March 2010 No. 42, Volume 4

ran nvestment TURQUOISE Monthly March 2010 Volume 4, No 42 PARTNERS

THIS MONTH

HAPPY PERSIAN Market Overview 2 NEW YEAR In February, the Tehran Stock Exchange’s positive performance continued on from the previous month. The main 1389 reason was viewed as gains in the global prices of metals and crude oil, following the weakening of the US Dollar. Trade volumes also jumped by 60% this month.

Turquoise Iran Equity Investments 4 This section provides data and charts on the performance of all portfolios of Turquoise Iran Equity Investments for the month of February.

Country Overview 6 The capture of Abdolmalek Rigi by the Iranian intelligence service and the Mehr housing scheme will be discussed in this section.

Economy 8 Iran’s copper industry, the Central Bank’s monetary policy for the coming year, Iran’s free trade agreements and the latest D8 summit will be covered in this section.

Iran Investment Monthly is produced by Turquoise Partners, No. 17 East Gord Alley, Turquoise Partners. Distributed electroni- Bidar St., Fayyazi (Fereshteh) Ave.

cally by exclusive subscription. Tel : +98 21 220 35 830 Fax : +98 21 220 49 260 Chief Editor: Ramin Rabii Email : [email protected] Consulting Editor: Eddie Kerman To nd out more about Turquoise Partners, Authors: Shervin Shahriari visit our website at: Ali Mashayekhi www.turquoisepartners.com. Haft-Seen table, set up as part of Iranian New Year, Norouz, celebrations Year, Haft-Seen table, set up as part of Iranian New © 2010 All rights reserved Iran Investment Monthly, Volume 4, No. 42 This wasthebestperformingsectorinFebruary. Strongearningsresultsforthe Sugar andBy-Products increased therisksinsteelsector. both massimportsandalsothetargeted subsidiesplananditspotentialadverseimpactonenergy costs,have The generalconsensusseemstobebullishonthepriceofsteel.However, analystsargue thatthethreatfrom (an IslamicformofFuturescontract)grewbyanaverage20%. 11% invalueandhadthegreatestpositiveimpactonmarketindex.Inaddition,pricesofSalafcontracts manufacturers sawpriceincreases.MobarakehSteelCo,thethirdlargest listedcompanyonthe TSE, gained Mines, werethehighestonanycommodityexchangeinworld.Unsurprisingly, thestockpricesofsteel $800 ontheIranianMercantileExchange(IME). These prices,accordingtotheMinistryofIndustriesand Steel products,suchashotandcoldsheetsbillet,weretradedinFebruaryatpricesbetween $700and Steel Some ofthekeysectorsandeventsmarketwillbeanalysedbelow: well asseveralotherindustrialsectors. increased marketvolatility. This wasparticularlynotableinthecommodityandmanufacturingsectors,as economy andtheglobalmarketsresultedinalarge volumeofshareschanginghandsandconsequently, Trading activityalsoreacheditshighestlevelofthepastfourmonths. Varying investoroutlookonthedomestic price changesaresomewhatexaggerated. markets haveresultedininvestorsbecomingverysensitivetocommodityprices. As aresult,reactionsto and zincleadproducerswereamongthetopgainersofmonth.Recentvolatilityincommodity weakening oftheUSDollar. This resultedinpriceralliesmostcommodityrelatedsectors.Steel,ironore, further gainsintheglobalpricesofmetalsandcrudeoilsecondhalfmonth,following next year’s statebudgetresultedinmanyinvestorsadoptingacautiousapproach.However, there were In the The Tehran StockExchange(TSE)startedoff slowlyinFebruary, but Market Overview year alongwithanticipationoffurtherincreasesinpro After aslumpintheglobalpriceofsugar2007, thedomesticmarketwas 10, whichre investor attentiontothissector. Currently, theweightedaveragepricetoearningsratioofsectorisabove This year hasbeen amongthe worst forcompanies in this sector. Declines insales areacommon problem Agricultural &IndustrialMachinery stood at$137million,and onlyoneofthesecompaniesrankedamongthe top100largest onthe TSE. capitalisation andarerelatively illiquid. As attheend ofFebruary, totalmarketcapitalisationofthesector index monthlygains. There are14listedcompaniesin thissector. However, theyallhaveasmallmarket The sectorindexgained 43%invalueoverthecourseofmonthand brokethe5-yearrecordofsector expansion plans.Domesticconsumptionisestimated at2milliontonnesperannum. conditions forsugarmanufacturersandthereisa considerableamountofinvestmentbeingmadenowinto this year. However, pricerecoveries sincethebeginningofcurrentIranianyearhaveimprovedbusiness This resultedinafalldomesticproductionfrom 1.3milliontonnesin2007,tojustover500,000 [ rst halfofthemonth,uncertaintiessurroundingtargeted subsidiesplanandtheanticipationof \ ects thebullishviewsofinvestorsonthissector. [ tability inthecomingyearresultedsigni [ nished themonthonapositiverun. \ ooded withimportedsugar. [ rst 9monthsoftheIranian 2 [ cant Market Overview 3

throughout the sector. Delays in payments from customers (the largest of whom is the government), have also brought about signi[cant cash \ow problems for these companies. To make matters worse, the high cost of bank loans (with interest rates of 22-26%) is placing considerable [nancial strain on these companies, to the point that the majority of them have become loss making this year.

In February, Teraktor Sazi, Iran’s largest producer of agricultural machinery and equipment, cut its earnings forecast for the existing year to $9 million. This is 50% lower than the previous year. However, the company reported a net loss of $4 million for the [rst 9 months of the Iranian year and analysts are sceptical about the company’s ability to generate a pro[t this year. This is the worst pro[tability performance of the company for a decade. Teraktor Sazi’s shares have lost 30% of their value over the past 6 months.

Fixed Income Market The Iranian [xed income market had another active month in February. In this month, two sets of Participation Papers (an Islamic form of bond) were issued. The [rst was issued by the Ministry of Industries and Mines for the sum of $500 million. Proceeds from this issuance will be used to develop 8 steel manufacturing projects. The second was issued by the Tehran Municipality for a total value of $100 million. The funds will be used for a major real estate development project. Both of these papers pay a coupon of 16% per annum.

In February, the government also announced its plans to issue €1 billion of Euro-denominated bonds next month. The National Iranian Oil Company (NIOC) will be the issuer and the proceeds will be used for the development of 4 phases of the South Pars oil and gas [eld project, located in the Persian Gulf. These bonds will have a tenure of 3 years and pay a coupon of 8% per annum.

Overall, the Tehran Stock Exchange experienced another positive month in February, with the TSE All-Share Index gaining 2.4% in value. Trade volumes jumped by 62% from last month to stand at $1.04 billion.

Performance of TSE All-Share Index ( February 2010)

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re-based to 100 returns, withgreaterdiversi on the Tehran StockExchange(TSE)andotherIranian-basedsecurities. The goalistoprovidesuperior in theworld. Turquoise combinesinternationalexperiencewithlocalexpertiseininvestingequitieslisted investing intheconsumerandcommoditypotentialofIran,onemostundervaluedemerging markets Investment Objective– Portfolio OnePerformance(IranianRial)- As at28 Portfolio Two Performance(Euro)- As at28 re-based to 100 100 110 120 130 140 150 160 170 180 190 200 01 June2009 Launch Date British Virgin Islands Vehicle Domicile 101.0 104.0 107.0 110.0 113.0 116.0 119.0 122.0 Portfolio Two (Open)

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The capture of Abdolmalek Rigi by the Iranian intelligence forces and the Mehr housing project will be discussed in this edition of Country Overview.

Abdolmalek Rigi, the head of the Sunni Muslim Rebel group Jundallah (Army of God), and Iran's most wanted terrorist, was captured on 23rd February by the Iranian intelligence service. Rigi was arrested while on a \ight from Dubai to Kyrgyzstan. The \ight was intercepted by the Iranian air force and ordered to land in Iran, where he was arrested. He is reported to be responsible for a series of attacks which have killed many civilians, as well as military of[cials.

Rigi is the founder of Jundallah, which is a Sunni militant organisation based in Western Pakistan. The Iranian government has linked Jundallah to various acts of terror such as mass killing, kidnapping of citizens and the smuggling of narcotics into Iran. Rigi is considered as one of the most active terrorists in Southeast Iran and is said to have links with Al-Qaeda.

Among the noteworthy attacks of Jundallah was the 2005 attack against President Ahmadinejad on his visit to Sistan and Balouchestan province. In 2007, Jundallah organised a bombing and also gun[re aimed at a bus which resulted in the death of 18 members of the Iranian Revolutionary Guards. Jundallah’s most recent attack was carried out in October 2009 when at least 21 people died and 200 were injured in a suicide bombing in the Sistan and Balouchestan. Among those killed were 6 members of Iran’s Revolutionary Guards, including the Vice Commander of the Revolutionary Guards ground force.

This event was deemed as a signi[cant achievement by Iranian Intelligence and has had a number of positive implications for Iran. The plan for his arrest was a covert operation planned by the intelligence forces and was in preparation for [ve months. Although Rigi’s terrorist operations were not carried out on a global level, his arrest nonetheless has had a widespread effect. Jundallah is considered as a dangerous terrorist group and its leader’s capture may eventually lead to the destabilisation of other terrorist groups in the region. Rigi’s arrest was broadcasted worldwide and the global reaction was positive with many countries congratulating Iran for this success.

The Mehr housing project, which began in 2007, is a nationwide government plan. This plan intends to provide affordable housing to [rst-time buyers and lower income families, by eliminating the cost of land. In this scheme, real estate developers are provided with land on a 99-year lease contract, in return for building low cost residential units. According to the Housing and Urban Development Ministry, the Mehr project will in the [rst phase provide 600,000 units in 18 new cities to low income families.

The Mehr housing scheme has experienced considerable turmoil from the start. The general consensus is that the lack of progress has been unacceptable, and the government has come under a great deal of criticism for its handling and management of the scheme. The Housing and Urban Development Ministry, along with the Cooperatives Ministry, took responsibility for the scheme in 2007. Initially, development contracts were Volume 4, No. 42 Volume awarded to government af[liated cooperatives. However, the vast majority of these cooperatives have failed to deliver on their contract commitments. Experts have identi[ed two main reasons for this. Firstly, these co-operatives lack the expertise for these projects. Even the housing-related cooperatives do not have the necessary experience and resources for large-scale real estate development. Secondly, the funding required for the construction has not been made available by the government. The plan was that the funding for the scheme would come in the form of lending facilities from state-owned banks. In summer 2008, the Central Iran Investment Monthly, Bank announced that $500 million has been dedicated to the Mehr housing scheme. However, [nancing has remained a challenge for the Mehr scheme up till now. Country Overview 7

Over the past few months, the government has taken a series of measures to address the shortcomings of the Mehr housing scheme. Firstly, new contracts will no longer be solely awarded to cooperatives. Instead, consortiums of 3 to 5 developers with the appropriate expertise and [nancial backing can now bid for the contracts. Secondly, the government has allocated $540 million for the development of the new cities’ infrastructure in its budget for the coming year. This is in order to facilitate the progress of the Mehr project in new cities. Four new cities of Parand and Hashtgerd, near Tehran, and Fooladshahr and Majlesi, near Isfahan, are the prime locations for the current development plans.

The new involvement of foreign developers is also an important step forward for the Mehr scheme. Developers from Italy, Turkey and South Korea are said to have been awarded contracts to build 160,000 housing units. Although the scheme is signi[cantly behind schedule, a widespread effort is now being put into this country-wide programme.

Volume 4, No. 42 Volume

Iran Investment Monthly, Iran Investment Monthly, Volume 4, No. 42 Economy Modern copperindustryinIrandatesbackto1949whenthe Iran’s Copper Industry million tonnes,Iranholds3%oftheworld'scopperreservesandranks10 With totalprovencopperorereservesofapproximately1.9billiontonnesandmetal14.3 privatised in2007andisthesecondlargest listedcompanyonthe TSE. and itbecameoperationalin1984.NICIChastotalcontroloverthecountry’s copperindustry. NICIC was western cityofKerman.In1972,theNationalIranianCopperIndustriesCompany(NICIC)wasestablished exports areintheformofcoppercathode(i.e.rawcopper)whichhasalowpro the downstreamcopperindustryinIranisstillsomewhatunderdeveloped. The vastmajorityofNICIC’s the projectisexpectedtocost$2billion,andarranging production to400,000tonnesperannum.However, thisplanwillnotbe completeduntil2014.Moreover, the pastseveralyears.NICICisplanningtoimplementamajorexpansionplaninorderincrease its is relativelylow, givenitsvastreserves. This isduetoalackofsuf The Iraniancopperindustryisconfrontedbytwokeychallenges.Firstly, theproductioncapacityofNICIC consumption. The housingand automotivesectorsarealsomajorconsumersofcopper. and communicationsectorsarebyfarthelargest consumersofcopper, togethercomprising20%ofdomestic Europe, India,China,Saudi Arabia andOman,orsoldontheLondonMetalExchange(LME). The electrical Approximately 60%ofNICIC’s productionisconsumeddomestically. The remaining40%isexportedto increase intheproductionvolumesincethen,duetoalackofinvestmentexpansionplans. completion ofthenewline),NICICproduced200,000tonnescopper. However, therehasbeenlittle production line,whichledtoa10%increaseinproduction.IntheIranianyearendedMarch2005(upon year, NICICproducedatotalof206,000tonnescopper. In2004,NICICcompletedanewextractionand production ranksitas12 interest rateforthe Iranian calendaryear(whichcommencesonMarch21 In February, theCentralBankpublisheditsproposedmonetaryandsupervisorypoliciesforcoming Central Bank’s Proposed MonetaryPolicy products withhigheraddedvalue. is incurringasubstantialopportunitycost,whichcouldbereducedifexportsareorientedtowards by- that theinterestrateshouldbereviewedonaquarterly basisinconjunctionwiththe breakthrough intheIranian adjusted accordingly. Experts believethatifthisproposalisapprovedbythegovernment,itwillbeamajor to beapproximately $48billion. in relationto theirbaddebt. The Central Bankhasestimated thetotalbaddebtin Iranian bankingsystem Bank alsostressestheneed forincreasedtransparencyintheregulatoryreporting ofthebanks,particularly with theCentralBank’s regulations,althoughother factorswillbetakenintoconsideration. The Central institutions inthecoming year. The mainfactorforrankingtheinstitutionswillbe theirlevelofcompliance A notable featureoftheproposalisCentralBank’s plantopublishrankingsforbanksandother government’s demands,resultingintwoCentralBankgovernorslosingtheir jobswithin3years. pressure tocutinterestratesatatimewhenthein controversy betweentheCentralBankandgovernment. The Bankwasunderimmensegovernmental Since thegovernmentof Ahmadinejad tookof [ rst time,ratherthana th amongglobalcompanies. That translatesto1%oftheworld’s production.Last [ nancial system. [ xed ratefortheentireyear. The CentralBank’s proposalis [ \ ce in2005,theinterestratehasalwayscaused much ation ratewasrapidlyincreasing. The Bankresistedthe st ). This year, theCentralBankisproposinga [ nancing willprovetobeachallenge.Secondly, [ rst copperminewasdiscoveredinthesouth [ cient investmentintothesectorover th intheworld.NICIC’s volumeof [ t margin. Therefore, NICIC \ ation rateand [ \ nancial 8 oating Iran Investment Monthly, Volume 4, No. 42 Economy Credit. Itwillthenbecomeenforceableafteramendmentsanda The CentralBank’s proposalwillbereviewedbytheGovernmentandHighCouncilofMoney to makea all memberstates.Inthismeeting,Iranallocated50millioneuroandtherebybecamethe Therefore, theyareexpectedtoleadtheproject.Nevertheless,thisprojectwilldrawuponexpertise of have carmanufacturingindustriesandtheytogethercomprise5%oftheworld’s automotiveproduction. total populationof950millionandprovideagoodtarget market.Currently, onlyIran, Turkey andMalaysia In thismeeting,membersagreedtoproduceacarwithcommonbrandname. The D8countrieshavea Malaysia andNigeria. Tehran. The D8was founded in1997andconsistsofIran, Turkey, Pakistan, Indonesia,Egypt,Bangladesh, On 28 The LatestD8Summit in Iran. exports andimportstariffs. Kish Island,QeshmIslandandthePortofChabahararekeyfreetradezones banking, labour, andemployment.Freetradezonesexcludecustomsauthoritiesareexemptfrom mainland. These by-lawsareregulationsofthesezonesrelatedto import, export,investment,insurance, which areadministeredundertheirownjurisdictionandhavedifferent lawsfromthegoverningof The IranianparliamentapprovedtheFreeZones Act in1993.InIran,therearespeci agricultural andindustrialproducts. and servicescantakeplaceacrossborderswithouttariffs. These tradeagreementscoverawiderangeof contracts signedbetweentwoormorecountriesinordertocreateafreetradeareawhereofgoods and Herzegovina,Uzbekistan,Cuba, Venezuela, Pakistan, Turkey andIndonesia.Free tradeagreementsare countries tofacilitatetrade. These countries,withwhomIranhassignedtradeagreements,includeBosnia In February2010,the Trade PromotionOrganization ofIran(TPOI),signedfreetradeagreementswith12 Iran’s Free Trade Agreements th February, the [ nancial commitmenttotheproject.Iranisexpectedleadpreliminarydesignstage. [ rst meetingoftheindustryministersDeveloping8Countries(D8)tookplacein [ nal approval. [ c freetradezones [ rst memberstate 9 Iran Investment Monthly, Volume 4, No. 42 Iran Investment Monthly Investment Iran ates Turquoise isaboutiqueinvestmentbankbasedinIranwithof About Turquoise This publicationdoesnotprovideindividuallytailoredinvestmentadviceandmaymatchthe and inaccuracy. [ is madetoensurethatthefactswepublisharecorrect.However, wedo notrepresentthatallfactsand The analysisprovidedbythispublicationisbasedoninformationthatweconsiderreliableandevery effort an offer tobuyanyspeci This materialisforinformationpurposesonlyanddoesnotconstituteanoffer tosell,norasolicitationof Disclaimer only orthroughanonlinerequestsentto:[email protected] worked closelyorhavebeenincontactwith Turquoise Partners.Subscriptiontothisnewsletterisbyreferral Tehran StockExchangeaswellintroducingnew cipients updatedonthelatestmacroeconomicdevelopmentsinIran,providinganin-depthanalysisof potential investors. 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[ ed anddiversemanagementteambasedbothinEuropeIranenables [ nancial servicestoselectclientsandinvestorswhoareinterestedinthe Iran Investment Monthly Investment Iran [ nancial productsandprivateequityopportunitiesto [ ces in Tehran andLondon. Turquoise cre- , withtheaimofkeepingitsre- [ nancial 10