Open Letter

It is appropriate to make the following clarification relating to the conclusions and recommendations recently made by the working group of the State Ikh Khural after its visit to Dornod uranium district last summer. The working group recommended that the legality of a number of licenses should be investigated, however license 9282X held by Khan Resources Co., Ltd was not been included in the list. It was also  mentioned that as far as license 237A held by Central Asia Uranium is concerned, the final decision should be made after investigating how the Canadian partner has met its obligations as manager of the CAUC JV. Please be advised that our company has already been fully cooperating with relevant government officials, submitted all necessary documents to SPC, NEA, and MonAtom LLC, and if required  we would be pleased to  provide all relevant documents to the working group. KRI is confident that it has fulfilled all its obligations towards CAUC, however we find 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?  It is most unfortunate that inaccurate information has been delivered to the public via press and other media sources through recent official and unofficial sources that suggests that only KRI may have  been in breach of the law.

Khan Resources Inc (KRI) is a Canadian registered company publicly traded on the Toronto Stock Exchange that owns 100% of shares of Khan Resources Co., Ltd (Khan Resources Mongolia) and 58% of shares of Central Asian Uranium Co., Ltd (CAUC).  CAUC was established in 1995 with the support of the Government of Mongolia that holds 21% interest in the CAUC, the Russian state owned Priargunsky company (ARMZ) has 21% of interest., and KRI through direct and indirect subsidiaries owns 58% in the CAUC. CAUC has been undertaking its activities for 15 years in compliance of the laws and regulations of Mongolia. The investment of the Mongolian Government for the foundation of CAUC was in providing the 237A mining license, and the JV has been conducting its operation with this license.
Khan Resources Mongolia was incorporated in 2004 and has held 9282X exploration license since 2005. Khan Resources Mongolia has been in compliance with all laws and regulations, and has funded all activities of the company. KRI has funded by itself the rehabilitation of the Dornod uranium deposit, including research, prospecting, exploration and drilling, costing over US$21 million from 1995-2009. Our company has also completed the Definitive Feasibility Study (DFS), and has issued reports and studies on environmental protection and reclamation according to international standards. The DFS was prepared in accordance with international standards utilizing safe mining and processing technology which is aimed at giving maximum protection to the health and safety of workers and the local population, and maximum environmental protection. In this connection KRI is planning use old Russian shafts mostly for ventilation purposes,  and will build everything else from scratch. Although, this will be more costly than using existing facilities KRI believes strongly in putting health, safety, and environment protection, as a number one priority, and well ahead of profits. 

The Minerals Law of Mongolia was amended in 2007 and the Nuclear Energy Law was adopted in July 2009. KRI has been making efforts to negotiate with the appropriate authorities in Mongolia according to the new regulations and requirements. On 10 November 2009, we submitted applications to re-register 237A mining and 9282X exploration licenses to the NEA in conformity with the Nuclear Energy Law and the application results are pending. The NEA has not provided us with any official response nor has requested any additional documents. We collaborated with Mon Atom LLC, the representative of the Mongolian government in order to ensure that we were in compliance with the new law. For example as part of our cooperation with the Mongolian government KRI has concluded a Memorandum of Understanding (MOU) with MonAtom LLC on 22 January 2010 with the aim of developing the Dornod uranium project, and bring it into production in the shortest time possible with our Mongolia and Russian partners. According to the MOU, KRI agreed to transfer 51% of the shares of Khan Resources Co., Ltd to Mon Atom free of charge. Also, KRI agreed that MonAtom should own 51% in CAUC and agreed to transfer its proportion of shares to MonAtom free of charge. In this way, a condition of the Government of Mongolia to acquire free of charge 51% of Khan Resources Mongolia and CAUC holding licenses of Dornod uranium deposit would have been met. This was a clear acknowledgment by KRI of the Mongolian right to own a majority of the Dornod uranium deposit and thereby comply with Nuclear Energy law of Mongolia. Unfortunately, the Russian partner (ARMZ) did not respond to this request and abstained from voting.
During this time ARMZ of Russia – the partner in CAUC, made a hostile take-over bid to purchase all of the common outstanding shares of Khan Resources for C$ 0.65 per share. According to our knowledge, ARMZ did not obtain any approval from the NEA to purchase the shares of KRI, but the NEA has not made any statement regarding the ARMZ offer during this time. While KRI has been taking every measure to comply with the Nuclear Energy Law of Mongolia, and has co-operated with the representative of the Government - MonAtom, the NEA has made a statement a day before the expiration (February 1, 2010) of the ARMZ take-over bid, that stated that the MOU  violated Mongolian laws and should not be implemented. This would have led to a drop of the share price of KRI, and would have allowed ARMZ to purchase all of the common shares of Khan Resources for low value. It was at this time that CNNC of China made an Offer to acquire the all the outstanding common shares of KRI at C$0.96 per share. It is appropriate to specifically emphasize that KRI had no other option than to accept the CNNC offer under such circumstances.

We’re 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, and has been releasing information about the actions that have not taken place and appears to be telling the Government of Mongolia what to do and what not to do. For example, when the official conclusion of the working group appointed by Mongolian government had not yet submitted its conclusions after reviewing the licenses of Dornod, Gurvanbulag and Mardai uranium deposits, the Chairman of ARMZ said in his interview to Interfax on 27 February 2010 (published in “Today” daily newspaper on 5 March 2010) that the Government of Mongolia has revoked and invalidated the licenses of KRI and that KRI has violated the law. However, the conclusion of the working group of the State Ikh Khural has not stated anything like that, and moreover, 9282X exploration license of KRI has not been included in the list of the licenses that are violating laws. In fact the conclusion of the working group’s committee said that the decision regarding 237A mining license will be taken upon further investigation. 

In a market economies such as Canada, USA, Europe, etc., a publicly traded company cannot dictate who buys its shares, and in this regard Khan management has no power to prevent investors purchasing its shares, whether they be Russian, Chinese or any other third party. KRI management cannot make the final decision in a takeover process, only shareholders make the final decision.  In a takeover situation  KRI management just can only offer its recommendation to shareholders to support or not an offer. At this point the shareholders make the final decision. In our case the ARMZ offer 0.65 cent per share of KRI was too low and KRI management recommended not accept this offer. When the CNNC offer 0.96 cent per KRI share was announced, which was almost 50% premium to the ARMZ offer, KRI management suggested that this offer be accepted. Final decision will be made by shareholders and it is too early to predict what the outcome will be. So obtaining prior approval from 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.  The Nuclear Energy Law of Mongolia stipulates that the license holder must obtain approval if it intends to sell, pledge or transfer its shares to others. However, the shareholders of 237A and 9282X license holders (Khan Resources Mongolia and CAUC) remains same, and no announcements were made to make any changes in their ownership. A third party has made an offer to purchase all outstanding common shares of the Canadian parent company KRI only, and the potential sale of the shares of KRI will not change the ownership of shares of the company holding a licenses in Mongolia. Therefore, we would like to clarify that no amendments were made into the ownership of Khan Resources Co., Ltd and CAUC holding licenses in Mongolia and indeed if there were any changes to the ownership of these two companies, we would have obtained approval in accordance with the law.

Regarding Dornod uranium deposit reserve approval, we need to clarify that its reserves been approved by Soviet Mineral Reserve council in 1988 and accepted by Mongolian State integrated reserve registry No.0881. On this basis 237A mining license was issued in 1998 by Mongolian State Agency according to the existing law. More recently the Dornod uranium deposit was considered a Strategic deposit by the Mongolian parliament in 2007, and also the Mongolian state considered this deposit to be explored with funds from Mongolian State budget, and on this basis asked for 51% ownership free of charge. KRI was ready to accept this claim according to the terms of the MOU signed with MonAtom LLC. However, the claim by certain NEA officials that KRI “violated” law, and did not get the Dornod uranium deposit reserve approved, is simply not true and is completely misleading. KRI was asked in 2007 to make a re-calculation of Dornod uranium deposit reserves according Mongolian standards, and in August 2008 KRI submitted this re-calculation to Mongolian Mineral Council. Moreover KRI also completed an international acceptable 43-101 standard reserve calculation. Since the submission of Dornod uranium deposit reserve re-calculation, Mongolian government officials did not make a decision, but asked KRI to wait until uranium regulations were issued. KRI waited for this to happen, and in late 2009 Mineral Council experts were appointed and concluded their work. However the Mineral Council meeting was delayed again by Mongolian government for unknown reasons. In other words KRI has done everything it possibly can to have the Dornod uranium reserves approved by Mongolian Mineral Council. A similar situation with exists with the pre-mining agreement. KRI 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 not made any decision but simply asked KRI to wait . So, accusations that Khan has not fulfilled its obligation are completely without foundation and misleading. 

We wish to take this opportunity to appeal 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.
Finally, we would like to reiterate that KRI, Khan Resources Co., Ltd and CAUC have been conducting all their activities strictly within the framework of the laws of Mongolia, and will   take all measures to protect the interest of its shareholders in accordance with Mongolian and International laws and regulations.

2010.03.12
KHAN RESOURCES INC