weve gleaned, Katusa says, its unlikely that any of these licences will actually be revoked. Instead, the end result will be that companies who hold these exploration licences under review will be forced to ante up and buy mining licences.

But in Khans case such an assessment doesnt hold water.

I wish it were that simple, Quick says of Katusas analysis. He notes that Khan has been trying to secure a mining licence for Additional Dornod but hasnt been able to because the Mineral Council isnt around to approve its resource estimate — a necessary precondition to upgrading the licence.

Quick says the Mineral Council hasnt convened in roughly 2 years.

Its a catch 22, he says. You have to get them to approve it but you cant get it approved because the body that approves it doesnt meet.

Such confusion is part of the cost of doing business in Mongolia — a former communist country that shows signs of embracing the free market, only to relapse into old socialist habits.

The result is that while foreign investors like Khan are encouraged to exploit the countrys mineral resources by some in parliament, they are also derided by others for robbing the nation of its mineral wealth.

Still for Katusa, the situation in Mongolian is an opportunity for investors willing to persevere through those times when nationalizing tendencies seem to gain the upper hand.

Weve traveled to Mongolia, and everything we saw there indicates that it will move towards a capitalist model, albeit haltingly and with the occasional missteps, Katusa says. the (investment) opportunity remains.

The reason for the governments targeting Additional Dornod and Western Prospector’s Gurvanbulag deposit is that their being — according to factions of the government — explored in the past with state funds. According to the countrys Mining law, that gives the government the right to earn into up to 50% of projects where state funds were used for exploration or other purposes.

But both Additional Dornod and Gurvanbulag were drilled by the Russians with Soviet, not Mongolian money, the two companies say.

For Mongolians to now claim that it was money they put in, is just as far as were concernedwell, were saying show us, says Quick.

While he says the government has made strides in establishing its fledgling democracy it still has a ways to go towards constructing a transparent system and engaging in open dialogues with companies doing business there.

No one called us, Quick says about the time leading up to the delivery of the letter which said the licence was invalid. No one said, you better do something with your exploration licence. We could have sorted it out if they did. It came absolutely out of blue.

In all, MRPAM said it was cancelling 34 exploration licences, which would affect 18 companies.

Khan has a 100% stake in Additional Dornod, which is covered by the exploration licence that was initially declared invalid. Additional Dornod has a resource of roughly 16 million lbs of U308 .

Khans mining licence for Dornod remains unaffected. It has a 58% interest in the 48 million lbs. of U308 that are covered by that mining licence.

Western Prospectors Gurvanbulag deposit contains an indicated resource of 2.83 million tonnes grading 0.22% U308 for about 13.6 million contained pounds U308 plus an additional 2.67 million inferred tonnes at 0.15% U308.

While Western Prospector shares were harder hit than Khans, they followed roughly the same trajectory. Western Prospector shares were trading at $3.40 before the news broke, and went as low as 96, but after Khans second new release questioning the status of its licence, Western Prospector shares rose as high as $1.80 before closing at $1.60 on Aug. 29.