Mongolia 101 Mongolia

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January 2 4 2011

Res Cap

Mongolia 101

Initiating country coverage on one of the last remaining mining frontiers

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January 24 2011

ResCap Mongolia 101 – One of the Last Remaining Mining Frontiers

Mongolia - One of the Key Global Economic and Mining Stories of 2011

Nestled between two political giants - China and Russia, Mongolia is a vastly undeveloped resource rich country on the brink of an economic transformation. Thanks to positive recent political and economic developments, Mongolia is set for spectacular growth which is becoming noticed globally. And backed by its resource rich landscape of world class deposits, Mongolia has been coined the “Saudi Arabia of Coal” with strong parallels to previous natural resource booms around the world.

The Mongol Rally Has Literally Just Begun

A rally to attract foreign investment, re-develop the stock exchange, re-urbanize much of the population into sustainable housing and reignite a process to unlock much of the country’s wealth in state owned mineral assets, has brought many foreigners rallying into Ulaanbaatar. The potential for discovery of more world class assets such as Oyu Tolgoi has unlocked a wave of financiers and geologists flooding into Mongolia. But quite simply the fascination of the unknown in a country not very well understood but linked with enormous potential has naturally played into human nature and curiosity – root to many visitors arriving in Ulaanbaatar, financiers and tourists alike.

Patriotism and History Underpinning Development

Modern humans first arrived in Mongolia over 40,000 years ago and battled through waves of liberation, bloodless democratic revolution and one of the harshest climates on earth, now prospering through a young but developing free- market economy. Mongolia is a nation proud to have partners but also very proud to remain unique and independent and central to success in Mongolia is prospering through strong, local partnerships.

ResCap Mongolia 101 Country Guide

2011 will be a fascinating year and a potential turning point for Mongolia. As investors continue to ask the questions of “how, what, where and when” in Mongolia, ResCap has developed a user guide to the country. This ResCap Mongolia 101 is an account of Mongolia in a detailed handbook as part of our initiation of coverage on one of the last remaining mining frontiers.

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Abstract

Mongolia's national identity has been dominated by the talismanic figure of Chinggis Khan. This legendary warrior-nomad conquered vast tracts of Central Asia in the 13th century to found the Mongol Empire, which remains the largest contiguous empire to have existed in the history of the world. He remains the subject of great national pride, and understanding the history, the culture, the laws, politics and the economy can not only help investors understand the nature of these proud, nomadic people and Mongolian society, but also help them better judge where to put capital to work in this large, resource-rich country.

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Executive Summary

1 Executive Summary

1.1 History

Chinggis Khan founded the Mongol Empire in 1206. By the end of the XVII century, most of Mongolia had fallen under the rule of the Qing Dynasty. With the demise of the Qing Dynasty in 1911, Mongolia declared independence, but had to struggle until 1921 to firmly establish de facto independence from China. Mongolia came under strong Soviet influence in 1921. The Mongolian People's Republic was declared in 1924. After the collapse of the Soviet Union, Mongolia saw its own peaceful Democratic Revolution in early 1990.

1.2 Government

Mongolia follows a parliamentary type of governance. The highest executive power is the Prime Minister. The President of Mongolia has limited powers but acts as the Head of State and Commander-in-Chief of Mongolia’s army. The biggest political parties are the Mongolian People's Party (MPP), formerly the Mongolian People's Revolutionary Party (MPRP), and the Democratic Party (DP). Since the Democratic Revolution, there has been continuous replacement of governments. The current Prime Minister is Sukhbaataryn Batbold and the current President is Tsakhiagyn Elbegdorj. In 2008 a coalition government was formed between the MPP and DP, which facilitated the greatest advancements in the economy. “The State Great Khural” or the “Parliament” is the legislative authority of Mongolia and consists of a single chamber with 76 seats, led by the house Speaker.

1.3 Foreign Relations

“In developing its relations with other countries, Mongolia is guided by universally recognized principles and norms of international law as defined in the UN charter.”

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Executive Summary

Mongolia has bilateral relations with 140 and diplomatic relations with 149 countries. Mongolia almost certainly has the strongest relationship with Russia. Russia helped Mongolia to ward off the Chinese invasion. In December 2010, Mongolia and Russia signed an agreement to develop the Dornod uranium deposit. Russia holds 190 reports on Mongolia’s 6 uranium fields, while Mongolia only has access to 34. As the Soviet Union had been Mongolia’s main ally and the most influential neighbouring power up until 1990, foreign relations between the PRC and Mongolia used to be predominantly determined by the PRC and USSR relations. With adoption of democracy and transition to a market economy, Mongolia’s relationships with China began to improve. Currently the PRC is the largest trading partner of Mongolia. Mongolia will soon have the capacity to supply 25-40 mtpa of coal to the PRC. The People’s Republic of Mongolia established diplomatic relations with Japan in February 1972. The ties were strengthened after the Democratic Revolution in Mongolia. Japan has historically been the largest aid benefactor to Mongolia, until the US had approved a “Millennium Challenge Compact” aid worth $285 million in October 2007. 96% of Japan’s rare-earth metals are imported from China and the latter restricted their export quotas by 72% and 35% in H2 2010 and Q1 2011 respectively. Japanese geologists and scientists launched exploration of rare- earth elements in Mongolia. The People’s Republic of Mongolia established diplomatic relations with North Korea in October 1948. Mongolia is one of the few countries in the world that maintain warm relations with the Democratic People's Republic of Korea (DPRK). Mongolia endeavours to maintain close relationships with European countries. In 1991, Mongolia signed an economic cooperation agreement with the UK, and investment promotion and protection agreements with France and Germany. Canada and Mongolia established bilateral ties in November 1973. Canadian FDI thus far has been mainly flowing to the mineral resource sector of Mongolia. Negotiations are ongoing on the signing of a foreign investment promotion and protection agreement (FIPA). The United States agency for International Development (USAID) has continuously been one of the key aid donors to Mongolia. In October 2007, the Mongolian government signed a Compact agreement with the Millennium Challenge Corporation (MCC) for the receipt of a grant worth $285 million.

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Executive Summary

1.4 Geography and Climate

Mongolia is ranked 19 th in the world by country size after Iran. It covers 1.56 million square km. The climate is generally dry and the temperature varies significantly across the year, making the winters extremely cold and summers very warm.

1.5 Administrative Regions

Mongolia is divided into 21 aimags. Each aimag is subdivided into a number of soums.

1.6 Economy

Economic activity in Mongolia has historically been focused on agriculture and herding, but recent discoveries of mineral deposits have attracted large levels of foreign direct investment (FDI) into the mining sector. The global economic downturn in late 2008/early 2009 had a harsh impact on Mongolia. Mongolia is about to experience a period of remarkable growth. The IMF forecasts the real GDP growth to be over 25% in three years time driven by advancements in the mining sector. In 2010, the real GDP growth was 6.1%, nominal growth was 25.3% (GDP reaching $6.6 billion), general government budget showed a surplus of $611 million and the external trade deficit amounted to $378.7 million (both exports and imports were up around 53%) Inflation smoothed down to 13% in 2010 from the soaring 36% in August 2008. FDI into the country has been growing 30% annually and is expected to reach $11 billion in the next four years. In 2010, the total industrial output increased 10% to approximately $1.5 billion 9at 2005 constant prices) compared to the previous year In December 2010, the MNT/USD rate gained in value 15% since January 2010, when it was 1,446, which made it the second best-performing currency against the dollar in 2010. By the end of December 2010 Mongolia’s official international reserves has exceeded $2.0 billion, growing 82.6% yoy.

1.7 Banking Sector

The Mongolian financial sector consists of 14 commercial banks, 188 NBFIs and 207 S&C (saving and credit) Cooperatives.

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Executive Summary

The minimum capital requirement for commercial banks ordered by the Bank of Mongolia is MNT 8.0 billion ($6.4 million) In Q3 2010 non-performing loans with arrears in principals as percentage of total outstanding loans declined to 17% from 25% in November 2009. General levels of NPLs were considerably high throughout 2010. Real interest rates plummeted, resulting in negative returns, especially on depository accounts, due to inflationary pressure. Bank lending more concentrated, with around 50 largest borrowers accounting for approximately 30% of total loans or $690 million. MNT deposits continued to rise reaching $1.3 billion in mid 2010 (51% increase yoy), despite falling real interest rates on deposits, owing to the Deposit Guarantee Law and greater currency appreciation expectations. Nominal interest rates on lending and borrowing remained high as banks needed capital due to liquidity problems. Business activities increased in 2010, nevertheless, coping with the fundamental weaknesses of the banking sector in Mongolia remains a top priority for the officials in charge. Demand for credit will substantially increase in the coming five years as greater necessity for capital will spread across all sectors in the economy. Deposit Guarantee Law has been amended, the pledge is no longer unlimited

1.8 The Central Bank

The Bank of Mongolia (BoM) is the central bank of Mongolia. It reports to Parliament and is independent from the Government. The BoM’s aim is “to insure the Tugrik’s stability” in terms of external stability of the exchange rate and internal stability of the consumer price index.

1.9 Mongolian Taxation System

The general rate of tax in Mongolia is 10% income tax for individuals and corporation earnings under MNT 3bn ($2.4m) and 25% on corporation earnings over MNT 3bn. VAT is 10%.

1.10 Mongolian Stock Exchange

Established in 1991 as a result of the first round of privatisations of state properties, the MSE is the second smallest bourse in the world by market cap, yet the second best performing market in the world in 2010. In December 2010 the London Stock Exchange (LSE) has signed a contract agreement with

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Executive Summary

the Mongolian Stock Exchange (MSE). The LSE has been selected as the international partner to assist in reforming the MSE.

1.11 Mining

The estimated value of total reserves in Mongolia is US$1.3 trillion. Approximately 1,170 mineral deposits and 7,654 occurrences have been identified to date. Occurrences include over 60 types of minerals, including copper, gold, coal, molybdenum, iron ore, uranium, tin, tungsten, silver, zinc and fluorspar. 15 deposits have been acknowledged by the government as strategically important. The mining sector accounts for 81% of exports, 32% of government revenue and 30% of GDP. Only around 27% of Mongolian land has been mapped to a scale of 1:50,000, therefore, the country’s resources remain largely untapped. There are numerous opportunities to invest in many large-scale investments, e.g. Tavan Tolgoi (TT) coal deposit. The government of Mongolia plans to attract up to US$25 billion in foreign investment for the mining projects in 2011-2015. Coal is now Mongolia’s number one export commodity. Total coal resources of Mongolia have been estimated at 152 billion tonnes. 2010 coal exports reached $877 million in value (16.6 million tonnes). By 2015 coal export to China is predicted to increase to 25-40 mtpa. Tavan Tolgoi coal deposit, which contains 6.4 billion tonnes of coking (25%) and thermal (75%) coal, is about to be privatised in Q1 2011. Copper was the former major export commodity of Mongolia. 2010 copper exports reached $771 million in value (586k tonnes), representing 26.4% of total exports. Oyu Tolgoi deposit contains 81 billion pounds of copper (37 million tonnes) and 46 million ounces of gold (1,431 tonnes). Initial production at Oyu Tolgoi mine is expected in Q3 2012 and commercial production in 2013. Mongolia started producing iron ore in 2007. 2010 iron ore exports reached $251 million in value (3.5 million tonnes). Iron ore exports now account for 8.7% of total exports. Mongolia was officially recognised as an oil producing country in 2008. Oil sector remains significantly under-explored. 2010 crude exports reached $155 million in value (2.0 million barrels). Marubeni Corporation in partnership with Toyo Engineering Corporation are about to construct a $600 million oil refinery in Mongolia. Russia estimated the Mongolian uranium reserves at 30 thousand tonnes while the Mongolian government identifies the resources at 62,000 tonnes.

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Executive Summary

Mongolia has not started exporting uranium yet. Measures on environmental protection and rehabilitation issues have been strengthened in Mongolia recently. The Law on Minerals has been amended and now includes progressively increasing royalties on 23 types of minerals. If a deposit is of strategic importance, the government in entitled to take up 34%-50% of the ownership rights. The Foreign Investment Law of Mongolia gives similarly positive treatment to both foreign and domestic investors with regard to control, use and removal of their investments.

1.12 Agriculture

Agriculture in Mongolia is focused on animal husbandry, only 1% of Mongolia’s arable land is cultivated with crops. Livestock accounts for over 80% of agricultural production. In 2010 the number of total livestock reached 33 million (human population of Mongolia = 2.8 million). 11 million heads were lost due to 2010 ‘dzud’. In 2010 harvest production reached 1.7 million tonnes. Mongolia has recently become self-sufficient in grain and potatoes.

1.13 Real Estate

The capacity to build residential properties in Ulaanbaatar is enormous, especially considering the increasing number of expats and foreign executives arriving in Mongolia. The population of Ulaanbaatar increased 30% to 1.1 million in the three years from 2007. More than half of Ulaanbaatar residents live in ger districts surrounding the city. The government is working on a project to replace the ger districts with proper residential complexes. In October 2010, the authorities announced that 0.07 Ha of land in ger districts can be exchanged for two-room apartments. The government plans to construct 100,000 apartments for lower-income people in Ulaanbaatar and provincial centres for an estimated budget of $6.2 billion. Construction and installation works implemented in Mongolia throughout 2010 grew 25.6% from 2009 and reached around $281 million in total.

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Executive Summary

1.14 Infrastructure

Mongolia’s infrastructure, or lack of it, is the most serious inhibitor to developing its resource wealth. However, there are many ambitious projects and foreign investment commitments to improve the situation. Mongolia’s main rail line is the Trans-Mongolian railway (2,215 km in length). 96.7% of roads in Mongolia are unpaved. Chinggis Khaan Airport, located 15 km from Ulaanbaatar, is the one and only international airport of Mongolia. Due to dry weather conditions, water is a scarce resource in Mongolia. Production levels of all sorts of mines heavily depend on water supply. In late 2010, the Oyu Tolgoi team discovered an aquifer, capable of ensuring 40 years of water supply to the mine. Most large-scale deposits in Mongolia are located in isolated areas, with very limited infrastructure. The 2010 Global Competitiveness Report ranked Mongolia last for the quality of overall infrastructure out of 134 countries. Mining investments are to total $13 billion in the coming years, of which $1.3 billion is to be spent on mining services. Infrastructure development requires around $5.2 billion in investments through 2011-2020. The government is planning to build 2,600 km of paved East-West road and 5,600 km of new railroads. The railway infrastructure plan has considered all major mineral deposits and around $3.0 billion is to be spent on the first phase. A $10 billion industrial complex in Sainshand is being built to increase the value of mineral reserves of Mongolia. The construction of Sainshand Park and the associated industrialisation could increase Mongolian GDP to $41 billion over the next 11 years. Mongolia Mining Corporation (MMC) has obtained all necessary permissions to build a 240 km railway with 15mtpa capacity from its Ukhaa Khudag deposit located in the Tavan Tolgoi region south to the Mongolian-Chinese border. MMC is also constructing a 245 km paved road with 18mtpa capacity from its Ukhaa Khudag deposit south to the Mongolian-Chinese border, which will come into operation in Q1 2011. Mongolian authorities chose to build a new railroad in 2011 linking Mongolia’s largest coal deposit Tavan Tolgoi with Mongolia’s domestic rail network, rather than establishing a direct route straight to China from TT. The Asian Development Bank (ADB) is funding a regional logistics development project at Zamiin-Uud with $45 million in loans and grants, which will create a new terminal with road and rail links.

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Executive Summary

The Hong Kong market is expected to be opened up to Mongolia on a regular basis via direct flights starting in April 2011. Currently, the direct access to Ulaanbaatar from major global financial centres is unavailable. Mongolia’s electricity deficit is expected to reach 500 MW by 2013.

1.15 Privatisation of State Properties

2011-2012 privatisation plans will allow international investors to gain access not only to some of the world's largest unexploited mineral resources, but also to the non-resource sector boom of the fastest growing economy in the world. State properties to be privatised in 2011-2012: - Baganuur coal deposit (1.3billion tonnes of lignite coal) - Erdenet Power Plant and TPP-3 (two out of the 5 power plants making up the Central Electricity System, which covers the most populated area of the country, including Ulaanbaatar) - MIAT or Mongolian Airlines (the largest carrier in the country which operates flights to Beijing, Berlin, Moscow, Seoul, Tokyo and Irkutsk) - Mongolian Stock Exchange - Mongolian Telecom Company (a national telecommunications company offering variety of services) - Strategic deposits (the government will bundle in groups the state owned shares from the 15 strategic deposits by types of minerals and certain percentages of those will be sold through domestic and international stock exchanges) - ... and more In December 2010, the London Stock Exchange (LSE) signed a contract agreement with the Mongolian Stock Exchange (MSE) for the latter’s restructuring. Tavan Tolgoi’s Eastern Block is to be privatised to domestic investors in Q1 2011. The tender for strategic investors for Tavan Tolgoi’s Western Block has been officially announced and closed on 17 th January at 16:00. The tender for contract miners for Tavan Tolgoi’s Eastern Block has been officially announced and closes on the 27 th January 2011. China’s Shenhua Energy Co, Peabody Energy Corp from the US, a Russian consortium led by Gazprom, a consortium of four Japanese trading houses, including, Itochu Corp, Sumitomo Corp, Sojitz Corp and Marubeni Corp, a consortium of 10 South Korean companies, including Poco and Korea Electric Power Corp, Anglo-Australian mining companies Rio Tinto and BHP Billiton, Brazil’s Vale, India’s International Coal Ventures Pvt, a joint venture of five state-run companies and others have expressed their interest to participate in Tavan Tolgoi bid.

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Executive Summary

In December 2010 an agreement was signed between the Mongolian and Russian Prime Minsters specifying the business plan for the Dornod Uranium JV. Two existing Mongolian-Russian joint ventures, Erdenet and MongolRosTsvetMet, may soon merge and market their stock.

1.16 Demographics

Mongolia’s population is 2.8 million people (59% below the age of 30, 27% below the age of 14). The unemployment rate in Mongolia has been lower than 4% since 2002. During the peak of the economic crisis (2009) it reached 13% and now is returning to its regular levels. 40% of Mongolia’s population live in Ulaanbaatar, 20% in other urban areas, the remaining 40% in rural areas. 30% are herders. 85% of Mongolia’s population consist of ethnic Mongolians, out of which 90% consist of Khalkha Mongols.

1.17 Languages

The official language in the country is Khalkha Mongolian. Many Mongolians have a good grasp of Russian and English. Other widely spoken languages are Chinese, Korean, Japanese, French, Spanish and Italian.

1.18 Religion

50% of Mongolia's population follow the Tibetan Buddhism, 40% are listed as having no religion, 6% are Shamanist, Baha'i and Christian, and 4% are Muslims.

1.19 Equity Research

Stock information of top 10 performers on the MSE (+1 mining company) is provided at the end of this report.

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Mongolia Key Statistics

Mongolia: Key Indicators 2010 2003 2004 2005 2006 2007 2008 2009 (f) Output, Employment and Prices Real GDP (%yoy change) 7.0 10.6 7.3 8.6 10.2 8.9 -1.6 8.5 Industrial production index - - - 100.0 110.4 113.4 109.6 - (% yoy change) - - - - 10.4 2.8 -3.3 - Unemployment (%) 3.4 3.6 3.3 3.2 2.8 2.8 3.3 - Consumer price index (% yoy change) 4.6 10.9 9.6 5.6 14.1 23.2 11.2 12.0 Public Sector Government balance (% of GDP) -3.7 -1.8 2.6 3.3 2.8 -5.0 -5.4 -2.2 Non-mining balance (% of GDP) 1 -5.9 -5.8 -1.3 -7.3 -13.4 -15.1 -12.9 -11.2 Public Sector Debt 3.1 1.4 0.1 1.0 0.5 0.0 3.7 19.3 Foreign Trade, BOP and External Trade balance ($mn) -199.6 -99.2 -99.5 136.2 -52.4 -613.0 -195.0 -639.0 Export of goods ($mn) 627.0 872.0 1066.0 1542.0 1889.0 2534.0 1875.0 2446.0 (% yoy change) 19.7 39.0 22.2 44.8 22.4 34.0 -26.0 30.4 Copper exports (% yoy change) - - 14.7 94.8 27.7 12.1 39.9 40.4 Imports of goods ($mn) 826.9 971.3 1021.1 1485.6 2117.3 3147.0 2070.0 3085.0 (% yoy change) 21.6 17.5 16.0 25.4 42.5 70.8 -41.1 30.5 Current account balance ($mn) -102.4 24.1 29.7 221.6 264.8 -722.0 -411.0 -805.0 (% of GDP) -7.1 1.3 1.3 7.0 6.7 -14.0 -9.8 -14.0 Foreign direct investment ($mn) 131.5 128.9 257.6 289.6 360.0 836.0 496.0 422.0 External debt (% of GDP) 2 92.6 76.0 61.2 45.1 40.1 33.7 47.1 39.0 Foreign exchange reserves, gross ($mn) 204.0 208.0 333.0 718.0 1001.0 658.0 1328.0 1599.0 In month of imports of g&s 2.4 2.0 2.6 4.3 3.8 3.0 4.3 3.0 Financial markets Domestic credit (% yoy change) 157.3 25.8 18.8 -3.1 78.4 52.5 -7.6 47.1 Short-term interest rate (% per annum) 3 - 15.8 3.7 5.1 8.4 9.8 - - Exchange rate (MNT/USD) 1168.0 1209.0 1221.0 1165.0 1170.0 1267.5 1442.8 - Real effective exchange rate (2006=100) 4 94.2 93.9 99.6 102.8 104.8 124.4 102.4 - (% yoy change) -4.8 -0.4 6.1 3.2 1.9 18.7 -17.7 - Stock market index (2000=100) 5 151.5 120.8 203.6 382.0 2048.0 1181.6 - - Memo: Nominal GDP (MNT bn) 1660.0 2152.0 2780.0 3715.0 4600.0 6020.0 6055.0 7911.0 Nominal GDP ($ mn) 1448.0 1814.0 2307.0 3156.0 3930.0 5258.0 4203.0 - GDP per capita ($) 583.0 722.0 900.0 1214.0 1491.0 1921.0 1551.0 -

2 Mongolia Key Statistics Notes: 1. Non-mining balance excludes revenues from corporate income tax and dividends from mining companies, the Windfall Profit Tax and royalties. 2. On public and publicly guaranteed debt. 3. Yield of 14-day bills until 2006 and of 7-day bills for 2007. 4. Increase is appreciation. 5. Top-20 index, end of year, index=100 in Dec 2000. Source: IMF and World Bank

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Contents

3 Contents ABSTRACT 3 1 EXECUTIVE SUMMARY ...... 4 1.1 HISTORY ...... 4 1.2 GOVERNMENT ...... 4 1.3 FOREIGN RELATIONS ...... 4 1.4 GEOGRAPHY AND CLIMATE ...... 6 1.5 ADMINISTRATIVE REGIONS ...... 6 1.6 ECONOMY ...... 6 1.7 BANKING SECTOR ...... 6 1.8 THE CENTRAL BANK ...... 7 1.9 MONGOLIAN TAXATION SYSTEM ...... 7 1.10 MONGOLIAN STOCK EXCHANGE ...... 7 1.11 MINING ...... 8 1.12 AGRICULTURE ...... 9 1.13 REAL ESTATE ...... 9 1.14 INFRASTRUCTURE ...... 10 1.15 PRIVATISATION OF STATE PROPERTIES ...... 11 1.16 DEMOGRAPHICS ...... 12 1.17 LANGUAGES ...... 12 1.18 RELIGION ...... 12 1.19 EQUITY RESEARCH ...... 12 2 MONGOLIA KEY STATISTICS ...... 13 3 CONTENTS ...... 14 4 HISTORY OF MONGOLIA ...... 18 4.1 PRE -HISTORY ...... 18 4.2 EARLY HISTORY ...... 19 4.3 MONGOL EMPIRE ...... 19 4.4 POST -IMPERIAL PERIOD ...... 19 4.5 UNDER THE QING ...... 20 4.6 INDEPENDENCE ...... 20 4.7 MONGOLIAN PEOPLE 'S REPUBLIC ...... 21 4.8 DEMOCRATIC REVOLUTION ...... 21 5 GOVERNMENT ...... 22 5.1 POLITICAL SYSTEM AND RECENT HISTORY ...... 22 5.2 PRESIDENT ...... 23 5.3 THE STATE GREAT KHURAL ...... 23 5.4 MONGOLIA PEOPLE ’S PARTY AND DEMOCRATIC PARTY ...... 23 5.5 PRIME MINISTER AND THE CABINET ...... 23 6 FOREIGN RELATIONS ...... 24 6.1 AFRICA ...... 24 6.1.1 EGYPT ...... 24 6.2 ASIA ...... 25

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Contents

6.2.1 RUSSIA ...... 25 6.2.2 PEOPLE ’S REPUBLIC OF CHINA (PRC) ...... 26 6.2.3 JAPAN ...... 27 6.2.4 NORTH KOREA ...... 29 6.3 EUROPE ...... 29 6.3.1 UNITED KINGDOM ...... 29 6.4 NORTH AMERICA ...... 30 6.4.1 CANADA ...... 30 6.4.2 USA ...... 31 7 GEOGRAPHY AND CLIMATE ...... 33 8 ADMINISTRATIVE REGIONS ...... 34 9 ECONOMY...... 35 9.1 THE GLOBAL FINANCIAL CRISIS OF 2008/2009 ...... 36 9.2 CURRENT STATE OF THE ECONOMY ...... 36 9.3 GROSS DOMESTIC PRODUCT ...... 38 9.4 MONEY SUPPLY ...... 39 9.5 BUDGET ...... 40 9.6 INFLATION ...... 42 9.7 TRADE ...... 43 9.7.1 EXPORTS ...... 44 9.7.2 IMPORTS ...... 45 9.8 IMPLEMENTED POLICIES ...... 46 9.9 FOREIGN DIRECT INVESTMENT ...... 47 9.10 CURRENCY ...... 47 10 BANKING SECTOR ...... 48 10.1 BACKGROUND ...... 48 10.2 BANKING SECTOR PERFORMANCE DURING 2008/2009 FINANCIAL CRISIS ...... 49 10.3 STRENGTHENING OF THE FINANCIAL SYSTEM ...... 50 10.4 DEPOSITS AND LOANS ...... 51 10.4.1 NON -PERFORMING LOANS (NPL S) ...... 53 10.5 BANKING INTEREST RATES ...... 53 10.6 BANK ASSET QUALITY ...... 55 10.7 BANKING SYSTEM CAPITALISATION ...... 57 10.8 BANKING LAW OF MONGOLIA (2010) ...... 57 10.8.1 SUMMARY OF THE AMMENDED BANKING LAW ...... 57 10.9 BANKING SECTOR 2010 SUMMARY ...... 59 10.10 BANKING SECTOR PROSPECTS ...... 59 11 THE CENTRAL BANK ...... 61 11.1 BANK OF MONGOLIA MONETARY POLICY ...... 61 11.2 BANK OF MONGOLIA POLICY RATE ...... 61 11.3 CENTRAL BANK ’S NON -STANDING FACILITIES ...... 62 11.3.1 COLLATERALIZED LOAN ...... 62 11.4 OBJECTIVES OF MONETARY POLICY ...... 63

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Contents

11.5 BANK OF MONGOLIA STANDING FACILITIES ...... 63 11.5.1 OVERNIGHT LOAN ...... 63 11.5.2 REPO FINANCING ...... 63 11.6 CENTRAL BANK BOND RATE ...... 64 12 MONGOLIAN TAXATION SYSTEM ...... 65 12.1 GENERAL TAXATION ...... 65 12.1.1 TAXPAYERS ...... 65 12.2 CORPORATE INCOME TAX ...... 65 12.2.1 TAXPAYERS ...... 65 12.2.2 TAX RATE ...... 66 12.2.3 TAX EXEMPTION ...... 66 12.3 PERSONAL INCOME TAX LAW OF MONGOLIA ...... 67 12.3.1 TAXPAYER ...... 67 12.3.2 TAX RATE AND AMOUNT ...... 67 12.4 VALUE ADDED TAX (VAT) ...... 68 12.4.1 SCOPE OF VAT ...... 68 13 MONGOLIAN STOCK EXCHANGE ...... 69 13.1 OVERVIEW ...... 69 13.2 THE SECOND BEST PERFORMING MARKET IN THE WORLD ...... 71 14 MINING ...... 73 14.1 MINING SECTOR ...... 73 14.2 EXPLORATION AND GEOLOGICAL MAPPING ...... 76 14.3 LICENSES ...... 77 14.4 COAL ...... 78 14.4.1 TAVAN TOLGOI ...... 81 14.5 COPPER /G OLD ...... 83 14.5.1 OYU TOLGOI (COPPER -GOLD , MONGOLIA ) ...... 84 14.6 IRON ORE ...... 85 14.7 OIL ...... 87 14.8 URANIUM ...... 89 14.9 MINERALS LAWS AND TAXES ...... 90 14.9.1 STRATEGICALLY SIGNIFICANT DEPOSITS ...... 90 14.9.2 OVERVIEW OF FOREIGN INVESTMENT ...... 93 14.9.3 FOREIGN INVESTMENT IN MINING ...... 94 14.9.4 PROGRESSIVE ROYALTIES ON MINERALS ...... 97 15 AGRICULTURE ...... 99 15.1 DZUD ...... 100 16 REAL ESTATE ...... 101 17 INFRASTRUCTURE ...... 106 17.1 RAILWAY ...... 106 17.2 ROADS ...... 107 17.3 AIRPORTS ...... 107 17.4 WATER ...... 107

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Contents

17.5 MINING BOOM AND INFRASTRUCTURE DEVELOPMENT ...... 108 17.6 INDUSTRIAL PARK IN SAINSHAND ...... 112 17.7 RECENT DEVELOPMENTS ...... 113 17.8 MINING BOOM AND AIR INDUSTRY ...... 115 18 PRIVATISATION OF STATE PROPERTIES ...... 117 18.1 2011-2012 PRIVATISATION STRATEGY ...... 117 18.1.1 NEAR TERM PRIVATISTAION TARGETS ...... 117 18.1.2 DETAILED MAPS OF PLANNED PRIVATISATIONS ...... 120 18.1.3 STATE PROPERTY COMMITTE ...... 124 18.1.4 RECENT DEVELOPMENTS ...... 125 19 DEMOGRAPHICS ...... 127 20 LANGUAGES ...... 129 21 RELIGION ...... 130 21.1 TAVAN TOLGOI ...... 131 1 EQUITY RESEARCH ...... 131 1.1 BAGANUUR ...... 132 1.2 SHIVEE OVOO ...... 133 1.3 APU ...... 134 1.4 MONGOLIA TELECOM ...... 135 1.5 SHARYN GOL ...... 136 1.6 GOBI ...... 137 1.7 BDS EC ...... 138 1.8 ADUUNCHULUUN ...... 139 1.9 MONGOLIA DEVELOPMENT RESOURCES ...... 140 1.10 MOGOIN GOL ...... 141 2 REFERENCES ...... 143 3 CONTACTS ...... 144

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History of Mongolia

4 History of Mongolia CHINGGIS KHAN Horse nomadism, Chinggis Kahn, Qing dynasty, Russian liberation, communism, bloodless democratic revolution, free market economy…

The Mongol Empire was founded by Chinggis Khan in 1206. Following the collapse of the Yuan Dynasty, the Mongols returned to previous behaviour of constant internal conflict and raids on the Chinese borderlands. Mongolia came under the influence of Tibetan Buddhism in the 16th and 17th centuries, but by the end of the 17th century, most of Mongolia had fallen under the rule of the Qing Dynasty. With the demise of the Qing Dynasty in 1911, Mongolia declared independence, 1206: The Mongol Empire but had to struggle until 1921 to firmly establish de facto independence from 1921: Independence China, and only gained international recognition of it in 1945. 1945: International recognition Afterwards, Mongolia came under strong Soviet influence; in 1924, the Mongolian 1924: Soviet influence, socialism People's Republic was declared, and Mongolian politics began to follow the same 1990: Democratic revolution patterns as that of the Soviet Union at the time. After the breakdown of

communist regimes in Eastern Europe in late 1989, Mongolia saw its own peaceful Democratic Revolution in early 1990, which led to a multi-party system, a new constitution in 1992, and the on-going transition to a market economy.

4.1 Pre-History

Homo erectus inhabited Mongolia 800,000 years ago, whereas modern humans Modern humans reached Mongolia reached Mongolia approximately 40,000 years ago during the Upper Paleolithic 40,000 years ago period.

Neolithic agricultural settlements (c. 5500-3500 BC) preceded the introduction of 5500-3500 BC: horse-riding nomadism horse-riding nomadism, and became the dominant lifestyle during the Copper and became dominant lifestyle Bronze Age (3500-2500 BC). The wheeled vehicles found in burials have been dated to before 2200 BC. Pastoral nomadism and metalworking became more and more developed with the Okunev Culture (2nd millenium BC), Andronovo culture (2300-1000 BC) and Karasuk culture (1500-300 BC), culminating with the Iron Age Xiongnu Empire in 209 BC.

Tocharians (Yuezhi) and Scythians inhabited western Mongolia during the Bronze Age. The mummy of a 30-40 year old, male Scythian warrior with blond hair is believed to be 2,500 years old, and was found in the Altai, Mongolia. As horse nomadism was introduced into Mongolia the political center of the Eurasian Steppe shifted with it to Mongolia, where it remained until the 18th century CE.

2300-1000 BC: development of pastoral Cultivation of crops continued since the Neolithic period, but has always remained nomadism and metalworking small-scale compared to pastoral nomadism, which was first introduced from the West.

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History of Mongolia

4.2 Early History

Since pre-historic times, Mongolia has been inhabited by nomads who The Modu Shanyu confederation forced occasionally formed great confederations that rose to prominence. The first of the Qin Dynasty to construct the Great these, the Xiongnu, were brought together to form a confederation by Modu Wall of China Shanyu in 209 BC. They soon emerged as the greatest threat to the Qin Dynasty, forcing the latter to construct the Great Wall of China. During Marshal Meng Tian's tenure it was guarded by up to 300,000 soldiers in order to defend against the destructive Xiongnu raids.

Previous monarchs: The Xiongnu empire (209 BC-93 AD) was superseded by the Mongolic Xianbei 209 BC-93 AD: Xiongnu empire (93-234) which ruled over a larger area than present-day Mongolia. The 93-234: Mongolic Xianbei Mongolic Rouran Khaganate (330-555) ruled a massive empire before being 330-555: Mongolic Rouran Khaganate defeated by the Gokturks (555-745) whose empire was even larger. They were 555-745: Gokturks followed by the Uyghur Khaganate (745-840) who were in turn defeated by the 745-840: Uyghur Khaganate Kyrgyz. During the Liao Dynasty (907-1125) the Mongolic Khitans ruled Mongolia 907-1125: Mongolic Khitans after which the Khamag Mongol (1125-1206) rose to prominence. 1125-1206: Khamag Mongol

4.3 Mongol Empire

1206: Chinggis Khan assembled the During the chaos of the late 12th century, a chieftain named Temüjin united the Mongol Empire Mongol tribes between the Altai Mountains and Manchuria. He took the title Chinggis Khan In 1206, and waged a series of brutal and ferocious military campaigns, sweeping through much of Asia, and forming the largest contiguous The Mongol Empire - the largest land empire in the history of the world. Under his successors it stretched from contiguous land empire in the history of present-day Poland in the west to Korea in the east, and from Siberia in the north the world: to the Gulf of Oman and Vietnam in the south, covering 13 million square miles - 33 million sq. km (or 22% of the Earth's total land area) and included a population of over 100 - 100 million people million people.

1368: Collapse of the Mongol Empire Following the death of Chinggis Kahn, the empire was subdivided into four kingdoms (“Khanates”), which eventually became semi-independent after Möngke's death in 1259. One of the khanates, the "Great Khaanate", included the Mongol homeland and China, and became the Yuan Dynasty under Chinggis Khan’s Grandson, Kublai Khan. His capital was in present day Beijing, but after a century the Yuan was superseded by the Ming Dynasty in 1368, with the Mongol court fleeing north. As the Ming armies pursued the Mongols into their homeland, they sacked the Mongol capital of Karakorum, among other cities, throwing Mongolia back into anarchy and wiping out cultural progress made by the Mongolians during their imperial period.

4.4 Post-Imperial Period

Following centuries: violent power The centuries that followed were marked by violent power struggles between struggles between various fractions various factions and there were numerous Chinese invasions. The Oirads, under Esen Tayisi, gained the upper hand in the early 15th century and raided China in 1449 in a conflict over Esen's right to pay tribute, and in the process captured the

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16 th century: Mongolia reunited Chinese Emperor. However, the Borjigids were recovered when Esen was murdered in 1454.

1578: Second introduction of Tibetan Batumongke Dayan Khan reunited the entire Mongols under the Chinggisids in the Buddhism early 16th century and in 1557, Altan Khan of the Tümed, Grandson of Batumöngke, founded Hohhot. His meeting with the Dalai Lama in 1578 sparked the second introduction of Tibetan Buddhism to Mongolia. Abtai Khan converted to buddhism in 1585 and founded the Erdene Zuu monastery.

4.5 Under the Qing

Ligden Khan: the last Mongol Khan Ligden Khan was the last Mongol Khan (early 17th century). He alienated most of the Mongol tribes and got into conflicts with the Manchu over the looting of Chinese cities. He died on his way to Tibet in 1634, whilst attempting to destroy 1636: most Inner Mongolian tribes the Yellow Hat sect of Buddhism and evading the Manchu. By 1636, most Inner submitted to Manchu Mongolian tribes had submitted to the Manchu and the Khalkha eventually submitted to the Qing in 1691, thus bringing all but the west of today's Mongolia under Beijing's rule. The Dzungars were virtually wiped out in 1757–58 by several 1691: Khalkha Mongol submitted to Qing wars. Mongolian culture remained in tact because The Manchus forbade mass Empire Chinese immigration.

The Manchu maintained control of Mongolia until 1911 with a combination of military and economic measures, intermarriages and alliances. Manchu high Until 1911: the Manchu maintained the officials, “Ambans”, were installed around territories and the country was control of Mongolia subdivided into ever more feudal and ecclesiastical fiefdoms. During the 19th century, feudal lords cared more about representation than the responsibilities of their subjects. This behaviour of Mongolia's nobility resulted in poverty becoming ever more widespread, and was worsened by the usurious practices of Chinese traders and the collection of imperial taxes in silver instead of livestock.

4.6 Independence

1911: independence from Qing Dynasty Following the collapse of the Qing Dynasty, Mongolia declared independence in 1911 under Bogd Khaan. However, the newly established Republic of China claimed the territory of Mongolia as part of its own. The area controlled by the Bogd Khaan was approximately that of the former Outer Mongolia, and the 49 hoshuns of Inner Mongolia expressed their willingness to join the new country, but to no avail. In 1919, after the October Revolution in Russia, Chinese troops occupied Mongolia, led by Xu Shuzheng.

However, in October 1920 as a result of the Russian Civil War, the White Russian adventurer Baron Ungern led his troops into Mongolia, where in February 1921 he defeated the Chinese at Niislel Khüree (Ulaanbaatar). Bolshevik Russia supported the establishment of a communist Mongolian government and army to reduce the threat posed by Ungern. This Mongolian army took the Mongolian part of Kyakhta The eighth Jebtsundamba from the Chinese on March 18, 1921, and Russian and Mongolian troops arrived Khutuktu (Bogd Khaan) in Khüree on July 6. Mongolia's independence was once again declared on July 11,

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1921: full independence from China 1921. Mongolia remained closely aligned with the Soviet Union over the next seven decades.

4.7 Mongolian People's Republic

1924: Mongolian People’s Republic Following the death in 1924 of the king and religious leader, Bogd Khan, a established Mongolian People's Republic was proclaimed with support from the Russians.

By the beginning of the 20th century, 750 monasteries were functioning in Mongolia, and during the 1920s approximately one third of the male population were monks. In 1928, Khorloogiin Choibalsan rose to power. He instituted collectivisation of livestock, the destruction of Buddhist monasteries and the 1924 onwards: centrally planned murder of monks and other “enemies of the people”. The Stalinist purges in economy, destruction of monasteries, Mongolia beginning in 1937 left more than 30,000 people dead. Japanese murder of monks, Stalinism imperialism became even more alarming following the invasion of neighbouring Manchuria in 1931. However, during the Soviet-Japanese Border War of 1939, the Soviet Union successfully defended Mongolia against Japanese expansionism.

1945: China recognised Outer Mongolia’s Mongolian forces also took part in the Soviet Manchurian Strategic Offensive independence Operation of August 1945 in Inner Mongolia. China agreed to recognize Outer Mongolia's independence, provided a referendum was held, because of the Soviet threat of seizing parts of Inner Mongolia. The referendum took place in October 1945 and 100% of the electorate voted for independence, according to official numbers. Both countries confirmed mutual recognition on October 6, 1949 following the establishment of the PRC.

1945 onwards: Mongolia aligned closely Mongolia continued to align itself closely with the Soviet Union, especially as with USSR relations worsened between the PRC and the USSR in the late 1950s. In the 1980s, 55,000 Soviet troops were based in Mongolia.

4.8 Democratic revolution

1990: peaceful Democratic Revolution, Mongolian politics was strongly influenced by the introduction of perestroika introduction of multi-party system & (restructuring) and glasnost (openness and freedom of speech) by Mikhail market economy Gorbachev in the early 90s, leading to the peaceful Democratic Revolution, the introduction of a multi-party system and a market economy. In 1992, a new constitution was introduced and the "People's Republic" was dropped from the 1992: new constitution country's name. The first election wins for non-communist parties came in the 1993 Presidential elections and the 1996 parliamentary elections.The transition to a market economy was often rocky, with the early 1990s seeing food shortages 1993: the first election wins for and high inflation. The signing of the Oyu Tolgoi copper/gold mine contract is non-communist parties considered a major cornerstone in recent Mongolian history. The Mongolian People's Revolutionary Party dropped the “Revolutionary” from its name in 2010.

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Government

5 Government

Democracy, coalition government between the MPP & the DP, ‘State Great Khural’, elections in 2012…

The biggest political parties: Mongolia exists as a parliamentary republic, whose government is elected by parliament, which is in turn elected by the people. Mongolia's constitution The Mongolian People's Party (MPP) guarantees full freedom of expression and religion and Mongolia has a number of The Democratic Party (DP) competing political parties, the most significant two being the Mongolian People's Party (MPP, formerly the MPRP) and the Democratic Party (DP).

5.1 Political System and Recent History

Mongolian politics is established under the framework of a parliamentary democracy, in which the State Great Khural (Parliament) holds legislative powers and the executive branch is headed by the Prime Minister who appoints a Cabinet. The President of Mongolia has limited executive powers but acts as the Head of State and Commander-in-Chief of Mongolia’s army. Elections are held every four years, and so there have been six parliamentary and Presidential elections since 1991. The MPRP won the parliamentary and Presidential elections in 1992, but was defeated by the Democratic Party in 1996. The 2000 parliamentary election returned the MPRP to dominant power, who remained in Sukhbaatar Square in front of the Saaral office after the 2004 elections, but with reduced representation. Ordon that houses the offi ces of the Prime Minister and President From 2004 there were numerous changes of Prime Minister. A coalition government headed by the leader of the Democratic Party, Elbegdorj Tsakhia, was Since Democratic Revolution, there has formed in 2004. In January 2006, he was replaced by MPRP leader Enkhbold been continuous replacement of Miyeegombo as Prime Minister, who in turn resigned his position following his governments failure to be re-elected as MPRP Chairman, and was superseded by Bayar Sanjaa.

In November of 2007, a new cabinet was formed with members of several Current Prime Minister: different parties. Again the MPRP won a majority in the 2008 parliamentary Sukhbaataryn Batbold elections, but allegations of electoral fraud by the opposition led to the first ever riots and several damages to property and deaths arose. Consequently, the MPRP Current President: invited opposition members into the Cabinet forming the coalition government Tsakhiagyn Elbegdorj that exists today.

2008: coalition government formed In May 2009, the long tenure of MPRP politicians in the Presidential seat was between the MPP and DP ended when the Democratic Party figure Elbegdorj Tsakhia was elected President.

Mr Bayar resigned his position in October of 2009 due to ill-health, and was replaced by the current Prime Minister, Sukhbaataryn Batbold, who was previously Minister of Foreign Affairs.

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5.2 President

Mongolia's President, as Head of State, has a largely symbolic role, but with the power to block Parliament's decisions. Parliament can then over-rule the veto with a two-thirds majority vote. The President is required to formally resign his or her party membership when he takes office. The current President, Tsakhiagiin Elbegdorj, was twice formerly the Prime Minister and member of the Democratic Party. He was elected as President on May 24, 2009. Mongolia's constitution provides three requirements for taking office as President; the candidate must be at least 45 years old, be a native-born Mongolian and have resided in Mongolia for five years prior to taking office. President of Mongolia, Tsakhiagyn Elbegdorj

5.3 The State Great Khural

“The State Great Khural” is the name of the parliament, and consists of a single chamber with 76 seats with a house speaker who acts as Chairman. The members of parliament are elected every four years.

5.4 Mongolia People’s Party and Democratic Party

PARLIAMENTARY SEATS The Mongolia People’s Republic Party, or MPRP, governed the country in a one- party system from 1921 to 1990. Then, with the peaceful democratic revolution, came a multi-party system. The party continued governing until 1996, and from 3 2000 to 2004, after which it formed a coalition with the Democratic Party and two others, and since then has formed two other coalitions, initiating the change both times and remaining the dominant party. The MPRP won the last round of parliamentary elections in June 2008, and in November 2010, the party reverted 27 to its initial name of 1921 by removing the “revolutionary” title, now known simply as the Mongolia People’s Party, or MPP.

46 The Democratic Party, or DP, was the dominant governing party in the coalition formed from 1996-2000 and approximately an equal partner in the coalition formed from 2004-2006.

MPP Democratic Party Others 5.5 Prime Minister and the cabinet

The current Prime Minister, Sukhbaataryn Batbold, assumed office on 29 October 2009, and his deputy Prime Minister is Norovyn Altankhuyag. There are ministers of each department (finance, defense, labour, agriculture, etc.) and those offices constitute the Prime Minister's cabinet, as nominated by the Prime Minister in consultation with the President and confirmed by the State Great Khural. A key position of present, given the importance of mining to the economy, is the Minister of Minerals and Energy, currently held by Minister D.Zorigt.

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Foreign Relations

6 Foreign Relations

Key relations with Russia (largest importer into Mongolia, uranium & rail JVs), China (85% of Mongolian exports), North Korea (amicable relationship) & Japan (interests in rare earth expansion)

Mongolia maintains bilateral relations In developing its relations with other countries, Mongolia is guided by universally with 140 and diplomatic relations with recognized principles and norms of international law as defined in the UN charter. 149 countries. Mongolia has bilateral relations with 140 countries and diplomatic relations with 149 countries. Recently, the government has put much emphasis on encouraging foreign investment into Mongolia.

6.1 Africa

6.1.1 Egypt

Relations between Egypt and Mongolia officially began in 1964, since then the countries have signed various bilateral corporation agreements. The only Mongolian embassy on the African continent is in Cairo.

Recent Official Visits

A Mongolian parliamentary delegation visited Egypt in June 2001 in order to sign an agreement to try to boost Mongolian students attending Egyptian courses.

In April 2004, the Mongolian President Natsagiin Bagabandi met with the Egyptian June 2001: cooperation agreement was President, Hosni Mubarak, in Egypt and discussed ways to improve bilateral signed relations, as well as problems in Iraq and Palestine. They signed an executive protocol for agreements on economic cooperation, air services and investment protection.

2007: enhanced cooperation between In March 2007, the Egyptian Minister of International Cooperation visited the two countries discussed Ulaanbaatar where he met Mongolian Prime Minister Miyeegombyn Enkhbold.

In October 2008, the Secretary General of the Egyptian Fund for Technical Cooperation with the Commonwealth visited Ulaanbaatar where he met with ministers and discussed enhanced cooperation between Egypt and Mongolia. The Mongolian officials said they welcomed the technical support provided by the fund in training and other economic benefits.

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Security cooperation

2001 and 2008: enhancement of security Mongolia and Egypt have cooperated on security exercises and operations, such cooperation as Mongolian policeman visiting Egypt in 2001 to train for techniques in prevention of drug-trafficking and anti-terrorism, and in 2008 Mongolian officials visiting Egypt to learn of the role of anti-corruption officers.

6.2 Asia

6.2.1 Russia

Mongolia almost certainly has the strongest relationship with Russia, who it has been close with ever since the Russians helped liberate Mongolia from the Chinese in 1921, and over the next 70 years the Soviet Union was the country’s greatest ally. Both are members of the Organization for Security and Co-operation in Europe, Mongolia has an embassy in Moscow and Russia has one in Ulaanbaatar.

Background

Russia and Mongolia share a 3,500km Mongolia shares its borders with only two countries, Russia and China, and as a border result its economics and politics are directly influenced by the two. The majority of imports come from Russia, in particular petroleum and diesel, and they two Russia helped Mongolia to ward off the countries share a 3,500km border. Chinese invasion In the past, Mongolian invasions in the 13 th century bought much of Russia into The Mongolian People's Republic was the Mongol Empire, and a significant portion of the Russian population were established under the Soviet influence in killed. Most of Russia remained under Mongol rule for the following 300 years. In 1921 1921, the Soviets helped establish the Mongolian People’s Republic after helping to ward off the Chinese invasion.

Communist era

Close bilateral relations due to both Both nations forged close relations during soviet times with strong industrial trade communist regimes links, and a large number of soviet troops were permanently deployed in Mongolia through fear of Chinese expansionism. Mongolia supported Russia 1986: treaty of peace, friendship and during the Sino-Soviet split of the 1950s, and a treaty of peace, friendship and cooperation signed cooperation was signed between the two nations in 1986. Plans for the withdrawal of Russian troops from Mongolia were finalised in 1989.

Modern era

Following the end of the cold war and dissolution of the Soviet Union, Russia’s Collapse of Soviet Union, Mongolia's trade with Mongolia decreased by 80% almost overnight and China’s influence trade with Russia declined by 80% over Mongolia increased. However, today the majority of imports come from

Russia, in particular petroleum and diesel imports.

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In 2000, Vladimir Putin (then President of Russia) made a visit to Mongolia to re- 2000: Vladimir Putin renewed a major strengthen a bilateral treaty, which was the first visit by a Russian head of state bilateral treaty since Leonid Brezhnev in 1974.

Recently, a meeting between Ruissian PM Vladimir Putin and his Mongolian Russian government writes off 98% of counter-part S. Batbold led to Russia writing off 97.8% of Mongolian debts which Mongolia's state debt had accumulated during soviet times - $172m, of which Mongolia would only be

asked to pay back $3.8m in a single transfer.

Uranium exploration and recent Joint Venture

Russia holds 190 reports on Mongolia’s 6 Through the decades of former Soviet exploration in Mongolia in the second half uranium fields, Mongolia only has access of the last century, Russia has become an adept student of Mongolian geology to 34 and mining potential. From 1970-1990, the Soviet Union discovered 6 uranium deposits in which it estimated 1.5mt of reserves in Mongolia. All 190 reports on the discoveries are currently held in Russia, whereas the Mongolians have only been given copies to 34 of these reports. Russia now finds itself positioned again as a very important player participating in Mongolian uranium exploration.

In December 2010, Mongolia and Russia signed an agreement to develop the Dornod uranium resource, Mongolia’s biggest untapped uranium field. Rosatom Corp., Russia’s nuclear power company, Russia’s government-run ARMZ Uranium Holding, Mongolia’s state-owned KOO MonAtom and the country’s Nuclear Energy Agency (NEA) signed the agreement in Moscow. Mongolians will remain in control, with 51% of the share to Monatom and 49% going to ARMZ.

The Russians will invest $300 million in the first stage, and first production is expected in 2011, with the action plan stating that the JV would begin to function around June. The expected Mongolian reserves are 30,000 tons, and the new company will survey, mine and process the uranium.

6.2.2 People’s Republic of China (PRC)

As the Soviet Union had been Mongolia’s main ally and the most influential neighbouring power up until 1990, foreign relations between the PRC and Mongolia used to be predominantly determined by the PRC and USSR relations. With adoption of democracy and transition to a market economy, Mongolia’s relationships with China also began to improve. Currently the PRC is the largest trading partner of Mongolia.

Background

Mongolia and China instigated many wars throughout history, provoking the Chinese to build their Great Wall to defend against the Mongols. Although Khubilai Khaan conquered the majority of China and established the Mongolian Mongolia and China wars capital at the location of modern Beijing, the Qing dynasty of Manchu invaded

Mongolia in the 18 th century. The ruling of the Qing dynasty came to an end in

1911, when Mongolia declared its independence. Although in 1919 China regained control over the region, in 1921 the USSR forces helped Mongolia to

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Foreign Relations

reclaim its independence, prompting the later formation of the Mongolian People’s Republic.

Communist era

In October 1949, Mongolia established diplomatic relations with the PRC. 1949: diplomatic relations with PRC Although a border treaty was signed in 1962, Mongolia requested for further 1962: border treaty signed support from the USSR due to security concerns. Only in 1984, when a high- 1984: demarcation of border power delegation from China visited Mongolia, was tension over bilateral 1986: further agreements relations relaxed, and the two nations started to set apart their borders. Various 1988: border treaty verified agreements to improve trade and create air and transport links were signed in 1986. A treaty on border control was verified in 1988.

Modern period

Since the end of the Cold War, China has been continuously making effort to 1994: treaty of friendship and strengthen its bilateral ties with Mongolia with all due respect to the latter’s cooperation autonomy. In 1994, the two countries signed a treaty of friendship and

cooperation. Today, the PRC has become the major trading partner of Mongolia Mongolia given access to Tianjin port and the greatest contributor in mining related foreign investments. China’s

decision to allow Mongolia to use its Tianjin port was a significant move bolstering the landlocked country’s trade with the Asia Pacific region.

Recent News

In November 2010, two Mongolian Parliament Members and the Director of Agreement reached in uranium sector MonAtom, a state organization accountable for all uranium licenses in Mongolia, cooperation visited the USA for discussions on partnership in the mining sector. The visitors learnt about the United States’ uranium exploration and enrichment experience,

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methods of efficient utilization of resources for fuel production and their regulatory system in the uranium sector. High officials responsible for energy and mining industries of the US exchanged views with their Mongolian counterparts in order to find ways to strengthen bilateral cooperation of the two countries. A consensus was reached on how the USA could contribute to the training and development of the Mongolian workforce recruited in the uranium field.

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Geography and Climate

7 Geography and Climate

A large, land-locked country with long, harsh winters but with highest number of blue-sky days… the “Nomad Empire of Eternal Blue Sky”

th 19th largest country (1.56 km 2) Mongolia is ranked 19 in the world by country size after Iran. It covers 1.56 million square km. Mongolia’s geography varies from a cold, mountainous region Khuiten Peak – the highest altitude in the north to the Gobi desert in the south. (4,374m) It is the country of steppes. The highest altitude of Mongolia is the Khuiten Peak Winter: −40 °C (−40 °F) (4,374m) situated in the far western massif, Tavan Bogd. The climate is generally Summer: +35 °C ( +95 °F) dry and the temperature varies significantly across the year, making the winters extremely cold and summers very warm. In January, the temperature may fall as low as −40 °C ( −40 °F) and in summer it can rise to as high as +35 °C (+95 °F).

Ulaanbaatar – coldest capital city in the There are many occasions when Mongolia is hit hard by exceptionally cold winters world called “dzud”. Explanation of “dzud” is given in the Agriculture section of this report. Ulaanbaatar has been named the coldest capital city in the world. 275 out of 365 days sunny Mongolia receives little precipitation, as a result of short and dry summers, and is especially windy due to its high altitude above sea level. On average, 257 out of the 365 days of the year are cloudless and the heaviest atmospheric pressure falls on the central region of Mongolia.

Little precipitation Precipitation is the highest in the Northern region, averaging 25-30 cm per year, while it is the lowest in the Southern region, averaging 10-20 cm per year. Gobi means desert steppe Sometimes there may be no rainfall in a year in parts of the Gobi desert. “Gobi” means desert steppe in Mongolian, referring to the dry terrain that has deficient foliage to be able to support livestock, except camels.

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Administrative Regions

8 Administrative Regions

21 a imags (provinces), 329 soums (sub-provinces)

Mon golia is divided into 21 aimags. Each aimag is subdivided into a number of soums. Aimag means "tribe” in Mongolian. All aimags are governed as separate municipalities. An exception is the capital city , Ulaanbaatar, which is administered separate ly from Töv Aimag (Central Province), where it is located.

LIST OF AIMAGS 1. Arkhangai 2. Bayan-Ölgii 3. Bayankhongor 4. Bulgan 5. Darkhan-Uul 6. Dornod 7. Dornogovi 8. Dundgovi 9. Govi-Altai 10. Govisümber 11. Khentii 12. Khovd 13. Khövsgöl 14. Orkhon 15. Ömnögovi 16. Övörkhangai 17. Selenge 18. Sükhbaatar 19. Töv 20. Uvs 21. Zavkhan

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Economy

9 Economy

The Largest contributors to the Economy are mining and agriculture. Expected GDP growth in 2013 in excess of 25% (IMF).

Large reserves of copper, gold, coal, Economic activity in Mongolia has historically been focused on agriculture and molybdenum, fluorspar, uranium, tin herding, but recent discoveries of mineral deposits have attracted large levels of and tungsten foreign direct investment (FDI) into the mining sector, which is also the largest contributor to government receipts. Up until the dismantlement of the Soviet 1990-2000: combination of deep Union in 1990-1991, soviet assistance used to account for up to a third of GDP, recession due to political before almost disappearing overnight. The decade that followed saw natural inaction/natural disasters as well as disasters and political inaction cause deep recession, as well as free-market economic growth due to privatization economics, reform and privatization lead to economic growth. Mongolia joined and free-market economic reform the WTO in 1997.

From 2000-02, the country again entered recession due to particularly harsh winters and summer droughts which led to large-scale livestock fatalities, and was compounded by falling prices for primary sector exports and opposition to privatization.

2004-2008: CAGR 9% due to high Cu In 2004-08, GDP grew at a compounded 9%, mainly because of increased gold prices and new Au projects. ‘08 inflation production and high copper prices. In 2008, inflation reached the highest levels in peaked at 36% over a decade, hitting 36% in August, but by the end of the year the price levels dropped as commodity prices fell and the global financial crisis took hold. ‘08 Financial crisis: lower inflation, Government revenues fell, forcing cuts in spending. reduced govt. revenues & spending

Oct 09: landmark agreement to develop In early 2009, aided by the IMFs $242 million Stand-by Arrangement, Mongolia OT, world’s largest untapped copper began to recover from the crisis, although instability remained in the banking deposit sector. In October 2009, legislation was finally passed to develop the Oyu Tolgoi gold/copper project, the world’s largest untapped copper deposit.

85% of Mongolian exports to China Mongolia’s economy continues to be significantly influenced by neighbouring behemoths, Russia and China. Approximately 85% of all exports go to China, and China accounts for over half of all Mongolian external trade. On the other hand, 95% of petroleum products and a large proportion of Mongolia’s electricity come from Russia, leaving it vulnerable to Russian price hikes.

Over 30,000 businesses in Mongolia There are over 30,000 businesses operating in Mongolia, the majority of which are operational in Ulaanbaatar. Outside of the capital city, subsistence herding employs most of the workforce. Livestock typically consist of sheep, goats, cattle, horses and camels.

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Economy

9.1 The Global Financial Crisis of 2008/2009

In 2009 economy contracted by 1.6%, The global economic downturn in late 2008/early 2009 resulted in reduced primarily due to copper prices falling as demand for commodities and a resulting slump in their value. Mongolia saw its much as 65% demand for exports and export revenue decrease, and the GDP growth of 8.9% seen in 2008 was following by a contraction in the economy by 1.6% in 2009. Most crucial to Mongolia, being at the time the country’s largest export, were copper prices, which fell from $8,700/tonne in April 2008, to $3000/tonne in March 2009, a 65% reduction. Other commodities essential to Mongolia’s export industry fell, including zinc, crude oil, coal and cashmere, and the only exception was gold, which held its price on account of its status as a safe-haven investment.

China’s growth slowing from 16% to 5% The fall in price of commodities was combined with a fall in demand for led to decreased demand for Mongolian commodities by China, which accounts for 85% of Mongolian exports, and year- exports on-year growth in industrial production shrunk from 16% in mid 2008 to 5% in the first quarter of 2009. This resulted in a contraction in Chinese demand for Mongolian copper imports by around 50% in the first half of 2009.

Current account moved from surplus of The sharp fall in exports, combined with moderate growth in imports, led to a 6.7% of GDP in 2007 to deficit of 14% in significant shift in the balance of payments in late 2008/early 2009. The current 2008 account showed a surplus of 6.7% of GDP in 2007 compared to a deficit of 14% of GDP in 2008, and the deficit further increased to 15% of GDP in the first half of 2009.

The Mongolian Tugrik depreciated by 38% between the end of October 2008 and MNT fell 38% from Oct08 – Mar09 the middle of March 2009 due to a currency flight, which was further aggravated $500m in foreign reserves were lost by the attempts of the Bank of Mongolia to defend the currency and maintain the de-facto peg against the dollar. This resulted in the bank losing $500 million in foreign currency reserves between July 2008 and February 2009.

To prevent an overshooting of the exchange rate, measures were taken including De-facto peg abandoned the introduction of a transparent, bi-weekly foreign exchange auctioning

mechanism and abandoning the de-facto peg to the dollar. The Central Bank rate

was hiked from 9.75% to 14% in March of 2009, and the combination of these BoM raised IRs from 9.75-14% in March 2009 to restore confidence in local measures resulted in exchange rate stabilisation and the ability of the Bank to currency replenish its foreign currency reserves. The spread between the ask and bid rates in the commercial bank foreign exchange markets have remained low after the sharp spike in late 2008/early 2009, a good sign of improved liquidity in the market.

9.2 Current state of the economy

Mongolia continues on the road to a market economy, despite the significant 2010 GDP growth = 6.1% impact of the global financial crisis, and in 2010 saw significant growth in its industrial and services sectors. Real GDP growth of 6.1% in 2010 was driven by strong growth in PRC (whose reported GDP was up 10.3% in 2010). International reserves has exceeded $2.0 billion as of the end of December 2010 (82.6% growth yoy), a record high for Mongolia.

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Economy

Recovery attributable to policy response The strong recovery may be attributable to a number of factors including the and IMF loan facility of $242m strong policy response from the authorities, assistance from the international community including the $242 million stand-by loan facility from the IMF (of which only $194 million was actually drawn), the global economic recovery, high copper prices and strong growth from the PRC.

Fiscal framework approved for 2011 to The Government at the end of 2010 made plans to increase its spending given the encourage economic stability increased revenue and availability of budget financing, and has established a fiscal framework with the focus on macroeconomic stability for 2011. It is pursuing plans for structural reforms and has adopted a comprehensive fiscal responsibility law.

Oct 2009: milestone agreement between A major milestone for developing Mongolia’s resource wealth was the eventual government, Ivanhoe & Rio Tinto to signing of the investment agreement in October 2009 between the Government, develop OT Ivanhoe Mines and Rio Tinto over the development of the vast Oyu Tolgoi copper/gold prospect in the South Gobi desert.

Value of mineral assets in country Mongolia is about to experience a period of remarkable growth. The estimated estimated at $1.3 trillion value of untapped mineral assets in the country is around $1.3 trillion. Industry experts talk of the success and efficiency of recently implemented domestic Inflation 13% policies which took the country out of recession. The IMF forecasts the real GDP FDI growing at 30% annually & expected growth to be over 25% in three years time, driven by advancements in the mining to total $11bn in 4 years sector. Inflation smoothed down to 13% in 2010 from the soaring 36% in August Budget surplus $611mn 2008, but the authorities’ plans to hold price increases at a single digit through External trade deficit $373.8mn 2011 seem far fetched. FDI into the country has been growing at 30% annually and is expected to reach $11 billion in the next five years. In 2010, general government budget showed a surplus of $611 million and the external trade deficit reached $373.8 million (exports and imports were both up 53% yoy).

According to Montsame, in 2010, the total industrial output increased 169.7 Industrial output up 10% to $1.5bn (at billion MNT ($135.7 million) or 10% to 1,874.6 billion MNT ($1.5 billion) at 2005 2005 constant prices) constant prices compared to the previous year. This increase was mainly due to a 16.7% - 91.8% increase in main mining and quarrying products such as crude oil, fluor spar concentrate and coal; a 11.2% - 69.0% increase in manufacturing products such as copper, lime, alcohol, metal steel, flour, solid concrete, cement, sawn wood, yoghurt, soft drinks, juice, metal foundries, fodder, milk; and a 2.1x - 2.3x increase in products such as steel casting, and iron ore.

In 2010, Industrial output (at 2005 constant prices) showed increases in mining of coal and lignite extraction of peat (91.8%), other mining and quarrying (19.5%), extraction of crude petroleum and natural gas (16.7%) for the mining and quarrying sector; manufacture of office accounting and computing (5.5 times), manufacture of rubber and plastics products (84.4%), production of non-metallic mineral products (54.0%), manufacture of wood and wooden products (35.6%), manufacture of basic metals (29.6%), manufacture of food products and beverages (24.0%), manufacture of chemicals and chemical products (18.2%), manufacture of wearing apparel, dressing and dyeing of fur (17.5%), publishing, printing and reproduction of recorded media (7.6%), manufacture of tobacco products (2.9%) for the manufacturing sector compared to the previous year.

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There was an increase in production of electricity, thermal energy, and steam (6.4%) [Montsame].

9.3 Gross Domestic Product

Historically, the greatest contributors to GDP were livestock, agriculture and animal husbandry, but recently focus has changed to mining. In 2009, 21.2% of Mongolia’s GDP was attributable to agriculture whereas 22.5% of the economy was attributable to the mining sector. The mining sector is by far the largest source of foreign currency inflows, and contributed to 85% of exports in 2008 and 82% of exports in 2009.

th 2010 real GDP growth = 6.1% On 13 January 2011, the NSO officially announced that the 2010 real GDP growth was 6.1%, and nominal growth was 25.3%. (The IMF prediction of real GDP growth for 2010 was 8.5%). Trade in service, processing industry and mining had high profits, but the agriculture sector experienced large losses when 11.3 million livestock died during the winter dzud.

2010 nominal GDP = $6.6bn Mongolia is an emerging market whose GDP is comparatively small, at $6.6bn. 2005 – 2008 annual growth rate = 8.7% However, this figure grew at a CAGR of 8.7% from 2005 to 2008, primarily driven by i) increased FDI cash in-flows, particularly in the mining industry ii) increased commodity prices, chiefly copper, gold and iron

NOMINAL GDP COMPOSITION BY SECTOR

2007 2008 2009 Agriculture 20.5% 21.6% 21.2% Mining 29.5% 22.5% 22.5% Manufacturing 6.1% 6.2% 5.9% Trading 7.0% 7.9% 6.0% Services 19.0% 21.5% 23.2% Other 10.40% 22.80% 23.30%

Source: National Statistics Office 2009

Expected real GDP growth 8.9% in 2011, The IMF forecasts the real GDP growth to be over 25% by 2013 driven by and in excess of 25% in 2013. advancements in the mining sector, while income per capita is expected to reach $3,500 in 2015 compared to the current level of $1,745.

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Economy

14 30 12.4 12 11.0 25 9.5 10 20 7.7 8 7.2 15 5.8 6 5.1 10 4.2

GDP, $ billions GDP, 4 5 Real GDP growth,% GDP Real 2 0

0 -5 2008 2009 2010 2011 2012 2013 2014 2015

Source: IMF

4000 3504 3500 3101 3000 2693 2500 2192 2051 2000 1670 1745 1343 1500

Income per capita,$per Income 1000 500 0 2008 2009 2010 2011 2012 2013 2014 2015

Source: World Bank estimate, IMF forecast

9.4 Money Supply

By the end of December 2010, money supply had reached 4.7 trillion tugrik ($3.8 billion), up 1.8 trillion tugrik ($1.45 billion) or 62% from the previous year. In 1990, the M2 supply of money was $5.6 billion, this means in 1990-2010 the amount of money in circulation increased 83,829%.

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Economy

MONEY SUPPLY, $ MILLIONS

3500 3000 M1 M2 2500 2000 1500 1000 500 0 97 98 00 01 02 03 04 05 06 07 08 09 97 99 08 ------Jul Jan Jan Jun Oct Apr Sep Feb Dec Dec Aug Nov Nov Mar May

Source: Bank of Mongolia (calculated at constant 2010 USD:MNT exchange rate)

In two and a half years from the beginning of 2008 to June of 2010, the M2 money supply increased from $1.88bn to $2.86bn (52% rise)

MONEY SUPPLY, $ MILLIONS

3500 M1 M2 3000 2500 2000 1500 1000 500 0 08 08 08 08 08 08 09 09 09 09 09 09 10 10 10 ------Jul Jul Jan Jan Jan Sep Sep Nov Nov Mar Mar Mar May May May

Source: Bank of Mongolia (calculated at constant 2010 USD:MNT exchange rate)

9.5 Budget

In August 2010, gov revenues were up According to the World Bank estimates, in August 2010 the fiscal deficit fell to 56% YTD and expenditures up 23% YTD 0.4% of GDP, compared to 10.6% a year ago. Total government revenues were up 56% YTD due to rebounding commodity prices and the infamous Windfall Tax, while expenditures increased 23% owing to cash handouts delivered to 50’000 civilians. The figures indicate overall the improving economy and positive

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Economy

Windfall tax abolished, effective from 01 prospects. Worth noting, the abolishment of the 68% Windfall Tax has been in full st Jan 2011 effect since the 1 of January 2011.

300 YTD % INCREASE IN GOVERNMENT REVENUE 250 Aug -09 Aug -10 200

Due to recovery in commodity prices and 150 domestic demand, revenues grew 100 sharply 50

-50 VAT WPT Royalty -100 Excise taxes Excise Tax revenue Tax tax revenues tax Import duties Import - Social sec cont'ns sec Social Non Wages and salaries and Wages

Corporate income tax income Corporate Source: World Bank

In 2011 budget, govt revenue to be 42% On the 1st of December 2010, Parliament approved a new budget for 2011. of GDP, govt expenditure 52% of GDP According to the estimates, government revenues are to be 42% of GDP, government expenditures 52% of GDP and the fiscal deficit 9.9% of GDP. There is to be an increase in spending on wages of 22% and an increase in spending on transfers of 50%. Expenditures are mainly about to hike due to project-financing costs related to mining, infrastructure and agriculture. Financing of the Human Development Fund, which is responsible for cash handouts and the provision of student tuition fees, is to take up 11% of GDP. Income is mainly to be generated by copper, gold and coal exports, exploitation of oil reserves and privatizations of state properties.

Before the budget was officially approved, the World Bank had been continuously World Bank warns against such high warning about the possible inflationary pressure likely to be caused by the government spending of 52% of GDP adoption of such a fiscal policy. According to their view, excessive spending worth through fear of high inflation 52% of GDP would fuel the already existing inflation in the form of wage-price

spirals, pushing inflation towards 25%. The bank mentioned about the possibility

of the 2006-2008 mistakes being replayed, which were the years of boom and excessive spending, during which no government funds were saved to cushion against frictions in the economy and following which the 2008-2009 collapse occurred in Mongolia.

Amended progressive royalties: In 2011, the Windfall Tax will no longer bring revenues to the government, but the 30% if Cu ore price exceeds 9000$/t recently approved progressive royalties on minerals, i.e. 30% on copper ore and 15% if Cu concentrate price exceeds 15% on copper concentrate if their prices exceed 9000$/t, 5% on gold if the gold 9000$/t price exceeds 1,300$/oz, will bring some income boost. The amended royalties on 5% if gold price exceeds 1300$/oz copper will not be applied to Oyu Tolgoi production. Also the World Bank and the ...etc. IMF are not planning to secure any more lending to Mongolia, finding it unnecessary as the country did not use the remaining two tranches of the IMF’s Stand-by Agreement (SBA), worth $48 million. The IMF approved an 18-month

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Economy

SBA in April 2009 for an amount equivalent to $242 million. Despite these issues and the World Bank’s warnings, the spending plans in overall seem to be highly unconstrained. The parliament members justified their move by asserting that no matter what the government decides , there are always precautionary warnings coming from the expert financial institutions, whereas the parliament makes their resolutions based on their own estimates and specialist advisors.

9.6 Inflation

After falling to as low as 8.8% in July 2010, inflation resumed its upward trend yet 2010 inflation: 13% again by the end of 2010. The overall 2010 CPI, inflation as stated by the Bank of

Mongolia, was 13%. Main factors behind the price increases mostly belonged to Supply side shocks in food prices main the supply side. Food and energy prices climbed up due to adverse weather contributor to increased inflation effects in Russia, which boosted grain prices, and a disastrously cold winter in towards end of 2010 Mongolia, destroying ample of livestock and escalating meat prices.

Demand side inflation increasing, due to Higher volatility of the CPI index points to greater instability of the overall pressures from government’s 30% public economy. However unfortunate it is, this usually is the case with transition sector wage hike & public handouts economies. The central bank justifies its incompetence in handling inflation on the grounds that the price increases were mainly due to the supply side, while the bank’s intervention could predominantly soothe the demand side inflation. Such an excuse will no longer work in the future, as demand side inflation is also creeping up, especially with the upcoming government expenditures leaving no spare capacity (consequences of the 30% public sector wage increases effective from October 2010 and a continuation of the promised cash handouts to the public). Therefore, and not surprisingly, the World Bank predicts two-digit inflation figures over the year 2011.

INFLATION, ANNUAL % CHANGE IN CPI 40.0 35.0 Inflation reached 36% in Sep 08 30.0 25.0 20.0 Deflation occurred in Q4 2009 15.0

10.0 5.0 0.0 -5.0 06 06 07 07 07 08 08 08 09 09 09 10 10 10 ------Jan Jan Jan Jan Sep Sep Sep Sep Sep May May May May May

Source: Bank of Mongolia

Food prices are given the heaviest weighting in the consumer price index, therefore supply-side shocks in food prices have the greatest effect on calculated inflation levels in Mongolia.

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Economy

PROPORTIONAL CPI BASKET OF GOODS 100% Restaurants 90% 80% Education 70% Recreation & Food makes up over 40% of the CPI 60% Transport basket of goods 50% Medical care 40% Electricity, 30% 20% Water 10% Housing 0% Clothing 06 06 07 07 08 09 07 08 09 10 10 Food ------Jul Jan Jun Oct Apr Sep Feb Dec Aug Mar May

Source: Bank of Mongolia

9.7 Trade

2010 trade turnover = $6.2bn, up 54% In 2010, total external trade turnover reached $6.2 billion, an increase of $2.15 2010 trade deficit = $379m, up 50% million or 53.5% over 2009. However, the external trade balance showed a deficit of $378.7m in 2010, up $126.4 million or 50.1% compared to 2009.

TRADE, $ MILLION (12 MONTH ROLLING SUM)

Exports Imports Trade balance (right axis)

4,000 0 3,500 -200 3,000 2,500 -400 2,000 -600 1,500 -800 1,000 500 -1,000 0 -1,200 08 09 10 07 07 08 08 08 09 09 09 10 10 ------Feb Feb Feb Aug Aug Aug Aug Nov Nov Nov May May May

Source: World Bank

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Economy

9.7.1 Exports

2010 exports = $2.9bn, up 54% The latest update informs that In 2010, Mongolian exports totalled $2.9 billion, up 53.8% from 2009. Mineral products, natural or cultured stones, precious metal, jewellery, coins, textiles & textile articles live animals, animal origin products, raw & processed hides, skins, fur & articles thereof accounted for 98% of the total export value amount, and approximately 85% of all Mongolian exports go to China.

The contribution of copper to export growth is levelling off, whereas has become the leading contributor to growth in exports. In February, copper contributed 53% to export growth, though by August this had reduced to only 9%, whereas coal contributed 40 percentage points of the 59% that was the year on year August growth. The dollar value of coal shipments in August had increased year-on-year by 172%, for an increase in total shipment volume of 146%, and coal made up 27% of all goods exported from Mongolia, up from 16% the previous year.

Gold and cashmere exports down On the other hand, gold exports were down, despite gold prices once again reaching record heights. This was most likely a result of the abolishment of the 68% windfall profit tax coming into play on January 1 st 2011, and hence gold producers were withholding stocks until this time. Cashmere export remained low, reflecting the effects of the devastating “dzud” last winter that destroyed livestock.

2010 I-XII Value, $ % of total Volume EXPORTS million exports

Coal 16.6 million tonnes 877.6 30.3% Copper 568.7k tonnes 770.5 26.6% concentrate Coal now Mongolia’s largest export Iron ore 3.5 million tonnes 250.9 8.7% commodity, accounting for 30% of all Gold 5.1 tonnes 178.3 6.1% exports Crude oil 2.1 million barrels 154.9 5.3%

Zinc ore 119k tonnes 134.1 4.6% concentrate Greasy 3k tonnes 104.9 3.6% cashmere Fluorspar 376k tonnes 63.2 2.2% ore/concentrate Combed 977 tonnes 68.8 2.4% cashmere Molybdenium 4.8k tonnes 52.0 1.8% ore/concentrate Rest exports 244.0 8.4%

Source: National Statistics Office of Mongolia

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Economy

China is Mongolia’s biggest trading partner. Currently around 85% of exports go to the PRC. EXPORTS, IN %

China Russia Other

100

60 85% of exports go to China 40 20

0 01 06 97 97 98 99 00 02 02 03 04 05 07 07 08 09 10 ------Jul Jul Jul Jan Jan Jan Sep Sep Sep Nov Nov Nov Mar Mar May May May

Source: Bank of Mongolia

9.7.2 Imports

Imports rising as economy recovers, in Imports have continued to grow as the economy recovers. In 2010, goods and particular machinery and equipment services of value $3.3 billion were imported, up 53.3% on 2009. The increase in demand for imported goods was primarily driven by rising demand for machinery and transport equipment, reflecting increased industrial activity involved in mining, construction and agriculture. These activities also added to petroleum and Largest imports: diesel and petroleum diesel imports, which are the country’s largest import products, and are supplied from Russia by The Russian Federation. Mongolia imported $400 million worth of diesel, $230 million worth of petroleum in 2010. 2010 I-XII IMPORTS $ million % of total EU countries 318.8 9.7% Other countries of Europe 1,148.6 35.0% of which Russia 1,090.2 33.3% Northeast Asia 1,386.7 42.3% of which Japan 197.6 6.0% of which China 1000.2 30.5% Southeast Asia 121.1 3.7% Other countries of Asia 43.9 1.3% Africa 9.5 0.3% America 199.8 6.1% Australia 49.5 1.5% Total 3,277.9

Source: National Statistics Office

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Econ omy

33.3% of all imports came from Russia in 2010, and 30.5% came from China, maintaining the situation of Russia being the primary supplier and China being the major buyer. The figure below displays historical proportions of imports that came from the two neighbouring giants. IMPORTS FROM RUSSIA AND CHINA, IN %

China Russia Other

100% 80% 60% 34% of imports from Russia, 30% from PRC 40%

20% 0% 97 97 98 99 00 01 02 02 03 04 05 06 07 07 08 09 10 ------Jul Jul Jul Jan Jan Jan Sep Sep Sep Nov Nov Nov Mar Mar May May May

Source: Bank of Mongolia

9.8 Implemented Policies

Recovery after crisis due to strong policy As the IMF judges, Mongolia’s recovery after the crisis was largely due to strong response and IMF loans policy responses made by the authorities and substantial aid coming from international communities, including a loan from the IMF itself. According to the IMF, a number of successful policies have been implemented:

1) A flexible exchange rate regime adopted in early 2009, supported by a forthright 400 bps increase in the policy rate. The new regime efficiently Successful policies included adopting and stabilized the foreign exchange market and Mongolia’s foreign reserves stabilising a flexible exchange rate by reached $1.7 billion (29% of GDP) in September 2010. increasing policy rate 400bps, fiscal 2) Fiscal adjustments were made in 2009 and continued in 2010 creating responsibility laws and revised banking financing constraints and bringing down fiscal deficit to 0.4% of GDP. laws Parliament passed a comprehensive fiscal responsibility law in 2010. 3) Parliament approved a revised banking law that strengthened the regulatory framework. Tougher supervision regulations were issued bolstering the banking system and ensuring that banks could play their crucial role in fostering development by providing credit to the private sector.

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Economy

9.9 Foreign Direct Investment

Inflow of FDI into Mongolia during 2005 – 2007 was equivalent to the total level of direct investment received throughout 1990-2004. Net value in 2007 was 500 million USD, 67% of which was accounted for by mining alone and 22% by trade and food. FDI, $ billion 4 3.5 3 FDI is expected to total around $11 2.5 billion over the next 4 years 2 1.5 1 0.5 0 2007 2008 2009 2010(f) 2011(f) 2012(f) 2013(f) 2014(f)

Source: Trade and Development Bank

9.10 Currency

A flexible exchange rate regime was adopted in early 2009. Prior to 2005, when exports were insignificant, the manufacturing industry was almost non-existent, the overall supply of products came primarily from imports, and the supply of international reserves were highly deficient, the de facto peg of the MNT against USD in all probability was the most sensible way of protecting the currency from continuous depreciation.

MNT second best performing currency Recently, with the increasing amount of mining related foreign capital flowing into against the dollar in 2010 the country, the Mongolian Tugrik started appreciating. In December 2010, the MNT/USD rate gained in value 15% since January 2010, when it was 1,446, which made it the second best-performing currency against the dollar in 2010. EXCHANGE RATE, MNT/USD 1600 1500 1400 1300 1200 1100 ------04 05 06 07 08 09 10 Jan Jan Jan Jan Jan Jan Jan

Source: Bank of Mongolia

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Banking Sector

10 Banking Sector

14 commercial banks active in Mongolia, of which the biggest are Golomt Bank, Xac bank, Khan Bank and TDB (Trade & Development Bank)

14 commercial banks, 188 NBFIs, 207 According to the Trade and Development Bank, the Mongolian financial sector saving & credit (S&C) cooperatives consists of 14 commercial banks, 188 NBFIs and 207 S&C (saving and credit) Cooperatives. NBFIs provide similar products and services to banks such as loans to small borrowers, money transfers and FX trading, although they do not take deposits. S&C Cooperatives mostly provide micro-finance lending.

10.1 Background

During the transition from Soviet style Mongolia’s banking industry grew from a centrally planned, soviet-style single mono-banking to commercial banking, bank system in which the State Bank of Mongolia performed all banking duties several banking crises occurred in 1994, within the country. As Mongolia transitioned into a free-market economy in 1991, 1996 and 1998 due to high levels of non- the first steps taken by the government to reform the financial sector were the performing loans. development of a two-tier banking system in which the Central Bank controls the activities of state-owned and commercial banks, who in turn took over all lending activities to the public. The commercial banks that emerged inherited non- performing loans from the former state bank and also approved loans to poorly performing enterprises. Several banking crises occurred during the transition period in Mongolia in 1994, 1996 and 1998 as increasing NPLs damaged the solvency of the banking system. Many banks faced severe liquidity issues and public confidence in the banking system fell. In addition, institutional weaknesses in the new banks, inadequate regulatory frameworks and general macroeconomic problems resulted in eventual deposit runs.

To restore confidence in the banks, the Government initiated financial sector reforms, promoting an efficient financial system. Previously insolvent banks were rehabilitated, state ownership in banks gradually divested and foreign ownership in the banking sector increased to help improve competition and efficiency.

2006: reckless lending of S&Cs led to The reckless lending practices resulted in collapse and closure of many S&C flight of funds to safe commercial banks Cooperatives in 2006 and ever since there has been a flight of funds from NBFIs and S&C Cooperatives to commercial banks considered safe deposit holders. In 2009: Anod Bank closure and Zoos Bank 2006, the FRC was formed by the Government to regulate all financial institutions, into state-ownership due to liquidity with the exception of commercial banks which remained under the Bank of issues Mongolia’s supervision.

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Banking Sector

10.2 Banking sector performance during 2008/2009 financial crisis

In 2009, the total assets of the banking sector grew by 21.1% $3.57bn from the previous year, of which foreign currency appreciation was responsible for 13.3 out of the 21 percent of this growth. The liquidity of banks became an issue due to the economic downturn, the insolvency of Anod Bank, and tugrik depreciation which lasted until Q2 2009.

BANKING SECTOR ASSETS AND FINANCIAL INTERMEDIATION

3,500 80

3,000 70

1 60 2,500 50 2,000 40 1,500 30 1,000 20

Total assets, assets, Total $ million 500 10 Total assets/GDP assets/GDP Total ratio, % 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Note: 1. Exchange rate as of 31 Dec 2009 Source: Bank of Mongolia

The govt guarantee on deposits reduced The rate of decline in deposits, which had begun to decrease in October 2008, outflow of deposits began to slow as a result of the government’s blanket guarantee on deposits, and they soon reached pre-crisis levels of $2bn. However, Zoos Bank’s loan portfolio deteriorated significantly, being unable to fully commit to repayment of customers' money because of violating the limit of a single borrower’s exposure, and in November 2009 was taken into state ownership. However, the collapse did not negatively affect the overall confidence of depositors, because in 2009 total Bank deposits grew by 34.5% in 2009 deposits totalled $1.46bn and grew by 34.5%. To provide liquidity support, the Bank of Mongolia extended interbank loans of $77.6m to banks via new financial instruments such as reverse repo, collateralized loan and foreign currency swaps, and consequently the acid ratio of the banking sector grew by 16.6 percentage points to 38.3% in 2009 compared to 2008.

The Mongolian government put a total of $53m on deposit into three banks, all of which were repaid by the end of 2009. Total funding of $66.25m was given to 5 banks, who in turn lent $44.9m to 23 companies to support the gold mining activities and improve their liquidity.

Until 25 th November 2012, the government’s blanket guarantee covers all money on deposit. Although this has beneficial effects for the banking system, the potential costs for the government (up to $2.5bn or 40% of GDP) could place pressure on the state budget.

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Banking Sector

10.3 Strengthening of the Financial System

Bank examinations more driven by risk Degree of prudence in the financial system in Mongolia has increased over the assessments last ten years, and particular focus has been placed on detecting potential problems relating to loans. Some of the measures taken by the central bank include: introducing prudential norms, better enforcement and supervision, loan Loan reserve requirements increased classification and loan loss provisioning systems. Bank’s undergo risk assessments, loan loss reserve requirements have increased (1% reserve for performing loans, 5% for overdue loans – up from 1%). Loans are classified as overdue if the interest payments are overdue, not just on whether the principal is up to date.

Capital adequacy principles for banks in Mongolia are very similar to international standards, and prudential norms were introduced to the Mongolian banking sector in 1996.

For the tier 1 ratio, the minimum capital adequacy for commercial banks is currently 6% and the total capital ratio is 12%. These figures have increased from 2% and 4% respectively. The Central Bank also increased the minimum paid-in capital required for commercial banks to the current level of $6.5m and failure to comply results in revocation of the bank’s license.

2005: Financial stability committee To monitor the stability of the financial system, a financial stability committee was established in 2005. The committee ensures public awareness of possible financial crises, interacts directly with the management of financial institutions, and gives financial support when needed.

From 2003-2009, deposits grew 5 fold, Total deposits in the banking system from 2003-2009 increased 5x from $460 loans grew 6 fold million to $2.42 billion and had further increased to $2.87 billion by mid 2010. Similarly, loans which totalled $360 million in 2003, grew to $2.15 billion in 2009 at a CAGR of 35% for the six year period, and had further increased to $2.4 billion by mid 2010. There is however still room for banks to lend more since the present Banks could further increase their loan liquidity in the banking system remains above the minimum regulatory level of portfolios 12%.

Capital adequacy ratio for banking Banking sector capital (prepaid tax deducted) reached $190 million at the end of system (mid 2010) = 14% 2009, and increased by 21% to $226 million by mid 2010. The risk weighted capital adequacy ratio for the whole banking system (one of the main indicators of sector’s ability to withstand risk) stood at 14% by mid 2010, exceeding the minimum central bank requirement of 12%.

Max loan exposure to single borrower = Regulations have been tightened on lending to related and other parties, and total 20% of bank’s total capital loans to a single related party must not exceed 5% of a bank’s total capital, while total loans to a single borrower must not exceed 20% of the bank’s total capital.

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Banking Sector

10.4 Deposits and Loans

The following table sets forth the year-on-year credit and deposit growths of the banking sector:

LOANS AND DEPOSITS AS OF 31 DECEMBER $ millions, except percentages 2003 2004 2005 2006 2007 2008 2009 2010 1

Loans 353 485 688 977 1,644 2,108 2,124 2,350 % yoy 91.0 37.4 41.9 42.0 68.3 28.2 0.8 13.9 Deposits 457 563 814 1,081 1,781 1,782 2,385 2,825

% yoy 63.7 23.2 44.6 32.8 64.8 0.1 33.8 30.5

Loan/Deposit, % 77.2 86.1 84.5 90.4 92.3 118.3 89.1 83.2

Assumed MNT/USD rate = 1250. Deposits include current, savings and time deposits. Source: Bank of Mongolia, mid 2010

TBD, Golomt Bank, Khan Bank & Xac There are 4 banks who dominate commercial and retail banking in Mongolia who Bank are the most significant commercial extend approximately 70% of all loans 73% of all deposits. These banks are TDB, banks Golomt Bank, Khan Bank and Xac Bank, and their market shares are shown in the following table: TDB Golomt Bank Khan Bank Xac Bank Assets 16.2% 23.8% 28.5% 6.6% Loans 14.9% 22.9% 22.8% 9.2% Deposits 16.7% 18.4% 33.9% 3.7%

Source: Public filings made by each bank, mid 2010

TOTAL LOANS OUTSTANDING ($m)

2500

2000

1500

1000

500

0 97 00 03 06 09 97 98 99 00 01 02 03 04 05 06 07 08 09 ------Jul Jul Jul Jul Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Apr Apr Apr Apr

Source: Bank of Mongolia

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Banking Sector

Appreciation of the tugrik, commercial bank competition, rising incomes and Largely increasing deposits into banks improved macroeconomic conditions have all helped increase bank deposits in

recent times. From 2003 to 2009, total deposits grew by a CAGR of 31.7% from $464 million to $2.42 bill ion and further increased to $2.86 billion in 2010. Current account balances totalled $840 million while time deposits totalled $1.69 billion by mid 2010.

DISTRIBUTION OF LOAN PORTFOLIO BY ECONOMIC SECTOR

5.8% Agriculture

Mining 26.0% 13.2% Manufacturing

Construction 15.5% 7.1% Motor vehicles

Real estate 18.0% 14.4% Other

Source: Bank of Mongolia

63% of credit extended to private sector In 2001 the Government relaxed regulation on private real estate ownership, 36% to individuals which led to an expansion in credit for housing. In 2010, 63% of credit was lent to 1.1.% to public sector the priv ate sector, 36% to individuals and a mere 1.1% of loans were extended to the public sector. The rate of default was 8.4% in 2010 (in 1999 this peaked at 51%). Default rate = 8.4% 2.50 80 70 2.00 60

1 50 1.50 40 1.00 30 $ billion $ 20 0.50 10

0 growth,Annual yoy % Total loans Total outstanding, 0.00 -10 07 07 08 08 08 09 09 09 10 10 ------Apr Apr Apr Dec Dec Dec Aug Aug Aug Aug

Note: 1.Assumed exchange rate: 1USD=1250MNT Source: World Bank

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Banking Sector

10.4.1 Non-Performing Loans (NPLs)

In 2009, number of default loans The 2008/2009 financial crises and economic slowdown led to a decline in increased 2.8 fold turnover and an increase in the rate of defaulting loans. As of 2009, NPLs increased by $60 million in the construction sector, $48 million in the manufacturing sector, $33 million in trading, and $28 million in the mining sector In 2009, NPL ratio grew by 12.8 and total number of NPLs went up almost three fold within 2009, reaching $435 percentage points to 20% million. The NPL ratio in the year went from 7.2% to 20%, eroding bank profits, who in turn limited extension of new loans due to the increased levels of risk.

NPL ratio (% of total) Loans (% of total)

Other sectors

Wholesale and retail

Construction

Manufacturing

Mining and quarrying

Agriculture

0 5 10 15 20 25 30 35

Source: World Bank

10.5 Banking Interest Rates

INTER-BANK INTEREST RATES, % 25.0

20.0

15.0

10.0

5.0

0.0 08 08 08 08 08 08 09 09 09 09 09 09 10 10 10 ------Jul Jul Jan Jan Jan Sep Sep Nov Nov Mar Mar Mar May May May

Source: Bank of Mongolia

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Banking Sector

Commercial bank interest rates offered for MNT sight deposits are persistently higher (approximately twice the rate) than those offered for USD sight deposits.

WEIGHTED AVERAGE OF CURRENT ACCOUNT INTEREST RATES, %

Current account IR, MNT Current account IR, USD 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 09 09 09 09 10 10 08 09 09 10 ------Jun Jun Oct Apr Apr Feb Feb Dec Dec Aug

Source: Bank of Mongolia

Commercial bank interest rates offered for MNT time deposits are persistently higher (approximately twice the rate) than those offered for USD time deposits.

WEIGHTED AVERAGE OF TIME DEPOSIT INTEREST RATES (12 MONTHS), %

Time Deposit IR, MNT Time Deposit IR, USD

15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 09 09 10 08 09 09 09 09 10 10 ------Jun Jun Oct Apr Apr Feb Feb Dec Dec Aug

Source: Bank of Mongolia

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Banking Sector

While back in February 1998 it cost 48% to borrow money from a bank in MNT and around 40% in USD, in February 2010 the monthly loan interest rates fell to around 20% in MNT and 14% in USD.

AVERAGE MONTHLY LOAN RATES, %

Loan rate, MNT Loan rate, USD Paid rate 60.0

50.0

40.0

30.0

20.0

10.0

0.0 98 98 99 00 01 01 02 03 04 04 05 06 07 07 08 09 10 ------Feb Feb Feb Feb Feb Aug Aug Aug Aug Nov Nov Nov Nov May May May May

Source: Bank of Mongolia

Assumed exchange rate throughout this 10.6 Bank Asset Quality section: 1USD = 1250MNT Three banks dominate the Mongolian banking sector, constituting around 69% of the country’s total banking assets.

According to Trade and Development Bank estimates, in August 2010 loans totalled around $2.4 billion, performing loans and non-performing loans (NPLs) H2 2010: grew by $268 million (16.1%) and $46 million (16.5%) respectively, while past-due Total loans: $2.4 bn loans declined by $29 million (25.5%), all compared to the same period the Performing loans grew 16% yoy previous year. The top four commercial banks’ non-performing loan ratios fell to NPLs grew 16.5% yoy 3.7% on average in H2 2010 from 4.9% in H2 2009. Such good news implies improvement of asset quality in Mongolia.

TDB Golomt Bank Khan Bank Xac Bank Impairment Ratio 5.0% 2.5% 5.4% 1.7%

Source: Public filings made by each bank, mid 2010

Q1 2010: Agric. sector loans = $124m In 2009 the sectors with greatest loans were retail, manufacturing, mining and quarrying, jointly accounting for 61% of total credit. Agriculture sector loans have increased at a 40% CAGR since 2004 and reached $124 million in Q1 2010. The

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Banking Sector

table below shows loans and deposits in the banking sector as percentage of GDP for 2008 and 2009.

2008 2009 Loans (% of GDP) 40.1 37.0 Deposits (% of GDP) 36.3 52.6

Source: Bank of Mongolia, EIU Mongolia Country Report August 2010

ASSET QUALITY BY INDUSTRY, AS OF 31 DECEMBER 2008 2009 Non- Non- Performing Past due Performing Past due performing performing Agriculture, hunting, forestry and fishing 84.7% 4.2% 11.1% 73.3% 2.1% 24.6% Mining and quarrying 74.2% 9.6% 16.3% 78.0% 4.0% 18.0% Manufacturing 90.9% 3.5% 5.6% 76.0% 4.2% 19.8% Electricity, gas, steam and air conditioning supply 88.4% 11.1% 0.5% 76.8% 3.5% 19.6% Water supply, sewerage, waste management and remediation activities 96.9% 0.3% 2.8% 98.0% 0.3% 1.7% Construction 83.4% 6.0% 10.5% 62.1% 7.7% 30.2% Wholesale and retail trade, repair of motor vehicles and motorcycles 92.1% 2.2% 5.8% 80.0% 4.1% 15.9% Transportation and storage 81.7% 1.1% 17.2% 67.6% 7.7% 24.7% Accommodation and food services activities 95.2% 1.4% 3.3% 87.9% 3.4% 8.7% Information and communication 82.9% 8.6% 8.5% 91.9% 0.4% 7.8% Financial and insurance activities 94.5% 0.1% 5.4% 85.9% 0.4% 13.7% Real estate activities 92.5% 1.6% 5.9% 81.9% 6.8% 11.3% Professional, scientific and technical activities 94.7% 0.0% 5.3% 85.9% 12.5% 1.5% Administrative and support service activities 92.6% 1.9% 5.5% 74.9% 15.2% 9.9% Public administration and defence; compulsory social security 99.5% 0.0% 0.5% 97.6% 0.6% 1.8% Education 72.8% 1.7% 25.5% 73.7% 3.3% 23.1% Human health and social work activities 94.8% 1.7% 3.6% 90.6% 1.8% 7.5% Other 93.3% 2.6% 4.1% 91.4% 2.2% 6.4% Total 89.3% 3.6% 7.1% 78.0% 4.6% 17.4%

Source: Bank of Mongolia

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Banking Sector

10.7 Banking System Capitalisation

Minimum cap. requirement = $6.4mn The minimum capital requirement for commercial banks ordered by the Bank of Mongolia is MNT 8.0 billion ($6.4 million). Mongolian banks are in general very 2010 general cap. adequacy ratio = 14% well capitalised and according to the Trade and Development Bank indicators, the (2.3% above required) banking system’s average capital adequacy ratio increased to 14% in 2010 (2.3% above the minimum requirement) from 13.3% in 2008.

TDB Golomt Bank Khan Bank Xac Bank Capital Adequacy 13.9% 14.5% 17.2% 13.9% Ratio

Source: Public filings made by each bank , mid 2010

10.8 Banking Law of Mongolia (2010)

The following information has been provided by the Trade and Development Bank of Mongolia. Commercial banks and their activities are governed by the Banking Law of Mongolia. A new Banking Law was adopted in March 2010 for better implementation of state policies and stability and efficiency of the banking sector.

10.8.1 Summary of the Ammended Banking Law

Transfer of a Bank’s Shares

• Banks must inform the Bank of Mongolia (BoM) in the following cases: - if the size or structure of their share capital changes - if a party attempts to become a “shareholder with significant influence” in a bank, or an existing “shareholder with significant influence” changes the size or structure of their ownership interest in the bank

• A “shareholder with significant influence” in one bank is not allowed to become a “shareholder with significant influence” in another bank, along with related parties.

Capital requirements

• Minimum amount of paid-in capital for banks as determined by the BoM is MNT 8.0 billion ($6.4 million at 1USD = 1250 MNT exchange rate).

• A bank may distribute dividends only if, following the dividend payment, it will continue to meet the mandatory prudential ratios set by the BoM

• A bank must quantify decreases/increases in its capital in accordance with the profits earned or losses accrued from banking activities and fluctuations in the size of its compulsory “reserve fund”

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Banking Sector

• Allocation of funds from “the reserve fund” will be administered by the BoM and the Ministry of Finance (MoF)

Law on Deposit Guarantee (2008)

• In line with the Deposit Guarantee Law effective until November 2012, the Mongolian Government must insure all current accounts and deposit accounts of citizens and legal entities at Mongolian commercial banks

• Fully covers the risk of non-repayment by banks

• Deposits of related persons, depositors or holders of subordinated or convertible debts and deposits from the interbank market or from foreign banks and financial institutions are excluded from this scheme

Law on Executing Domestic Settlement Transactions by National Currency (2009)

• All payments and settlements within the territory of Mongolia must be conducted in MNT (domestic transactions cannot be made in foreign currency)

• MNT contracts can not be indexed to any foreign exchange index

• Savings deposits, loans from bank and non-bank entities, other equivalent services, and derivative financial agreements and their obligations can be expressed and executed in foreign currencies

Accounting Law (2001)

• All business entities must adopt and adhere to international accounting standards, and submit audited quarterly financial statements and reports to the MoF

• MoF and accounting associations are responsible for formulation of generally accepted accounting principles and implementation of international accounting standards

• The Accounting Council is responsible for developing accounting forms and methodology, and for training of professional accountants

• MoF is responsible for implementation of reforms to accounting and auditing systems

Mongolia has three accounting associations: - The Accounting Council (26 members), - The National Association of Certified Public Accountants (200 associate unlicensed accountants) - The Union of Finance Specialists Association (MoF accountants)

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Banking Sector

10.9 Banking Sector 2010 Summary

Trade and Development Bank inferences inform that:

In Q3 2010 non-performing loans with arrears in principals as NPLs as % of total loans fell to 17% • percentage of total outstanding loans declined to 17% from 25% in Levels of NPLs were high November 2009. Real i.r. plummeted Bank lending more concentrated • General levels of NPLs were considerably high throughout 2010. MNT deposits rose 51% yoy • Real interest rates plummeted, resulting in negative returns, especially Nominal i.r. remained high on depository accounts, due to inflationary pressure. • Bank lending further concentrated with around 50 largest borrowers accounting for approximately 30% of total loans or $690 million. • MNT deposits continued to rise reaching $1.3 billion in mid 2010 (51% increase yoy), despite falling real interest rates on deposits, owing to the Deposit Guarantee Law and greater currency appreciation expectations • Nominal interest rates on lending and borrowing remained high as banks needed capital due to liquidity problems

10.10 Banking sector prospects

Weaknesses of the banking sector Business activities increased in 2010. Nevertheless, coping with the fundamental remains a priority weaknesses of the banking sector in Mongolia remains a top priority for the officials in charge. Based on the experience gained from the recent turmoil, the necessity to create a sound banking system to cushion against future frictions in the economy is now deemed to be a matter of utmost importance.

On account of the ongoing mining boom and expected economic prosperity, Great possibilities in front of commercial commercial banks in Mongolia at present have the possibility to develop a firm banks basis for continued growth by improving their internal control, corporate governance and risk management solutions.

Demand for credit will substantially increase in the coming five years as greater Credit demand will increase necessity for capital will spread across all sectors in the economy. Commercial banks must be prepared to meet the rising demand in order to ensure that the flow of funds in and out of the country will not circumvent the local banks.

The collapse Anod and Zoos sent an essential signal that financial institutions in Banks must be restructured Mongolia have to be restructured to a certain degree. The Bank of Mongolia is

working on implementing a better supervisory system, such that each bank’s Increasing supervision from BoM operations will be examined independently and in stages.

Limited coverage of Deposit Guarantee Protection provided by the Deposit Guarantee Law is not indefinite. The scope of this move taken by the government to rescue the banking industry on the verge of its collapse has now been confined. According to the July 2010 amendments to the Deposit Guarantee Law, banks will have to pay a fee equivalent to 0.5% of cashable deposits in order to be entitled for future government’s protection against insolvency. The extent of the guarantee has also been limited, the following items have been removed from the coverage:

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Banking Sector

- current accounts and deposits assembled from the interbank market, foreign banks and financial institutions - current accounts and deposits of individuals and their related parties who have loans and other assets - guarantees and letters of credit and other contingent liabilities in a specific bank - cashable deposits with interest rate that exceeds the BoM’s refinancing rate

Amendments to Deposit Guarantee in These amendments were made in line with international principles, such that line with international principles excessive risk taking by commercial banks is restrained and fiscal burden to taxpayers is reduced, preventing against ill-treatment of regulations in favour of commercial banks’ self interest.

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The Central Bank

11 The Central Bank

The Bank of Mongolia (BoM) is the central bank of Mongolia. It reports to Parliament and is independent from the Government.

According to the Bank of Mongolia, their main objectives are to formulate and implement monetary policy by regulating money, supervising banking activities, organising inter-bank payments and settlements, holding and managing the State’s foreign currency reserves and issuing currency into circulation. The Bank is headed by a Governor, managed by a 12-man Board of Directors and has a representative office in London.

11.1 Bank of Mongolia Monetary Policy

Final decision making at the BoM on monetary policy is done by the President of the Bank, although his decision is supposed to be based on the advice of the 12 strong management board. Board meetings are regularly held and discuss the following issues:

• Changing or keeping the policy rate • Defining the principles of open market operations • Defining the amount of long term central bank bills • Changing or keeping the reserve ratio requirements • Approving or introducing new policies or regulations on monetary policy, and additions or amendments on existing regulations • Discussing state monetary policy, monitoring and evaluating current results, presenting the decisions to the parliament and getting approval • Forecasting economic indicators • Balancing foreign exchange rates according to monetary policy

Source: Bank of Mongolia

11.2 Bank of Mongolia Policy Rate

In the case of the Bank of Mongolia, monetary policy works by taking excess money out of the economy and placing it in the Central Bank Bill. The interest rate on the Central Bank’s 7 day bill has been named the official Bank of Mongolia policy rate since July 2007. When this rate moves it affects the interest rates offered by commercial banks, and it is not only the indicator of the monetary direction of Mongolia but also the inter-bank rate. The Central Bank bill has a 7 day term at fixed interest and is traded every Wednesday on the inter-bank market. All other rates are derived from the policy rate:

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The Central Bank

Repo rate (15%) = policy rate +4% Collateralized loan rate (19%) = policy rate +8% Overnight rate (20%) = policy rate +9%

Source: Bank of Mongolia

Policy Rate In July 2007, the initial Bank of Mongolia policy rate was 6.4%. In October and

Jul ‘07 6.40% November of 2007 the Bank increased it by 1%, in March 2008 it increased 1.35% and by a further 0.5% in September 2008, and thus it reached 10.25%. By Oct ‘07 7.40% November 2008, it was 9.75%. By the end of 2008/start of 2009 the global Nov ’07 8.40% slowdown resulted in inflation reaching 34% in Mongolia, and so the BoM rate Mar ’08 9.75% was hiked to 14%. Sep ’08 10.25%

(inflation = 34%) The Bank rate was subsequently reduced in May, June and September of 2009 to Mar ’09 14.00% Sep ’09 10.00% 10%. Due to the particularly harsh winter of 2009/2010 (‘dzud”), from April 2010 the Human Development Fund started to allocate money to people, resulting in Apr ’10 11.00% rising inflation. The Bank of Mongolia increased the policy rate by 1%, and it is now at 11%.

BANK OF MONGOLIA POLICY RATE, % 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 07 08 08 08 08 08 08 09 09 09 09 09 09 10 10 10 10 10 10 ------Jun Jun Jun Oct Oct Oct Apr Apr Apr Feb Feb Feb Dec Dec Dec Dec Aug Aug Aug

Source: Bank of Mongolia

11.3 Central Bank’s non-standing facilities

11.3.1 Collateralized loan

BoM can provide 90 day loans to banks Banks that have good long-term liquidity but get into short term problems can be in financial difficulty. 2009 collateralised lent money up to 90 days, but with collateral backing. The collateralised loan rate loans = $84m was 8% higher than the policy rate at the start of 2010. In 2009, the Central Bank’s collateralised loan balance was $84 million. $77 million was extended according to “The Deposit Insurance Law” and $6.3 million of it extended according to “Collateralised Loan Regulation”

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The Central Bank

11.4 Objectives of monetary policy

No restrictions on inflows or outflows of A goal of the Bank of Mongolia is to insure the stability of the Tugrik. The capital foreign currency in Mongolia account is open in Mongolia, meaning there are no restrictions on inflow or outflow of international currencies or international investment or trade. An open capital account, low inflation control through interest rate mechanisms and stability of the exchange rate cannot all be simultaneously controlled as they are not all mutually exclusive, and only a combination of 2 can be controlled. Because inflation and exchange rate stability usually takes five or more years to harmonise, the BoM only focuses on keeping inflation in check and lets the exchange rate be determined by market forces. CPI is not supposed to exceed 8% according to the State Monetary Policy Guidelines (2010). If CPI remains lower than 8% and exchange rate fluctuations are kept at a sensible level then Inflation and exchange rate stability are assumed, respectively.

11.5 Bank of Mongolia Standing Facilities

11.5.1 Overnight loan

An overnight loan which starts before the closing of the clearing transaction and ends at the beginning of the next clearing transaction is available at a rate of 9% higher then the policy rate, at present.

11.5.2 Repo financing

$367m was given through repo financing Loans from the central bank with a Repo rate 4% higher than the policy rate and a in 2009 term of up to 90 days can be lent to commercial banks with collateral of central bank bills, government bonds, or bonds of the Mortgage Corporation of Mongolia (MIK). $367 million was given through repo financing in 2009 at an average rate of 16.84%.

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The Central Bank

11.6 Central Bank Bond Rate

CENTRAL BANK BOND RATE, % (1998-2010)

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 98 98 00 01 01 03 04 04 06 07 07 09 10 99 02 05 08 ------Jul Jul Jul Jul Jan Jan Jan Jan Jan Oct Oct Oct Oct Apr Apr Apr Apr

Source: Bank of Mongolia

Mongolian bond market highly under- The Mongolian economy is 95% reliant on the banking industry, and the bond developed market is very primitive. As a result, government bonds, despite being the least risky investment vehicle, are hardly ever used. The Central Bank Bond is preferred.

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Mongolian Taxation System

12 Mongolian Taxation System

The general rate of tax in Mongolia is 10% income tax for individuals and corporation earnings under MNT 3bn ($2.4m) and 25% on corporation earnings over MNT 3bn. VAT is 10%

12.1 General Taxation

A taxpayer is the Mongolia tax system comprises of taxes, fees and payments. The State Great Khural (Parliament) of Mongolia is authorized to introduce or amend taxes by law.

12.1.1 Taxpayers

The following individual, business entity or organization, which have taxable income, property in possession, and rights:

1) A citizen of Mongolia; 2) A foreign resident and a stateless person in the territory of Mongolia, a non-resident person who gains income in Mongolia; 3) Foreign and domestic business entity, organization and fund in the territory of Mongolia, legal person which is not located in the territory of Mongolia, but gains income in this country; 4) A Representative Office of a foreign business entity or organization which gains income in Mongolia.

12.2 Corporate Income tax

12.2.1 Taxpayers

• A corporate entity is a taxpayer, provided it produces revenue subject to tax at the end of each accounting year or is bound to pay tax under this law, notwithstanding the absence of taxable profits. • A taxpayer defined above can be either a permanent resident or non- resident taxpayer of Mongolia. • Permanent resident taxpayer in Mongolia means the following corporate entity: - A corporate entity incorporated under the laws of Mongolia; - A foreign corporate entity with its head office located in Mongolia;

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Mongolian Taxation System

• Non-resident taxpayer in Mongolia is the following corporate entity: - A foreign corporate entity that conducts its business in Mongolia within the frame of its representative office; - A foreign corporate entity that earns income in Mongolia in a form other than that set forth in the previous bullet point • A representative office means any of the following that partially or wholly carries out business activity of a foreign corporate entity: - Branch (unit, section); - Plant; - Trade and/or service unit; - A mine that extracts oil, natural gas or other natural resources.

12.2.2 Tax Rate

• If annual taxable income is 0-3 billion MNT, it shall be taxed at the rate of 10 percent. If annual taxable income exceeds 3 billion MNT, it shall be taxed at 300 million MNT plus 25% of income exceeding 3 billion MNT. • Taxpayer's income is taxed at the following rates:

- Income from dividend at 10%; - Income from royalty at 10%; - Income from gaming and lottery at 40%; - Income from sale or rental of erotic publication, book, and video recording and erotic performance at 40%; - Income from sale of immovable property at 2%; - Income from interest at 10%; - Income from sale of right at 30%; - If a representative office of a foreign company transfers its profits overseas, the transferred income at the rate of 20%

• The following income of a non-resident-taxpayer earned in Mongolia is taxed at the rate of 20%: - Dividend income received from a corporate entity registered and operating in Mongolia; - Loan interest and guarantee payments - Income from royalty, leasing interest, payment for administrative expenses, rent, management expenses, and income from use of tangible and intangible asset; - Income from goods sold, work performed and services provided in the territory of Mongolia.

12.2.3 Tax exemption

The following income of a taxpayer is tax exempt:

• Interest of government notes payable (bond); • Income stated in paragraph 1. of the previous section and income from divided earned by a non-resident.

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Mongolian Taxation System

• Taxpayer operating in the territory of Mongolia under a product-sharing contract in oil industry and derived from sale of its share of product; • Income of a cooperative earned from sale of its member's products through intermediary services.

12.3 Personal income tax law of Mongolia

12.3.1 Taxpayer

• A citizen of Mongolia, foreign national and stateless person who resides in Mongolia and earns income subject to tax for the tax year or who is liable to pay tax, even though the same income is not earned, must be a taxpayer. • The taxpayer is classified as a resident taxpayer of Mongolia and non- resident taxpayer of Mongolia.

A resident taxpayer of Mongolia

• The following individuals are a resident taxpayer of Mongolia: - An individual with a residence in Mongolia; - An individual who resides in Mongolia for 183 or more days in a tax year; - A civil servant of Mongolia appointed to work overseas. • A foreign national appointed at a foreign diplomatic mission, consulate, the United Nations, and their branches and his/her family members who reside in Mongolia are not considered residents of Mongolia.

A non-resident taxpayer of Mongolia

• A taxpayer who does not possess a place for residence and did not reside in Mongolia for more than 183 days in a given year.

12.3.2 Tax rate and amount

• A tax rate of 10% is imposed on the annual amount of the income of anyone who is specified. • The following tax rates are imposed on the income specified in the following provisions of this law:

- Tax rate on income from sale of immovable property is 2%; - Tax rate on income earned by creating a scientific, literature, and art work, innovating a new work, product prototype, and advantageous design, organizing and participating in a sports competition and cultural performance, and on income from rewards from a sports competition and cultural performance, and prizes is 5%;

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Mongolian Taxation System

- Tax rate on income from quiz, gambling, and lottery is 40%

12.4 Value Added Tax (VAT)

Value Added Tax at the rate of 10% is imposed on the supply of taxable goods and services in Mongolia, and on imports into Mongolia.

12.4.1 Scope of VAT

VAT is levied on the following in Mongolia:

Work performed and services rendered in Mongolia; All goods imported into Mongolia to be sold or used; and Goods exported from Mongolia for use or consumption outside Mongolia.

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Mongolian Stock Exchange

13 Mongolian Stock Exchange

The second smallest bourse in the world by market cap, yet the second best performing market in the world in 2010

13.1 Overview

1991 MSE established In 1991, the Mongolian Government established the Mongolian Stock Exchange (MSE) with the intention to implement its Privatization Policy as a base of 475 companies initially floated after transition from a central planned economy to a market economy. During the first privatization of state property phase of privatization between 1991 and 1995, $17m of state assets were privatized by distributing vouchers worth $8 to every citizen of Mongolia, and 475 companies were floated on the MSE.

As the Mongolian Parliament enacted the law of Securities and Exchange and The 1994: Law of Securities and Exchange Corporate Law in 1994 and 1995 respectively, the secondary market began by 1995: The Corporate Law establishing 28 brokerage firms. But during the start of the secondary market

between 1996 and 2004, shares worth over MNT38.8bn ($32.1m) had been 1996-2004: $32m shares traded in this traded and a few people had bought a large proportion of the shares, taking single period. A few had gained large stakes in control of the companies. As of the end of November 2010, there are 325 the companies companies listed on the MSE and over 80% of stocks are held by a few people or

free float of the overall market is lower than 20%. There are around 30 stocks Nov 2010: 325 companies on MSE, only actively traded on the MSE. 30 stocks actively traded

NUMBER OF LISTED COMPANIES

475 458 436 430 418 410 403 402 401 395 392 387 383 376 358 325 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Financial Regulatory Committee (FRC)

Since 1996: $233m raised in govt bond, Since 1996, MNT275.7bn ($233.2m) has been raised by issuing a government corporate bond and public offerings bond, a corporate bond and a public offering of shares through the MSE. The first government bond trading was held in 1996 and corporate bond trading was

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Mongolian Stock Exchange

introduced in 2001. To date, government bonds worth MNT200.2bn ($171m) and corporate bonds worth of MNT12.9bn ($11m) have been issued.

GOVERNMENT BONDS, MNT BILLION

250.0 200.2 200.0 150.0

100.0 41.7 39.6 50.0 30.8 21.7 30.0 0.1 11.1 12.5 6.8 4.5 1.5 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 - 1996

Source: MSE

CORPORATE BONDS, MNT BILLION

14.0 12.92 12.0 10.0 8.0 6.0 4.0 2.96 2.74 2.60 1.20 1.81 2.0 0.69 0.42 0.50 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 - 2001

Source: MSE

Since the first IPO on the MSE completed in 2005 by Hotel Mongolia, there have 14 IPOs raising $51m: 1 IPO was been 14 IPOs raising a total of $51m. Out of them, 1 IPO was unsuccessful, two unsuccessful companies were bankrupted and one company changed operation.

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Mongolian Stock Exchange

FUND RAISING THROUGH IPO, MNT BILLION

70.0 62.52 60.0 50.0 40.0 34.01 30.0 20.0 16.95 8.42 10.0 0.04 2.70 0.40 0.0 2005 2006 2007 2008 2009 2010 2010 -

2005 Source: MSE

Although in recent years the MSE has had formal connections with over 10 Market Cap/GDP = 15% Exchanges, signed an MOU with 7 stock exchanges, become a member of

Federation of Euro-Asian Stock Exchanges (FEAS) and the Asia Oceania Stock

Exchanges Federation (AOSEF), the Mongolian Stock Exchange is still the second

smallest bourse in the world after Laos. Penetration rate is very low compared

with other emerging and frontier markets, with a Market Cap/GDP ratio of only

15%, but the Mongolian stock exchange has already stepped towards the verge of LSE recently won bid for tender of a new development era. Recently, the London Stock Exchange won the bid for management tender of the management of the MSE with its reforming vision that includes normal custody, electronic trading and audited financials published in English.

13.2 The second best performing market in the world

‘Top -20’ index up 6 fold in 3yrs The MSE’s benchmark index called ‘Top-20’ surged six-fold over the last 3 years due to the following very positive factors:

1) Enormous, world-class mineral projects such as Oyu Tolgoi, the largest copper deposit in Asia, and Tavan Tolgoi, the second largest, undeveloped coal deposit in the world, are expected to bring in 2 to 3 times the current GDP in direct investment into this small, narrowly based economy, causing a significant spill-over effect. 2) Investors’ optimism about the local listing of at least 10% of the strategically important deposit’s stake in accordance with the new mining law. 3) Inflow of foreign funds into capital market on the back of further privatization of MSE listed coal mines which are undervalued (enterprise value to reserve ratio of lower than 1x).

In the short term, the biggest risk of portfolio investment into the MSE is the intention of major shareholders of some blue-chips to buy out shares cheaply.

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Mongolian Stock Exchange

In last year: The best contributors to the growth in 2010 were mostly coal miners such as Tavan Tolgoi (known as “small TT”), the biggest company on the MSE and a coking Tavan Tolgoi (biggest company on MSE, coal mine exporting coal to China, which surged $170m or 300% in the last year. coking coal) up 300% ($170m) Shivee Ovoo, one of the strategically important deposits of Mongolia, rose $115m Shivee Ovoo up 325% ($115m) or 325% in the last year. Baganuur, another strategically important deposit and Baganuur up 185% ($110m) the second largest company at on the MSE, increased $110m or 185%. Sharyn Gol, Sharyn Gol up 525% ($52m) the first coal mine among the MSE listed mining companies which made an internationally recognized JORC resource statement on their deposit, is up $52m or 525% YTD.

15 mining companies on MSE On the MSE, there are just 15 mining companies, out of them 10 are coal miners and the remaining 5 are geological exploration companies. But only 6 of them are over $5m market cap companies.

Additional 18 mining companies In addition to the potential development of the domestic capital market, there are operating in Mongolia listed abroad 18 mining companies operating in the Mongolian mining sector listed on the international stock exchanges, worth over $29bn or 5 times the Mongolian GDP, and all Mongolian leading business groups are still not listed on the domestic market.

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Mining

14 Mining

Mongolia is considered one of the last mining frontiers.

14.1 Mining Sector

Mongolia’s resources remain mostly Mongolia is now in the spotlight for something other than Chinggis Khan’s name. untapped Recently explored Mongolia’s vast mineral resources have caught the attention of many investors. The history of resource identification goes back to when British exploration te ams first came to the country over a century ago. During the era when Mongolia has been a Republic and a satellite state of the Soviet Union, Russian scientists discovered numerous mineral deposits with significant reserves. Some of them were brought into function, including Erdenet Mining Corporation (EMC), a copper concentrate producing Mongolia -Russian joint venture, located in the city of Erdenet. Today the copper factory remains a key constituent of the government revenue and is one of the biggest copp er deposits in the world. Only 27% of the Mongolian land has Although the Russians did some work, much remains to be done. Only around been mapped to a scale of 1:50000 27% of Mongolian land has been mapped to a scale of 1:50000, therefore, the resources remain mostly untapped. The Oyu Tolgoi deposit has been named the bigg est undeveloped copper and gold deposit in the world. Apart from Oyu Tolgoi, Possibilities to invest in many large-scale there is a good number of other large -scale investments, including the Tavan investments, including Tavan Tolgoi Tolgoi coal deposit, studied later in this section, which is about to be privatised in 2011.

Since the shift towards a market economy, the developments in the mining sector have been consistent, efficient and fast, especially throughout the past decade.

2006: Windfall Profit Jul 2008: Protests in Tax set Ulaanbaatar 1990: Mongolia 1998: Areva signs opened: Foreign June 2002: Cameco uranium exploration Investment Law gol buys Boroo gold deal passed 2009: Windfall Profit Tax repealed

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Oct 2009: Chinese CIC invests $500 million in SGQ coal 2004: Western and $700 million in 1994: QGX Gold 1997: Minerals Law May 2000: Ivanhoe Prospector enters iron ore enters Mongolia passed enters Mongolia Mongolia 2009: Oyu Tolgoi investment 2009: Chinese buy agreement signed Western Prospector (uranium) Source: Business Council of Mongolia

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Mining

Estimated value of total reserves = Mongolia is rich in natural resources, especially in gold, copper, coal, uranium, $1.3trillion molybdenum, tin, tungsten and oil deposits. The estimated value of total resources is $1.3 trillion. Among the commodities, coal, copper and gold have Mining sector : attracted the majority of investments thus far. While the agricultural sector was the former largest contributor to government revenue, the role of the mining 81% of exports sector in the economy continues to grow, making it the current major force 32% of government revenue behind Mongolia’s economic growth and development. Now the mining sector 30% of GDP accounts for approximately 81% of Mongolia’s total exports, 32% of government revenue and 30% of GDP. The latest updates inform that the industry employs 45 thousand people in total, which represents around 5% of the country’s total work force. The government’s attempt to create a favourable investment environment within the country through reformed tax regime and other legal frameworks is paying off. Numerous small and large-scale investors are being attracted to Mongolia these days, some are even willing to invest into very seed-stage projects. Involvement of mining giants like Rio Tinto, and interests of Peabody, Shenhua, Japanese and Korean consortiums to participate in the privatisation and development of the country’s largest coal deposit, all indicate towards Mongolia turning into one of the top performing mining investment destinations of today and tomorrow.

ROLE OF MINING SECTOR IN NATIONAL ECONOMY, IN % 100 In GDP In manufacturing industry In export

0 2002 2003 2004 2005 2006 2007 2008 2009

Source: National Statistics Office

Annual Production Proven Probable Commodity 2006 2007 2008 2009 Reserve Reserve Coal 8mt 8.8mt 9.8mt 13.2mt 20bt 152bt Copper 0.37mt 0.37mt 0.36mt 0.37mt 67.3 1.2bt Gold 22t 17t 15t 10t 136t 125,000t Iron ore 0.18mt 0.26mt 1.39mt 1.38mt 264mt 1.6bt Uranium 0 0 0 0 - 62,000t

Source: National Statistics Office & Mineral Resources Authority of Mongolia

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MAJOR PLAYERS

Coal Copper Gold Iron ore Uranium Erdenes- Khan Erdenet Centerra Gold Darkhan Steel Tavan Tolgoi Resources Ivanhoe SouthGobi Iron Mining Western Mines/Rio MAK Resources International Prospector Tinto Energy Western North Asia Cameco Resources Prospector Resources Haranga QGX Cameco Areva Resources Mongolia Areva Altain Khuder Energy Corp. Voyager Peabody Energy Resources Aspire Mining

Gobi Coal and Energy Prophecy Resource Corp. Xanadu Mines

MAK

REVENUE FROM EXPORTS, (M1-M8 2009 vs. M1-M8 2010), $ MILLION

600 500 485 2009 2010 500 Mining revenues climbed massively from 400 2009 - 2010 300 200 133 137 85 98 100 35 41 0 Coal Gold Zinc Iron ore Iron Copper Fluoride Crude oil Crude

Molybdenum

Source: Ministry of Mineral Resources and Energy of Mongolia

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14.2 Exploration and Geological Mapping

The geological map for 99.1% of Mongolia has been produced at a scale of 1:200,000 The geological mapping of 27.1% of Mongolia based on the general exploration work has been carried out at a scale of 1:50,000 1:500,000 scale map covers the basic geology for hydro-survey of 84% of Mongolia 22.5% of Mongolia covered by gravimetric survey at scales of 1:200,000 and 1:100,000 The aerial magnetic survey has been conducted for 60% of Mongolia at a scale of 1:200,000 Two maps of scales of 1:50,000 and 1:25,000 have been produced using aerial multi-spectral survey for 32% of Mongolia.

The geological mapping of 27.1% of Mongolia based on the general exploration work has been carried out at a scale of 1:50,000 Average 0.4% of the territory is subject to new mapping projects every year Source : Mineral Resources Authority of Mongolia

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Mining

The aerial magnetic survey has been conducted for 60% of Mongolia at a scale of 1:200,000

Source: Mineral Resources Authority of Mongolia

14.3 Licenses

Exploration license Mining License Total Quantity Area, Ha Quantity Area, Ha Quantity Area, Ha million million million Domestic 2,572 22.89 746 0.24 3,318 23.13 Companies Foreign 1,087 16.08 339 0.22 1,426 16.30 Companies Total 3,659 38.97 1,085 0.46 4,744 39.43

Source: Mineral Resources Authority of Mongolia (1 st Jan 2010)

Source: Mineral Resources Authority of Mongolia

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14.4 Coal

Coal Mongolia’s number one export Coal is now Mongolia’s number one export. Initially miners were attracted to the country’s gold, copper and molybdenum reserves, however, the magnetism has shifted towards coal riches now, giving Mongolia the new title of “The Saudi Arabia of Coal”. The value of its immense coal reserves has increased threefold, as the country is located right in between two of the world’s biggest resource consumers, Russia and China.

30 COKING COAL EXPORTS TO CHINA, MILLION TONNES

0 2007 2008 2009 2010 2011(f) 2012(f)

Source: National Statistics Office and Trade and Development Bank

COAL RESOURCES

Source: Mineral Resources Authority of Mongolia

Tavan Tolgoi: 6.4bn t coal By the amount of reserves, Tavan Tolgoi (TT) is Mongolia’s biggest coal deposit, with around 6.4 billion tonnes of coal, a quarter of which consists of high quality Total: 152bn t coal coking coal. Except for TT, there are many other attractive coal deposits and the total reserves of the country is estimated to be 152 billion tonnes. A majority of reserves, although proven, have not been developed due to lack of investment

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Mining

and infrastructure. Among the producing ones, the following are the most notable coal mines:

Baganuur = 1.3bn t brown coal, supplies 1) The largest player in the economy and the main supplier to local consumers domestic market is Baganuur coal mine, containing an estimated reserve of 1.3 billion tonnes of brown coal. The government owns the majority of the company (The ownership structure is better explained in the Equity Research part of this report as the company is listed on the Mongolian Stock Exchange). Baganuur was founded during Soviet times. Due to government control and necessity to maintain the sale prices at artificially low levels for local consumers, Baganuur is currently operating at a production scale significantly below its potential and is incapable of spending capital on new equipments. The mine is, in general, suffering from under-investment as no investor is interested in a loss-generating, state controlled company. Baganuur is included in the list of state properties to be privatised in 2011-2012.

Mongolia Mining Corporation = 500mt 2) Foreign investors are mostly attracted to coking coal reserves of Mongolia, coking coal, South Gobi province, 245km one of the main inputs to steel production, as there is growing demand from Chinese border coming from China. The PRC has stopped exporting coal in 2007 and its imports of coking coal grew from 8.5 million tonnes in 2008 to 50 million tonnes in 2010, representing 8% of the country’s total consumption. Obtained approval for railway Mongolia Mining Corporation’s (formerly Energy Resources) advancements construction in coking coal production have attracted immense attention from global investors. The company, which is currently extracting coal from its 500 Paved road to be completed Q1 2011 million tonnes Ukhaa Khudag deposit, located in the Tavan Tolgoi region, has

grown tremendously since its establishment in 2005. The mine is located

st 245 km from the Mongolian-Chinese border. They were the first Mongolian 1 Mongolian company to be listed on company to be listed on the Hong Kong stock exchange, raising $748 million HKEx ($748m) (15% higher than the planned $650 million), in October 2010. Mongolia Mining Corporation has obtained all necessary permission to put a railway south to the Mongolian-Chinese border from their Ukhaa Khudag mine. The construction of a paved road by the company is under way and is expected to be completed in Q1 2011.

Mongolyn Alt Corp = 134mt coal, 900km 3) Another major private coal supplier is Mongolyn Alt Corp. (MAK). The south of UB, 50km from Chinese border company began operations in the gold sector, then expanded into coal extraction by obtaining the license for its Nariin Sukhait coal deposit situated 900 km south of Ulaanbaatar and 50 km from the Mongolian-Chinese border Open-pit mine pass Shiveekhuren. Nariin Sukhait is an open-pit mine, like the majority of other coal mines in Mongolia, and contains 134 million tonnes of high-rank, Production capacity=3mtpa due to low-ash and low-sulphur coal reserves. The current production capacity infrastructure constraints remains at 3 mtpa due to infrastructure constraints and is expected to increase to 5-8 mtpa once railway is in place. MAK is constructing a coal No rail link, investing in new wash plant wash plant in order to increase the value of its product. The company is faced with some logistics problems, as the Mongolian side of the border mainly consists of earth road.

MAK JV with Chinese Qinhua Corp MAK has also created a joint venture with Qinhua Corporation of China and obtained another license nearby its main project. The Chinese provided the required capital enabling further growth of the company.

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SouthGobi Resources = 114.1mt thermal 4) SouthGobi Resources’ (SGQ) Ovoot Tolgoi project is certainly one of the and coking coal largest foreign investments in the coal field of Mongolia. The deposit is situated 42 km from the Mongolian-Chinese border pass Shiveekhuren , 2010: 4mtpa making it the closest coal supply to the PRC, with proven and probable 2012: 8mtpa reserves of 114.1 million tonnes of thermal and coking coal. Ivanhoe Mines and China Investment Corporation currently own around 54% and 13% of Off-take agreement signed with SGQ respectively. The company is listed on Toronto and Hong Kong stock Winsway for 3.2mt, at least 2mtpa to be exchanges. On top of their main project, SouthGobi owns 18 more sold to Winsway exploration licenses and intends to spend around $20 million annually on continuous exploration. The reported production target for 2010 was 4 mtpa, with an expected increase to 8 mtpa in 2012. China is the main buyer Coal supply agreement of SGQ’s coal. In Dec 2010, South Gobi signed an off-take agreement worth 3.2 mln tonnes of coal with Winsway Coking Coal. The two companies also - with NAEG for 450kt in 2011 entered into a strategic alliance agreement whereby SGQ has committed to - with a large international sell a minimum of 2 mtpa of coal to Winsway. Also, in Dec 2010, SouthGobi company for 500kt in 2011 signed a coal supply agreement with North Asia Energy Group Limited (NAEG) for the sale of 450k tonnes of coal in 2011 and another contract for 500k tonnes of coal in 2011 with a large international company. Recently, in Owns 20% of Aspire Mining late December 2010, SGQ completed its private placement with Aspire Mining and currently owns around 19.9% of the company. Aspire is an ASX listed company focused on developing the Ovoot coking coal project, located in Northern Mongolia, which contains 331 million tonnes of JORC resources.

As Mongolia has vast mineral reserves and large areas of unpopulated land, the 2010 revenue from coal = $877m country is in need of foreign investments, which would be the driving force behind

this underdeveloped country’s future growth. In 2010, total coal exports reached

$877 in value, growing by 135% in volume and 187% in value from 2009.

Mongolia borders with the PRC, which purchases more than 70% of its coal 2015 coal exports to China 30 -50mtpa exports. According to forecasts, the coal sales to China could reach 30-50 mtpa by 2015. Historically, Australia has been the major coal supplier to the PRC. However, Mongolia to replace Australia as main it could soon be replaced by Mongolia as the latter is located closer and has coal supplier to PRC plenty to offer.

COAL PRODUCTION, MILLION TONNES 14.0 12.0 2010 coal exports: 16.6mt 10.0

8.0

6.0 4.0 2.0 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Ministry of Mineral Resources and Energy of Mongolia

In 2010 Mongolian coal exports reached 16.6 million tonnes.

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Although Tavan-Tolgoi is one of the world’s largest unexploited coal deposits, Beyond Tavan Tolgoi... Mongolia’s riches are not limited to TT. Apart from the mentioned mines, there

are dozens of other coal resources in the country.

MAJOR COAL DEPOSITS IN MONGOLIA

Note: (8) – (14): numbers indicate resources as reported by the companies (1) - (7): numbers indicate reserves as defined by China Reality Research Source: World Bank, US Geological Survey, Ministry of Fuel and Energy of Mongolia and China Reality Research

14.4.1 Tavan Tolgoi

Total Reserve: 6.4bn t Tavan Tolgoi (TT) is one of the largest unexploited coking and thermal coal deposits in the world, with total estimated resources of 6.4 billion tonnes, a 25% of reserves: coking coal quarter of which consists of high quality coking coal. It is located 550 km south of Ulaanbaatar and 200 km from the Mongolian-Chinese border. The deposit was Ownership: 100% Government discovered by Soviet exploration teams in 1950 and the initial drilling work (Erdenes MGL) continued throughout the 1960s and 1970s. After the 1990 Democratic Revolution and a transition to market economy, private sector explorers were A strategic deposit allowed to search for more mineralization in the area. BHP Billiton took the initiative and started drilling. However, the company stopped exploration and 550 km south of Ulaanbaatar, 200 km Energy Resources LLC (currently Mongolia Mining Corporation), a consortium of from Chinese border major Mongolian companies, acquired the licenses, as it had the necessary capital when many others did not. The Mongolian government approved amendments to Discovered by Soviet exploration teams the Minerals Law in 2006 by identifying fifteen resource-rich areas as Strategic Deposits, including Tavan Tolgoi.

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Initial drilling: 1960-1970s In 2007, Erdenes MGL LLC, a state-owned limited liability company was established to represent the state interest in utilization of strategic deposits. The Initial license owner: BHP Billiton government acquired back the majority of TT ownership from Energy Resources in March 2008, leaving only the Ukhaa Khudag block in the company’s possession. Ukhaa Khudag block belongs to Various expansion options for Tavan Tolgoi have been evaluated since then, and Mongolia Mining Corp in 2009 it was announced that the state would delegate 49% of ownership rights to private mining companies. In early 2010, however, the government reversed its Deposit is to be privatized in 2011 statement by declaring that a 100% government ownership would be retained.

Eastern Block: By the end of 2010, the Mongolian government put forward a new arrangement - 10% to citizens to both strategic investors and contract miners, which is still effective today. The - 10% to Mongolian companies overall deposit has been divided into two blocks, Eastern and Western. In late - (via MSE) 2010, a new company Erdenes-Tavan Tolgoi LLC was established under the - 29% to IPO (via MSE and e.g. Erdenes MGL’s umbrella to hold the license and account for the management of HKEx) the deposit. In Q1 2011, through Erdenes-Tavan Tolgoi LLC, 10% of ownership - 51% to government rights of the Eastern Block is to be distributed to the citizens of Mongolia for free, another 10% is to be sold to private enterprises on the Mongolian Stock Exchange, Western Block: 29% is to be released through both domestic and international stock exchanges to - To strategic investors who will investors and a 51% stake is to be retained by the government. Funds raised assume full responsibility, through domestic and international IPO will be devoted to financing the including infrastructure infrastructure and working capital of the Eastern Block. The Western Block, development however, will be handed over to strategic investors who will assume entire responsibility for the block’s development, mine infrastructure and coal marketing, independent from the government of Mongolia. Contract miners will be able to participate in the development of the Eastern Block for a fixed service fee, while strategic investors will be obliged to transfer a portion of their future income to the government of Mongolia.

Substantial challenges remain Challenges include the preparation of draft contracts, conduct of an adequate bidding process and, above all, selection of the best suited contract miners, strategic investors, and all other related parties including investment banks, legal International mining giants interested in advisors, auditors and so forth. The Tavan Tolgoi coking coal deposit has attracted TT interest from many of the international mining giants, including China’s Shenhua Energy Co., Peabody Energy Corp from the US, a Russian consortium led by Gazprom, Brazil’s Vale, India’s International Coal Ventures Pvt, a joint venture of 2012: 15mtpa through contract mining five state-run companies, Anglo-Australian Rio Tinto Plc and BHP Billiton. The

deadline for investors to submit their proposals was 17 th January 2011. The Paved road from TT to Chinese border is deadline for contract miners to express their interest is the 27 th January 2011. complete Sources inform that the government is planning to extract 15 mtpa through

Railway construction required contract mining from the Eastern Block in 2012.

Although construction of a paved road to the Chinese border is almost complete by now, infrastructure challenges remain in the Tavan Tolgoi region, including railway construction, electricity and water supply, and border crossing arrangements.

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14.5 Copper/Gold

2010: 568k t of Cu exported, worth Copper has been the top Mongolian export commodity up until very recently. In $771m (26.4% of exports) 2010, Mongolia exported 568k tonnes of copper concentrate totalling $771 million in value. That represented 26.5% of total exports.

EMC – current largest producer of Cu ore Currently the largest Mongolian copper mine in production is Erdenet Mining and concentrate Corporation (EMC), a Mongolian-Russian joint venture established in 1978, 51% and 49% owned by the Mongolian and Russian governments, respectively. The deposit is included in the top ten list of the world’s largest copper-molybdenum- porphyry mineralisation areas, and is situated 400 km north-west of Ulaanbaatar. In 2010 Erdenet copper mine alone accounted for about 12% of the Mongolian GDP and was responsible for all of Mongolia’s copper ore and concentrate production.

nd nd Mongolia is ranked 2 in the world by copper reserves, including its massive, soon Mongolia – 2 largest in world by Cu to be fully developed Oyu Tolgoi (OT) copper and gold deposit. OT is considered to reserves be three times larger than EMC. Ivanhoe Mines have announced that the

commercial production at Oyu Tolgoi mine will begin in 2013 following an initial Oyu Tolgoi = Erdenet x3 start-up in late 2012.

High copper and coal exports, compared to modest exports of gold

Source: European Bank of Reconstruction and Development

Centerra Gold - dominant producer of Thus far the dominant company in the gold sector has been Boroo Gold (BG), a gold wholly owned subsidiary of Centerra Gold and one of the earliest foreign investment agreement deals in Mongolia. Boroo Gold started production in 2003, BG reserves almost depleted and in 2003-2009 the company extracted around 1.26 million oz of gold. Contrary to BG, whose reserves are almost depleted by now, a magnificent upcoming event OT development to change everything is the full development of the Oyu Tolgoi project, which contains 46 million oz of gold.

Gatsuurt deposit: 100% owned by The exploration license for Gatsuurt deposit with proven reserves of 1 million oz Centerra Gold of gold also belongs to Centerra Gold. Whether or not the Mongolian government will allow the company to proceed with the development of the deposit remains Mining in Gatsuurt not allowed unclear. In November 2010, the Ministry of Mineral Resources and Energy of Mongolia announced that 1,782 mining licenses held by private companies and

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254 alluvial-gold licenses would be revoked. Four small licenses of Centerra Gold were included in the revocation list.

14.5.1 Oyu Tolgoi (copper-gold, Mongolia) OT = world’s largest undeveloped copper-gold deposit Oyu Tolgoi is the world's largest undeveloped copper-gold deposit. It is situated

550 km south of Ulaanbaatar and in 80 km from the Mongolian-Chinese border.

Source: Ivanhoe Mines

Oct 09: Oyu Tolgoi Investment A long-term Investment Agreement has been signed between the Mongolian Agreement signed government, Ivanhoe Mines and Rio Tinto in October 2009 for the development of Oyu Tolgoi copper and gold mine. According to the terms of the Agreement, 34% - Mongolian government 34% of Oyu Tolgoi ownership belongs to the state and the remaining 66% belongs 66% - Ivanhoe Mines (42% owned by Rio to Ivanhoe Mines. The international mining giant Rio Tinto became Ivanhoe Tinto) Mines’ strategic partner in 2007 and currently owns 42% of the company.

March 2010: Investment Agreement After the government’s assessment of progresses made after the initial signing of took full legal effect the Investment Agreement, the contract came into full legal effect in March 2010. Based on Ivanhoe Mines’ estimates, the Oyu Tolgoi deposit contains around 81 Resources: billion lbs (37 million tonnes) of copper and 46 million (1,431 tonnes) oz of gold in 81bn lbs Cu (37mt) measured, indicated and inferred resources. 46m oz Au (1,431t) Currently construction of the mining complex is progressing ahead of schedule Initial production expected in Q3, 2012 and Oyu Tolgoi’s first production of copper concentrate is expected in Q3 2012 from the Southern Oyu block. Ivanhoe Mines expects commercial production to Commercial production to commence in start in 2013. 2013 The Southern Oyu part of the project is being developed as an open pit mine. A Southern Oyu open pit mine: 100k Cu copper concentrator plant and other facilities are being built around the area. At t/day from Q3 2012

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full capacity, the Southern Oyu open-pit mine will provide 100k tonnes of ore per day.

Hugo North underground mine: 85k Cu The Hugo North division of the project is being developed as a block-cave mine, t/day from 2015 which will yield the first output in 2015. At full capacity, the Hugo North deposit will produce 85k tonnes of ore per day. When the underground mine comes into operation, the processing capacity of the copper concentrator will be expanded.

30-50 years of stable tax and regulatory In accordance with the Minerals Law of Mongolia, Oyu Tolgoi is a strategic deposit provisions and qualifies for 30 years of stabilized taxes, including corporate income tax, customs duty, value-added tax, excise tax, royalties, exploration and mining license fees, immovable property and/or real estate taxes, and other regulatory provisions. There is an option to extend the terms of the Investment Agreement by an additional 20 years.

14.6 Iron ore

Iron ore production commenced in 2007 Iron ore mining in Mongolia commenced in 2007. Steel production is expanding at an accelerated rate in China and the country is increasing its imports of iron ore from Mongolia.

IRON ORE PRODUCTION, MILLION TONNES

3 2.5 2 1.5 1 0.5 0 2007 2008 2009 2010 (I-X)

Source: Trade and Development Bank

Iron ore extraction is rapidly growing in Mongolia, and now accounts for 8.7% of Iron ore exports = 8.7% of total exports all Mongolian exports.

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IRON ORE EXPORTS, $ MILLION

400 300 2012: iron ore exports to reach $375m in value 200

100 0 2008 2009 2010 (I -X) 2011 (f) 2012 (f)

Source: Trade and Development Bank

2010 iron ore exports = 3.5mt The Trade and Development Bank (TDB) of Mongolia made their forecasts in ($251m) October 2010, predicting the iron ore exports from Mongolia to rise to $250 million in value in 2011. However, the December figures from the National Statistics Office suggest that in 2010 Mongolia exported 3.5 million tonnes of iron ore, worth $251 million. The TDB’s 2011 forecast has already been realised in 2010. This means that iron ore exports could reach over $350 in value by the end of 2011.

MAJOR PLAYERS

Large Iron ore investors in Mongolia: 2008-2010 was a period of substantial investments in the iron ore sector of Mongolia.

Singapore sovereign wealth fund + Hopu In 2008, Singapore’s sovereign wealth fund, in partnership with Hopu Investment, Investment = $300m in Iron Mining a private equity fund, endowed $300 million in Iron Mining International (formerly International Lung Ming) which owns the Eruu Gol iron ore asset in Mongolia. China Investment Corporation (CIC) invested another $700 million in the same company in October China Investment Corp. (CIC) = $700m in 2009. All three funds are of substantial size, managing portfolios of $120 billion, Iron Mining International $2.5 billion and $300 billion respectively. Eruu Gol deposit contains 304 million tonnes of iron ore in reserves. Iron Mining International was planning an IPO in early 2011, however currently there is no news on their progress with the intended listing.

Taishen Development = 79mt of iron ore North Asia Resources Holdings Limited (NAR) entered into a framework reserves, bought by NAR agreement with Taishen Development LLC to acquire full equity interest in the company in August 2010. Taishen has exploration and mining licenses for two iron ore deposits situated in the Dundgobi and Dornogobi provinces of Mongolia close to the Choir Govisumber province train station. The first deposit contains 79 million tonnes of proven iron ore reserves and its license had been issued for thirty years in 2007.

Haranga Resources with five iron ore Another notable player in the industry is Haranga Resources, a majority owner projects raised $25m from ASX IPO and developer of five iron ore mining projects in Mongolia. The projects are located close to the existing and planned infrastructure and the target market for Haranga Resources’ iron ore production is mainland China. In mid December

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2010, the company raised $25 million in an Australian Stock Exchange IPO. As informed by the management, the initial offering was heavily oversubscribed.

IRON ORE DEPOSITS

Note: map also includes the planned East-West railway Source: Ministry of Road, Transportation, Construction and Urban Development of Mongolia

14.7 Oil

June ’08: Mongolia is an oil producer Although Mongolia started exporting crude oil in 1998, it was officially recognised as an oil producing country in June 2008. The current oil exporting capacity is Oil sector under-explored insignificant because of infrastructure constraints. Mongolia’s total oil exploration prospects, covering an area of 614 thousand square km, are divided into 25 Largest explorers: blocks.

• PetroChina The existing capacity for further oil exploration is immense as Mongolia remains • Petro Matad (London AIM listed) significantly under-explored. The major players in the industry are PetroChina and Petro Matad, an AIM-listed, Mongolian company. Both companies have heavily invested in their respective oil projects. PetroChina’s investment started in 2005 2010 crude exports = 2.0m barrels when they purchased three exploration blocks (XIX, XXI, XXII) from Soco ($155m) International Plc, a London-based oil producing company, for $93 million. In 2010, Mongolia exported 2 million barrels of crude oil worth $155 million. Compared to 2009, this was an increase of 7% in volume and 34% in value.

EBRD took an equity position of 17% in Petro Matad by investing $6 million in EBRD invested $6m in Petro Matad December 2009. Petro Matad is the parent company of an oil exploration group

and its main shareholder is Petrovis LLC, which is the largest importer and Oil discovered from the first well distributor of petroleum products in Mongolia with widespread retail and

wholesale network. In July 2010, the company discovered significant amounts of

oil from its first well Davsan Tolgoi-1 located in block XX, and the company’s share

prices soared 55% on the AIM market.

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The Mongolian government’s main intention is to reach self-sufficiency in oil Goal: self-sufficiency in oil products based on domestic resources and it is undertaking the possible means to

contribute to the exploration process and the further expansion of the petroleum producing potential of Mongolia.

Target market: China, the world’s second Mongolia’s southern neighbour, China, is the world’s second largest consumer of largest consumer oil after the US. Half satisfied by imports, the PRC’s consumption reached 8.3 million barrels per day in 2009. By 2011, Chinese oil demand is expected to grow to 9.6 million barrels per day taking up 37% of the global increase in demand. This justifies the presumption that oil blocks in Mongolia have the potential to be highly profitable once they start producing.

Marubeni Corp + Toyo Engineering = oil In October 2010, it was announced that Japan’s Marubeni Corporation and Toyo refinery in Mongolia ($600m) Engineering have agreed to construct an oil refinery in Mongolia, 200 km north of Ulaanbaatar. The estimated project cost is $600 million and the two companies are planning to assume full responsibility for maintenance and operation of the refinery. The plant is to commence producing in autumn 2014 with a daily capacity of 44k barrels.

CRUDE OIL EXPORTS TO CHINA, MILLION BARRELS

2.5

1.5

0.5

0 2008 2009 2010

Source: Trade and Development Bank

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OIL AND GAS DEPOSITS

Note: map also includes the planned East-West railway Source: Ministry of Road, Transportation, Construction and Urban Development of Mongolia

14.8 Uranium

Russia estimated the Mongolian uranium reserves at 30 thousand tonnes while Controversy around Khan Resources’ the Mongolian government identifies the resources as 62,000 tonnes. The recent licenses unresolved controversy surrounding the uranium sector in Mongolia has caught the attention

of many. Khan Resources, a Toronto-based company, had two exploration licenses

for uranium mines in the Dornod province of Mongolia. The main deposit was producing occasionally from 1988 to 1995 under Soviet administration. However, since 1995, no further mining has occurred in the area.

The Dornod uranium deposits are included in the list of the fifteen strategic Dornod is a strategic deposit deposits, like TavanTolgoi and Oyu Tolgoi. Therefore, the government of Mongolia is entitled to a maximum of 50% ownership rights of the resources. Historical Russian exploration work lay at the heart of the claim for ownership of the licenses.

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URANIUM DEPOSITS

Note: map also includes the planned East-West railway Source: Ministry of Road, Transportation, Construction and Urban Development of Mongolia

14.9 Minerals Laws and Taxes

Stronger measures on environmental Recently, measures on environmental protection and rehabilitation issues have protection and rehabilitation been strengthened in Mongolia. Now the local administrative bodies are given more regulatory power and private license holders have many more duties to comply with.

14.9.1 Strategically Significant Deposits

Approximately 1,170 mineral deposits and 7,654 occurrences have been identified Identified: in Mongolia to date. The occurrences include over 60 types of minerals, including 1,170 deposits copper, gold, coal, molybdenum, iron ore, uranium, tin, tungsten, silver, zinc and 7,654 occurrences fluorspar. Fifteen deposits have been acknowledged by the government as 60 types of minerals strategically important.

According to the Minerals Law (2006), a deposit is considered to be strategically

important, if it:

15 strategic deposits • has an influence on Mongolia’s national security, economic and social development (such as all uranium deposits) • contains minerals that have strong international demand • yields annual revenues exceeding 5% of GDP

If a deposit is strategic, government If a deposit is identified as strategically important to Mongolia, the government is takes up to 34%-50% of ownership rights allowed to acquire up to 34% of ownership rights from the license holder, if the exploration work has been financed purely with private funds, and up to 50% of ownership rights, if the exploration work has been financed partially with state funds, including capital invested during the Soviet times.

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DEPOSITS OF STRATEGIC IMPORTANCE

Source : Mineral Resources Authority of Mongolia

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OVERVIEW OF STRATEGIC ASSETS

State of development, Deposit Minerals Reserves and quantity Ownership structure Estimated capex start date, output p.a.

Tavan Metallurgical Partial production, ramp- 100% Erdenes MGL US$ 2.4 bn (US$ 1.6 1 6.4 bn t Tolgoi coal up in 2011, 15-30 mtpa LLC 1 in the first 3 years) 100% private (South Nariin Metallurgical 2 125.5. mn t Feasibility study Gobi Resources, MAK- N/A Sukhait coal Qinhua JV) 75% SPC 3, 25% locally 3 Baganuur Lignite coal 600.0 mn t 2 Production, 2.8 mtpa - listed 90% SPC, 10% locally Shivee listed (operational 4 Lignite coal 646.2 mn t Production, 2.0 mtpa - Ovoo part); rest owned by Erdenes MGL 100% private (Khan 0.001 mn t at 0.119% 5 Mardai Uranium Feasibility study Resources) O U 3 8 21% SPC, 21% Russian 0.029 mn t at 0.175% 6 Dornod Uranium Feasibility study Gov, 58% Khan Total US$ 200 mn O U 3 8 Resources Gurvan 0.016 mn t at 0.152% 100% private 7 Uranium Feasibility study Bulag O3U8 (Chinese company) 100% Darkhan 8 Tomortei Iron ore 229.3 mn t at 51.15% Fe Feasibility study Metallurgical factory US$ 100 mn (100% owned by SPC)

37 mn t of copper, Commercial production 34% Erdenes MGL, 9 Oyu Tolgoi Copper, gold US$ 6 bn 1,431 t of gold in 2013 66% Ivanhoe Mines

10.6 mn t of oxides at Tsagaan Copper, 0.42% Cu/0.011% Mo; 10 Feasibility study 100% private (MAK) US$ 200 mn Suvarga molybdenum 240.1 mn t sulphides at 0.53% Cu/0.018% Mo

Copper, 1.2 bn t at 0.51% Cu/ Production, 569k t of 51% SPC, 49% Russian US$ 150 mn for 11 Erdenet molybdenum 0.012% Mo concentrate Gov downstream plant 100% private (four 12 Burenkhaan Phosphorite 300 mn t at 19.0% P2O5 Feasibility study US$ 500 mn private companies) 100% private (Boroo 13 Boroo Gold, ore 0.025 mn t at 1.6g/t Au Close to depletion Gold) - Tomortein Production, 0.07 mn t of 100% private 14 Zinc 7.7 mn t at 11.5% Zn Ovoo zinc (Tsairminerals JV) - 100% Mongolrostsvetmet 15 Asgat Silver 6.4 mn t at 351.08g/t Ag Feasibility study US$ 47 mn (50% SPC, 50% Russian Gov) Source: Worley Parsons, Ministry of Mineral Resources and Energy, State Property Committee of Mongolia

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Note: 1. Erdenes MGL – state owned limited liability company 2. Other sources estimate Baganuur reserves at 1.3 billion tonnes 3. SPC – State Property Committee of Mongolia

14.9.2 Overview of Foreign Investment

(The following information has been provided by legal firms active in Mongolia, including Dewey & LeBoeuf)

The Mongolian Foreign Investment Law (FIL) was adopted in 1993 and subsequently amended. According to the Law, the minimum amount accepted as foreign investment is US$ 100k. The FIL gives similarly positive treatment to both foreign and domestic investors with regard to control, use and removal of their investments. Foreigners can repatriate income and profits earned. A Stability Agreement (i.e. stabilization of taxes) is obtainable, the eligibility for and terms of which depend on the degree of investment.

Foreign Ownership

• Foreign Investors can own 100% of any registered business and it is not legally required to have a Mongolian partner • Exceptions - In line with the Minerals Law adopted in 2006, the Government of Mongolia is entitled to obtain up to 34% or 50% share of any deposit identified as strategically important - In line with the Uranium Law adopted in 2009, the Government of Mongolia is entitled to obtain at least 51% share of any company engaged in uranium exploration and mining through MonAtom LLC

Registration of Foreign Investment

• Any company with 25% or more foreign direct investment has to be registered as a “foreign-invested firm” with the Foreign Investment and Foreign Trade Agency (FIFTA) • FIFTA is fully responsible for the registration process and currently operates under the supervision of the Ministry of Foreign Affairs and Trade (MFAT) • FIFTA certifies the environmental practices and technologies of registered foreign companies

Currency Issues

• Investment funds, profits, revenues, debt service and lease payments are easily convertible and transferrable in various currencies. • Mongolian companies are allowed to open offshore bank accounts • Foreign-held interest bearing bank accounts are subject to a tax rate of 20% • All domestic transactions must be conducted in local currency (MNT)

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Resolving Disputes

• Mongolia is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (CREFAA, New York Convention) • Mongolia is a signatory to the Convention on the Settlement of Investment Disputes (CSID, Washington Convention) • Mongolia has signed Bilateral Investment Treaties (BITs) with numerous countries • Benefits of BITS and CSID Conventions - Disputes can be resolved via international arbitration Domestic courts can be avoided - Broad protection standards are provided under international law Measures may have an effect equivalent to expropriation Provides investors with fair and equitable treatment

14.9.3 Foreign Investment in Mining

Exploration and Mining Licenses

• Mineral resources are the State’s property • Only legal entities registered in Mongolia can hold exploration and mining licenses • Exploration Licenses - Initially granted for 3 years - The license can be extended twice, each extension comprising a 3-year period - The license holders are required to spend the following minimum amounts on exploration from the second year onwards 2nd and 3rd year miners must spend at least US $0.5 per Ha annually 4th to 6th year miners must spend at least US $1.0 per Ha annually 7th to 9th year miners must spend at least US $1.5 per Ha annually • Mining Licenses - Initially granted for 30 years - The license can be extended twice, each extension comprising a 20-year period - 5% royalties are applied on export sales - Active mining companies must ensure that 90% of their workforce consists of Mongolian nationals - A license holder who invests $50 million or more can enter into a special Investment Agreement with the Government

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Foreign Ownership

• The Minerals Law adopted in 2006 gives the Government of Mongolia the right to obtain an equity stake in all strategically important deposits - up to a 50% stake if the exploration of the deposit has been partially financed with the State’s funds - up to a 34% stake if the exploration of the deposit has been fully financed with private funds • The Government has to pay for the share it takes at a fair market value • Holders of the mining licenses for strategic deposits must sell no less than 10% of the shares on the Mongolian Stock Exchange - Currently it is unclear how this provision of the Law will be implemented

Investment Agreements

• Investors who undertake to invest more than $50 million within the first five years of their mining operations are eligible to enter into a special Investment Agreement with the Government of Mongolia • The Investment Agreement can create fiscal and legal stability • The Government acts through the Cabinet of Ministers represented by cabinet members responsible for taxation, geology, mining and environmental issues • Maximum duration of the Investment Agreement: - for investments worth US$ 50 - 100 million: 10 years - for investments worth US$ 100 - 300 million: 15 years - for investments in excess of US$300 million: 30 years

Environmental Issues

• The license holders must prepare the following documents: - an environmental impact assessment - an environmental action plan which addresses all adverse impacts identified in the environmental impact assessment • The license holders must deposit 50% of their environmental protection budget for a particular year in a special bank account supervised by the Government • Current mining license holders are responsible for environmental liabilities incurred by former license holders

Taking Security

• The license holder may pledge mineral licenses and immovable property and register such pledge with FIFTA • Only banks and other financial institutions can be registered as pledgees of mineral licenses - Key issue: only Mongolian legal entities (or nationals) can hold mineral licenses • There is no system to register pledges over movable property

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Recent Changes to the Mongolian Tax Code

• Effective from the 1 st of January 2007, the Tax Code creates a level playing field between foreign and domestic investors • In 2009, the allowance to carry forward losses has been extended from 2 to 8 years - This was a condition for the development of the Oyu Tolgoi project • In 2009, Parliament revoked an exemption on VAT taxes of 10% on equipments used to bring a mine into production

Elimination of Excess Profits Tax on Gold and Copper

• Windfall Profits Tax law passed in 2006 - It imposed 68% tax on profits from gold and copper mining Gold: tax was applied when the gold price reached US$ 850/oz Copper: tax was applied when the copper price reached $2,600/t • The Parliament abolished the Windfall Profits Tax, effective from the 1 st of January 2011

Law on Prohibition of Mineral Exploration in Water Basins and Forest Areas (2009)

• The Law prohibits mining in water basins and in forested areas • According to the Law, licenses to explore or mine mineral resources within an area no less than 200 meters from a forest or water resource must be revoked or modified • The Law grants local officials the power to determine the actual areas to be mined - Local officials can extend the 200 meter threshold • The Law requires the Government to give compensation to the license holders for previously incurred exploration expenses or the revenues lost due to standstill of operations

Uranium Law (2009)

• Created the Nuclear Energy Agency of Mongolia (Regulatory Authority) • Created MonAtom, a new state-owned holding company, to maintain the uranium assets that the government will demand back from the current rights holders • Revoked all uranium exploration and mining licenses, and required all possessors to re-register those licenses (for a fee) with the Nuclear Energy Agency • Required investors to accept that MonAtom has the right to acquire 51% share of the license holder’s company without compensation • Created a uranium-specific licensing and regulatory regime - Independent of the regulatory framework set out in the Minerals Law (2006) for developing other mineral and metal resources

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- The state can issue distinct licenses for uranium exploration on a property otherwise dedicated to other mineral and metals exploration

14.9.4 Progressive royalties on minerals

The State Information Digest was published on the 27 th December 2010. According to the new release, the Law on Minerals has been amended and now includes progressively increasing royalties on 23 types of minerals.

PROGRESSIVE ROYALTIES ON MINERALS

Threshold No Mineral Unit market price, Percent levy US$ ore concentrate product 1 Copper tonnes 0-5000 0.0 0.0 0.0 5000-6000 22.0 11.0 1.0 6000-7000 24.0 12.0 2.0 7000-8000 26.0 13.0 3.0 8000-9000 28.0 14.0 4.0 Above 9000 30.0 15.0 5.0 2 Gold ounce 0-900 0.0 900-1000 1.0 1000-1100 2.0 1100-1200 3.0 1200-1300 4.0 Above 1300 5.0 6 Iron tonnes 0-60 0.0 0.0 0.0 60-70 1.0 0.7 0.4 70-80 2.0 1.4 0.8 80-90 3.0 2.1 1.2 90-100 4.0 2.8 1.6 Above 100 5.0 3.5 2.0 7 Zinc tonnes 0-1500 0.0 0.0 0.0 1500-2000 1.0 0.8 0.4 2000-2500 2.0 1.6 0.8 2500-3000 3.0 2.4 1.2 3000-3500 4.0 3.2 1.6 Above 3500 5.0 4.0 2.0 11 Raw coal tonnes 0-25 0.0 25-50 1.0 50-75 2.0

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75-100 3.0 100-125 4.0 Above 125 5.0 12 Processed coal tonnes 0-100 0.0 100-130 1.0 130-160 1.5 160-190 2.0 190-210 2.5 Above 210 3.0 13 Final product tonnes 0-160 0.0 (half-coke, 160-190 0.5 coke, gas, liquid fuel, 190-210 1.0 coke chemical 210-240 1.5 product) 240-270 2.0 Above 270 2.5

Source: State Information Digest

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Agriculture

15 Agriculture

Currently replaced by mining, the agriculture sector formerly has been the backbone of Mongolia’s economy and the major driver for people’s living standards.

Agriculture focused on animal husbandry The agriculture sector formerly has been the largest contributor to Mongolia’s economy, accounting for more than 20% of the country’s GDP and representing Pastureland is the backbone of around 14% of foreign currency revenue. The industry development has been and agriculture still is largely constrained by harsh climatic conditions, long winters and insufficient precipitation. To date, only 1% of Mongolia’s arable land is cultivated 1% of land cultivated with crops with crops. The majority of vegetables and food products, except livestock, are imported from China. The overall sector is mainly focused on animal husbandry, Self-sufficiency in grains and potatoes therefore pastureland is the backbone of Mongolia’s agriculture. Previously around 80% of the total territory used to be occupied with pastureland. However, this proportion is decreasing due to the current advancements in the mining sector. Mongolia has recently become self-sufficient in grains and potatoes.

Livestock accounts for over 80% of The livestock sub-sector, which accounts for more than 80% of agriculture agriculture production, is primarily focused on sheep, goat, cattle, horse, camel, yak and pig husbandry. Livestock is extensively distributed throughout the entire territory, First cooperatives founded in 1930s with greatest concentration of horses and cattle in the north-central regions and of goats and camels in the west-southern regions of Mongolia. The earliest agricultural cooperatives were founded in the 1930s following the government’s policy to systematize herders with their livestock. With assistance from the Soviet Union, the number of cooperatives were increased and their sizes expanded in the mid 1950s.

According to the National Statistics Office, by the end of 2010, there were 1.9 2010: total livestock 32.8m heads million horses, 2.2 million cattle, 270 thousand camels, 14.5 million sheep and 13.9 million goats in Mongolia, summing to 32.77 million heads of livestock. In total 11.3 million heads of animals were lost due to “dzud” (explained later in this section)

80% of cropland devoted to grain Crop cultivation areas are concentrated in the northern regions of Mongolia, cultivation especially around the Orkhon and Selenge river basins, owing to moister land. Around 80% of cropland is devoted to cultivation of grains such as wheat, barley Crop cultivation yields are low and and oat. The remaining part is primarily devoted to fodder crops or hay. The sub- inconsistent sector generates rather low yields that vary heavily each year depending on the weather conditions. A trivial fraction of the crop land is occupied by gardening of Largest farms: 270 sq km potatoes, yet the output is enough to satisfy the demand coming from 2.7 million people residing in the country. On average, the largest state-owned farms spread over an area of 270 square kilometres and normally encompass some livestock production.

2010: 1.7mt of harvest In 2010, Mongolia produced 355 thousand tonnes of cereal (9.3% decrease yoy), 168 thousand tonnes of potatoes (11.1% increase yoy), 82 thousand tonnes of

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vegetables (5.5% increase yoy), 1.1 million tonnes of hay (24.1% increase yoy) and 31 thousand tonnes of hand-made fodder (21.1% increase yoy), totalling 1.7 million of harvest.

CULTIVATED CROP LAND USE , THOUSAND HA

Sown, 195

Abandoned, 4 Fallow, 147 79

Unused, 376

Source: Ministry of Food Agriculture and Light Industry of Mongolia

15.1 Dzud

Dzud = cold and windy winters Dzud is a terminology explaining extremely cold and windy winters, throughout which livestock perish from starvation as it becomes impossible to find fodder. Animals perish from dzud Herder households sometimes categorise the phenomenon as black, white and ice dzuds. The first type is caused by low growth of fodder crop in summer followed by a cold winter, the second type is caused by heavy snow falls, regardless of the previous months’ harvest. The third type is a consequence of heavy rain falls which create an ice coverage on top of the soil, freezing all the hay. As a result of each type of dzud, livestock perish through malnourishment.

It is possible to prepare for dzud by drying and storing hay during the warm seasons and by building winter shelters in advance for the livestock.

Dzud can easily slay over 1 million heads of animals. According to UN estimates, Q4 2009 – Q1 2010: 7.8m livestock lost; the white dzud which occurred in late 2009 and early 2010 had a cruel impact and 45,000 people left without animals by the end of April 2010, over 7.8 million heads of livestock (around 17% of total livestock) were lost and 9,000 households (45,000) were left without animals. In 2009: livestock = 16% of GDP 2009, livestock accounted for around 16% of GDP. According to the National Statistics Office, by the end of 2010, the total loss increased to 11.3 million heads, including 13.5 thousand horses (301% decrease yoy), 423 thousand cattle (16.3% decrease yoy), 7.5 thousand camel (2.7% decrease yoy), 4.8 million sheep (24.9% decrease yoy), 5.8 million goats (29.4% decrease yoy). Compared to 2009, the total number of agricultural animals in Mongolia fell by 25.7%.

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Real Estate

16 Real Estate

The capacity to build residential properties in Ulaanbaatar is enormous, especially considering the increasing number of expats and foreign executives arriving in Mongolia.

2002-2008: residential property prices Residential property prices rose four fold during the period 2002-2008, after quadrupled which they fell to 2007 levels as a result of the global recession. In the beginning of 2010, the average price per square meter of an apartment in Ulaanbaatar was $800.

DYNAMICS OF RESIDENTIAL PRICES IN ULAANBAATAR ($/sqm)

1200 1100 1000 800 800 800 590 600 400 450 330 400 250 200 0 2002 2003 2004 2005 2006 2007 2008 2009

Source: Global Property Guide, Mongolian Properties

COMPARATIVE RESIDENTIAL PRICES ($/sqm)

5,000 4,500 4,500 4,000 3,500 3,000 2,500 1,900 2,000 1,550 1,500 1,200 800 1,000 650 475 500 0 Kiev Baku Almaty Bishkek Moscow Tashkent Ulaanbaatar

Source: Global Property Guide, Mongolian Properties

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Factors behind the real estate industry growth:

Mining boom, economic development and higher foreign direct investment; more foreign executives and diplomats coming to Mongolia; increasing living standards and greater number of wealthy citizens Lack of contemporary apartments; over 1 million people residing in Ulaanbaatar (40% of the population); lack of per person living space in the capital city (7 square meter per person) Mongolian households are bigger in size compared to Russia and Eastern Europe, having on average 4.1 persons Child benefits and population growth Migration of rural households to Ulaanbaatar Difficult living conditions in ger districts

2008: 15,000 foreign residents and 4,000 Figures suggest that in 2008, over 15 thousand foreigners and 4 thousand expats expats in Mongolia were residing in Ulaanbaatar. As a result, in 2008, the residential property yields in Mongolia were among the highest in all of Asia, hovering around 15% to 18%, with accommodation prices rising 30% yoy.

2009: property prices fell 30% Because of the global recession and plunging copper prices, which was the main export commodity of that time, residential property prices in Mongolia fell by around 30% in 2009. The banking sector experienced a collapse of two banks and commercial banks in general stopped providing loans to the citizens.

Oyu Tolgoi agreement, economic The signing of the Oyu Tolgoi Investment Agreement (Oct 2009) facilitated recovery, provision of mortgage loans substantial inflow of foreign capital into the mining sector, laying the foundation for complete economic recovery and robust future growth. The top banks of Demand expected to increase Mongolia started offering mortgage loans by the end of 2009. The recent success in economic performance gives a solid reason to presume that the demand for residential properties in the country is about to hike. Foreign residents are allowed to own a property in Mongolia. The special license that qualifies their ownership rights is the Immovable Property Ownership Certificate.

2007-2010: Ulaanbaatar population Statistics suggest that the population of Ulaanbaatar increased 30% to 1.1 million increased 30% in three years from 2007. More than half of the residents live in ger districts surrounding the city. The government is working on a project to replace the ger Offer to exchange 2-room apartments districts with proper residential complexes. An announcement has been made in for 0.07 Ha land October 2010 that the authorities are willing to exchange two-room apartments for 0.07 Ha of land in ger districts. The master plan is to construct residential 100,000 apartments for low-income complexes in those areas comprising 75 thousand apartments for lower-income people to be constructed ($6.2bn) people. The two-room replacements are meant to be a temporary provision of accommodation for the land owners, who will be entitled to obtain housing from the new complexes once they are fully constructed. Other projects designated for 25 thousand households are to be developed in provincial areas across Mongolia. The estimated budget for the construction of all 100 thousand apartments is $6.2 billion.

Substantial existing capacity The capacity to build residential properties in Ulaanbaatar is enormous, especially considering the increasing number of expats and foreign executives arriving in Mongolia. Being aware of such possibilities, several real estate suppliers have started constructing new large-scale residential buildings, some of which are

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Numerous large-scale ongoing projects complete by now. Mongolian Propert ies is the largest real estate company based in Ulaanbaatar, which is owned by Asia Pacific Investment Partners, an investment company focused on opportunities in Mongolia. Mongolian Properties has just finished the construction of the Regency Residence (9 7 apartments) and is currently working on the Olympic Residence (135 apartments) project. Tenants are now allowed to move into the former complex. The latter project is to be finished by 2013. Bodi Group, one of the largest companies in Mongolia, which ow ns Golomt Bank, is also building a 84-villa complex in the Sanzai area outside of Ulaanbaatar.

100 real estate developers, only 10 are Figures indicate that around 100 real estate developers are currently active in professional Mongolia, out of which 10 can be considered as professional. With further economic growth and development of the financial sector, provision of mortgage loans by banks is expec ted to increase substantially.

Source: Trade and Development Bank

Property market, recent research

Currently there is a significant lack of supply in the residential property market Lack of residential property throughout Mongolia. The demand for adequate accommodation and commercial

property is high and expected to hike further due to the mining boom, inflow of capital, rising num ber of expats and improvement in living standards.

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35,000 200% 30,000 150% 25,000 20,000 100% 15,000 50% 10,000

Number of expats of Number 0% 5,000

0 -50% populationgrowth Expat 2008 2009 2010 2011 2012 2013

Source: Broker research

Large-scale property projects are to be developed in the South Gobi province of Mongolia, a home to grand deposits like Oyu Tolgoi and Tavan Tolgoi.

LUXURY RESIDENTIAL PROPERTY PRICES ($ per 1 sqm)

25,000 22,200

20,000

15,000 11,900 9,500 10,000 7,050 6,900 5,200 5,000 4,500 5,000 3,150 3,100 1,700 0 Seoul Perth Beijing Almaty Bangkok Shanghai Singapore Hong Kong Hong Ho Chi Chi Minh Ho Ulaanbaatar Ulaanbaatar Kuala Lumpur Kuala

Source: CBRE, Savills, Global Property Guide, Krisha Magazine

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GRADE A OFFICE RENTAL PRICES ($ per 1 sqm)

70 63 61 57 60 54 50 38 40 31 31 30 30 24 24 23 22 20 10 0 Perth Seoul Taipei Beijing Almaty Bangkok Shanghai Singapore Hong Kong Hong Ho Chi Chi Minh Ho Ulaanbaatar Ulaanbaatar Kuala Lumpur Kuala

Source: CBRE, Savills, Global Property Guide, Krisha Magazine

In 2000, Ulaanbaatar was a soviet-style city with little construction activity taking place, whereas in 2010 it has transformed into a contemporary city with an extraordinary boom in real estate development. In 2000, the Mongolian GDP was $1 billion, the GDP per capita was $456 and Ulaanbaatar’s population was 791 thousand. In 2010, however, the numbers have grown to over $6.6 billion, $1,745 and 1.1 million, respectively. Recently Mongolia has been named the “Saudi Arabia of Coal” and many predict that Ulaanbaatar is about to follow the footsteps of Astana and Doha in terms of their success and achievements in transformation. According to the IMF estimates, Mongolia’s real GDP growth is to Ulaanbaatar – the capital city exceed 25% by 2013-2014. The country’s GDP per capita is expected to rise faster of Mongolia (2000) than the PRC’s, reaching $5,000 by 2012 and $12,000 by 2015, which is equivalent to what an average resident of Shanghai earns today.

The capacity for new residential developments in the main cities, including Ulaanbaatar, is immense. For instance, Dalanzadgad, the centre of the South Gobi province, will be the next main destination for domestic and foreign workforce, where construction of new housing, industrial complexes, offices and hospitals will be required. There are approximately 18,000 people residing in the city and most of them live in traditional gers. Another example is Sainshand city, where a $10 billion industrial complex (park) is being developed which will increase the value of Mongolian mineral resources. The park will contain a coal handling and processing plant (CHPP), a copper smelter, an iron pellets plant, an oil refinery and Ulaanbaatar – the capital city other facilities. Property developers and financiers should see the mine sites as of Mongolia (2010) the main destination for real estate related investments.

The latest update informs that construction and installation works implemented 2010: construction/installation works in Mongolia throughout 2010 grew 25.6% from 2009 and reached 351 billion MNT nationwide $281m (up 25.6% yoy) (around $281 million) in total. Domestic construction companies executed 93% of

those (30% increase in activity yoy), while foreigners accounted for the remaining 7%.

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Infrastructure

17 Infrastructure

Mongolia’s infrastructure, or lack of, is the most serious inhibitor to developing its resource wealth. However, there are many ambitious projects and foreign investment commitments to improve the situation.

17.1 Railway

The Trans -Mongolian railway, which is Mongolia’s main rail link co nnecting the Trans-Mongolian railway (2,215 km) is country’s borders with Russia and China, stretches across 2,215 km. The line starts Mongolia’s main rail line at Ulan -Ude town, passes through Ulaanbaatar, then reaches Zamiin -Uud and Erenhot, where it joins the Chinese railway. There are a few diverted short routes br anching out from the main line that link passengers to the main cities such as Erdenet and Darkhan. Apart from the Trans -Mongolian railway, a short link connects the eastern city Choibalsan, the centre of the Dornod province, with the Trans -Siberian railwa y of Russia. Ulaanbaatar Railway, 50% owned by the Russian government, is responsible for the operation of the main line.

In December 2010, the governments of Mongolia and Russia signed n ine Agreement signed on improvement of cooperation agreements, including a contract on the enlargement of the Ulaanbaatar Railway company Ulaanbaatar Railway capital at equal contribution, which will help modernize the company and facilitate the development of the required infrastructure in Mongolia.

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Infrastructure

17.2 Roads

Most roads in Mongolia are gravel road and 96.7% of the Mongolian road network 96.7% of roads unpaved is unpaved. Investments into the sectors were boosted only after 2000, when the

US and major financial institutions like the World Bank and ADB contributed to Major investments expected the development of road projects. As a result, 2,700 km of paved road were

added to the system, making the isolated regions of Mongolia more accessible.

As infrastructure constraints remain immense at this stage of the mining boom, New paved road by Mongolia Mining further investments are expected in rail and road networks. Mongolia Mining Corporation Corporation’s new paved road from its Ukhaa Khudag deposit located in the Tavan Tolgoi region to the Mongolian-Chinese border is soon to be fully completed.

There is a paved road from Ulaanbaatar to the Mongolian-Russian border.

17.3 Airports

Only one international airport Chinggis Khaan Airport, located in 15 km from Ulaanbaatar, is the one and only international airport of Mongolia. There are a number of domestic airports linking the capital city to isolated provinces. MIAT or Mongolian Airlines, a state-owned company, is the largest carrier in the country and currently offers international flights only. Among major global destinations, Mongolia is directly linked to Seoul, Beijing, Tokyo, Moscow and Berlin. The main two domestic carriers are AeroMongolia and Eznis Airways, which also organise charter flights to the main mine sites.

17.4 Water

Water is a scarce resource in Mongolia Due to dry weather conditions, water is a scarce resource in Mongolia. Some regions of the country do not receive precipitation at all throughout the year. There is the threat that Ulaanbaatar’s water supply may be significantly depleted in the medium to long term.

Not only is water required for people’s everyday life, but it also facilitates Water is vital in mine development industrial activities such as coal washing. In general, production levels of all sorts of mines heavily depend on water supply. Desert areas contain aquifers, but it is hard to quantify the size and distribution of those.

Oyu Tolgoi team discovered an aquifer In late 2010, Oyu Tolgoi’s environmental team announced that they had found a substantial amount of underground water deep beneath the Gobi desert. Experts Water supply ensured for 40 years predict that the discovered aquifer will be capable of supplying the copper and gold mine throughout the next 40 years. According to the announcement, even Environmental impacts will be minimal after those years of utilization, water resources in the area will not be fully depleted. The Oyu Tolgoi team is currently working to ensure that minimal environmental impacts are caused by their activity in the region. Development of

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the aquifer will also be devoted to the improvement of conditions in nearby towns.

Source: Trade and Development Bank

Estimated costs for developing water resources:

• Water resources for Gobi: $300 million for ground resources • Diverting waters from northern rivers: $400 million • Solving Ulaanbaatar’s needs: $300 million Total: $1 billion

Source: World Bank

17.5 Mining boom and infrastructure development

Although the mining boom is already ongoing in Mongolia, the realities of the industry today include several issues requiring attention: • Isolation – the mine sites are located in remote places, far away from existing infrastructure • Insufficient infrastructure – the existing infrastructure is highly underdeveloped owing to the size of the country and the size of the population • Technology, expertise and skilled labour deficiency – related to Mongolia’s development • Weak logistics system – related to underdeveloped infrastructure and lack of expertise • Undeveloped rural areas – the biggest and most developed city is the capital Ulaanbaatar, where 40% of the entire population resides • Environmental issues – applicable to any country

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Infrastructure

Largest deposits located in isolated areas Most of the large-scale deposits are located in isolated areas, with very limited infrastructure. Poor access to basic infrastructure Connection to the electrical grid in Mongolia takes twice as long to obtain in comparison with Russia, China and Kazakhstan. Power outages and water supply failure s occur constantly.

ACCESS TO BASIC INFRASTRUCTURE (DAYS SPENT) 25 20 15 10 5 0 China Russia Mongolia Kazakhstan Kazakhstan East Pacific Asia Pacific East Obtain electrical connection Water supply failures Power outages

Source: World Bank, “Mongolia Sources of Growth Country Economic Memorandum”, July 26 2007

As informed by the Business Council of Mongolia, the 2010 Global Ranked last for quality of infrastructure Competitiveness Report ranked Mongolia last for the quality of overall

infrastructure out of 134 countries. There are no paved roads from Ulaanbaatar to

the Mongolian -Chinese border. Because of underinvestment, the country’s overall railway capacity is substantially restrained. In addition, the half -Russian ownership of the current railway network is seen by many as an obstacle for development.

88.4% - earth road Currently in Mongolia, 88.4% of total roads are earth and only 3.3% are paved. 3.3% - paved road

Earth road 88.4% Improved road Gravel 0.5% Asphalt road 0.2% Cement road 3.1% Others 3.9% 3.8%

Source: Business Council of Mongolia

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Supply chain development potentials

Planned mining expenditures: $13bn Planned mining expenditures are to total $13 billion in the coming years, of which Mining service expenses: $1.3bn $1.3 billion is to be spent on mining services.

Source: Business Council of Mongolia

2011-2015: expected FDI in mining The government of Mongolia hopes to attract up to $25 billion in foreign $25bn investment for mining projects in 2011 -2015.

COAL CASE, MINING INVESTMENT REQUIREMENTS, % OF TOTAL

12% 26% 16% 600MW power plant Open -cut coal mining Railway 22% 24% Coal beneficiation Others

Note: Under 30 mtpa production scenario Source: Business Council of Mongolia

2011-2020: investment in infrastructure Infrastructure development requires around $5.2 billion in investments from $5.2bn 2011 -2020.

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REQUIRED INVESTMENT IN MINING INFRASTRUCTURE (2011-2020) Electricity $2.7 billion Town development $1.5 billion Land transport $800 million Water resource $262 million Total $5.2 billion

Source: World Bank

The government is planning to build 2,600 km of paved East-West road and 5,600 km of new railroads:

Railway construction strategy:

• Phase I (2010-2011), 1040 km: Tavan Tolgoi – Sainshand - Choibalsan route providing access to Russian far eastern ports • Phase II (2011-2012), 893 km: Nariin Sukhait - Shivee Khuren, Tavan Tolgoi (Ukhaa Khudag) – Gashuun Sukhait • Phase III (2012-2015), around 3,600km: the western railway lines from Tavan Tolgoi (Ukhaa Khudag) through Nariin Sukhait

Railway construction, 1 st phase $3.0bn The railway infrastructure plan has considered all major mineral deposits. Around $3.0 billion is to be spent on the first phase.

Source: Ministry of Road, Transportation, Construction and Urban Development of Mongolia

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17.6 Industrial Park in Sainshand

$10bn industrial complex in Sainshand An industrial complex is being built in Sainshand city, which is located at the crossroads of the Trans-Mongolian and East-West rail lines. The latter is currently under development and will link Tavan Tolgoi deposit with the Russian far-eastern seaports, i.e. Vladivostok, through the Trans-Siberian rail route. Projected capex of the entire complex is $10 billion.

SAINSHAND IND. PARK

Source: Ministry of Road, Transportation, Construction and Urban Development of Mongolia

The Industrial Park is to include a CHPP (coal handling and processing plant), an iron pellets plant, a copper smelter, an oil refinery and other facilities which will increase the value of Mongolian mineral resources.

PLANNED PROJECT DEVELOPMENT PHASES

Source: State Property Committee

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Sainshand Park can increase Mongolia’s According to the estimates of the Ministry of Road, Transportation, Construction GDP to $41bn and Urban Development of Mongolia, the construction of Sainshand Park and associated industrialisation could increase the Mongolian GDP to $41 billion over the next 11 years, compared to the current level of $6.6 billion.

Cumulative GDP growth over 2010-2021 is 45% higher under processing and export scenario $ billion Extraction and exports (unprocessed) 26 Losses due to higher transportation costs -4 Value added in transportation 3 Value added in processing and construction 11 Value added in power 3 Value added in other industries 1 Manufacturing and exports 40

Source: Boston Consulting Group, Oct 2010

17.7 Recent developments

The overall infrastructure investment needs are estimated to be around $5.2 billion throughout the next 10 years. Although the Mongolian government plans to spend around $3.0 billion on the first phase of railway construction, it also seeks to delegate some of the responsibility to individual companies.

Mongolia Mining Corporation (Energy Resources)

2011-2012: new railway, 240 km, 15mtpa Mongolia Mining Corporation (MMC) has obtained rights to construct a railway directly from its Ukhaa Khudag deposit to Gashuun Sukhait (the Mongolian- Chinese border) in 2011-2012. The company is doing so in order to increase their operational efficiency and reduce transportation costs. The new railway will be roughly 240 km in length. Although the target market for Ukhaa Khudag’s coal is mainland China, MMC is also seeking to export their product to other seaborne markets via the Gashuun Sukhait border pass. The new rail link is expected to convey 15 mtpa at full capacity, primarily satisfying the company’s own coal transportation needs. Other mining companies, however, will be allowed to use the railway in case of excess capacity.

Mongolia Mining Corporation has also started putting a 245 km paved road south Q1 2011: new paved road, 18mtpa to the Gashuun Sukhait border pass from its Ukhaa Khudag mine. The road is to be completed in Q1 2011 and will have a capacity of 18 mtpa. It will be used as a principal coal haulage channel prior to the construction of their railway. The project is intended to increase MMC’s transportation capacity and reduce the related costs directly affecting the company’s profitability.

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Mongolia – Russia - China

2011: new railroad from Tavan Tolgoi to Authorities of Mongolia have selected a more expensive infrastructure Choibalsan, 1,040 km, capex $3.0bn development option with the purpose of strengthening Mongolia’s sovereignty. Recently it has been announced that a new railroad will be constructed in 2011 linking Mongolia’s largest coal deposit, Tavan Tolgoi, with Mongolia’s domestic rail network. The alternative option was a direct route south to China. International advisors and a group of parliament members voted in favour of the alternative option, which would have been much cheaper. The selected option, as explained by political leaders, would protect Mongolia from the possible economic and political pressure from China if it becomes the principal importer of Tavan Tolgoi coal. Choibalsan is linked to Trans-Siberian railway The approved rail route will stretch 1,040 km north to Russia, from Tavan Tolgoi to Choibalsan city, which is linked to the Trans-Siberian railway through Sainshand. Approximately $3.0 billion will be spent on the development. Russian wide-gauges will be used in the construction, rather than narrower Chinese gauges that are common in many countries.

New route will help develop Sainshand A number of factors influenced the choice of such an expensive option. The Park principal reason was the back-up of Sainshand Industrial Park’s development. Via the new route, coal will be transported from Tavan Tolgoi to Sainshand.

Impediments to infrastructure development by individual companies

MMC’s plan to build a railway impeded Mongolia Mining Corporation’s plan to put a railway south to China from its Ukhaa Khudag mine has been impeded by resistance from some political leaders, who were greatly concerned that this would cause heavier economic dependency of Mongolia on China.

Numerous Mongolians do not trust China’s intentions towards their motherland, especially after being controlled by the Manchu dynasty for 200 years.

SouthGobi’s plan to build a railway In May 2010, SouthGobi Resources, engaged in coal exploration and mining terminated activity, terminated its plan to build a railway from its 114 million tonnes Ovoot Tolgoi project to the Mongolian-Chinese border because of uncertainty over government policy. The project is located only 42 km from the Chinese border, hence a railway was deemed “not essential”.

Asian Development Bank

The Asian Development Bank (ADB) is funding a regional logistics development ADB is funding a logistics project at project at Zamiin-Uud with $45 million in loans and grants, which will create a Zamiin-Uud ($45m) new terminal with road and rail links. Zamiin-Uud is a remote south-eastern Mongolia-Chinese border crossing, through which the majority of current export and import products pass.

Once completed, the new terminal will offer contemporary customs and quarantine facilities, which will make transit times shorter and increase capacity. Management will be delegated to a contract operator. ADB will also participate in

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the training and support program of the government employees who will oversee and implement the project.

ADB’s funding will take up 63% of the total costs of $71.6 million. $40 million of $40m in loans the assigned $45 million will be a 32-year loan with a 1% interest rate rising to $5m in grants 1.5%. The rest $5 million be given as a grant.

CADEX KK

CADEX KK of Japan and Mongolian Railway, a state-owned company, formed a Sep 2010: CADEX KK and Mongolian strategic alliance to improve the railway infrastructure of Mongolia in September Railway strategic alliance 2010.

According to the agreement, CADEX KK’s Mongolian subsidiary CADEX LLC Mongolia will serve as a project manager and a business consultant to the Mongolian Railway company in acquisition of new technologies and personnel. The alliance is aimed at securing Mongolian Railway’s long-term growth.

By using its project management experience in Asia, large network, and human resources base, CADEX will help Mongolia to catch new business opportunities, develop a stable freight transportation system and achieve efficient exploitation of mineral resources.

17.8 Mining boom and air industry

Domestic airports are soon to start International air travel from Mongolia is limited to a number of destinations. handling international routes Domestic airport infrastructure is already in place to begin handling of international routes from remote mine sites.

International air routes are split between numerous carriers • MIAT (Beijing/Berlin/Irkutsk/Seoul/Osaka/Tokyo) • Aeroflot (Moscow) • Korean Air (Seoul) • Air China (Beijing)

Domestic air routes are split between two carriers • Aero Mongolia • Eznis

Dalanzadgad (South Gobi centre) airport Requirement for new international routes is split evenly between domestic and can handle international routes international carriers. Assignment of new domestic and international routes into Mongolia is regulated by the Mongolian government and MCAA (Mongolian Civil Aviation Authority). A new airport with paved runway was built in 2007 in Dalanzadgad (540km south of Ulaanbaatar). This means that there is an existing paved runway at the Oyu Tolgoi mine site capable of handling Airbus A320 and Boeing 737 aircraft. The government is planning to transform four domestic airports into international airports by 2014.

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Hong Kong market to open up to The Hong Kong market is expected to be opened up to Mongolia on a regular Mongolia basis starting in 2011. Currently, the direct access to Ulaanbaatar from major global financial centres is unavailable.

Note: London and New York time differences vary based on daylight savings time

Trial charter flights from MIAT (Summer 2010)

• During summer 2010, MIAT planned 8 charter flights to Hong Kong but only completed 7. Fragmented demand due to irregular flight times and lower tourist season were seen as the cause for cancellation of the final flight. • Mongolian travel agent Juulchin World Tours Corporation and Miramar Travel in Hong Kong acted as agents. • The return fare was $550.

Planned charter flights from MIAT (beginning April 2011)

• Twice per week service from Ulaanbaatar to Hong Kong will be organised beginning from April 2011 • The plan is to use existing Boeing 737-800 (with 162 seats) to fly to Hong Kong • The return fare will be approximately $600-650

International air travel to Mongolia is expected to arise from expat growth at mine sites and business tourist demand linking Ulaanbaatar with Australasia through Hong Kong.

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Privatisation of State Properties

18 Privatisation of State Properties

In order to facilitate expansion of the economy based on private sector 1990-2010: SOEs were privatised development, the Mongolian government started privatising state owned

enterprises (SOE) through bidding, international tender, and management and 2011-2012: several SOEs to be privatised, ownership contracts over the past twenty years. A number of state properties are including Tavan Tolgoi on the list to be privatised in the following 2 years, including Tavan Tolgoi, a 6.4 billion tonne coal mine, a quarter of which consists of high quality coking coal. The 2011-2012 privatisation plan for the SOEs has been presented by Mr. Sugar, the Chairman of the State Property Committee (SPC), at the "Mongolia: raising capital" conference in June 2010.

1990: first round of privatisations, This upcoming share issuance of Tavan Tolgoi will not be the first experience in unsuccessful exercise Mongolia. The country went through the first round of privatizations in 1991 with pink and blue vouchers. Due to lack of involvement and participation of citizens, the exercise was seen as unsuccessful. Afterwards, people turned to high interest rate savings at Credit and Savings Cooperatives, which also ended up going bankrupt swallowing a good portion of the middle-income population’s savings.

International investors to benefit from Mongolia's plan to privatize its state-owned properties will allow international privatisations investors to gain access to some of the world's largest unexploited mineral resources.

18.1 2011-2012 privatisation strategy

18.1.1 Near term privatistaion targets

Baganuur, brown coal, 1.3bn tonnes 1. “Baganuur” JSC

Current production 3.0 mtpa 53% of the Mongolian central electricity system depends on the Baganuur coal supply. Containing estimated reserves of 1.3 billion tonnes of brown coal, Capacity 4.0+ mtpa Baganuur is the biggest coal supplier to coal consumers in Mongolia.

75% state owned The coal mine satisfies 100% of TPP-2 (Thermal Power Plant – 2), 100% of TPP-3 and 50% of TPP-4’s (the biggest power plant in Mongolia) coal needs. Between 15% owned by Firebird 1996-2004, the Mongolian Government implemented a project to modernize and expand the production capacity of Baganuur, taking $31.1m and $50.9m in loans from the World Bank and the Japanese government respectively. As a result, the

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company’s exploitation capacity reached 4.0 mtpa. However, currently Baganuur extracts only around 3.0 mtpa due to old equipment and financial constraints. The state owns 75% of the company and the biggest private shareholder is a New York based investment fund Firebird, which possesses over 15% of the shares, the rest is free float.

SPC’s conditions of privatisation:

• Coal resources must be evaluated by JORC standards • The mining license must be assessed in terms of a property • Power plant and coal liquefaction projects must be studied by professionals, then implemented

Method:

• Up to 51% of the current state-owned shares will be issued and offered for sale

2. “Erdenet Power Plant” and TPP-3

Mongolian electricity supply = 3 grids The electricity system in Mongolia consists of three independent grids. The largest one is the Central Energy System (CES), which covers the most populated area of Largest grid – CES the country, including Ulaanbaatar. The installed capacity of the CES area is 786.3 MW, which is provided by five main power plants in Ulaanbaatar, Erdenet and CES = 5 power plants Darkhan. There are also two provincial centres with individual power plants that are not connected to the main grids and meet the regional demand through local CES capacity: 786.3 MW networks.

Power Plant Installed Available Capacity District Indus. Commissioning Capacity Capacity Boilers Heating Stream year (MW e) (MW e) (MW th ) (MW th ) (MW th ) Ulaanbaatar TTP-2,3,4 709.5 554.7 3,978.0 1,523.0 192.0 1961-1991 Darkhan 48.0 38.6 477.0 210.0 49.0 1966, 1986 Erdenet 28.8 21.0 318.0 140.0 24.0 1987-1989 Total CES 786.3 614.3 4,773.0 1,873.0 265.0 -

Source: Energy Efficiency Technical Report, Ulaanbaatar

CES consumes 80% of domestic coal All five plants are coal-fired and of Soviet design. They are used in the production supply of electricity, hot water, heating and steam. 80% of domestic demand for coal is consumed by the CES. Power outages and water supply failures are common in Constant power outages and water Mongolia because the central grid is unable to meet the daily demand at its peak supply failures due to poor peaking potential of the plants.

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Privatisation of State Properties

Current supply: 650MW The Mongolian electricity system currently produces 650MW, leading to a deficit of more than 120 MW. The deficit is covered by expensive imports from Russia Current deficit: 120MW and has been forecasted to increase to 500 MW by 2013, as a result of Mongolia’s economic growth and mining related industrialisation. 2013 deficit: 500MW SPC’s conditions of privatisation:

• Investment must be made to improve technology: - Heating capacity must be increased - Costs must be reduced

Method:

• Privatization will be implemented via concession agreements

3. Mongolian Airlines MIAT

MIAT – largest carrier, state-owned MIAT or Mongolian Airlines, a state-owned company, is the largest carrier in the country and currently offers only international flights. MIAT flies to Beijing, Berlin, Seoul and Tokyo. The company is planning to organise charter flights to Hong Kong from Ulaanbaatar starting in summer 2011.

Method:

Privatization will be implemented via an international management and ownership contract.

4. Mongolian Stock Exchange (MSE)

LSE to manage MSE The description of the MSE has been provided earlier in this report. In October 2010, the London Stock Exchange was selected as the international partner to assist in reforming the MSE.

Method:

Privatization will be implemented via a management contract. An experienced team will assume administration of the stock exchange. The contract terms will be announced in early 2011.

5. Mongolian Telecom

MTC – national telecommunications Mongolia Telecom Company (MTC) is the Mongolian national telecommunications company company that offers a variety of services to its customers. Currently Mongolia is connected to 150 countries via MTC. The company also operates in mobile phone, 200+20 thousand customers data network, cable TV, radio and TV broadcasting, and intranet network sectors. It has 200k customers in the land line telephone segment and 20 thousand users 23% of total internet users in the mobile phone segment. 23% of total internet users in Mongolia are MTC’s customers.

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Privatisation of State Properties

The company was partially privatized in 1995, when a Mongolian -Korean joint venture was formed. Korean Telecommunications Company acquired 40% ownership.

Share ownership structure after the first privatisation: • 54% of shares owned by the Mongolian government • 40% of shares owned by South Ko rean KT Corporation • 6% of shares owned by the citizens of Mongolia

Method:

The state will offer its portion of shares to be privatised to the Korean KT Corporation first on a contractual basis. If an agreement can not be reached, the state will open a tender.

6. Mineral resources

The government will bundle in groups the state owned shares from the 15 strategic deposits by types of minerals and certain percentages of them will be sold through domestic and international stock exchanges. New Joint Stock companies will be established in the process.

18.1.2 Detailed maps of planned privatisations

The following are the detailed maps of the planned privatisation processes:

Source: State Property Committee

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Privatisation of State Properties

Tavan Tolgoi coal mine (TT) is currently 100% owned by Erdenes MGL LLC which is ful ly controlled by the State Property Committee.

Tavan Tolgoi privatisation: The SPC is going to split the deposit into two blocks. In October 2010, Erdenes - Tavan Tolgoi Ltd, a subsidiary of Erdenes MGL, was set up for the development 10% to citizens and operation of the TT coal deposit. Erdenes MGL is intending to retain 51% 10% to Mongolian companies ownership of the Ea stern Block and privatise the rest by splitting 20:29 between 29% to IPO Mongolian and international investors. That is, 10% will be distributed to the citizens of Mongolia at no cost, 10% sold to Mongolian private enterprises at a substantial price and 29% released through domestic and international stock exchanges (IP0).

Eastern block to contract miners Funds raised through IPO will be devoted to financing the infrastructure and working capital of the Eastern block. The Western block, however, is going to be Western block to strategic investors handed over to strategic investors who will assume entire responsibility for the block’s development, mine infrastructure and coal marketing independently from the government of Mongolia. Contract miners will be able to participate in the development of the Eastern block for a fixed service fee, while strategic investors will be obliged to transfer a portion of their future income to the government of Mongolia.

Source: State Property Committee

The State Proper ty Committee will bundle the coal assets it holds from the strategic deposits, except Tavan Tolgoi, to create a Coal Asset Joint Stock Company, and partially privatise that, retaining 70% of the shares and releasing the remaining 30% on the domestic and in ternational stock exchanges through an IPO. The Coal Asset Company will in turn own 90% of Shivee Ovoo, 75% of Baganuur, 34% of Nariin Sukhait, and 34% or higher stake of other coal deposits.

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Privatisation of State Properties

Source: State Property Committee

The State Property Committee will bundle the copper and silver assets it holds from the strategic deposits to create a Copper and Silver Joint Stock Company, and partially privatise that, retaining 70% of the shares and releasing the remaining 30% on the domestic and international st ock exchanges through an IPO. The Copper and Silver Company will in turn own 51% of Erdenet copper factory, 100% of Asgat silver deposit, 50% of Tsagaan Suvarga copper/molybdenum deposit and 34% of the Oyu Tolgoi deposit.

Copper smelter in Sainshand to increase The plan is to construct a copper smelting factory in Sainshand to increase the valu of Cu resources value of copper mines. The private sector will be the driving force for the development of the project. If the government of Mongolia arranges for construction of a copper smelter, then according to the Investment Agreement between the government of Mongolia and Ivanhoe Mines:

- Ivanhoe Mines must provide Rio Tinto's (or its affiliates) p roprietary technologies held in joint venture with Outokumpu , for the operation of the smelter.

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Privatisation of State Properties

Source: State Property Committee

The State Property Committee will bundle the iron ore assets it holds from the strategic deposits to create an Iron Assets Joint Stock Company, and partially privatise that, retaining 70% of the shares and releasing the remaining 30% on the domestic and international stock exchanges through an IPO. The Iron Assets Com pany will in turn own 100% of Temurtei iron ore deposit, 34% of Temurtein Ovoo zinc deposit, 100% of Temur Tolgoi iron ore deposit, and 100% of Darkhan Metallurgical plant.

Source: State Property Committee

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Privat isation of State Properties

The State Property Committee has already bundled the uranium assets it holds from the strategic deposits and created a Uranium Assets company – MonAtom LLC. The privatisation plan is similar to the previous cases, to retain 70% of the business and release the remaining 30% on domestic and international stock exchanges through an IPO. Mon Atom will in turn own 51% of Central Asia Uranium Company (58% owned by Khan Resources), 51% of Gurvan Bulag uranium deposit, 51% of Mardai uranium deposit (also owned by Khan Resources), 34% of Coge Gobi LLC (a joint Mongolia-French company, a subsidiary of Areva), and 51% of Gurvan Saikhan uranium deposit. According to the Uranium Law (2009), the State is entitled to control 51% of all uranium assets in Mongolia.

18.1.3 State Property Committe

(The following bullet points have been highlighted by the SPC)

Structure, duties and team

• The State Property Committee is a Government agency with the functions to own, use and protect state owned properties; • The State Property Committee operates with a total of 65 employees including a Chairman, 8 part time members, 3 departments and 4 divisions. The Government designates a Committee member based on the proposal of the Chairman.

Full powers of the State Property Committee

• Administer the activities on improvement of ownership, storage and protection of the state property and monitor its implementation; • Manage and oversee the recording of primary accounting documents, census and balance sheets of the state property, monitor and control its use and take measures to improve its efficiency; • Negotiate with relevant organization and determine planning, profit and revenue distribution, remuneration norms and normative of a state owned legal body; • Manage privatization of State Owned Enterprises based on a list approved by the Government and report performance; • Provide professional and methodological assistances to manage local properties; • Assign a state property representative in a state owned legal body and monitor its activities; • Review and approve proposal and order of excluding immovable property or movable property belonging to the fixed asset from account and make a decision on new purchase; • Other powers specified in the law.

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Privatisation of State Properties

18.1.4 Recent developments

Mongolian Stock Exchange

Contract agreement signed between In December 2010, the London Stock Exchange (LSE) signed a contract agreement MSE and LSE with the Mongolian Stock Exchange (MSE). It was informed that LSE officials will arrive in Mongolia in the third week of January, when the terms of the contract agreement will be announced to the public.

Tavan Tolgoi

Erdenes – Tavan Tolgoi, sole owner of Erdenes –Tavan Tolgoi (TT) LLC, a subsidiary of the State Property Committee the deposit, holds 15bn shares. owned Erdenes MGL, is the current fully authorised owner of TT licenses and holds 15 billion shares. The delegation of 10% of the Eastern Block’s ownership Eastern block privatisation to domestic rights to the citizens of Mongolia and the sale of another 10% at a market price to investors in Q1 2011, afterwards IPO Mongolian private enterprises will be organized in Q1 of 2011. The planned IPO of selling 29% of the same block on domestic and foreign stock exchanges will be organized in stages and start being implemented as early as possible in 2011.

Tender for the contract miner of the Eastern Block is ongoing.

2011 plans: - To raise funds for project financing - To cooperate with international and domestic investment banks and advisors in order to prepare for the IPO - To start work on infrastructure development, including water supply, mine camps, power plant and roads.

Eastern block privatisation to domestic The tender for strategic investors for the Western Block has been officially th investors in Q1 2011, afterwards IPO announced and closed on 17 January at 16:00. According to the latest update, China’s Shenhua Energy Co, Peabody Energy Corp from the US, a Russian Deadline for strategic investors: consortium led by Gazprom, a consortium of four Japanese trading houses, 17 Jan 2011 including, Itochu Corp., Sumitomo Corp., Sojitz Corp. and Marubeni Corp., a consortium of 10 South Korean companies, including Posco and Korea Electric Deadline for contract miners: Power Corp., Anglo-Australian mining companies Rio Tinto and BHP Billiton, 27 Jan 2011 Brazil’s Vale, and India’s International Coal Ventures Pvt, a joint venture of five state-run companies, have expressed their interest to participate in the bid. The tender for contract miners for the Eastern Block has been officially announced th and is about to close on the 27 January 2011.

Erdenet Factory, MongolRosTsvetMet and Dornod Uranium

14 December 2010, 9 cooperation In December 2010, on his last visit to Moscow, the Mongolian Prime Minister agreements signed between Mongolia Sukhbaataryn Batbold has signed nine cooperation agreements with his Russian and Russia: counterpart, Vladimir Putin. The negotiations included settlements on the - Debt settlement Mongolian debts to Russia and the national level joint venture, Dornod Uranium. - Dornod Uranium JV An agreement was signed specifying the business plan for the uranium deposit, - Erdenet + MonRosTsvetMet = according to which the joint venture would start functioning in 160 days. It also merger & IPO informed that the two existing Mongolian-Russian joint ventures, Erdenet and MongolRosTsvetMet, may merge and market their stock. Together the two

ResCap Mongolia 101 P a g e | 125 Res ource Investment Res Cap Capital

January 24 2011

Privatisation of State Properties

companies account for about 20% of the Mongolian GDP with Erdenet Copper Mine taking up 26.5% of total exports. Extensive modernization of Erdenet Copper Mine and MongolRosTsvetMet is currently in progress, and the privatisation process is intended to considerably enhance the two companies’ competitiveness and have a constructive effect on the Mongolian economy.

ResCap Mongolia 101 P a g e | 126 Res ource Investment Res Cap Capital

January 24 2011

Demographics

19 Demographics

A country the size of Western Europe with only 2.8 million people...

2009: 2.8m people (NSO estimate) In 2009, the National Statistics Office estimated that the population of Mongolia was 2.8 million people. The population growth rate is approximately 1.2%. Around - 59% below 30 59% of the citizens are below the age of 30 and 27% are below the age of 14. - 27% below 14 Compared to EU countries and Japan that are going through a period of “demographic winter”, Mongolia’s population is significantly younger. In Population growth rate 1.2% November 2010, the government conducted the 10 - yearly population Census, the results of which are yet to be released in 2011.

POPULATION, IN THOUSANDS

2800 2700 2600 2500 2400 2300 2200 2100 2000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: National Statistics Office

UNEMPLOYMENT RATE, % OF TOTAL LABOUR FORCE

14 12 10 8 6 4 2 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Source: IMF

ResCap Mongolia 101 P a g e | 127 Res ource Investment Res Cap Capital

January 24 2011

Demographics

13% unemployment rate in 2009 The unemployment rate in Mongolia has been lower than 4% since 2002. However, during the peak of the economic crisis (2009) it reached 13% and now is returning to its regular levels.

Since the transition into a market economy, the overall fertility rate (children per Since 1990: steadily declining fertility woman) in Mongolia has been declining at a steep rate compared to other rate countries in the world. According to UN estimations, the fertility rate in 1970-

1975 was 7.3 children per woman, while in 2005-2010 the number has decreased

to 1.9.

40% of population live in UB, Mongolia is becoming more urbanized with more rural population migrating to 20% in other urban areas the capital city in search of better living conditions. Currently about 40% of the 40% in rural areas population live in Ulaanbaatar, around 20% live in Darkhan, Erdenet, provincial centres and soum settlements and the remaining 40% live in rural areas. Semi- 30% are herders nomadic and nomadic herders make up around 30% of the entire population.

85% of Mongolia’s population consist of ethnic Mongolians, out of which 90% 90% of population: Khalkha Mongols consists of Khalkha Mongols. Buryats, Durbet and other ethnic groups make up the remaining 10%. People of Turkic origin, including Kazakhs, Tuvans and Uzbeks represent 7% of the population. The remaining 8% consist of Tungusic, Russian and Chinese people, although most Russians have left the country after the collapse of the Soviet Union.

ResCap Mongolia 101 P a g e | 128 Res ource Investment Res Cap Capital

January 24 2011

Languages

20 Languages

Many Mongolians have a good grasp of Russian and English

Official language – Khalkha Mongolian The official language in the country is Khalkha Mongolian. One can encounter other dialects such as Oiratian (spoken by Durbet) and Buryatian across the Cyrillic script adopted in 1937 country. Speakers of Khamnigan Mongolian also exist. The western region of Mongolia is occupied by Kazakhs and Tuvans who speak languages of Turkic origin.

Mongolians adopted the Cyrillic alphabet from Russia in 1937, before which they used to write in their traditional vertical script.

The majority people, especially the older population, speak fluent Russian, making it the most popular foreign language in the country. Currently English is gradually replacing Russian, being preferred among the younger generation. A substantial number of Mongolians work and live in South Korea, prompting the Korean language to also gain popularity in Mongolia. Plenty of youth are learning Chinese Traditional Mongolian script with growing importance of China as the other neighbouring power. Japanese is also widely spoken, especially due to the possibility to get access to Japanese Widely spoken languages: government funded scholarship programs. Older Mongolian academics, who studied in Germany during the Soviet times, can speak fluent German. Because - Russian households endeavour to send their children abroad for higher education (as long - English as there are possibilities to support them throughout their stay) many younger - Chinese Mongolians today fluently speak Western European languages such as French, - Korean German and Italian. - Japanese - Western European

ResCap Mongolia 101 P a g e | 129 Res ource Investment Res Cap Capital

January 24 2011

Religion

21 Religion

Religious practices were largely impeded by the Communist regime.

50% - Buddhists According to the CIA World Factbook and the U.S. Department of State, 50% of 40% - not religious Mongolia's population follow the Tibetan Buddhism, 40% are listed as having no 6% - follow Shamanism, Baha’i & religion, 6% are Shamanist, Baha'i and Christian, and 4% are Muslims. Christianity 4% - Muslims Historically, various forms of Shamanism have been practiced and widely accepted as the main religion by the Mongolian nomads. Tibetan Buddhism was first introduced to Mongolia during the ruling of Yuan Dynasty and currently is the most commonly practiced religion, although Shamanism is still popular. During the Mongol Empire Islam was also favoured and the three khanates (independent states of that time) adopted Islam.

First Shamanism, then Buddhism, then Following the Communist influence, throughout the XX century, religious practices Socialism (destruction of monasteries), were largely restrained by the government. The Buddhist Temples were a then Democracy (resumption of religious replication of the pre-socialist feudal system and the Khaan of Mongolia was the practices) head of the Temple (The 8 th Jebtsundamba Khutuktu Bogd Khaan). In 1930, most of Mongolia’s 700 Buddhist temples were destroyed and around 18,000 monks (lamas) were killed under the regime led by “Marshal” Choibalsan, who held a position equivalent to today’s Prime Minister. While in 1924 there were around 100,000 Buddhist monks, by 1990 the number decreased to only 110.

Collapse of the Soviet Union and the Democratic Revolution of 1990 restored the legitimacy of religious practices. The Tibetan Buddhism again became the most practiced religion in Mongolia. Other religious streams were also resumed, including Islam and Christianity. Statistics suggest that the number of Christians rose from just 4 in 1989 to 40,000 in 2008.

ResCap Mongolia 101 P a g e | 130 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

21.1 Tavan Tolgoi Stock data Price, MNT 530,000 Company brief: There are two companies named Tavan Tolgoi (TT). One is the 6.4 Price, US$ 436.86 billion tonne deposit Tavan Tolgoi which is 100% owned by the state-owned The peak, MNT 670,000 52Wk Range, MNT 120,000 - 670,000 Erdenes MGL and the other one is Tavan Tolgoi JSC listed on the MSE. The main Mkt cap, MNTbn 279 Tavan Tolgoi deposit complex is partially owned by Erdenes MGL (6 mining Mkt cap, US$mn 230 licenses), Mongolia Mining (1 mining license), Moril Luu (1 mining license), Broad Avg daily turnover, US$ 8,467 (1 mining license), Daitsuki (1 mining license) and Tavan Tolgoi JSC with 2 mining Free float, % 11.90% licenses. The South Gobi provincial government owns 51% of TT JSC and the rest is YTD performance, % 293% privately held. TT JSC is the biggest company on the MSE by market capitalization and the third largest coal miner in Mongolia by production volume. In 2004, the Key indicators Company signed a coal export contract with a Chinese client and since then its P/BV 5.27 coal export to China has substantially increased. The company cooperates with P/E 6.53 Tavan Tolgoi Trans private company in transporting coal to China. Although in ROE 116% Gansu and Inner Mongolia semi-soft coal and hard coking coal prices are around Gross margin 58% $85/t and $155/t respectively, the company is still selling their coking coal at Net debt/Equity -62% $7.5/t to the local market due to the state-regulated sale prices and is exporting EBITDA margin 59% at around $25-35/t. Since 2007 the company almost tripled the extracting EV/EBITDA 1 capacity to 2mtpa. In 2009, they extracted over 2m tonnes with 170 employees. EV/Resource 3.55 Dividend yield 61% Deposit: Tavan Tolgoi JSC’s license area is 169ha located in the South Gobi region of Mongolia, 250km from the Mongolian border with China and 550km from Share price performance, MNT Ulaanbaatar. The total proven reserve is 20.5m tonnes and the resource is 60m tonnes of coking coal with a calorific value of 6,500-7,500kcal/kg, 20% ash and 8.5% moisture. 700

600 Financial highlights: In the last few years, total revenue increased due to the company’s investment of $1.0m into new technology and equipments. In 2009, 500 the company sold over 2.5mt of coal to both foreign markets and local clients, and

MNT'000 400 worked with $65.8m revenue and $29.5m of net profit. Revenue has surged 12 times since 2006 and 65 times since 2003. Cash cost per tonne of Tavan Tolgoi JSC 300 coal mine is approx $11-12, which is very low compared to international peers. As 200 a result of the low cost, Tavan Tolgoi JSC mine’s profitability is great (ROA at 100 103%, ROE at 116%, gross margin at 58% and net margin at 44.8%, as of FY2009).

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Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009

Sales 32,564 47,797 95,436 Net profit 12,863 16,134 42,753 Provincial EPS, MNT 24,425 30,636 81,178 8% governor 7% Total Asset 15,519 23,984 58,835 Ajnai Current Asset/Non -Current Asset, % 638% 808% 1091% Corporation Net debt/Equity, % -37% -8% -62% Gross margin, % 52% 45% 58% 51% Net margin, % 40% 34% 45% 34% Board members EV/EBITDA, (x) 0.8 2.2 1.0 Sales growth, % 301% 47% 100% Retail shareholders 1 Equity Research

Source: Company data and SCH& CD

ResCap Mongolia 101 P a g e | 131 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.1 Baganuur Stock data Price, MNT 10,600 Price, US$ 8.74 Company brief: 53% of the Mongolian central electricity system depends on The peak, MNT 11,000 Baganuur coal supply. Containing an estimated reserves of 1.3 billion tonnes of 52Wk Range, MNT 2,800 - 11,000 brown coal, Baganuur is the biggest coal supplier to coal consumers in Mongolia. Mkt cap, MNTbn 222 The coal mine satisfies 100% of TPP-2 (Thermal Power Plant – 2), 100% of TPP-3 Mkt cap, US$mn 183 and 50% of TPP-4’s (the biggest power plant in Mongolia) coal needs. From 1996- Avg daily turnover, US$ 71,023 2004, the Mongolian Government modernized and expanded production at Free float, % 11.37% Baganuur by acquiring $31.1m and $50.9m in loans from the World Bank and the YTD performance, % 203% Japanese government respectively. As a result, the company’s exploitation capacity reached 4mtpa. Currently the mine extracts 3mtpa due to central-region Key indicators demand, old equipments and financial constraints. The State owns 75% of the company and the biggest private shareholder is Firebird investment fund, holding P/BV - P/E - over 14%, the rest is free float. Baganuur JSC is included in the 2011-2012 ROE 51% privatization plan, approved by the parliament of Mongolia. Gross margin 11% Net debt/Equity -541% Deposit: Baganuur coal deposit is one of the strategically important deposits of EBITDA margin -15% Mongolia (area: 0.6ha, waste:10-60m on average, general coal seam: 10.3-17.2m, EV/EBITDA - coal seam in the central part: 25-96m). The mine is located 139km east of EV/Resource 0.39 Ulaanbaatar and has access to railway. Baganuur’s strip ratio is around 1:1 to 6:1. Dividend yield - The total proven reserve is 600mt of coal with a calorific value of 3,200- 3,500kcal/kg, 12.9% ash and 32.9% moisture. Share price performance, MNT

Financial highlights: Despite the mine making losses due to the regulated coal 12.0 11.0 prices, the reserve based valuation of Baganuur is significantly low compared to 10.0 international peers. Baganuur’s EV/Reserve multiple is 0.39$/t. In 2009, the 9.0 company produced 3mt of coal at COGS of $30.5m or $10.15/t mining cost. SG&A 8.0 and other costs were $0.97/t. In 2009, the company operated with a gross margin 7.0

MNT'000 of 11%, an operating margin of 1% (due to the slight relaxation the sale price to 6.0 5.0 $12.54), net losses of $6.3m (due to exchange rate adjustments of debt and 4.0 interest rate payments). In December 2010, the Parliament made a decision to 3.0 cover all losses acquired from the exchange rate risk, inducing Baganuur’s 2.0 shareholder equity to increase by around $13.8m. Currently the company has $54.3m of long term debt on the balance sheet. In 2010, as part of the State’s 1/4/10 2/4/10 3/4/10 4/4/10 5/4/10 6/4/10 7/4/10 8/4/10 9/4/10

10/4/10 11/4/10 12/4/10 investment plan of $8.5m, Baganuur JSC purchased two additional 100t capacity trucks for $2.9m.

Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009 Sales 34,308 43,174 49,483 Net profit -7,184 -11,077 -9,121 EPS, MNT -342 -528 -435 14% 11% State Total Asset 61,466 64,776 75,472 Current Asset/Non -Current Asset, % 105% 109% 71% Gross margin, % -1% 6% 11% Master Net margin, % -21% -26% -18% Fund/Firebird EV/EBITDA, (x) na na na ROE, % na na na Dividend yield, % 0% 0% 0% Free Float 75% Sales growth, % 7% 26% 15%

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101 P a g e | 132 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.2 Shivee Ovoo Stock data Price, MNT 12,800 Company Brief: Shivee Ovoo, an open pit mine, satisfies 25% of coal consumption Price, US$ 10.55 in Mongolia. 80% of Shivee Ovoo coal production is supplied to TPP-4, the biggest The peak, MNT 14,900 power plant in Mongolia, and the remainder goes to Ulaanbaatar Railway, 52Wk Range, MNT 2,400 - 14,900 MongolRosTsevetment, Bor Undur, Sainshand, Zuun Mod and others. The Mkt cap, MNTbn 172 Mongolian Government owns 90% of the company through Erdenes MGL and Mkt cap, US$mn 142 9.0% is held by Firebird Fund. Production capacity of the company increased to Avg daily turnover, US$ 3,063 Free float, % 1% 2mtpa owing to the $67.6m loan from the Japanese government obtained in YTD performance, % 288% 1998-2004. The company produces 1.4mtpa of coal. In 2010, the Parliament of Mongolia established a cooperation contract to build a thermal power plant relying on Shivee Ovoo coal deposit. The Mongolian and Chinese governments Key indicators signed an agreement to erect a 4800MW thermal power plant, from which P/BV - 4500MW would be exported to China and the rest supplied to local consumers. P/E - The Mongolian government plans to build TPP-5 in UB, which will utilise 4mtpa of ROE 37% Gross margin 8% Shivee Ovoo’s coal. The Mongolian electricity consumption is 1,261kWh per capita Net debt/Equity -1268% (3 times, 6 times and 13 times lower than Kazakhstan, Russia and Canada EBITDA margin -68% respectively), however, the demand is inevitably increasing. EV/EBITDA - EV/Resource 0.08 Deposit: Shivee Ovoo coal deposit, one of the strategically important deposits of Dividend yield - Mongolia, covers 4,293ha with a width of 35km and a length of 15km, located 260km southeast of Ulaanbaatar and in 20km from the Choir railway station, one of the stops of the Trans-Mongolian rail line. Total proven reserve is 600mt of Share price performance, MNT brown coal and 2.7bn tonnes of resources. Out of the proven reserve, 564mt is economically viable. Coal contents are 2,963-4,407kcal/kg calorific value, 40% ash 16.0 content, 8.5% of moisture, 0.5% sulphur and 43% volatile material. 14.0

12.0 Financial highlights: At present, resources of the deposit is significantly undervalued considering the uncertainty over future dealing pipeline of Shivee 10.0 Ovoo and regulated tariffs on electricity and coal prices. The coal mine had 8.0 MNT'000 operational margins of 1%, 5% and 7% in 2007, 2008 and 2009 respectively, even 6.0 though the company incurred net losses due to the exchange rate adjustments of 4.0 long term debt. The company has accumulated $63.7m of debt on the balance

2.0 sheet as a result of the long term loan, which was obtained in 1998-2004 to increase the company’s mining capacity. In December 2010, the Parliament made a decision to cover all losses acquired from the exchange rate risk, inducing Shivee 1/4/10 2/4/10 3/4/10 4/4/10 5/4/10 6/4/10 7/4/10 8/4/10 9/4/10 10/4/10 11/4/10 12/4/10 Ovoo’s shareholder equity to increase by around $13.1m.

Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009 1% Sales 10,813 14,731 16,202 9% Net profit -566 -6,318 -11,048 EPS, MNT -42 -471 -823 State Total Asset 68,325 70,242 92,244 Current Asset/Non -Current Asset, % 49% 55% 45% Gross margin, % 3% 8% 10% Master Net margin, % -5% -43% -68% Fund/Firebird EV/EBITDA, (x) na na na ROE, % na na na Dividend yield, % 0% 0% 0% 90% Free Float Sales growth, % 10% 36% 10%

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101 P a g e | 133 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.3 APU Stock data Price, MNT 1,855 Company brief: APU is the fourth largest company on the MSE by market cap. It is Price, US$ 1.53 the leading brewery and alcohol producer in Mongolia, taking up over 50% of beer The peak, MNT 2,000 and over 40% of vodka markets. The company distributes their products through 52Wk Range, MNT 630 - 2,000 Mkt cap, MNTbn 138 over 6000 trade and shopping centres nationwide, the largest distribution Mkt cap, US$mn 114 network in Mongolia. APU has registered the vodka trademark "Chinggis Khan" in Avg daily turnover, US$ 18,612 over 20 countries worldwide. On June 11, 2010, APU opened a new brewery Free float, % 8.10% factory with a capacity of 58.4m litres/year of beer, after receiving a $25m loan YTD performance, % 194% from the EBRD in May 2010. In 2009, APU produced 230,000 hectolitres of beer with about 700 employees. The company has an intensive plan to double its brewery capacity by 2014. Key indicators

P/BV 4.35 Market presence: APU is the biggest player in the beer market. The other major P/E 17.31 players in Mongolia are MCS and GEM. APU’s market share in the beer market has ROE 31% Gross margin 23% increased dramatically in recent years. Net debt/Equity 119% EBITDA margin 13% Financial highlights: In the last 2 years, the company’s revenue increased 9 times EV/EBITDA 7.58 to $59.9m and total assets increased 1.8 times to $49.4m. Gross margin is robust Dividend yield 5% at 22%. In FY2009, ROE reached 31%, the highest in the company’s history, on the back of net sales increasing 61% and high leverage of 1.24 x of D/E ratio. In 2009, the company expanded sales into urban markets. Share price performance, MNT

2.5

2.0

1.5

MNT'000 1.0

0.5

0.0

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10/4/10 11/4/10 12/4/10

Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009

Sales 10,114 53,799 86,867 Net profit 367 3,856 8,070 8% Shunkhlai EPS, MNT 5 52 109 Total Asset 39,751 47,918 71,858 Current Asset/Non -Current Asset, % 0.84 0.63 1.01 Net debt/Equity, % 517% 127% 119% Two key Gross margin, % 20% 21% 23% 40% 52% shareholders Net margin, % 4% 7% 9% EV/EBITDA, (x) na na 7.6x Free float ROE, % 6% 29% 31% Dividend yield, % nmf 5% 5% Sales growth, % na 432% 61%

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101 P a g e | 134 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.4 Mongolia Telecom Stock data Price, MNT 3,626 Company brief: Mongolian Telecom was established the under name of Price, US$ 2.99 Mongolian Telecommunication Company (MTC) in 1992. Then MTC was divided The peak, MNT 9,000 into two separate companies, Information Communication Network Company 52Wk Range, MNT 2,100 - 4,000 Mkt cap, MNTbn 94 (ICNC) and Telecom Mongolia JSC. ICNC is currently a 100% state owned company Mkt cap, US$mn 77 and Mongolian Telecom was partially privatized. Mongolia Telecom’s Avg daily turnover, US$ 800 shareholders are the Mongolian Government - 55%, Korean Telecom - 40% and Free float, % 5.30% the rest is free float. Mongolia Telecom is a quasi-monopoly in the land line YTD performance, % 58% telecommunications sector. The company has branches in all aimag and soum centres in Mongolia. The company also offers Wireless Local Loop (WLL), internet Key indicators and internet based services. Mongolia Telecom is the leasing backbone from P/BV 2.82 (ICNC) and has its own fiber optic network along the railway. The WLL network of P/E 17.75 Mongolia Telecom Company was introduced with South Korean LG Electronics ROE 9% Company’s help. A network, with a capacity of over 10,000 users, 7 base stations Gross margin 16% and a CDMA-based wireless network called “MY Phone”, was introduced on July Net debt/Equity 12% 8th, 2002. Within its expansion of services, the company introduced CDMA EBITDA margin 14% 450MHz, NGN+CDMA+IN, payment systems at such banks as TDB, Khan and EV/EBITDA 16.6 Savings and extended its prepaid card distributor’s network with ATMs. Dividend yield -

Market presence: The number of fixed telephone subscribers per 100 people is Share price performance, MNT 5.3, which is far below the world average of 17.8. The number of mobile phone subscribers per 100 people is 82.2, well above the world average of 67. The overall Mongolian telecommunication basic network leased by the ICNC consists 4.5 of 3,100km of analogue, and approximately 900km of digital lines connecting Ulaanbaatar and provincial centres. Mongolia Telecom has access to the INTELSAT 4.0 satellites in the Indian Ocean region and to the Express-6 satellite of the

3.5 INTERSPUTNIK system. The Wireless Local Loop (WLL) services were newly

MNT'000 introduced in May 1999. The Mobile phone market has undergone a remarkable 3.0 boom, with mobile phone users increasing 26% yoy to 2.38m as of June 2010. However, in current years, customers of fixed telephones have been decreasing at 2.5 about 10% per annum.

2.0 Financial highlights: In current years, the company’s revenue has been decreasing due to the shrinking fixed telephone market in Mongolia. The company’s 1/4/10 2/4/10 3/4/10 4/4/10 5/4/10 6/4/10 7/4/10 8/4/10 9/4/10

10/4/10 11/4/10 12/4/10 introduction of new services could not offset the decrease in revenue land line services.

Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009 Sales 31,471 26,655 24,657 5% State Net profit 5,321 2,776 2,893 EPS, MNT 206 107 112 40% Total Asset 41,487 39,736 38,147 Korean Current Asset/Non -Current Asset, % 0.83 1.09 1.26 Telecom Net debt/Equity, % -3% -11% -11% Gross margin, % 22% 16% 16% 55% Free Float Net margin, % 17% 10% 12% EV/EBITDA, (x) 19.6 9.3 16.6 ROE, % 16% 8% 9% Sales growth, % na -15% -7%

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101 P a g e | 135 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.5 Sharyn Gol Stock data Price, MNT 10,300 Company Brief: Sharyn Gol is the only MSE listed coal mine with an approved Price, US$ 8.49 JORC resource. In 1995, the company was partially privatized and floated on the The peak, MNT 13,500 MSE and in 2005 it became a 100% private company. The company has a capacity 52Wk Range, MNT 1,696 - 13,500 to extract 2mtpa of coal. It produces around 0.5mtpa and 80% of its coal is Mkt cap, MNTbn 74 supplied to Darkhan and Erdenet Thermal Power Plants (TPP). Currently, the Mkt cap, US$mn 61 company is owned by a New York based Fund Firebird (54.4%), local management Avg daily turnover, US$ 31,282 team (38.8%) and the rest is free float. As the Major shareholders want to convert Free float, % 8.14% YTD performance, % 507% the company into a western style coal company, the business is undergoing full- scale restructuring. The board has been changed with 2 Australians and 2 Americans and a new British CFO was appointed. They are proposing to expand its Key indicators drilling program to 30k meters. P/BV 51.66 P/E 337.04 Deposit: Sharyn Gol deposit is located 50km south of Darkhan city and 240km ROE 17% Gross margin 11% north of Ulaanbaatar, and connected through railroad to the cities. The deposit’s Net debt/Equity 545% total license area is 1,8ha. According to the company management, the total EBITDA margin 4% reserve is over 100-150mt of coal as a result of additional drilling of 16K meters. EV/EBITDA 63.16 Sharyn Gol recently found new coal seams, as well as highly mineralised EV/Resource 0.5 continuation of the current coal seams they are mining at the moment on the Dividend yield - license area. The coal quality is high grade thermal coal and in some places semi- soft coking coal. According to the company’s announcement made on 10 October Share price performance, MNT 2010, a new coal seam was discovered and most coal samples have a calorific value of over 7,000kcal/kg on an air-dried, ash-free basis as of early laboratory results. 16.0 14.0 Financial highlights: The company’s EV/Reserve multiple of 0.53$/t is relatively 12.0 cheap compared to international peers. Regulated low coal prices and delays with 10.0 payments for delivered coal by the TPPs cause financial problems to the company.

MNT'000 8.0 In FY2009, despite the fact that company’s production decreased by 22% to 426kt, 6.0 net profit increased to the highest point of $180m since 1998 as a result of 4.0 reduced non-operational costs. As for exports, historically the company sold coal 2.0 to Russia and China (2006, 2007). For the company to be able to export coal to 0.0 China $70 million must be spent on infrastructure, in which case production capacity could be increased to 2.5 mtpa.

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Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009

Sales 8,198 10,526 8,812 Master Fund/Firebird Net profit 173 61 219 EPS, MNT 24 8.5 30 Batmunkh Batkhuu 54% Total Asset 12,590 10,790 9,535 Sharyn Gol Energo Current Asset/Non -Current Asset, % 2.84 2.10 2.22 22% Net debt/Equity, % 1005% 737% 545% Batbold Gross margin, % 9% 10% 11% Net margin, % 2% 1% 2% MDR EV/EBITDA, (x) nmf nmf nmf 14% ROE, % 17% 5% 17% Balihuu Dambachultem 3% Sales growth, % 17% 28% -16% 1% 3% Anod Bank 0% 3% Free Float

ResCap Mongolia 101 P a g e | 136 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.6 Gobi Stock data Price, MNT 5,749 Company brief: Gobi JSC is the leading producer of cashmere and camel wool Price, US$ 4.74 products in Mongolia and the 5 th largest manufacturer in the cashmere market The peak, MNT 9,002.00 worldwide, with an annual capacity to process 1,000 tonnes of raw cashmere, 200 52Wk Range, MNT 3,850 - 7,700 tonnes of raw camel wool and 40 tonnes of sheep and yak wool. The company’s Mkt cap, MNTbn 45 products are sold through its own stores and vendor companies in the domestic Mkt cap, US$mn 37 market, and mostly through vendor companies in the international market. Even Avg daily turnover, US$ 13,764 Free float, % 16% though historically 80% of its products are exported to international markets, YTD performance, % 42% essentially Europe (60% of its export), in current years exports have been tightening. In 2009, 71.5% of total sales were derived from the domestic market and 28.5% from export. The company has over 130 partners in over 30 countries. Key indicators According to management estimates, in 2009 Gobi held 42% of market share in P/BV 1.8 the domestic finished products market. P/E 29.09

ROE 6% Market presence: China and Mongolia are the two biggest pure cashmere Gross margin 27% Net debt/Equity 38% producers with 60% and 30% of the world’s pure cashmere market share EBITDA margin 15% respectively. Chinese cashmere traders and companies buy as much as 75% of EV/EBITDA 13.22 Mongolian raw cashmere and the rest is bought by domestic cashmere Dividend yield - manufacturers. China is key to the Mongolian cashmere sector in terms of cashmere products and raw cashmere purchases.

Share price performance, MNT Financial highlights: Over the last 3 years, the company’s sales outside of Mongolia decreased and domestic sales rose sharply. In 2009, domestic sales 8.0 increased 44% and foreign sales decreased 39%. However, the company has 7.5 activated marketing efforts internationally, opening their own shops in North 7.0 America and Europe. But in 2010, their product competitiveness in foreign 6.5 markets weakened on the appreciating national currency versus the greenback. 6.0 5.5 As a result, management’s ambitious goal to increase sales up to $100m by 2012,

MNT'000 5.0 recovering Gobi brand’s reputation and former market internationally, appears 4.5 challenging. Gobi’s vertically integrated business model allows it to control 4.0 production costs, with the exception of raw material costs. 3.5 3.0

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10/4/10 11/4/10 12/4/10

Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009

Sales 20,282 19,585 20,247 Net profit -732 689 1,501 74% Tavan Bogd EPS, MNT -93.92 88.35 192.51 Total Asset 27,069 30,778 34,018 Current Asset/Non -Current Asset, % 2.22 1.92 1.48 Net debt/Equity, % 24% 34% 38% Foreign 2 Gross margin, % 8% 18% 27% stakeholders Net margin, % -4% 4% 7% EV/EBITDA, (x) na 15.4 13.2 11% Free float ROE, % -3% 3% 6% 16% Sales growth, % 16% -3% 3%

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101 P a g e | 137 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.7 BDSec Stock data Price, MNT 2,500 Company brief: BDSec is a local brokerage firm in Mongolia. The company was Price, US$ 2.06 established in 1991 under the name of Bayandukhum in the Tuv aimag (Central The peak, MNT 4,000 province) as a part of the privatization program in Mongolia. BDSec was the first 52Wk Range, MNT 1,600 - 2,700 underwriter in Mongolia licensed by the Financial Regulatory Commission in 2004. Mkt cap, MNTbn 28 The company is now licensed with brokerage, dealer, underwriting and Mkt cap, US$mn 23 investment advisory services. Major shareholders are Mr. Dayanbilguun, Avg daily turnover, US$ 7,267 Alexander Zwahr, Master fund-1 LLC and Master fund-2 LLC (together Firebird Free float, % 19% YTD performance, % 56% Fund)

Market presence: BDSec is the largest brokerage firm by transactions made on

the MSE with a market share of 50% in total trading turnover. They serve 17% of Key indicators domestic account holders and 47% of foreign account holders at the Securities P/BV 5.69 Clearing House and the Central Depository of Mongolia. P/E -

ROE -9% Gross margin 5% Financial highlights: In 2009, due to the crisis, the company’s total assets declined Net debt/Equity 1% 17% to $3.96m. As the company revenue decreased 13% to $1.45m in 2009, gross EBITDA margin - profit sharply fell and the company had net losses of $380k. As a result, EV/EBITDA - shareholder’s equity decreased 5% to $3.88m. Dividend yield -

Share price performance, MNT

2.9 2.7

2.5

2.3

MNT'000 2.1

1.9

1.7

1.5

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Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009

Sales 2,020 2,023 1,765 Management Net profit 991 363 -455 team EPS, MNT 121 33 -41 56% Total Asset 2,111 5,899 4,853 Current Asset/Non -Current Asset, % 2.36 0.91 0.95 Net debt/Equity, % 3% 16% 1% Master Gross margin, % 100% 64% 5% 25% Fund/Firebird Net margin, % 49% 18% -26% EV/EBITDA, (x) na na na ROE, % 99% 10% -9% 19% Free Float Sales growth, % na 0% -13%

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101 P a g e | 138 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.8 Aduunchuluun Stock data Price, MNT 7,000 Company brief: “Aduunchuluun” joint stock Company was established with Price, US$ 5.77 underground mining operations in 1954 to supply the Eastern Mongolian region The peak, MNT 8,331 with coal and meet Choibalsan city’s electricity demand. Later in 1969, the current 52Wk Range, MNT 450 - 8,331 open-pit mining was given a start with a capacity of producing 200ktpa of coal. In Mkt cap, MNTbn 22 1979, with research from Russian economists and technical analysis teams, the Mkt cap, US$mn 18 scope of operations was expended and capacity increased to 600ktpa. The current Avg daily turnover, US$ 127 capacity, with innovative technology and equipment, allows a production of 1.5- Free float, % 8% 2mtpa. Today Aduunchuluun LLC, which functions with well trained workers and YTD performance, % 1334% skilled managers, is fully capable of satisfying Dornod Power Plant’s long term coal needs. The deposit is included in the list of Mongolia’s tier-2 deposits of strategic Key indicators importance. Choibalsan city is connected to Russia by railway. Aduunchuuun coal products can also be delivered to China via Russian and Eastern Inner Mongolian P/BV 10.34 railways. P/E 53.84 ROE 19% Deposit: Aduunchuluun deposit is located in 5km from Choibalsan city, a centre of Gross margin 33% the Dornod province, 650 km east of Ulaanbaatar and 100 km from the Net debt/Equity 14% Mongolian-Chinese border. The total proven reserves and resources of brown coal EBITDA margin - are 241.3mt and 423.8mt respectively with gross calorific value of 3,203Kcal/kg, EV/EBITDA 4.5 9.9% ash content, 38.7% moisture, 1% sulphur and 45.8% volatile matter. The coal EV/Resource 0.82 seam is 25.65m in thickness, consisting of two layers, and is positioned 40-42m Dividend yield - below the surface.

Share price performance, MNT Financial highlights: The company’s gross margin is very high at 33% and 9.0 profitability is at 19%, even though the company sells their coal to local clients at 8.0 $6.6 per tonne. 7.0 6.0 5.0

MNT'000 4.0 3.0 2.0 1.0 0.0

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Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009 Sales n/a 9.8 2,881 Net profit n/a 1.5 409 8% Management EPS, MNT n/a 0.47 130.00 team Total Asset n/a 2,495 3,150 Current Asset/Non -Current Asset, % n/a 1.73 1.94 Two Net debt/Equity, % n/a 16% 32% shareholders 38% 54% Gross margin, % n/a 22% 33% Net margin, % n/a 15% 14% Free float EV/EBITDA, (x) n/a nmf 4.5 ROE, % n/a 0% 19% Dividend yield, % n/a 10% - Sales growth, % n/a n/a nmf

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101 P a g e | 139 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.9 Mongolia Development Resources Stock data Price, MNT 1,250 Company brief: Mongolian Development Resources (MDR) was the first property Price, US$ 1.03 and non-resource sector investment and project development company listed on The peak, MNT 1,410 the MSE, with a focus on high-growth investment opportunities in Mongolia. In 52Wk Range, MNT 750 - 1,410 December 2006, the company was initially established under the name Tuul Mkt cap, MNTbn 17 Songino Usnii Nuuts (Tuul Songino Water Resources) dedicated to infrastructure Mkt cap, US$mn 14 Avg daily turnover, US$ 10,678 development with a number of projects such as a Technical Water Facility, Free float, % Drinking Water Facility and a Pumped Storage Power Station. In December 2007, YTD performance, % 26% Tuul Songino Water Resources conducted an IPO. Over 70% of the company stake is owned by international investors mainly from the USA, Europe and Asia. According to an extraordinary shareholders meeting held in December 2009, the Key indicators company decided to transform into a diversified investment company, stopping P/BV 0.61 three prior infrastructure projects due to the unviable nature of the three projects P/E 35.24 caused by the state-regulated electricity tariff and the fact that the TPPs use fresh ROE - water from aquifers at no cost. Gross margin - Net debt/Equity - Market presence: MDR pursues attractive investment opportunities across EBITDA margin - EV/EBITDA 60.25 various sectors (mainly finance, property, tourism, construction service and Dividend yield - materials, consumer goods, agriculture, media, professional service, mining and metal and health care) in Mongolia and provides diversified exposure to the Mongolian economy for local and international investors. The company is to Share price performance, MNT launch a non capital raising Global Depositary Receipt program, an advanced capital market instrument, with the Bank of New York Mellon, in order to attract new international investors. 1.5 1.4 Financial highlights: Since IPO in December 2007, the main source of the 1.3 company’s revenues were from non-operational income of interest accruals on the company’s cash placed in term deposits with local banks. Since a new 1.2 management team was appointed, the company’s main operation is transferred MNT'000 1.1 to investment operation. Therefore, from 2010, the main revenue is to be derived 1.0 from investment yields they receive .

0.9

0.8

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10/4/10 11/4/10 12/4/10

Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009 Sales 26 - - Net profit -90 487 -145 Provincial 8% EPS, MNT -6.57 35.47 -10.58 7% governor Total Asset 27,798.06 28,341.76 13,324.43 Ajnai Corporation Current Asset/Non -Current Asset, % 0.79 0.60 5.16 Net debt/Equity, % -43% -33% -43% 51% Board member Gross margin, % 90% na na 34% Net margin, % -338% na na EV/EBITDA, (x) nmf 7.12 nmf Retail ROE, % 0% 2% -1% shareholders Sales growth, % na na na

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101 P a g e | 140 Res ource Investment Res Cap Capital

January 24 2011

As of 16 Dec 2010 Equity Research

1.10 Mogoin Gol Stock data Price, MNT 10,349 Company brief: Mogoin Gol mine was established in 1970, and now supplies coal Price, US$ 8.53 mainly to the centres of Khuvsgul and Zavkhan provinces and eastern soums of The peak, MNT 11,376 the Zavkhan province. In 1983, 1989 and 1995 production capacity was expanded 52Wk Range, MNT 1,970 - 11,367 with investments in new mining equipment and machines, increasing to 200ktpa Mkt cap, MNTbn 9 of coal production. In 1995, the company was partially privatized, floating 49% of Mkt cap, US$mn 7 the company on the MSE. Then the state owned 51% was transferred to the Avg daily turnover, US$ 1,021 provincial government’s ownership. Currently, the company has 74 employees. In Free float, % 9% FY2009, Mogoin Gol JSC supplied 18K tonnes of coal to western provinces’ clients, YTD performance, % 425% Zavkhan (71.4%) and Khuvsgul aimags (28.6%), providing them with energy and heating. Key indicators P/BV 3.78 Deposit: Located in the Tsetserleg soum of Khuvsgul aimag, 880km northwest P/E nmf from Ulaanbaatar city and 209km west from the Khuvsgul province centre, ROE 0% Mogoin Gol coal deposit is strategically important for the northern region of Gross margin 24% Mongolia. The deposit covers an area of 89ha. Total reserve is a 13.6m tonnes of Net debt/Equity 36% coal with a calorific value of 5,200-7,100kcal/kg, 7.3% ash and 0.9% moisture, out EBITDA margin 3% of which 3.6m is viable by open pit mining. Mogoin Gol’s average strip ratio is EV/EBITDA nmf about 5-7. According to the management of the company, the remaining total EV/Resource 0.59 reserve is 11.2m, out of which 3.1m was viable by open pit mining as of 2009. Dividend yield - Financial highlights: In 2009, the company sold 18k tonnes of coal and worked Share price performance, MNT with $280k of revenue, gross margin of 24% and net margin of 1%. However, the company is on track to surge production volume over 10 times through 2 separate coal selling pipelines: 1) future dealing pipeline relating to electricity consumption 12.0 of Mongolian western regions, and 2) delivery of coal to the nearby Russia to 10.0 cover for lost production caused by Raspadskaya accident. The opening ceremony of a 60MW thermal power plant (TPP), the first ever TPP in Mongolia with private 8.0 investment, to be built on the basis of Mogoin Gol coal mine, was held on June 20, 6.0 2010. On Dec 29, 2009, Yuanda Group Ltd, a Mongolia-China joint venture, and New Asia Mining LLC signed an Engineering, Procurement, Construction and MNT'000 4.0 Management contract (EPCM) with the Mongolian Ministry of Mineral Resources 2.0 and Energy to construct the 60MW TPP. It is expected that the commercial operation of the TPP will start in early 2012, providing energy to two western 0.0 provinces of Mongolia including Zavkhan and Gobi-Altai with an average power consumption of 15MW per year. According to the provincial government, once 1/4/10 2/4/10 3/4/10 4/4/10 5/4/10 6/4/10 7/4/10 8/4/10 9/4/10 10/4/10 11/4/10 12/4/10 the TPP operation starts, Mogoin Gol JSC will supply 200k tonnes of coal annually to its prospective TPP, increasing current production volume 12 times.

Shareholders Key financials, MNT million unless otherwise stated 2007 2008 2009 Sales na 300 351 Provincial Net profit na 4 4 government EPS, MNT na 4.8 4.8 Total Asset na 1,053 3,172 51% 40% Current Asset/Non -Current Asset, % na 0.79 0.67 Mogoin Gol Net debt/Equity, % na 69% 36% Energy/Transneft Gross margin, % na 24% 24% Net margin, % na 1% 1% 9% EV/EBITDA, (x) na nmf nmf Free Float ROE, % na 1% 0% Sales growth, % na na 17%

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101 P a g e | 141 Res ource Investment Res Cap Capital

January 24 2011

Equity Research

Analyst Certification We hereby certify that all of the views expressed in this research report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our respective compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Important Disclosures Resource Investment Capital ("ResCap") is a boutique corporate finance advisor working with clients in connection with mergers and acquisitions, project development, public and private capital raisings and other strategic matters. ResCap is based in Ulaanbaatar, Mongolia with a dedicated focus advising on Mongolian-related transactions.

Disclaimer This report is made for information purposes only, and does not constitute an offer, solicitation of an offer to purchase, hold, sell, invest or make any other financial decision. In making decisions, investors may rely on their own examinations of the parties and risks involved. Information contained in this report is obtained from the sources believed to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors such information provided ‘as is’ without warranty of any kind and ResCap, in particular, make no representation or warranty, express or implied, as to accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances, ResCap has any liability to any person or entity (-ies) for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligible or otherwise) or other circumstances or contingency within or outside the control of any of their directors, managements, officers, employees, or agents in connection with compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, loss profits) even if ResCap is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information.

ResCap Mongolia 101 P a g e | 142 Res ource Investment Res Cap Capital

January 24 2011

References

2 References

IMF (Oct 2010); Joint Statement by Mongolia’s Minister of Finance, Governor of the Bank of Mongolia and IMF staff Mission, Press Release No. 10/387 IMF (Jun 2010); Mongolia: Joint IMF/World Bank Debt Sustainability Analysis Under the Debt Sustainability Framework for Low-Income Countries, IMF Country Report No. 10/166 World Bank (Oct 2010); Mongolia Quarterly Economic Update CIA – The World Factbook Bank of Mongolia, Monetary Policy Guide for 2011 Bank of Mongolia (Nov 2010); Monthly Statistical Bulletin Bank of Mongolia (Nov 2010); Managing Mongolia’s Growth: The Role of The Central Bank National Statistics Office, Monthly Bulletin (Dec2010) Trade and Development Bank of Mongolia (Dec 2010); Mongolia’s Investment Needs and Opportunities, Presentation Trade and Development Bank Information Memorandum (October 2010) Ministry of Road, Transportation, Construction and Urban Development of Mongolia (Oct 2010); Mongolia: Building a Sustainable Economic Growth through Downstream Industries and Rail Infrastructure, Presentation Ministry of Food, Agriculture and Light Industry of Mongolia; Agricultural Policy (2008-2010) Business Council of Mongolia (Nov 2010); Mongolia Mining Supply Chain, Presentation Energy Efficiency Study of Thermal Power Plant #4 (2006); Technical Report EBRD (Nov 2010); Mongolia Investment Summit in London, Presentation Engineering and Mining Journal (Aug 2010); Mongolian Mining, Global Business Reports Eurasia Capital Management (Oct 2010); Mongolia Development Resources: Property and Infrastructure Developer in Mongolia, Presentation State Property Committee of Mongolia (Oct 2010); Privatizing Mongolia’s State Owned Assets and What This Means for Investors, Presentation Dewey & Le Boeuf (Nov 2010); Overview of the Legal Framework for Foreign Investment in Mining and Infrastructure in Mongolia, Presentation PricewaterhouseCoopers (2010); Mongolia Doing Business Guide 2010-2011 General taxation Law of Mongolia Corporate Income Tax Law of Mongolia Personal Income Tax Law of Mongolia Wikipedia (Mongolia History and Public Relations) Value Added Tax Law of Mongolia Business Council fo Mongolia (BCM Newswire)

Some information in this report may have been derived from the following sources:

Business Council of Mongolia World Bank Bank of Mongolia Eurasia Capital Trade and Development Bank (esp. Information Memorandum Oct. 2010) International Monetary Fund Price Waterhouse Cooper (esp. Tax Law)

ResCap Mongolia 101 P a g e | 143 Res ource Investment Res Cap Capital

January 24 2011

Contacts

3 Contacts

ResCap 3rd Floor, Monnis Tower 15 Chinggis Avenue 1st Khoroo Sukhbaatar District 210648, Ulaanbaatar, Mongolia

Tel/Fax: +976 70100095 www.resource-cap.com

David Hanbury [email protected] +976 99998853

Enkhbayar Davaatseren [email protected] +976 99007069

Uyanga Orgodol [email protected] +976 99094282

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