Download - ResCap Mongolia 101 v2

Initiating country coverage on one of the

last remaining

January 24 2011

ResCap

Mongolia 101


last remaining mining frontiers

Res

Cap

Mongolia 101


mining frontiers

ResCap Resource Investment Capital


January 24 2011

ResCap Mongolia 101 P a g e | 2

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.

Abstract


January 24 2011


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.

Executive Summary


January 24 2011


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.”

Executive Summary


January 24 2011


� 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.

Executive Summary


January 24 2011


1.4 Geography and Climate

� Mongolia is ranked 19th

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 (at 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.

Executive Summary


January 24 2011


� 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

Executive Summary


January 24 2011


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.

Executive Summary


January 24 2011


� 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.

Executive Summary


January 24 2011


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.

Executive Summary


January 24 2011


� 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 17th

January at 16:00.

� The tender for contract miners for Tavan Tolgoi’s Eastern Block has been

officially announced and closes on the 27th

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.

Executive Summary


January 24 2011


� 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.

Mongolia Key Statistics


January 24 2011


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

Mongolia: Key Indicators

2003 2004 2005 2006 2007 2008 2009 2010

(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 -

Contents


January 24 2011


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

Contents


January 24 2011


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 (NPLS) .......................................................... 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

Contents


January 24 2011


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/GOLD ..................................................................................... 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

Contents


January 24 2011


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

1 EQUITY RESEARCH ........................................................... 131

1.1 TAVAN TOLGOI ................................................................................... 131

1.2 BAGANUUR ........................................................................................ 132

1.3 SHIVEE OVOO .................................................................................... 133

1.4 APU ................................................................................................ 134

1.5 MONGOLIA TELECOM .......................................................................... 135

1.6 SHARYN GOL ...................................................................................... 136

1.7 GOBI ................................................................................................ 137

1.8 BDSEC .............................................................................................. 138

1.9 ADUUNCHULUUN ................................................................................ 139

1.10 MONGOLIA DEVELOPMENT RESOURCES .................................................. 140

1.11 MOGOIN GOL .................................................................................... 141

2 DISCLAIMERS ................................................................. 142

3 REFERENCES .................................................................. 143

4 CONTACTS .................................................................... 144

History of Mongolia


January 24 2011


4 History of Mongolia 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,

but had to struggle until 1921 to firmly establish de facto independence from

China, and only gained international recognition of it in 1945.

Afterwards, Mongolia came under strong Soviet influence; in 1924, the Mongolian

People's Republic was declared, and Mongolian politics began to follow the same

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

reached Mongolia approximately 40,000 years ago during the Upper Paleolithic

period.

Neolithic agricultural settlements (c. 5500-3500 BC) preceded the introduction of

horse-riding nomadism, and became the dominant lifestyle during the Copper and

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.

Cultivation of crops continued since the Neolithic period, but has always remained

small-scale compared to pastoral nomadism, which was first introduced from the

West.

1206: The Mongol Empire 1921: Independence 1945: International recognition

CHINGGIS KHAN

1924: Soviet influence, socialism 1990: Democratic revolution

Modern humans reached Mongolia 40,000 years ago

5500-3500 BC: horse-riding nomadism became dominant lifestyle

2300-1000 BC: development of pastoral nomadism and metalworking

History of Mongolia


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4.2 Early History

Since pre-historic times, Mongolia has been inhabited by nomads who

occasionally formed great confederations that rose to prominence. The first of

these, the Xiongnu, were brought together to form a confederation by Modu

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.

The Xiongnu empire (209 BC-93 AD) was superseded by the Mongolic Xianbei

empire (93-234) which ruled over a larger area than present-day Mongolia. The

Mongolic Rouran Khaganate (330-555) ruled a massive empire before being

defeated by the Gokturks (555-745) whose empire was even larger. They were

followed by the Uyghur Khaganate (745-840) who were in turn defeated by the

Kyrgyz. During the Liao Dynasty (907-1125) the Mongolic Khitans ruled Mongolia

after which the Khamag Mongol (1125-1206) rose to prominence.

4.3 Mongol Empire

During the chaos of the late 12th century, a chieftain named Temüjin united the

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

land empire in the history of the world. Under his successors it stretched from

present-day Poland in the west to Korea in the east, and from Siberia in the north

to the Gulf of Oman and Vietnam in the south, covering 13 million square miles

(or 22% of the Earth's total land area) and included a population of over 100

million people.

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

The centuries that followed were marked by violent power struggles between

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

The Modu Shanyu confederation forced the Qin Dynasty to construct the Great Wall of China

Previous monarchs: 209 BC-93 AD: Xiongnu 93-234: Mongolic Xianbei 330-555: Mongolic Rouran Khaganate 555-745: Gokturks 745-840: Uyghur Khaganate 907-1125: Mongolic Khitans 1125-1206: Khamag Mongol

1206: Chinggis Khan assembled the Mongol Empire

The Mongol Empire - the largest contiguous land empire in the history of the world: - 33 million sq. km - 100 million people

1368: Collapse of the Mongol Empire

Following centuries: violent power struggles between various fractions

History of Mongolia


January 24 2011


Chinese Emperor. However, the Borjigids were recovered when Esen was

murdered in 1454.

Batumongke Dayan Khan reunited the entire Mongols under the Chinggisids in the

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 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

the Yellow Hat sect of Buddhism and evading the Manchu. By 1636, most Inner

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

wars. Mongolian culture remained in tact because The Manchus forbade mass

Chinese immigration.

The Manchu maintained control of Mongolia until 1911 with a combination of

military and economic measures, intermarriages and alliances. Manchu high

officials, “Ambans”, were installed around territories and the country was

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

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

from the Chinese on March 18, 1921, and Russian and Mongolian troops arrived

in Khüree on July 6. Mongolia's independence was once again declared on July 11, The eighth Jebtsundamba

Khutuktu (Bogd Khaan)

Ligden Khan: the last Mongol Khan

1636: most Inner Mongolian tribes submitted to Manchu

1691: Khalkha Mongol submitted to Qing Empire

Until 1911: the Manchu maintained the control of Mongolia

16th

century: Mongolia reunited 1578: Second introduction of Tibetan Buddhism

1911: independence from Qing Dynasty

History of Mongolia


January 24 2011


1921. Mongolia remained closely aligned with the Soviet Union over the next

seven decades.

4.7 Mongolian People's Republic

Following the death in 1924 of the king and religious leader, Bogd Khan, a

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

murder of monks and other “enemies of the people”. The Stalinist purges in

Mongolia beginning in 1937 left more than 30,000 people dead. Japanese

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.

Mongolian forces also took part in the Soviet Manchurian Strategic Offensive

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.

Mongolia continued to align itself closely with the Soviet Union, especially as

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

Mongolian politics was strongly influenced by the introduction of perestroika

(restructuring) and glasnost (openness and freedom of speech) by Mikhail

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

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

and high inflation. The signing of the Oyu Tolgoi copper/gold mine contract is

considered a major cornerstone in recent Mongolian history. The Mongolian

People's Revolutionary Party dropped the “Revolutionary” from its name in 2010.

1921: full independence from China

1924: Mongolian People’s Republic established

1924 onwards: centrally planned economy, destruction of monasteries, murder of monks, Stalinism

1945: China recognised Outer Mongolia’s independence

1945 onwards: Mongolia aligned closely with USSR

1990: peaceful Democratic Revolution, introduction of multi-party system & market economy

1992: new constitution

1993: the first election wins for non-communist parties

Government


January 24 2011


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

Mongolia exists as a parliamentary republic, whose government is elected by

parliament, which is in turn elected by the people. Mongolia's constitution

guarantees full freedom of expression and religion and Mongolia has a number of

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

office after the 2004 elections, but with reduced representation.

From 2004 there were numerous changes of Prime Minister. A coalition

government headed by the leader of the Democratic Party, Elbegdorj Tsakhia, was

formed in 2004. In January 2006, he was replaced by MPRP leader Enkhbold

Miyeegombo as Prime Minister, who in turn resigned his position following his

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

different parties. Again the MPRP won a majority in the 2008 parliamentary

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

invited opposition members into the Cabinet forming the coalition government

that exists today.

In May 2009, the long tenure of MPRP politicians in the Presidential seat was

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.

Sukhbaatar Square in front of the Saaral

Ordon that houses the offices of the

Prime Minister and President

The biggest political parties: The Mongolian People's Party (MPP) The Democratic Party (DP)

Current Prime Minister: Sukhbaataryn Batbold Current President: Tsakhiagyn Elbegdorj

2008: coalition government formed between the MPP and DP

Since Democratic Revolution, there has been continuous replacement of governments

Government


January 24 2011


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.

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

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

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

to its initial name of 1921 by removing the “revolutionary” title, now known

simply as the Mongolia People’s Party, or MPP.

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.

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.

President of Mongolia, Tsakhiagyn

Elbegdorj

46

27

3

PARLIAMENTARY SEATS

MPP Democratic Party Others

Foreign Relations


January 24 2011


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)

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.

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

President, Hosni Mubarak, in Egypt and discussed ways to improve bilateral

relations, as well as problems in Iraq and Palestine. They signed an executive

protocol for agreements on economic cooperation, air services and investment

protection.

In March 2007, the Egyptian Minister of International Cooperation visited

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.

Mongolia maintains bilateral relations with 140 and diplomatic relations with 149 countries.

June 2001: cooperation agreement was signed

2007: enhanced cooperation between the two countries discussed

Foreign Relations


January 24 2011


Security cooperation

Mongolia and Egypt have cooperated on security exercises and operations, such

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

Mongolia shares its borders with only two countries, Russia and China, and as a

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

countries share a 3,500km border.

In the past, Mongolian invasions in the 13th

century bought much of Russia into

the Mongol Empire, and a significant portion of the Russian population were

killed. Most of Russia remained under Mongol rule for the following 300 years. In

1921, the Soviets helped establish the Mongolian People’s Republic after helping

to ward off the Chinese invasion.

Communist era

Both nations forged close relations during soviet times with strong industrial trade

links, and a large number of soviet troops were permanently deployed in

Mongolia through fear of Chinese expansionism. Mongolia supported Russia

during the Sino-Soviet split of the 1950s, and a treaty of peace, friendship and

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

trade with Mongolia decreased by 80% almost overnight and China’s influence

over Mongolia increased. However, today the majority of imports come from

Russia, in particular petroleum and diesel imports.

2001 and 2008: enhancement of security cooperation

Russia and Mongolia share a 3,500km border

Russia helped Mongolia to ward off the Chinese invasion

The Mongolian People's Republic was established under the Soviet influence in 1921

Close bilateral relations due to both communist regimes

Collapse of Soviet Union, Mongolia's trade with Russia declined by 80%

1986: treaty of peace, friendship and cooperation signed

Foreign Relations


January 24 2011


In 2000, Vladimir Putin (then President of Russia) made a visit to Mongolia to re-

strengthen a bilateral treaty, which was the first visit by a Russian head of state

since Leonid Brezhnev in 1974.

Recently, a meeting between Ruissian PM Vladimir Putin and his Mongolian

counter-part S. Batbold led to Russia writing off 97.8% of Mongolian debts which

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

Through the decades of former Soviet exploration in Mongolia in the second half

of the last century, Russia has become an adept student of Mongolian geology

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

capital at the location of modern Beijing, the Qing dynasty of Manchu invaded

Mongolia in the 18th

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

Russia holds 190 reports on Mongolia’s 6 uranium fields, Mongolia only has access to 34

Mongolia and China wars

2000: Vladimir Putin renewed a major bilateral treaty

Russian government writes off 98% of Mongolia's state debt

Foreign Relations


January 24 2011


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.

Although a border treaty was signed in 1962, Mongolia requested for further

support from the USSR due to security concerns. Only in 1984, when a high-

power delegation from China visited Mongolia, was tension over bilateral

relations relaxed, and the two nations started to set apart their borders. Various

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

strengthen its bilateral ties with Mongolia with all due respect to the latter’s

autonomy. In 1994, the two countries signed a treaty of friendship and

cooperation. Today, the PRC has become the major trading partner of Mongolia

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

The latest news informs that around 15 million tonnes of coking coal has been lost

in Queensland floods in Australia, the largest exporter of coal to China. Mongolia

will soon have the capacity to supply 25-40 mtpa of coal to the PRC. It has been

continuously noted that there are great opportunities for mutually beneficial

cooperation between the two countries, especially since Mongolia has abundant

natural resources and China has the market. Currently, negotiations are taking

place on the establishment of dairy and flour factories in rural Mongolia.

6.2.3 Japan

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-Mongolia relations over 2006 - 2010 2006 First ever visits by Mongolian and Japanese Prime Ministers

• Contracts for SME development and environmental protection project

were signed, an official development assistance loan to Mongolia was

approved (JPY 3 billion/$36 million)

• Over 80 members of the Japanese Diet visited Mongolia

1949: diplomatic relations with PRC 1962: border treaty signed 1984: demarcation of border 1986: further agreements 1988: border treaty verified

1994: treaty of friendship and cooperation Mongolia given access to Tianjin port

25-40 mtpa of coal from Mongolia to China Dairy and flour factories to be developed in rural Mongolia

1972: diplomatic relations with Japan Capitalism in Mongolia strengthened further ties

Foreign Relations


January 24 2011


2007 Mongolian President visits Japan

� Basic action plan for Mongolia-Japan cooperation over the following ten

years was signed

� An agreement was signed to hold a two-stage Public-Private Joint

Consultative Meeting for promotion of trade, investment and joint

utilisation of mineral resources.

2008

Speaker of the Mongolian Great Khural visits Japan

� A project for a new international airport near to Ulaanbaatar was

approved. A contract for an official development assistance loan to

Mongolia for the airport project was signed (JPY 29 billion/$349 million)

2009

Mongolian Prime Minister and Foreign Affairs Minister visit Japan

• A new loan was approved for the development of public finances ($50

million to be repaid in 2 years)

2010

• An agreement to cooperate in the rare-earths development sector of

Mongolia was signed between the two countries (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.

China controls more than 95% of the world’s rare-earth output)

• Japanese geologists and scientists launched exploration of rare-earth

elements in Mongolia.

Economic cooperation

The economic relations of Mongolia and Japan have been significantly expanded

since the former’s transition to a market economy in 1991. 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.

At first, economic cooperation between the two nations was mainly in the form of

humanitarian aid to support the population of Mongolia, who were struggling to

bypass the transition period. The cooperation, however, later was extended to

focus on the development of infrastructure projects and to facilitate self-

sufficiency in certain sectors of the economy.

Economic ties strengthened after 1990 Japan – former largest aid donor to Mongolia From humanitarian aid to larger-scale projects

Foreign Relations


January 24 2011


6.2.4 North Korea

The People’s Republic of Mongolia established diplomatic relations with North

Korea in October 1948, when the former acknowledged the Soviet-backed

government of Kim II-Sung. Mongolia is one of the few countries in the world that

maintains warm relations with the Democratic People's Republic of Korea (DPRK).

History

During the 1950s’ civil war in Korea, Mongolia supported North Korea by

providing assistance. The first cooperation and friendship treaty between the two

countries was signed in 1986, after which Kim II-Sung paid an official visit to

Mongolia in 1988.

Abandonment of socialism and transition to democracy caused the two nations’

diplomatic relations to collapse, such that in 1995 the previously signed

cooperation treaty was cancelled and North Korea closed their embassy in

Ulaanbaatar in 1999.

The July 2007 visit by the Presidium of the Supreme People's Assembly of the

Democratic People's Republic of Korea, Kim Yong Nam, was the first high-status

visit to Mongolia by a North Korean delegate in 19 years.

North Koreans are deemed to see Mongolia as a “fellow non-Western” nation

which went through an experience similar to the DPRK’s during the Soviet era.

In 2006 rumours went that the Mongolian government allocated 1.3 square km of

land to North Korean refugees for the establishment of a camp in 40 km from

Ulaanbaatar, but the Mongolian Prime Minister of that time, M. Enkhbold,

officially rejected such a postulation.

6.3 Europe

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.

6.3.1 United Kingdom

Recent Controversy

On September 17, 2010 the Mongolian Chief of Administration at the National

Security Council, Mr. B.Khurts, was arrested at Heathrow Airport while paying an

official visit to the United Kingdom. He was accused of kidnapping D.Enkhbat, a

Mongolian citizen who later died from health problems, from France as the

suspect in a high government official’s murder. Mr. Khurts and his three

associates’ action was deemed as alleged kidnapping, violating the Law of the

European Union.

1948: diplomatic relations with North Korea Mongolia backed North Korea during Korean civil war 1986: cooperation and friendship agreement 1995: cancellation 2007: first high-profile visit by North Korean delegate in 19 years

1991: cooperation agreements with UK, France and Germany

Foreign Relations


January 24 2011


After the incident, the Mongolian Prime Minister Sukhbaataryn Batbold cancelled

his official visit to London which was scheduled for 27 November 2010. Some see

this as an expression of Mongolia’s discontentment with the arrest of Mr. Khurts,

who was diplomatically immune, and the refusal of the British government to

release him upon Mongolia’s request.

6.4 North America

6.4.1 Canada

Canada and Mongolia established bilateral ties in November 1973. Mongolia

operates an Embassy in Ottawa and an Honorary Consulate in Toronto, while

Canada has an Honorary Consulate in Ulaanbaatar and an Embassy in nearby

Bejiing (China).

The two countries’ diplomatic relations were intensified when the Canada-

Mongolia Society was founded in 1980. After the collapse of the USSR, Canada

started supporting Mongolia by providing aid through its non-governmental

organizations and other specialised development agencies.

At the end of 2009, the Canadian FDI into Mongolia reached CAD 601 million

(around $594 million). According to the estimates, in 1999 – 2009 the bilateral

merchandise trade between the two nations rose over 60x from CAD2.6 million

($2.57 million) in 1999 to CAD163.8 million ($162 million) in 2009. Toronto-based

mining companies such as Ivanhoe Mines, SouthGobi Resources and Centerra

Gold are the major players in the Mongolian mining industry.

Recent News

Canadian FDI thus far has been mainly concentrated in the mineral resource

sector of Mongolia. Negotiations are ongoing on the signing of a foreign

investment promotion and protection agreement (FIPA) between the two nations.

In September 2010, the Mongolian Prime Minister (PM) Sukhbaataryn Batbold

attended the Canada-Mongolia Investors' Forum held in Toronto. Representatives

of the most influential mining companies with assets in Mongolia gathered at the

conference. The Prime Minister highlighted Mongolia’s intentions to create a

more favourable environment in the country for foreign businesses and investors

through legal and regulatory regime.

Mr. Batbold also paid a visit to the Toronto Stock Exchange (TSX). 19 companies

that are actively engaged in mining and exploration businesses in Mongolia are

listed on the TSX. The stock exchange officials expressed their willingness to help

develop the Mongolian Stock Exchange (MSE).

Subsequently the Prime Minister attended another investor meeting in Vancouver

where he stated that Mongolia should see Canada as a role model in terms of

Sep 2010: Mr. Khurts arrested at Heathrow Nov 2010: Mongolian PM cancelled his visit to UK

1973: bilateral relations with Canada Post-1990: strengthened relations 2000-2009: FDI x 60

Canadian FDI – mostly into mining

Sep 2010: Mongolian PM visits Canada PM calls for more FDI

PM visits TSX 19 companies with assets in Mongolia on TSX

Canada as Mongolia’s role model

Foreign Relations


January 24 2011


development, efficient utilisation of natural resources, cost-effective agriculture,

and high-quality public governance and education systems.

The PM pledged that Mongolia will continue supporting Canadian investors and

recommended that companies start building processing plants in Mongolia,

similar to those in Canada, so that the value of their extracted minerals could be

significantly enhanced.

A memorandum of understanding (MOU) was signed between the two countries

to promote cooperation on civil services in Mongolia.

6.4.2 USA

US Assistance

The United States agency for International Development (USAID) has continuously

been one of the key aid donors to Mongolia. The program primarily focuses on

“sustainable, private sector-led economic growth and more effective and

accountable governance”. As stated by the organization, in 1991-2008 USAID

granted Mongolia $174.5 million in total. The budget allocated in 2007 amounted

to $6.6 million and comprised projects in various fields.

In 2006, the United States Department of Agriculture granted Mongolia food aid

worth $4.2 million with the intention to improve the livelihood of herders and

encourage entrepreneurship in the agricultural sector of the economy.

The US also supports Mongolia’s reforms in defence. Since 2003 Mongolia has

been contributing small numbers of troops to support US operations in

Afghanistan and Iraq, and in 2005 it also deployed armed peacekeepers to UN and

NATO missions. The 100 troops sent to Iraq were withdrawn in 2008, as Russia

and China applied significant pressure.

The Peace Corps from the US, which is mainly focused on English teaching and

training work, operates with around 100 volunteers in Mongolia. The organisation

is also active in such fields as SME development, public health and youth

education. In 2011, the program will celebrate its 50th

anniversary and its 20th

anniversary in 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. The program comprises projects in railroad development, improvement of

vocational training, upgrade of health services and establishment of a property

registration system in Mongolia.

Recent News

In November 2010, two Mongolian Parliament Members and the Director of

MonAtom, a state organization accountable for all uranium licenses in Mongolia,

visited the USA for discussions on partnership in the mining sector. The visitors

learnt about the United States’ uranium exploration and enrichment experience,

Sep 2010: MOU on improvement of civil services

USAID – key aid donor to Mongolia 1991-2008: USAID = $174.5 mn Mongolia sent troops to Afghanistan and Iraq

2008: troops withdrawn from Iraq 1991: Peace Corps in Mongolia

MCC: grant = $285 mn

Agreement reached in uranium sector cooperation

Foreign Relations


January 24 2011


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.

Geography and Climate


January 24 2011


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” Mongolia is ranked 19

th in the world by country size after Iran. It covers 1.56

million square km. Mongolia’s geography varies from a cold, mountainous region

in the north to the Gobi desert in the south.

It is the country of steppes. The highest altitude of Mongolia is the Khuiten Peak

(4,374m) situated in the far western massif, Tavan Bogd. The climate is generally

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).

There are many occasions when Mongolia is hit hard by exceptionally cold winters

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.

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.

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.

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.

19th largest country (1.56 km2)

Khuiten Peak – the highest altitude (4,374m) Winter: −40 °C (−40 °F) Summer: +35 °C (+95 °F)

Ulaanbaatar – coldest capital city in the world 275 out of 365 days sunny

Little precipitation Gobi means desert steppe

Administrative Regions

January 24 2011

21 a

Mon

s

municipalities. An exception is the capital city

separate

Administrative Regions

Res

ResCap Mongolia 101

8 Administrative Regions21 aimags (provinces), 329 soums (sub-provinces)

Mongolia 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,

separately from Töv Aimag (Central Province), where it is located.

LIST OF AIMAGS

1. Arkhangai 2. Bayan-Ölgii 3. Bayankhongor

5. Darkhan-Uul 6. Dornod 7. Dornogovi

9. Govi-Altai 10. Govisümber 11. Khentii

13. Khövsgöl 14. Orkhon 15. Ömnögovi

17. Selenge 18. Sükhbaatar 19. Töv

21. Zavkhan


P a g e | 34

Administrative Regions provinces)

aimag is subdivided into a number of

All aimags are governed as separate

Ulaanbaatar, which is administered

it is located.

3. Bayankhongor 4. Bulgan

7. Dornogovi 8. Dundgovi

12. Khovd

15. Ömnögovi 16. Övörkhangai

20. Uvs

Economy


January 24 2011


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

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, which is also the largest

contributor to government receipts. Up until the dismantlement of the Soviet

Union in 1990-1991, soviet assistance used to account for up to a third of GDP,

before almost disappearing overnight. The decade that followed saw natural

disasters and political inaction cause deep recession, as well as free-market

economics, reform and privatization lead to economic growth. Mongolia joined

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.

In 2004-08, GDP grew at a compounded 9%, mainly because of increased gold

production and high copper prices. In 2008, inflation reached the highest levels in

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.

Government revenues fell, forcing cuts in spending.

In early 2009, aided by the IMFs $242 million Stand-by Arrangement, Mongolia

began to recover from the crisis, although instability remained in the banking

sector. In October 2009, legislation was finally passed to develop the Oyu Tolgoi

gold/copper project, the world’s largest untapped copper deposit.

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.

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.

Large reserves of copper, gold, coal, molybdenum, fluorspar, uranium, tin and tungsten

1990-2000: combination of deep recession due to political inaction/natural disasters as well as economic growth due to privatization and free-market economic reform

2004-2008: CAGR 9% due to high Cu prices and new Au projects. ‘08 inflation peaked at 36%

‘08 Financial crisis: lower inflation, reduced govt. revenues & spending

Oct 09: landmark agreement to develop OT, world’s largest untapped copper deposit

85% of Mongolian exports to China

Over 30,000 businesses in Mongolia

Economy


January 24 2011


9.1 The Global Financial Crisis of 2008/2009

The global economic downturn in late 2008/early 2009 resulted in reduced

demand for commodities and a resulting slump in their value. Mongolia saw its

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.

The fall in price of commodities was combined with a fall in demand for

commodities by China, which accounts for 85% of Mongolian exports, and year-

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.

The sharp fall in exports, combined with moderate growth in imports, led to a

significant shift in the balance of payments in late 2008/early 2009. The current

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

the middle of March 2009 due to a currency flight, which was further aggravated

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

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

measures resulted in exchange rate stabilisation and the ability of the Bank to

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

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.

In 2009 economy contracted by 1.6%, primarily due to copper prices falling as much as 65%

China’s growth slowing from 16% to 5% led to decreased demand for Mongolian exports

MNT fell 38% from Oct08 – Mar09 $500m in foreign reserves were lost

2010 GDP growth = 6.1%

Current account moved from surplus of 6.7% of GDP in 2007 to deficit of 14% in 2008

De-facto peg abandoned BoM raised IRs from 9.75-14% in March 2009 to restore confidence in local currency

Economy


January 24 2011


The strong recovery may be attributable to a number of factors including the

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.

The Government at the end of 2010 made plans to increase its spending given the

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.

A major milestone for developing Mongolia’s resource wealth was the eventual

signing of the investment agreement in October 2009 between the Government,

Ivanhoe Mines and Rio Tinto over the development of the vast Oyu Tolgoi

copper/gold prospect in the South Gobi desert.

Mongolia is about to experience a period of remarkable growth. The estimated

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

policies which took the country out of recession. The IMF forecasts the real GDP

growth to be over 25% in three years time, driven by advancements in the mining

sector. Inflation smoothed down to 13% in 2010 from the soaring 36% in August

2008, but the authorities’ plans to hold price increases at a single digit through

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

billion MNT ($135.7 million) or 10% to 1,874.6 billion MNT ($1.5 billion) at 2005

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.

Recovery attributable to policy response and IMF loan facility of $242m

Oct 2009: milestone agreement between government, Ivanhoe & Rio Tinto to develop OT

Fiscal framework approved for 2011 to encourage economic stability

Value of mineral assets in country estimated at $1.3 trillion

Inflation 13% FDI growing at 30% annually & expected to total $11bn in 4 years Budget surplus $611mn External trade deficit $373.8mn

Industrial output up 10% to $1.5bn (at 2005 constant prices)

Economy


January 24 2011


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.

On 13th

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.

Mongolia is an emerging market whose GDP is comparatively small, at $6.6bn.

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

The IMF forecasts the real GDP growth to be over 25% by 2013 driven by

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.

2010 nominal GDP = $6.6bn 2005 – 2008 annual growth rate = 8.7%

Expected real GDP growth 8.9% in 2011, and in excess of 25% in 2013.

2010 real GDP growth = 6.1%

Economy


January 24 2011


Source: IMF

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%.

5.14.2

5.8

7.2 7.7

9.5

11.0

12.4

-5

0

5

10

15

20

25

30

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013 2014 2015

Real G

DP growth, %

GDP, $ billions

16701343

17452051 2192

2693

3101

3504

0

500

1000

1500

2000

2500

3000

3500

4000

2008 2009 2010 2011 2012 2013 2014 2015

Income per capita, $

Economy


January 24 2011


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)

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

9.5 Budget

According to the World Bank estimates, in August 2010 the fiscal deficit fell to

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

0

500

1000

1500

2000

2500

3000

3500

Jan

-97

De

c-9

7

No

v-9

8

Oct

-99

Sep

-00

Au

g-0

1

Jul-

02

Jun

-03

Ma

y-0

4

Ap

r-0

5

Ma

r-0

6

Feb

-07

Jan

-08

De

c-0

8

No

v-0

9

MONEY SUPPLY, $ MILLIONS

M1 M2

0

500

1000

1500

2000

2500

3000

3500

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Sep

-08

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Ma

r-1

0

Ma

y-1

0

MONEY SUPPLY, $ MILLIONS

M1 M2

In August 2010, gov revenues were up 56% YTD and expenditures up 23% YTD

Economy


January 24 2011


prospects. Worth noting, the abolishment of the 68% Windfall Tax has been in full

effect since the 1st

of January 2011.

Source: World Bank

On the 1st of December 2010, Parliament approved a new budget for 2011.

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

warning about the possible inflationary pressure likely to be caused by the

adoption of such a fiscal policy. According to their view, excessive spending worth

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.

In 2011, the Windfall Tax will no longer bring revenues to the government, but the

recently approved progressive royalties on minerals, i.e. 30% on copper ore and

15% on copper concentrate if their prices exceed 9000$/t, 5% on gold if the gold

price exceeds 1,300$/oz, will bring some income boost. The amended royalties on

copper will not be applied to Oyu Tolgoi production. Also the World Bank and the

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

-100

-50

0

50

100

150

200

250

300

Tax

reve

nu

e

Co

rpo

rate

inco

me

tax

Wag

es

and

sal

arie

s

WP

T

Soci

al s

ec

con

t'n

s

VA

T

Exci

se t

axe

s

Imp

ort

du

tie

s

Ro

yalt

y

No

n-t

ax r

eve

nu

es

YTD % INCREASE IN GOVERNMENT REVENUE

Aug-09 Aug-10

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

In 2011 budget, govt revenue to be 42% of GDP, govt expenditure 52% of GDP

World Bank warns against such high government spending of 52% of GDP through fear of high inflation

Amended progressive royalties: 30% if Cu ore price exceeds 9000$/t 15% if Cu concentrate price exceeds 9000$/t 5% if gold price exceeds 1300$/oz ...etc.

Windfall tax abolished, effective from 01 Jan 2011

Economy


January 24 2011


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

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

the supply side. Food and energy prices climbed up due to adverse weather

effects in Russia, which boosted grain prices, and a disastrously cold winter in

Mongolia, destroying ample of livestock and escalating meat prices.

Higher volatility of the CPI index points to greater instability of the overall

economy. However unfortunate it is, this usually is the case with transition

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.

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.

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Ma

y-0

6

Sep

-06

Jan

-07

Ma

y-0

7

Sep

-07

Jan

-08

Ma

y-0

8

Sep

-08

Jan

-09

Ma

y-0

9

Sep

-09

Jan

-10

Ma

y-1

0

Sep

-10

INFLATION, ANNUAL % CHANGE IN CPI

2010 inflation: 13% Supply side shocks in food prices main contributor to increased inflation towards end of 2010

Demand side inflation increasing, due to pressures from government’s 30% public sector wage hike & public handouts

Inflation reached 36% in Sep 08 Deflation occurred in Q4 2009

Economy


January 24 2011



9.7 Trade

In 2010, total external trade turnover reached $6.2 billion, an increase of $2.15

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.

Source: World Bank

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ap

r-0

6

Sep

-06

Feb

-07

Jul-

07

De

c-0

7

Ma

y-0

8

Oct

-08

Ma

r-0

9

Au

g-0

9

Jan

-10

Jun

-10

PROPORTIONAL CPI BASKET OF GOODS

Restaurants

Education

Recreation &

Transport

Medical care

Electricity,

Water

Housing

Clothing

Food

-1,200

-1,000

-800

-600

-400

-200

0

0

500

1,000

1,500

2,000

2,500

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3,500

4,000

Au

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Feb

-08

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y-0

8

Au

g-0

8

No

v-0

8

Feb

-09

Ma

y-0

9

Au

g-0

9

No

v-0

9

Feb

-10

Ma

y-1

0

Au

g-1

0

TRADE, $ MILLION (12 MONTH ROLLING SUM)

Exports Imports Trade balance (right axis)

2010 trade turnover = $6.2bn, up 54% 2010 trade deficit = $379m, up 50%

Food makes up over 40% of the CPI basket of goods

Economy


January 24 2011


9.7.1 Exports

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.

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 1st

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

EXPORTS Volume

Value, $

million

% of total

exports

Coal 16.6 million tonnes 877.6 30.3%

Copper

concentrate 568.7k tonnes 770.5 26.6%

Iron ore 3.5 million tonnes 250.9 8.7%

Gold

5.1 tonnes 178.3 6.1%

Crude oil

2.1 million barrels 154.9 5.3%

Zinc ore

concentrate 119k tonnes 134.1 4.6%

Greasy

cashmere 3k tonnes 104.9 3.6%

Fluorspar

ore/concentrate 376k tonnes 63.2 2.2%

Combed

cashmere 977 tonnes 68.8 2.4%

Molybdenium

ore/concentrate 4.8k tonnes 52.0 1.8%

Rest exports

244.0 8.4%

Source: National Statistics Office of Mongolia

Gold and cashmere exports down

2010 exports = $2.9bn, up 54%

Coal now Mongolia’s largest export commodity, accounting for 30% of all exports

Economy


January 24 2011


China is Mongolia’s biggest trading partner. Currently around 85% of exports go to

the PRC.


9.7.2 Imports

Imports have continued to grow as the economy recovers. In 2010, goods and

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

diesel imports, which are the country’s largest import products, and are supplied

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

0

20

40

60

80

100

Jan

-97

No

v-9

7

Sep

-98

Jul-

99

Ma

y-0

0

Ma

r-0

1

Jan

-02

No

v-0

2

Sep

-03

Jul-

04

Ma

y-0

5

Ma

r-0

6

Jan

-07

No

v-0

7

Sep

-08

Jul-

09

Ma

y-1

0

EXPORTS, IN %

China Russia Other

85% of exports go to China

Imports rising as economy recovers, in particular machinery and equipment

Largest imports: diesel and petroleum from Russia

Economy


January 24 2011


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.


9.8 Implemented Policies

As the IMF judges, Mongolia’s recovery after the crisis was largely due to strong

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

stabilized the foreign exchange market and Mongolia’s foreign reserves

reached $1.7 billion (29% of GDP) in September 2010.

2) Fiscal adjustments were made in 2009 and continued in 2010 creating

financing constraints and bringing down fiscal deficit to 0.4% of GDP.

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.

0%

20%

40%

60%

80%

100%

Jan

-97

No

v-9

7

Sep

-98

Jul-

99

Ma

y-0

0

Ma

r-0

1

Jan

-02

No

v-0

2

Sep

-03

Jul-

04

Ma

y-0

5

Ma

r-0

6

Jan

-07

No

v-0

7

Sep

-08

Jul-

09

Ma

y-1

0

IMPORTS FROM RUSSIA AND CHINA, IN %

China Russia Other

34% of imports from Russia, 30% from PRC

Recovery after crisis due to strong policy response and IMF loans

Successful policies included adopting and stabilising a flexible exchange rate by increasing policy rate 400bps, fiscal responsibility laws and revised banking laws

Economy


January 24 2011


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.

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.

Recently, with the increasing amount of mining related foreign capital flowing into

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.


0

0.5

1

1.5

2

2.5

3

3.5

4

2007 2008 2009 2010(f) 2011(f) 2012(f) 2013(f) 2014(f)

FDI, $ billion

1100

1200

1300

1400

1500

1600

Jan

-

04

Jan

-

05

Jan

-

06

Jan

-

07

Jan

-

08

Jan

-

09

Jan

-

10

EXCHANGE RATE, MNT/USD

FDI is expected to total around $11 billion over the next 4 years

MNT second best performing currency against the dollar in 2010

Banking Sector


January 24 2011


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)

According to the Trade and Development Bank, the Mongolian financial sector

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

Mongolia’s banking industry grew from a centrally planned, soviet-style single

bank system in which the State Bank of Mongolia performed all banking duties

within the country. As Mongolia transitioned into a free-market economy in 1991,

the first steps taken by the government to reform the financial sector were the

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.

The reckless lending practices resulted in collapse and closure of many S&C

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

2006, the FRC was formed by the Government to regulate all financial institutions,

with the exception of commercial banks which remained under the Bank of

Mongolia’s supervision.

During the transition from Soviet style mono-banking to commercial banking, several banking crises occurred in 1994, 1996 and 1998 due to high levels of non-performing loans.

14 commercial banks, 188 NBFIs, 207 saving & credit (S&C) cooperatives

2006: reckless lending of S&Cs led to flight of funds to safe commercial banks

2009: Anod Bank closure and Zoos Bank into state-ownership due to liquidity issues

Banking Sector


January 24 2011


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

Note: 1. Exchange rate as of 31 Dec 2009


The rate of decline in deposits, which had begun to decrease in October 2008,

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

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 25th

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.

0

10

20

30

40

50

60

70

80

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

To

tal a

sse

ts/G

DP

ra

tio

, %

To

tal a

sse

ts,

$ m

illio

n1

The govt guarantee on deposits reduced outflow of deposits

Bank deposits grew by 34.5% in 2009

Banking Sector


January 24 2011


10.3 Strengthening of the Financial System

Degree of prudence in the financial system in Mongolia has increased over the

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

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.

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.

Total deposits in the banking system from 2003-2009 increased 5x from $460

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

liquidity in the banking system remains above the minimum regulatory level of

12%.

Banking sector capital (prepaid tax deducted) reached $190 million at the end of

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%.

Regulations have been tightened on lending to related and other parties, and total

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.

Bank examinations more driven by risk assessments Loan reserve requirements increased

From 2003-2009, deposits grew 5 fold, loans grew 6 fold

Banks could further increase their loan portfolios

Max loan exposure to single borrower = 20% of bank’s total capital

2005: Financial stability committee

Capital adequacy ratio for banking system (mid 2010) = 14%

Banking Sector


January 24 2011


10.4 Deposits and Loans

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

banking sector:

Assumed MNT/USD rate = 1250.

Deposits include current, savings and time deposits.

Source: Bank of Mongolia, mid 2010

There are 4 banks who dominate commercial and retail banking in Mongolia who

extend approximately 70% of all loans 73% of all deposits. These banks are TDB,

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


0

500

1000

1500

2000

2500

Jan

-97

Oct

-97

Jul-

98

Ap

r-9

9

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01

Ap

r-0

2

Jan

-03

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-03

Jul-

04

Ap

r-0

5

Jan

-06

Oct

-06

Jul-

07

Ap

r-0

8

Jan

-09

Oct

-09

TOTAL LOANS OUTSTANDING ($m)

LOANS AND DEPOSITS AS OF 31 DECEMBER

$ millions, except percentages

2003 2004 2005 2006 2007 2008 2009 20101

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

TBD, Golomt Bank, Khan Bank & Xac Bank are the most significant commercial banks

Banking Sector

January 24 2011

Appreciation of the tugrik, commercial bank competition, rising incomes and

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

account balances totalled $840 million while time deposits totalled $1.69 billion

by mid 2010.

DISTRIBUTION OF LOAN PORTFOLIO BY ECONOMIC SECTOR


In 2001 the Government relaxed regulation on private real estate ownership,

which led to an expansion in credit for housing. In 2010, 63% of credit was lent to

the priv

the public sector. The rate of default was 8.4% in 2010 (in 1999 this peaked at

51%).

Note: 1.Assumed exchange rate: 1USD=1250MNT

Source: World Bank

To

tal l

oa

ns

ou

tsta

nd

ing

,

Largely increasing deposits into banks

63% of credit extended to private sector 36% to individuals 1.1.% to public sector Default rate = 8.4%

Banking Sector

Res

ResCap Mongolia 101




$464 million to $2.42 billion and further increased to $2.86 billion in 2010. Current


by mid 2010.





the private sector, 36% to individuals and a mere 1.1% of loans were extended to


51%).

Note: 1.Assumed exchange rate: 1USD=1250MNT

Source: World Bank

5.8%

13.2%

15.5%

14.4%18.0%

7.1%

26.0%

0.00

0.50

1.00

1.50

2.00

2.50

Au

g-0

7

De

c-0

7

Ap

r-0

8

Au

g-0

8

De

c-0

8

Ap

r-0

9

Au

g-0

9

De

c-0

9

Ap

r-1

0

To

tal l

oa

ns

ou

tsta

nd

ing

,

$ b

illio

n1


P a g e | 52




ion and further increased to $2.86 billion in 2010. Current





ate sector, 36% to individuals and a mere 1.1% of loans were extended to


Agriculture

Mining

Manufacturing

Construction

Motor vehicles

Real estate

Other

-10

0

10

20

30

40

50

60

70

80

Au

g-1

0

An

nu

al g

row

th,

% y

oy

Banking Sector


January 24 2011


10.4.1 Non-Performing Loans (NPLs)

The 2008/2009 financial crises and economic slowdown led to a decline in

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

and total number of NPLs went up almost three fold within 2009, reaching $435

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.

Source: World Bank

10.5 Banking Interest Rates


0 5 10 15 20 25 30 35

Agriculture

Mining and quarrying

Manufacturing

Construction

Wholesale and retail

Other sectors

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

0.0

5.0

10.0

15.0

20.0

25.0

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Sep

-08

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Ma

r-1

0

Ma

y-1

0INTER-BANK INTEREST RATES, %

In 2009, number of default loans increased 2.8 fold

In 2009, NPL ratio grew by 12.8 percentage points to 20%

Banking Sector


January 24 2011


Commercial bank interest rates offered for MNT sight deposits are persistently

higher (approximately twice the rate) than those offered for USD sight deposits.


Commercial bank interest rates offered for MNT time deposits are persistently

higher (approximately twice the rate) than those offered for USD time deposits.


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

De

c-0

8

Feb

-09

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

WEIGHTED AVERAGE OF CURRENT ACCOUNT INTEREST RATES, %

Current account IR, MNT Current account IR, USD

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

De

c-0

8

Feb

-09

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

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

Time Deposit IR, MNT Time Deposit IR, USD

Banking Sector


January 24 2011


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.


10.6 Bank Asset Quality

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)

grew by $268 million (16.1%) and $46 million (16.5%) respectively, while past-due

loans declined by $29 million (25.5%), all compared to the same period the

previous year. The top four commercial banks’ non-performing loan ratios fell to

3.7% on average in H2 2010 from 4.9% in H2 2009. Such good news implies

improvement of asset quality in Mongolia.


Impairment Ratio 5.0% 2.5% 5.4% 1.7%


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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AVERAGE MONTHLY LOAN RATES, %

Loan rate, MNT Loan rate, USD Paid rate

H2 2010: Total loans: $2.4 bn Performing loans grew 16% yoy NPLs grew 16.5% yoy

Q1 2010: Agric. sector loans = $124m

Assumed exchange rate throughout this section: 1USD = 1250MNT

Banking Sector


January 24 2011


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

Performing Past due Non-

performing Performing Past due

Non-

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%


Banking Sector


January 24 2011


10.7 Banking System Capitalisation

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

well capitalised and according to the Trade and Development Bank indicators, the

banking system’s average capital adequacy ratio increased to 14% in 2010 (2.3%

above the minimum requirement) from 13.3% in 2008.


Capital Adequacy

Ratio 13.9% 14.5% 17.2% 13.9%


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”

Minimum cap. requirement = $6.4mn 2010 general cap. adequacy ratio = 14% (2.3% above required)

Banking Sector


January 24 2011


• 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)

Banking Sector


January 24 2011


10.9 Banking Sector 2010 Summary

Trade and Development Bank inferences inform that:

• 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 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

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. 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,

commercial banks in Mongolia at present have the possibility to develop a firm

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

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

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

operations will be examined independently and in stages.

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:

NPLs as % of total loans fell to 17% Levels of NPLs were high Real i.r. plummeted Bank lending more concentrated MNT deposits rose 51% yoy Nominal i.r. remained high

Weaknesses of the banking sector remains a priority

Great possibilities in front of commercial banks

Credit demand will increase

Banks must be restructured Increasing supervision from BoM

Limited coverage of Deposit Guarantee

Banking Sector


January 24 2011


- 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

These amendments were made in line with international principles, such that

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.

Amendments to Deposit Guarantee in line with international principles

The Central Bank


January 24 2011


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


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:

The Central Bank


January 24 2011


� Repo rate (15%) = policy rate +4%

� Collateralized loan rate (19%) = policy rate +8%

� Overnight rate (20%) = policy rate +9%


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

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

November 2008, it was 9.75%. By the end of 2008/start of 2009 the global

slowdown resulted in inflation reaching 34% in Mongolia, and so the BoM rate

was hiked to 14%.

The Bank rate was subsequently reduced in May, June and September of 2009 to

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

rising inflation. The Bank of Mongolia increased the policy rate by 1%, and it is

now at 11%.


11.3 Central Bank’s non-standing facilities

11.3.1 Collateralized loan

Banks that have good long-term liquidity but get into short term problems can be

lent money up to 90 days, but with collateral backing. The collateralised loan rate

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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BANK OF MONGOLIA POLICY RATE, %

Policy Rate Jul ‘07 6.40% Oct ‘07 7.40% Nov ’07 8.40% Mar ’08 9.75% Sep ’08 10.25%

(inflation = 34%) Mar ’09 14.00% Sep ’09 10.00% Apr ’10 11.00%

BoM can provide 90 day loans to banks in financial difficulty. 2009 collateralised loans = $84m

The Central Bank


January 24 2011


11.4 Objectives of monetary policy

A goal of the Bank of Mongolia is to insure the stability of the Tugrik. The capital

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

Loans from the central bank with a Repo rate 4% higher than the policy rate and a

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%.

No restrictions on inflows or outflows of foreign currency in Mongolia

$367m was given through repo financing in 2009

The Central Bank


January 24 2011


11.6 Central Bank Bond Rate


The Mongolian economy is 95% reliant on the banking industry, and the bond

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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CENTRAL BANK BOND RATE, % (1998-2010)

Mongolian bond market highly under-developed

Mongolian Taxation System


January 24 2011


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;



January 24 2011


• 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.



January 24 2011


• 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%;



January 24 2011


- 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.

Mongolian Stock Exchange


January 24 2011


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

In 1991, the Mongolian Government established the Mongolian Stock Exchange

(MSE) with the intention to implement its Privatization Policy as a base of

transition from a central planned economy to a market economy. During the first

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

Corporate Law in 1994 and 1995 respectively, the secondary market began by

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

traded and a few people had bought a large proportion of the shares, taking single

control of the companies. As of the end of November 2010, there are 325

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

actively traded on the MSE.

NUMBER OF LISTED COMPANIES

Source: Financial Regulatory Committee (FRC)

Since 1996, MNT275.7bn ($233.2m) has been raised by issuing a government

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

475458

436 430 418 410 401 403 402 395 392 387 383 376358

325

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1991 MSE established 475 companies initially floated after privatization of state property

1994: Law of Securities and Exchange 1995: The Corporate Law 1996-2004: $32m shares traded in this period. A few had gained large stakes in the companies Nov 2010: 325 companies on MSE, only 30 stocks actively traded

Since 1996: $233m raised in govt bond, corporate bond and public offerings



January 24 2011


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

Source: MSE

CORPORATE BONDS, MNT BILLION

Source: MSE

Since the first IPO on the MSE completed in 2005 by Hotel Mongolia, there have

been 14 IPOs raising a total of $51m. Out of them, 1 IPO was unsuccessful, two

companies were bankrupted and one company changed operation.

0.1 11.130.841.7

21.712.5 6.8 4.5

39.6

1.530.0

200.2

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1.202.96 2.74

1.812.60

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14 IPOs raising $51m: 1 IPO was unsuccessful



January 24 2011


FUND RAISING THROUGH IPO, MNT BILLION

Source: MSE

Although in recent years the MSE has had formal connections with over 10

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

a new development era. Recently, the London Stock Exchange won the bid for

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

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.

0.04

8.42

16.95

34.01

2.70 0.40

62.52

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

20

05

20

06

20

07

20

08

20

09

20

10

20

05

-20

10

Market Cap/GDP = 15% LSE recently won bid for tender of management

‘Top-20’ index up 6 fold in 3yrs



January 24 2011


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

coal mine exporting coal to China, which surged $170m or 300% in the last year.

Shivee Ovoo, one of the strategically important deposits of Mongolia, rose $115m

or 325% in the last year. Baganuur, another strategically important deposit and

the second largest company at on the MSE, increased $110m or 185%. Sharyn Gol,

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.

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.

In addition to the potential development of the domestic capital market, there are

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.

In last year: Tavan Tolgoi (biggest company on MSE, coking coal) up 300% ($170m) Shivee Ovoo up 325% ($115m) Baganuur up 185% ($110m) Sharyn Gol up 525% ($52m)

15 mining companies on MSE Additional 18 mining companies operating in Mongolia listed abroad

Mining

January 24 2011

Mongolia

14.1

Mongolia is now in the spotlight for something other than Chinggis Khan’s name.

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

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

(EMC), a copper concentrate producing Mongolia

the city of Erdenet. Today the copper factory remains a key constituent of the

government revenue and is one of the biggest copp

Although the Russians did some work, much remains to be done. Only around

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

there is a good number of other large

Tolgoi coal deposit, studied later in this section, which is about to be privatised in

2011.

Since

have been consistent, efficient and fast, especially throughout the past decade.

Source: Business Council of Mongolia

Mongolia’s resources remain mostly untapped Only 27% of the Mongolian land has been mapped to a scale of 1:50000 Possibilities to invest in many large-scale investments, including Tavan Tolgoi

Mining

Res

ResCap Mongolia 101

14 Mining Mongolia is considered one of the last mining frontiers.

14.1 Mining Sector




exploration teams first came to the country over a century ago. During the era



Some of them were brought into function, including Erdenet Mining Corporation

(EMC), a copper concentrate producing Mongolia-Russian joint venture, located in


government revenue and is one of the biggest copper deposits in the world.




biggest undeveloped copper and gold deposit in the world. Apart from Oyu Tolgoi,

there is a good number of other large-scale investments, including the Tavan


2011.

Since the shift towards a market economy, the developments in the mining sector



90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

1994: QGX Gold

enters Mongolia

1990: Mongolia

opened: Foreign

Investment Law

passed

1998: Areva signs

uranium exploration

deal

1997: Minerals Law

passed

June 2002: Cameco

gol buys Boroo gold

May 2000: Ivanhoe

enters Mongolia

2004: Western

Prospector enters

Mongolia

2006: Windfall Profit

Tax set

2009: Chinese buy

Western Prospector

(uranium)


P a g e | 73

one of the last mining frontiers.




ams first came to the country over a century ago. During the era



function, including Erdenet Mining Corporation

Russian joint venture, located in


er deposits in the world.




est undeveloped copper and gold deposit in the world. Apart from Oyu Tolgoi,

scale investments, including the Tavan


the shift towards a market economy, the developments in the mining sector


90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

2006: Windfall Profit Jul 2008: Protests in

Ulaanbaatar

2009: Windfall Profit

Tax repealed

Oct 2009: Chinese

CIC invests $500

million in SGQ coal

and $700 million in

iron ore

Western Prospector

2009: Oyu Tolgoi

investment

agreement signed

Mining


January 24 2011


Mongolia is rich in natural resources, especially in gold, copper, coal, uranium,

molybdenum, tin, tungsten and oil deposits. The estimated value of total

resources is $1.3 trillion. Among the commodities, coal, copper and gold have

attracted the majority of investments thus far. While the agricultural sector was

the former largest contributor to government revenue, the role of the mining

sector in the economy continues to grow, making it the current major force

behind Mongolia’s economic growth and development. Now the mining sector

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.


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

0

50

100

2002 2003 2004 2005 2006 2007 2008 2009

ROLE OF MINING SECTOR IN NATIONAL ECONOMY, IN %

In GDP In manufacturing industry In export

Estimated value of total reserves = $1.3trillion Mining sector: 81% of exports 32% of government revenue 30% of GDP

Mining


January 24 2011


MAJOR PLAYERS

Coal Copper Gold Iron ore Uranium

Erdenes-

Tavan Tolgoi Erdenet Centerra Gold Darkhan Steel

Khan

Resources

SouthGobi

Resources

Ivanhoe

Mines/Rio

Tinto

MAK Iron Mining

International

Western

Prospector

Energy

Resources

Western

Prospector

North Asia

Resources Cameco

QGX

Cameco Haranga

Resources Areva

Mongolia

Energy Corp. Areva Altain Khuder

Peabody Energy

Voyager

Resources

Aspire Mining

Gobi Coal and

Energy

Prophecy

Resource Corp.

Xanadu Mines

MAK

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

Source: Ministry of Mineral Resources and Energy of Mongolia

500 485

13385 98

137

35 41

0

100

200

300

400

500

600

Copper

Coal

Gold

Zinc

Crude oil

Iron ore

Molybdenum

Fluoride

2009 2010

Mining revenues climbed massively from 2009 - 2010

Mining


January 24 2011


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.

Source: Mineral Resources Authority 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

Mining


January 24 2011



14.3 Licenses

Exploration license Mining License Total

Quantity Area, Ha

million

Quantity Area, Ha

million

Quantity Area, Ha

million

Domestic

Companies

2,572 22.89 746 0.24 3,318 23.13

Foreign

Companies

1,087 16.08 339 0.22 1,426 16.30

Total 3,659 38.97 1,085 0.46 4,744 39.43

Source: Mineral Resources Authority of Mongolia (1st

Jan 2010)


� The aerial magnetic survey has been conducted for 60% of Mongolia at a

scale of 1:200,000

Mining


January 24 2011


14.4 Coal

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.

Source: National Statistics Office and Trade and Development Bank

COAL RESOURCES


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

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

0

10

20

30

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

COKING COAL EXPORTS TO CHINA, MILLION TONNES

Coal Mongolia’s number one export

Tavan Tolgoi: 6.4bn t coal Total: 152bn t coal

Mining


January 24 2011


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

coal mines:

1) The largest player in the economy and the main supplier to local consumers

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.

2) Foreign investors are mostly attracted to coking coal reserves of Mongolia,

one of the main inputs to steel production, as there is growing demand

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.

Mongolia Mining Corporation’s (formerly Energy Resources) advancements

in coking coal production have attracted immense attention from global

investors. The company, which is currently extracting coal from its 500

million tonnes Ukhaa Khudag deposit, located in the Tavan Tolgoi region, has

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

245 km from the Mongolian-Chinese border. They were the first Mongolian

company to be listed on the Hong Kong stock exchange, raising $748 million

(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.

3) Another major private coal supplier is Mongolyn Alt Corp. (MAK). The

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

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,

low-ash and low-sulphur coal reserves. The current production capacity

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

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 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.

Baganuur = 1.3bn t brown coal, supplies domestic market

Mongolia Mining Corporation = 500mt coking coal, South Gobi province, 245km from Chinese border

1st

Mongolian company to be listed on HKEx ($748m)

Paved road to be completed Q1 2011

Mongolyn Alt Corp = 134mt coal, 900km south of UB, 50km from Chinese border Open-pit mine Production capacity=3mtpa due to infrastructure constraints No rail link, investing in new wash plant

MAK JV with Chinese Qinhua Corp

Obtained approval for railway construction

Mining


January 24 2011


4) SouthGobi Resources’ (SGQ) Ovoot Tolgoi project is certainly one of the

largest foreign investments in the coal field of Mongolia. The deposit is

situated 42 km from the Mongolian-Chinese border pass Shiveekhuren,

making it the closest coal supply to the PRC, with proven and probable

reserves of 114.1 million tonnes of thermal and coking coal. Ivanhoe Mines

and China Investment Corporation currently own around 54% and 13% of

SGQ respectively. The company is listed on Toronto and Hong Kong stock

exchanges. On top of their main project, SouthGobi owns 18 more

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

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

entered into a strategic alliance agreement whereby SGQ has committed to

sell a minimum of 2 mtpa of coal to Winsway. Also, in Dec 2010, SouthGobi

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

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

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

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,

it could soon be replaced by Mongolia as the latter is located closer and has

plenty to offer.

Source: Ministry of Mineral Resources and Energy of Mongolia

In 2010 Mongolian coal exports reached 16.6 million tonnes.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2001 2002 2003 2004 2005 2006 2007 2008 2009

COAL PRODUCTION, MILLION TONNES

2010: 4mtpa 2012: 8mtpa

Off-take agreement signed with Winsway for 3.2mt, at least 2mtpa to be sold to Winsway

2010 revenue from coal = $877m

2015 coal exports to China 30-50mtpa

SouthGobi Resources = 114.1mt thermal and coking coal

Coal supply agreement

- with NAEG for 450kt in 2011 - with a large international

company for 500kt in 2011

Owns 20% of Aspire Mining

Mongolia to replace Australia as main coal supplier to PRC

2010 coal exports: 16.6mt

Mining


January 24 2011


Although Tavan-Tolgoi is one of the world’s largest unexploited coal deposits,

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

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

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

discovered by Soviet exploration teams in 1950 and the initial drilling work

continued throughout the 1960s and 1970s. After the 1990 Democratic

Revolution and a transition to market economy, private sector explorers were

allowed to search for more mineralization in the area. BHP Billiton took the

initiative and started drilling. However, the company stopped exploration and

Energy Resources LLC (currently Mongolia Mining Corporation), a consortium of

major Mongolian companies, acquired the licenses, as it had the necessary capital

when many others did not. The Mongolian government approved amendments to

the Minerals Law in 2006 by identifying fifteen resource-rich areas as Strategic

Deposits, including Tavan Tolgoi.

Total Reserve: 6.4bn t 25% of reserves: coking coal Ownership: 100% Government (Erdenes MGL) A strategic deposit 550 km south of Ulaanbaatar, 200 km from Chinese border Discovered by Soviet exploration teams

Beyond Tavan Tolgoi...

Mining


January 24 2011


In 2007, Erdenes MGL LLC, a state-owned limited liability company was

established to represent the state interest in utilization of strategic deposits. The

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.

Various expansion options for Tavan Tolgoi have been evaluated since then, and

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

statement by declaring that a 100% government ownership would be retained.

By the end of 2010, the Mongolian government put forward a new arrangement

to both strategic investors and contract miners, which is still effective today. The

overall deposit has been divided into two blocks, Eastern and Western. In late

2010, a new company Erdenes-Tavan Tolgoi LLC was established under the

Erdenes MGL’s umbrella to hold the license and account for the management of

the deposit. In Q1 2011, through Erdenes-Tavan Tolgoi LLC, 10% of ownership

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,

29% is to be released through both domestic and international stock exchanges to

investors and a 51% stake is to be retained by the government. Funds raised

through domestic and international IPO will be devoted to financing the

infrastructure and working capital of the Eastern Block. The Western Block,

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.

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

advisors, auditors and so forth. The Tavan Tolgoi coking coal deposit has attracted

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

five state-run companies, Anglo-Australian Rio Tinto Plc and BHP Billiton. The

deadline for investors to submit their proposals was 17th

January 2011. The

deadline for contract miners to express their interest is the 27th

January 2011.

Sources inform that the government is planning to extract 15 mtpa through

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.

Substantial challenges remain

International mining giants interested in TT

2012: 15mtpa through contract mining Paved road from TT to Chinese border is complete Railway construction required

Initial drilling: 1960-1970s Initial license owner: BHP Billiton Ukhaa Khudag block belongs to Mongolia Mining Corp Deposit is to be privatized in 2011 Eastern Block:

- 10% to citizens - 10% to Mongolian companies - (via MSE) - 29% to IPO (via MSE and e.g.

HKEx) - 51% to government

Western Block:

- To strategic investors who will assume full responsibility, including infrastructure development

Mining


January 24 2011


14.5 Copper/Gold

Copper has been the top Mongolian export commodity up until very recently. In

2010, Mongolia exported 568k tonnes of copper concentrate totalling $771

million in value. That represented 26.5% of total exports.

Currently the largest Mongolian copper mine in production is Erdenet Mining

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.

Mongolia is ranked 2nd

in the world by copper reserves, including its massive, soon

to be fully developed Oyu Tolgoi (OT) copper and gold deposit. OT is considered to

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

start-up in late 2012.

Source: European Bank of Reconstruction and Development

Thus far the dominant company in the gold sector has been Boroo Gold (BG), a

wholly owned subsidiary of Centerra Gold and one of the earliest foreign

investment agreement deals in Mongolia. Boroo Gold started production in 2003,

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

is the full development of the Oyu Tolgoi project, which contains 46 million oz of

gold.

The exploration license for Gatsuurt deposit with proven reserves of 1 million oz

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

unclear. In November 2010, the Ministry of Mineral Resources and Energy of

Mongolia announced that 1,782 mining licenses held by private companies and

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

2010: 568k t of Cu exported, worth $771m (26.4% of exports)

Centerra Gold - dominant producer of gold

EMC – current largest producer of Cu ore and concentrate

Mongolia – 2nd

largest in world by Cu reserves Oyu Tolgoi = Erdenet x3

BG reserves almost depleted OT development to change everything

Gatsuurt deposit: 100% owned by Centerra Gold Mining in Gatsuurt not allowed

Mining


January 24 2011


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)

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

A long-term Investment Agreement has been signed between the Mongolian

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% of Oyu Tolgoi ownership belongs to the state and the remaining 66% belongs

to Ivanhoe Mines. The international mining giant Rio Tinto became Ivanhoe

Mines’ strategic partner in 2007 and currently owns 42% of the company.

After the government’s assessment of progresses made after the initial signing of

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

billion lbs (37 million tonnes) of copper and 46 million (1,431 tonnes) oz of gold in

measured, indicated and inferred resources.

Currently construction of the mining complex is progressing ahead of schedule

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

start in 2013.

The Southern Oyu part of the project is being developed as an open pit mine. A

copper concentrator plant and other facilities are being built around the area. At

OT = world’s largest undeveloped copper-gold deposit

Oct 09: Oyu Tolgoi Investment Agreement signed 34% - Mongolian government 66% - Ivanhoe Mines (42% owned by Rio Tinto) March 2010: Investment Agreement took full legal effect Resources: 81bn lbs Cu (37mt) 46m oz Au (1,431t) Initial production expected in Q3, 2012 Commercial production to commence in 2013 Southern Oyu open pit mine: 100k Cu t/day from Q3 2012

Mining


January 24 2011


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

day.

The Hugo North division of the project is being developed as a block-cave mine,

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.

In accordance with the Minerals Law of Mongolia, Oyu Tolgoi is a strategic deposit

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 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 extraction is rapidly growing in Mongolia, and now accounts for 8.7% of

all Mongolian exports.

0

0.5

1

1.5

2

2.5

3

2007 2008 2009 2010 (I-X)

IRON ORE PRODUCTION, MILLION TONNES

30-50 years of stable tax and regulatory provisions

Iron ore exports = 8.7% of total exports

Hugo North underground mine: 85k Cu t/day from 2015

Iron ore production commenced in 2007

Mining


January 24 2011



The Trade and Development Bank (TDB) of Mongolia made their forecasts in

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

2008-2010 was a period of substantial investments in the iron ore sector of

Mongolia.

In 2008, Singapore’s sovereign wealth fund, in partnership with Hopu Investment,

a private equity fund, endowed $300 million in Iron Mining International (formerly

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

2009. All three funds are of substantial size, managing portfolios of $120 billion,

$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.

North Asia Resources Holdings Limited (NAR) entered into a framework

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.

Another notable player in the industry is Haranga Resources, a majority owner

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

0

100

200

300

400

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

IRON ORE EXPORTS, $ MILLION

2010 iron ore exports = 3.5mt ($251m)

Large Iron ore investors in Mongolia: Singapore sovereign wealth fund + Hopu Investment = $300m in Iron Mining International China Investment Corp. (CIC) = $700m in Iron Mining International

Taishen Development = 79mt of iron ore reserves, bought by NAR

Haranga Resources with five iron ore projects raised $25m from ASX IPO

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

Mining


January 24 2011


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

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

insignificant because of infrastructure constraints. Mongolia’s total oil exploration

prospects, covering an area of 614 thousand square km, are divided into 25

blocks.

The existing capacity for further oil exploration is immense as Mongolia remains

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

when they purchased three exploration blocks (XIX, XXI, XXII) from Soco

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

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

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.

June ’08: Mongolia is an oil producer Oil sector under-explored Largest explorers:

• PetroChina

• Petro Matad (London AIM listed)

2010 crude exports = 2.0m barrels ($155m)

EBRD invested $6m in Petro Matad Oil discovered from the first well

Mining


January 24 2011


The Mongolian government’s main intention is to reach 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.

Mongolia’s southern neighbour, China, is the world’s second largest consumer of

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.

In October 2010, it was announced that Japan’s Marubeni Corporation and Toyo

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.


0

0.5

1

1.5

2

2.5

2008 2009 2010

CRUDE OIL EXPORTS TO CHINA, MILLION BARRELS

Goal: self-sufficiency in oil

Target market: China, the world’s second largest consumer

Marubeni Corp + Toyo Engineering = oil refinery in Mongolia ($600m)

Mining


January 24 2011


OIL AND GAS DEPOSITS



Mongolia

14.8 Uranium

Russia estimated the Mongolian uranium reserves at 30 thousand tonnes while

the Mongolian government identifies the resources as 62,000 tonnes. The recent

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

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.

Controversy around Khan Resources’ licenses unresolved

Dornod is a strategic deposit

Mining


January 24 2011


URANIUM DEPOSITS



Mongolia

14.9 Minerals Laws and Taxes

Recently, measures on environmental protection and rehabilitation issues have

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

in Mongolia to date. The occurrences include over 60 types of minerals, including

copper, gold, coal, molybdenum, iron ore, uranium, tin, tungsten, silver, zinc and

fluorspar. Fifteen deposits have been acknowledged by the government as

strategically important.

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

important, if it:

• 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 identified as strategically important to Mongolia, the government is

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.

Stronger measures on environmental protection and rehabilitation

Identified: 1,170 deposits 7,654 occurrences 60 types of minerals 15 strategic deposits

If a deposit is strategic, government takes up to 34%-50% of ownership rights

Mining

January 24 2011

Source

Mining

Res

ResCap Mongolia 101

DEPOSITS OF STRATEGIC IMPORTANCE



P a g e | 91

DEPOSITS OF STRATEGIC IMPORTANCE

Mining


January 24 2011


OVERVIEW OF STRATEGIC ASSETS

Deposit Minerals Reserves and quantity

State of development,

start date, output p.a. Ownership structure Estimated capex

1 Tavan

Tolgoi

Metallurgical

coal 6.4 bn t

Partial production, ramp-

up in 2011, 15-30 mtpa

100% Erdenes MGL

LLC1

US$ 2.4 bn (US$ 1.6

in the first 3 years)

2 Nariin

Sukhait

Metallurgical

coal 125.5. mn t Feasibility study

100% private (South

Gobi Resources, MAK-

Qinhua JV)

N/A

3 Baganuur Lignite coal 600.0 mn t2 Production, 2.8 mtpa

75% SPC3, 25% locally

listed -

4 Shivee

Ovoo Lignite coal 646.2 mn t Production, 2.0 mtpa

90% SPC, 10% locally

listed (operational

part); rest owned by

Erdenes MGL

-

5 Mardai Uranium 0.001 mn t at 0.119%

O3U8 Feasibility study

100% private (Khan

Resources)

Total US$ 200 mn 6 Dornod Uranium

0.029 mn t at 0.175%


21% SPC, 21% Russian

Gov, 58% Khan

Resources

7 Gurvan

Bulag Uranium

0.016 mn t at 0.152%


100% private

(Chinese company)

8 Tomortei Iron ore 229.3 mn t at 51.15% Fe Feasibility study

100% Darkhan

Metallurgical factory

(100% owned by SPC)

US$ 100 mn

9 Oyu Tolgoi Copper, gold 37 mn t of copper,

1,431 t of gold

Commercial production

in 2013

34% Erdenes MGL,

66% Ivanhoe Mines US$ 6 bn

10 Tsagaan

Suvarga

Copper,

molybdenum

10.6 mn t of oxides at

0.42% Cu/0.011% Mo;

240.1 mn t sulphides at

0.53% Cu/0.018% Mo

Feasibility study 100% private (MAK) US$ 200 mn

11 Erdenet Copper,

molybdenum

1.2 bn t at 0.51% Cu/

0.012% Mo

Production, 569k t of

concentrate

51% SPC, 49% Russian

Gov

US$ 150 mn for

downstream plant

12 Burenkhaan Phosphorite 300 mn t at 19.0% P2O5 Feasibility study 100% private (four

private companies) US$ 500 mn

13 Boroo Gold, ore 0.025 mn t at 1.6g/t Au Close to depletion 100% private (Boroo

Gold) -

14 Tomortein

Ovoo Zinc 7.7 mn t at 11.5% Zn

Production, 0.07 mn t of

zinc

100% private

(Tsairminerals JV) -

15 Asgat Silver 6.4 mn t at 351.08g/t Ag Feasibility study

100%

Mongolrostsvetmet

(50% SPC,

50% Russian Gov)

US$ 47 mn

Source: Worley Parsons, Ministry of Mineral Resources and Energy, State Property Committee of Mongolia

Mining


January 24 2011


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)

Mining


January 24 2011


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

Mining


January 24 2011


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

Mining


January 24 2011


Recent Changes to the Mongolian Tax Code

• Effective from the 1st

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 1st

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

Mining


January 24 2011


- 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 27th

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

No Mineral Unit Threshold

market price, US$

Percent levy

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

Mining


January 24 2011


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,

coke, gas,

liquid fuel,

coke chemical

product)

160-190 0.5

190-210 1.0

210-240 1.5

240-270 2.0

Above 270 2.5

Source: State Information Digest

Agriculture


January 24 2011


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.

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

around 14% of foreign currency revenue. The industry development has been and

still is largely constrained by harsh climatic conditions, long winters and

insufficient precipitation. To date, only 1% of Mongolia’s arable land is cultivated

with crops. The majority of vegetables and food products, except livestock, are

imported from China. The overall sector is mainly focused on animal husbandry,

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.

The livestock sub-sector, which accounts for more than 80% of agriculture

production, is primarily focused on sheep, goat, cattle, horse, camel, yak and pig

husbandry. Livestock is extensively distributed throughout the entire territory,

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

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)

Crop cultivation areas are concentrated in the northern regions of Mongolia,

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

and oat. The remaining part is primarily devoted to fodder crops or hay. The sub-

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

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.

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

Agriculture focused on animal husbandry Pastureland is the backbone of agriculture 1% of land cultivated with crops Self-sufficiency in grains and potatoes

Livestock accounts for over 80% of agriculture First cooperatives founded in 1930s

80% of cropland devoted to grain cultivation Crop cultivation yields are low and inconsistent Largest farms: 270 sq km

2010: total livestock 32.8m heads

2010: 1.7mt of harvest

Agriculture


January 24 2011


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.

Source: Ministry of Food Agriculture and Light Industry of Mongolia

15.1 Dzud

Dzud is a terminology explaining extremely cold and windy winters, throughout

which livestock perish from starvation as it becomes impossible to find fodder.

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,

the white dzud which occurred in late 2009 and early 2010 had a cruel impact and

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 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%.

Abandoned, 4

79

Unused, 376

Fallow, 147

Sown, 195

CULTIVATED CROP LAND USE , THOUSAND HA

Dzud = cold and windy winters Animals perish from dzud

Q4 2009 – Q1 2010: 7.8m livestock lost; 45,000 people left without animals 2009: livestock = 16% of GDP

Real Estate


January 24 2011


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.

Residential property prices rose four fold during the period 2002-2008, after

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 [Eurasia Capital].

Source: Global Property Guide, Eurasia Capital, Mongolian Properties

Source: Global Property Guide, Eurasia Capital, Mongolian Properties

250330

400450

590

800

1100

800

0

200

400

600

800

1000

1200

2002 2003 2004 2005 2006 2007 2008 2009

DYNAMICS OF RESIDENTIAL PRICES IN ULAANBAATAR ($/sqm)

4,500

1,9001,550

1,200800 650 475

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

Mo

sco

w

Kie

v

Alm

aty

Ba

ku

Ula

an

ba

ata

r

Bis

hke

k

Ta

shke

nt

COMPARATIVE RESIDENTIAL PRICES ($/sqm)

2002-2008: residential property prices quadrupled

Real Estate


January 24 2011


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

Figures suggest that in 2008, over 15 thousand foreigners and 4 thousand expats

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.

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.

The signing of the Oyu Tolgoi Investment Agreement (Oct 2009) facilitated

substantial inflow of foreign capital into the mining sector, laying the foundation

for complete economic recovery and robust future growth. The top banks of

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.

Statistics suggest that the population of Ulaanbaatar increased 30% to 1.1 million

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

districts with proper residential complexes. An announcement has been made in

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

complexes in those areas comprising 75 thousand apartments for lower-income

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.

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

2008: 15,000 foreign residents and 4,000 expats in Mongolia

2009: property prices fell 30%

Oyu Tolgoi agreement, economic recovery, provision of mortgage loans Demand expected to increase

2007-2010: Ulaanbaatar population increased 30% Offer to exchange 2-room apartments for 0.07 Ha land 100,000 apartments for low-income people to be constructed ($6.2bn)

Substantial existing capacity

Real Estate

January 24 2011

complete by now. Mongolian Propert

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

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

Ulaanbaatar.

Figures indicate that around 100 real estate developers are currently active in

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


Property market, recent research

Currently there is a significant lack of supply in the residential property market

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

Numerous large-scale ongoing projects

100 real estate developers, only 10 are professional

Lack of residential property

Real Estate

Res

ResCap Mongolia 101

complete by now. Mongolian Properties is the largest real estate company based



finished the construction of the Regency Residence (9




owns Golomt Bank, is also building a 84-villa complex in the Sanzai area outside of

Ulaanbaatar.




loans by banks is expected to increase substantially.


Property market, recent research




capital, rising number of expats and improvement in living standards.


P a g e | 103

ies is the largest real estate company based



finished the construction of the Regency Residence (97 apartments) and is




villa complex in the Sanzai area outside of







ber of expats and improvement in living standards.

Real Estate


January 24 2011


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.

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

-50%

0%

50%

100%

150%

200%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2008 2009 2010 2011 2012 2013

Expat population growth

Number of expats

22,200

11,900

9,500

7,050 6,9005,200 5,000 4,500

3,150 3,1001,700

0

5,000

10,000

15,000

20,000

25,000

Ho

ng

Ko

ng

Sin

ga

po

re

Seo

ul

Be

ijin

g

Sha

ng

ha

i

Ba

ng

kok

Pe

rth

Ho

Ch

i M

inh

Alm

aty

Ku

ala

Lu

mp

ur

Ula

an

ba

ata

r

LUXURY RESIDENTIAL PROPERTY PRICES ($ per 1 sqm)

Real Estate


January 24 2011


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

exceed 25% by 2013-2014. The country’s GDP per capita is expected to rise faster

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

other facilities. Property developers and financiers should see the mine sites as

the main destination for real estate related investments.

The latest update informs that construction and installation works implemented

in Mongolia throughout 2010 grew 25.6% from 2009 and reached 351 billion MNT

(around $281 million) in total. Domestic construction companies executed 93% of

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

7%.

63 6157

54

38

31 31 3024 24 23 22

0

10

20

30

40

50

60

70

Ho

ng

Ko

ng

Sin

ga

po

re

Seo

ul

Pe

rth

Ho

Ch

i M

inh

Sha

ng

ha

i

Be

ijin

g

Alm

aty

Ta

ipe

i

Ku

ala

Lu

mp

ur

Ba

ng

kok

Ula

an

ba

ata

r

GRADE A OFFICE RENTAL PRICES ($ per 1 sqm)

Ulaanbaatar – the capital city

of Mongolia (2000)

Ulaanbaatar – the capital city

of Mongolia (2010)

2010: construction/installation works nationwide $281m (up 25.6% yoy)

Infrastructure

January 24 2011

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

17.1

The Trans

country’s borders with Russia and China, stretches across 2,215 km. The line starts

at Ulan

Erenhot, where it j

branching out from the main line that link passengers to the main cities such as

Erdenet and Darkhan. Apart from the Trans

connects the eastern city Choibalsan,

Trans

government, is responsible for the operation of the main line.

In December 2010, the governments of Mongolia and Russia signed nine

cooperation agreements, including a contract on the enlargement of the

Ulaanbaatar Railway capital at equal contribution, which will help modernize the

company and facilitate the develop

Mongolia.

Trans-Mongolian railway (2,215 km) is Mongolia’s main rail line

Agreement signed on improvement of Ulaanbaatar Railway company

Infrastructure

Res

ResCap Mongolia 101

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 connecting the


at Ulan-Ude town, passes through Ulaanbaatar, then reaches Zamiin

Erenhot, where it joins the Chinese railway. There are a few diverted short routes


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 railway of Russia. Ulaanbaatar Railway, 50% owned by the Russian





company and facilitate the development of the required infrastructure in

Mongolia.


P a g e | 106

most serious inhibitor to developing its resource wealth. However, there are many ambitious projects and foreign investment commitments to

Mongolian railway, which is Mongolia’s main rail link connecting the


Ude town, passes through Ulaanbaatar, then reaches Zamiin-Uud and

oins the Chinese railway. There are a few diverted short routes


Mongolian railway, a short link

the centre of the Dornod province, with the

Siberian railway of Russia. Ulaanbaatar Railway, 50% owned by the Russian





ment of the required infrastructure in

Infrastructure


January 24 2011


17.2 Roads

Most roads in Mongolia are gravel road and 96.7% of the Mongolian road network

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

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,

further investments are expected in rail and road networks. Mongolia Mining

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

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

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

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.

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

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

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

96.7% of roads unpaved Major investments expected New paved road by Mongolia Mining Corporation

Only one international airport

Water is a scarce resource in Mongolia

Water is vital in mine development

Oyu Tolgoi team discovered an aquifer Water supply ensured for 40 years Environmental impacts will be minimal

Infrastructure


January 24 2011


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

towns.


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

Infrastructure

January 24 2011

Most of the la

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

failures occur

Source: World Bank, “Mongolia Sources of Growth Country Economic

Memorandum”, July 26 2007

As informed by the Business Council of Mongolia, the 2010 Global

Competitiveness Report ranked M

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

the Mongolian

railway capacity is substantially restrained. In addit

of the current railway network is seen by many as an obstacle for development.

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


Largest deposits located in isolated areas Poor access to basic infrastructure

Ranked last for quality of infrastructure

88.4% - earth road 3.3% - paved road

Infrastructure

Res

ResCap Mongolia 101

Most of the large-scale deposits are located in isolated areas, with very limited

infrastructure.



failures occur constantly.


Memorandum”, July 26 2007


Competitiveness Report ranked Mongolia last for the quality of overall


the Mongolian-Chinese border. Because of underinvestment, the country’s overall

railway capacity is substantially restrained. In addition, the half




0

5

10

15

20

25

Mo

ng

olia

Ch

ina

Ru

ssia

Ka

zakh

sta

n

ACCESS TO BASIC INFRASTRUCTURE (DAYS SPENT)

Obtain electrical connection Water supply failures

88.4%

3.8%3.9%

3.1%

0.2%

0.5%


P a g e | 109

scale deposits are located in isolated areas, with very limited





ongolia last for the quality of overall


Chinese border. Because of underinvestment, the country’s overall

ion, the half-Russian ownership



Ka

zakh

sta

n

Ea

st P

aci

fic

Asi

a

ACCESS TO BASIC INFRASTRUCTURE (DAYS SPENT)

Water supply failures Power outages

Earth road

Improved road

Gravel

Asphalt road

Cement road

Others

Infrastructure

January 24 2011

Supply chain development potentials

Planned mining expenditures are to total $13 billion in the coming years, of which

$1.3 billion is to be


The government of Mongolia hopes to attract up to $25 billion in foreign

investment for mining projects in 2011

Note: Under 30 mtpa


Infrastructure development requires around $5.2 billion in investments from

2011

Planned mining expenditures: $13bn Mining service expenses: $1.3bn

2011-2015: expected FDI in mining $25bn

2011-2020: investment in infrastructure $5.2bn

Infrastructure

Res

ResCap Mongolia 101

Supply chain development potentials


$1.3 billion is to be spent on mining services.



investment for mining projects in 2011-2015.

Note: Under 30 mtpa production scenario



2011-2020.

26%

22%24%

16%

12%

COAL CASE, MINING INVESTMENT REQUIREMENTS, % OF TOTAL


P a g e | 110




COAL CASE, MINING INVESTMENT REQUIREMENTS, % OF TOTAL

600MW power plant

Open-cut coal mining

Railway

Coal beneficiation

Others

Infrastructure


January 24 2011


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

The railway infrastructure plan has considered all major mineral deposits. Around

$3.0 billion is to be spent on the first phase.


Mongolia

Railway construction, 1st

phase $3.0bn

Infrastructure


January 24 2011


17.6 Industrial Park 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.


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

SAINSHAND IND. PARK

$10bn industrial complex in Sainshand

Infrastructure


January 24 2011


According to the estimates of the Ministry of Road, Transportation, Construction

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)

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

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.

Sainshand Park can increase Mongolia’s GDP to $41bn

2011-2012: new railway, 240 km, 15mtpa

Q1 2011: new paved road, 18mtpa

Infrastructure


January 24 2011


Mongolia – Russia - China

Authorities of Mongolia have selected a more expensive infrastructure

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.

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.

A number of factors influenced the choice of such an expensive option. The

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

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.

In May 2010, SouthGobi Resources, engaged in coal exploration and mining

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

project at Zamiin-Uud with $45 million in loans and grants, which will create a

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

2011: new railroad from Tavan Tolgoi to Choibalsan, 1,040 km, capex $3.0bn

Choibalsan is linked to Trans-Siberian railway

New route will help develop Sainshand Park

MMC’s plan to build a railway impeded

SouthGobi’s plan to build a railway terminated

ADB is funding a logistics project at Zamiin-Uud ($45m)

Infrastructure


January 24 2011


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

the assigned $45 million will be a 32-year loan with a 1% interest rate rising to

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

strategic alliance to improve the railway infrastructure of Mongolia in September

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

International air travel from Mongolia is limited to a number of destinations.

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

Requirement for new international routes is split evenly between domestic and

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.

$40m in loans $5m in grants

Sep 2010: CADEX KK and Mongolian Railway strategic alliance

Domestic airports are soon to start handling international routes

Dalanzadgad (South Gobi centre) airport can handle international routes

Infrastructure

January 24 2011

The Hong Kong market is expected to be opened up to Mongolia on a regular

basis starting in 2011.

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)

Planned charter flights from MIAT (beginning April 2011)

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.

Hong Kong market to open up to Mongolia

Infrastructure

Res

ResCap Mongolia 101


basis starting in 2011. Currently, the direct access to Ulaanbaatar from major

global financial centres is unavailable.


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.


• 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



ong Kong.


P a g e | 116


direct access to Ulaanbaatar from major


charter flights to Hong Kong but

Fragmented demand due to irregular flight times and

lower tourist season were seen as the cause for cancellation of the final

Mongolian travel agent Juulchin World Tours Corporation and Miramar


Twice per week service from Ulaanbaatar to Hong Kong will be organised

800 (with 162 seats) to fly to Hong



Privatisation of State Properties


January 24 2011


18 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. In order to facilitate expansion of the economy based on private sector

development, the Mongolian government started privatising state owned

enterprises (SOE) through bidding, international tender, and management and

ownership contracts over the past twenty years. A number of state properties are

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.

This upcoming share issuance of Tavan Tolgoi will not be the first experience in

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.

Mongolia's plan to privatize its state-owned properties will allow international

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

1. “Baganuur” JSC

53% of the Mongolian central electricity system depends on the Baganuur coal

supply. Containing estimated reserves of 1.3 billion tonnes of brown coal,

Baganuur is the biggest coal supplier to coal consumers in Mongolia.

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

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

1990-2010: SOEs were privatised 2011-2012: several SOEs to be privatised, including Tavan Tolgoi

1990: first round of privatisations, unsuccessful exercise

International investors to benefit from privatisations

Baganuur, brown coal, 1.3bn tonnes Current production 3.0 mtpa Capacity 4.0+ mtpa 75% state owned 15% owned by Firebird



January 24 2011


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

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

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

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

networks.

Power Plant Installed

Capacity

(MWe)

Available

Capacity

(MWe)

Capacity

Boilers

(MWth)

District

Heating

(MWth)

Indus.

Stream

(MWth)

Commissioning

year

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

All five plants are coal-fired and of Soviet design. They are used in the production

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

Mongolia because the central grid is unable to meet the daily demand at its peak

due to poor peaking potential of the plants.

Mongolian electricity supply = 3 grids Largest grid – CES CES = 5 power plants CES capacity: 786.3 MW

CES consumes 80% of domestic coal supply Constant power outages and water supply failures



January 24 2011


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

and has been forecasted to increase to 500 MW by 2013, as a result of Mongolia’s

economic growth and mining related industrialisation.

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 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)

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

Mongolia Telecom Company (MTC) is the Mongolian national telecommunications

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,

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

in the mobile phone segment. 23% of total internet users in Mongolia are MTC’s

customers.

MIAT – largest carrier, state-owned

LSE to manage MSE

MTC – national telecommunications company 200+20 thousand customers 23% of total internet users

Current supply: 650MW Current deficit: 120MW 2013 deficit: 500MW


January 24 2011

The company was partially privatized

venture was formed. Korean Telecommunications Company acquired 40%

ownership.

Share ownership structure after the first privatisation:

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. 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

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



Res

ResCap Mongolia 101

The company was partially privatized in 1995, when a Mongolian


ownership.

Share ownership structure after the first privatisation:

• 54% of shares owned by the Mongolian government

• 40% of shares owned by South Korean KT Corporation

• 6% of shares owned by the citizens of Mongolia

Method:



state will open a tender.

6. Mineral resources The government will bundle in groups the state owned shares from the 15



companies will be established in the process.

18.1.2 Detailed maps of planned privatisations




P a g e | 120

in 1995, when a Mongolian-Korean joint


54% of shares owned by the Mongolian government

rean KT Corporation



The government will bundle in groups the state owned shares from the 15





January 24 2011

Tavan Tolgoi coal mine (TT) is currently 100% owned by Erdenes MGL LLC which is

ful

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

and operation of the TT coal deposit. Erdenes MGL is intending to retain 51%

ownership of the Ea

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

exchanges (IP0).

Funds raised through IPO will be devoted to financing the infrastructure and

working capital of the Eastern block. The

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

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.


The State Proper

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

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.

Tavan Tolgoi privatisation: 10% to citizens 10% to Mongolian companies 29% to IPO

Eastern block to contract miners Western block to strategic investors


Res

ResCap Mongolia 101


fully controlled by the State Property Committee.

The SPC is going to split the deposit into two blocks. In October 2010, Erdenes



ownership of the Eastern Block and privatise the rest by splitting



substantial price and 29% released through domestic and international stock

exchanges (IP0).


working capital of the Eastern block. The Western block, however, is going to be



the government of Mongolia. Contract miners will be able



Mongolia.


The State Property Committee will bundle the coal assets it holds from the



the remaining 30% on the domestic and international stock exchanges through an




P a g e | 121


The SPC is going to split the deposit into two blocks. In October 2010, Erdenes-



stern Block and privatise the rest by splitting 20:29 between



through domestic and international stock


estern block, however, is going to be



the government of Mongolia. Contract miners will be able to participate in the



ty Committee will bundle the coal assets it holds from the



ternational stock exchanges through an




January 24 2011


The State Property Committee

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

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.

The plan is to construct a copper smelting factory in Sainshand to increase the

value of copper mines.

development of the project. If the government of Mongolia arranges for

construction of a copper

between the government of Mongolia and Ivanhoe Mines:

Copper smelter in Sainshand to increase valu of Cu resources


Res

ResCap Mongolia 101


The State Property Committee will bundle the copper and silver assets it holds



remaining 30% on the domestic and international stock exchanges through an





value of copper mines. The private sector will be the driving force for the


construction of a copper smelter, then according to the Investment Agreement


- Ivanhoe Mines must provide Rio Tinto's (or its affiliates) p

technologies held in joint venture with Outokumpu

the smelter.


P a g e | 122

will bundle the copper and silver assets it holds



ock exchanges through an





The private sector will be the driving force for the


smelter, then according to the Investment Agreement


Ivanhoe Mines must provide Rio Tinto's (or its affiliates) proprietary

with Outokumpu, for the operation of


January 24 2011


The State Property Committee will bundle the iron ore assets it

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

Ovoo zinc deposit, 100% of Temur Tolgoi iron ore deposit, and 100% of Darkhan

Metallurgical plant.



Res

ResCap Mongolia 101


The State Property Committee will bundle the iron ore assets it




Company will in turn own 100% of Temurtei iron ore deposit, 34% of Temurtein


Metallurgical plant.



P a g e | 123

The State Property Committee will bundle the iron ore assets it holds from the




pany will in turn own 100% of Temurtei iron ore deposit, 34% of Temurtein




January 24 2011


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.



January 24 2011


18.1.4 Recent developments


In December 2010, the London Stock Exchange (LSE) signed a contract agreement

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 (TT) LLC, a subsidiary of the State Property Committee

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

rights to the citizens of Mongolia and the sale of another 10% at a market price to

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.

The tender for strategic investors for the Western Block has been officially

announced and closed on 17th

January at 16:00. According to the latest update,

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 Posco and Korea Electric

Power Corp., Anglo-Australian mining companies Rio Tinto and BHP Billiton,

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

and is about to close on the 27th

January 2011.

Erdenet Factory, MongolRosTsvetMet and Dornod Uranium In December 2010, on his last visit to Moscow, the Mongolian Prime Minister

Sukhbaataryn Batbold has signed nine cooperation agreements with his Russian

counterpart, Vladimir Putin. The negotiations included settlements on the

Mongolian debts to Russia and the national level joint venture, Dornod Uranium.

An agreement was signed specifying the business plan for the uranium deposit,

according to which the joint venture would start functioning in 160 days. It also

informed that the two existing Mongolian-Russian joint ventures, Erdenet and

MongolRosTsvetMet, may merge and market their stock. Together the two

Contract agreement signed between MSE and LSE

Erdenes – Tavan Tolgoi, sole owner of the deposit, holds 15bn shares. Eastern block privatisation to domestic investors in Q1 2011, afterwards IPO

Eastern block privatisation to domestic investors in Q1 2011, afterwards IPO Deadline for strategic investors: 17 Jan 2011 Deadline for contract miners: 27

Jan 2011

14 December 2010, 9 cooperation agreements signed between Mongolia and Russia:

- Debt settlement - Dornod Uranium JV - Erdenet + MonRosTsvetMet =

merger & IPO



January 24 2011


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.

Demographics


January 24 2011


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

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% of the citizens are below the age of 30 and 27% are below the age of 14.

Compared to EU countries and Japan that are going through a period of

“demographic winter”, Mongolia’s population is significantly younger. In

November 2010, the government conducted the 10 - yearly population Census,

the results of which are yet to be released in 2011.


Source: IMF

2000

2100

2200

2300

2400

2500

2600

2700

2800

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

POPULATION, IN THOUSANDS

0

2

4

6

8

10

12

14

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

UNEMPLOYMENT RATE, % OF TOTAL LABOUR FORCE

2009: 2.8m people (NSO estimate)

- 59% below 30 - 27% below 14

Population growth rate 1.2%

Demographics


January 24 2011


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

woman) in Mongolia has been declining at a steep rate compared to other

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.

Mongolia is becoming more urbanized with more rural population migrating to

the capital city in search of better living conditions. Currently about 40% of the

population live in Ulaanbaatar, around 20% live in Darkhan, Erdenet, provincial

centres and soum settlements and the remaining 40% live in rural areas. Semi-

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%

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.

13% unemployment rate in 2009 Since 1990: steadily declining fertility rate

40% of population live in UB, 20% in other urban areas 40% in rural areas 30% are herders

90% of population: Khalkha Mongols

Languages


January 24 2011


20 Languages Many Mongolians have a good grasp of Russian and English

The official language in the country is Khalkha Mongolian. One can encounter

other dialects such as Oiratian (spoken by Durbet) and Buryatian across the

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

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

government funded scholarship programs. Older Mongolian academics, who

studied in Germany during the Soviet times, can speak fluent German. Because

households endeavour to send their children abroad for higher education (as long

as there are possibilities to support them throughout their stay) many younger

Mongolians today fluently speak Western European languages such as French,

German and Italian.

Official language – Khalkha Mongolian

Cyrillic script adopted in 1937

Traditional Mongolian script

Widely spoken languages:

- Russian - English - Chinese - Korean - Japanese - Western European

Religion


January 24 2011


21 Religion Religious practices were largely impeded by the Communist regime.

According to the CIA World Factbook and the U.S. Department of State, 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.

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.

Following the Communist influence, throughout the XX century, religious practices

were largely restrained by the government. The Buddhist Temples were a

replication of the pre-socialist feudal system and the Khaan of Mongolia was the

head of the Temple (The 8th

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.

50% - Buddhists 40% - not religious 6% - follow Shamanism, Baha’i & Christianity 4% - Muslims

First Shamanism, then Buddhism, then Socialism (destruction of monasteries), then Democracy (resumption of religious practices)

Equity Research


January 24 2011


1 Equity Research

1.1 Tavan Tolgoi

Company brief: There are two companies named Tavan Tolgoi (TT). One is the 6.4

billion tonne deposit Tavan Tolgoi which is 100% owned by the state-owned

Erdenes MGL and the other one is Tavan Tolgoi JSC listed on the MSE. The main

Tavan Tolgoi deposit complex is partially owned by Erdenes MGL (6 mining

licenses), Mongolia Mining (1 mining license), Moril Luu (1 mining license), Broad

(1 mining license), Daitsuki (1 mining license) and Tavan Tolgoi JSC with 2 mining

licenses. The South Gobi provincial government owns 51% of TT JSC and the rest is

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

Company signed a coal export contract with a Chinese client and since then its

coal export to China has substantially increased. The company cooperates with

Tavan Tolgoi Trans private company in transporting coal to China. Although in

Gansu and Inner Mongolia semi-soft coal and hard coking coal prices are around

$85/t and $155/t respectively, the company is still selling their coking coal at

$7.5/t to the local market due to the state-regulated sale prices and is exporting

at around $25-35/t. Since 2007 the company almost tripled the extracting

capacity to 2mtpa. In 2009, they extracted over 2m tonnes with 170 employees.

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

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.

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,

the company sold over 2.5mt of coal to both foreign markets and local clients, and

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

coal mine is approx $11-12, which is very low compared to international peers. As

a result of the low cost, Tavan Tolgoi JSC mine’s profitability is great (ROA at

103%, ROE at 116%, gross margin at 58% and net margin at 44.8%, as of FY2009).

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

EPS, MNT 24,425 30,636 81,178

Total Asset 15,519 23,984 58,835

Current Asset/Non-Current Asset, % 638% 808% 1091%

Net debt/Equity, % -37% -8% -62%

Gross margin, % 52% 45% 58%

Net margin, % 40% 34% 45%

EV/EBITDA, (x) 0.8 2.2 1.0

Sales growth, % 301% 47% 100%

Stock data

Price, MNT 530,000

Price, US$ 436.86

The peak, MNT 670,000

52Wk Range, MNT 120,000 - 670,000

Mkt cap, MNTbn 279

Mkt cap, US$mn 230

Avg daily turnover, US$ 8,467

Free float, % 11.90%

YTD performance, % 293%

Key indicators

P/BV 5.27

P/E 6.53

ROE 116%

Gross margin 58%

Net debt/Equity -62%

EBITDA margin 59%

EV/EBITDA 1

EV/Resource 3.55

Dividend yield 61%

100

200

300

400

500

600

700

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

/4/1

0

11

/4/1

0

12

/4/1

0

MN

T'0

00

Share price performance, MNT

Shareholders

51%34%

7%8%

Provincial

governor

Ajnai

Corporation

Board members

Retail

shareholders

Source: Company data and SCH&CD

As of 16 Dec 2010

Equity Research


January 24 2011


1.2 Baganuur

Company brief: 53% of the Mongolian central electricity system depends on

Baganuur coal supply. Containing an estimated reserves of 1.3 billion tonnes of

brown coal, Baganuur is the biggest coal supplier to coal consumers in Mongolia.

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. From 1996-

2004, the Mongolian Government modernized and expanded production at

Baganuur by acquiring $31.1m and $50.9m in loans from the World Bank and the

Japanese government respectively. As a result, the company’s exploitation

capacity reached 4mtpa. Currently the mine extracts 3mtpa due to central-region

demand, old equipments and financial constraints. The State owns 75% of the

company and the biggest private shareholder is Firebird investment fund, holding

over 14%, the rest is free float. Baganuur JSC is included in the 2011-2012

privatization plan, approved by the parliament of Mongolia.

Deposit: Baganuur coal deposit is one of the strategically important deposits of

Mongolia (area: 0.6ha, waste:10-60m on average, general coal seam: 10.3-17.2m,

coal seam in the central part: 25-96m). The mine is located 139km east of

Ulaanbaatar and has access to railway. Baganuur’s strip ratio is around 1:1 to 6:1.

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.

Financial highlights: Despite the mine making losses due to the regulated coal

prices, the reserve based valuation of Baganuur is significantly low compared to

international peers. Baganuur’s EV/Reserve multiple is 0.39$/t. In 2009, the

company produced 3mt of coal at COGS of $30.5m or $10.15/t mining cost. SG&A

and other costs were $0.97/t. In 2009, the company operated with a gross margin

of 11%, an operating margin of 1% (due to the slight relaxation the sale price to

$12.54), net losses of $6.3m (due to exchange rate adjustments of debt and

interest rate payments). In December 2010, the Parliament made a decision to

cover all losses acquired from the exchange rate risk, inducing Baganuur’s

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

investment plan of $8.5m, Baganuur JSC purchased two additional 100t capacity

trucks for $2.9m.


2007 2008 2009

Sales 34,308 43,174 49,483

Net profit -7,184 -11,077 -9,121

EPS, MNT -342 -528 -435

Total Asset 61,466 64,776 75,472


Gross margin, % -1% 6% 11%

Net margin, % -21% -26% -18%

EV/EBITDA, (x) na na na

ROE, % na na na

Dividend yield, % 0% 0% 0%

Sales growth, % 7% 26% 15%

Stock data

Price, MNT 10,600

Price, US$ 8.74


52Wk Range, MNT 2,800 - 11,000

Mkt cap, MNTbn 222

Mkt cap, US$mn 183


Free float, % 11.37%


Key indicators

P/BV -

P/E -

ROE 51%

Gross margin 11%


EBITDA margin -15%

EV/EBITDA -

EV/Resource 0.39

Dividend yield -


2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

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

/4/1

0

11

/4/1

0

12

/4/1

0

MN

T'0

00

Shareholders

75%

14% 11% State

Master

Fund/Firebird

Free Float

Source: Company data, SCH&CD and ResCap

As of 16 Dec 2010

Equity Research


January 24 2011


1.3 Shivee Ovoo

Company Brief: Shivee Ovoo, an open pit mine, satisfies 25% of coal consumption

in Mongolia. 80% of Shivee Ovoo coal production is supplied to TPP-4, the biggest

power plant in Mongolia, and the remainder goes to Ulaanbaatar Railway,

MongolRosTsevetment, Bor Undur, Sainshand, Zuun Mod and others. The

Mongolian Government owns 90% of the company through Erdenes MGL and

9.0% is held by Firebird Fund. Production capacity of the company increased to

2mtpa owing to the $67.6m loan from the Japanese government obtained in

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

signed an agreement to erect a 4800MW thermal power plant, from which

4500MW would be exported to China and the rest supplied to local consumers.

The Mongolian government plans to build TPP-5 in UB, which will utilise 4mtpa of

Shivee Ovoo’s coal. The Mongolian electricity consumption is 1,261kWh per capita

(3 times, 6 times and 13 times lower than Kazakhstan, Russia and Canada

respectively), however, the demand is inevitably increasing.

Deposit: Shivee Ovoo coal deposit, one of the strategically important deposits of

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

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

content, 8.5% of moisture, 0.5% sulphur and 43% volatile material.

Financial highlights: At present, resources of the deposit is significantly

undervalued considering the uncertainty over future dealing pipeline of Shivee

Ovoo and regulated tariffs on electricity and coal prices. The coal mine had

operational margins of 1%, 5% and 7% in 2007, 2008 and 2009 respectively, even

though the company incurred net losses due to the exchange rate adjustments of

long term debt. The company has accumulated $63.7m of debt on the balance

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

Ovoo’s shareholder equity to increase by around $13.1m.


2007 2008 2009

Sales 10,813 14,731 16,202

Net profit -566 -6,318 -11,048

EPS, MNT -42 -471 -823

Total Asset 68,325 70,242 92,244



Net margin, % -5% -43% -68%


ROE, % na na na

Dividend yield, % 0% 0% 0%

Sales growth, % 10% 36% 10%

Stock data

Price, MNT 12,800

Price, US$ 10.55


52Wk Range, MNT 2,400 - 14,900

Mkt cap, MNTbn 172

Mkt cap, US$mn 142


Free float, % 1%


Key indicators

P/BV -

P/E -

ROE 37%

Gross margin 8%


EBITDA margin -68%

EV/EBITDA -

EV/Resource 0.08

Dividend yield -


2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

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

/4/1

0

11

/4/1

0

12

/4/1

0

MN

T'0

00

Shareholders

90%

9%

1%

State

Master

Fund/Firebird

Free Float


As of 16 Dec 2010

Equity Research


January 24 2011


1.4 APU

Company brief: APU is the fourth largest company on the MSE by market cap. It is

the leading brewery and alcohol producer in Mongolia, taking up over 50% of beer

and over 40% of vodka markets. The company distributes their products through

over 6000 trade and shopping centres nationwide, the largest distribution

network in Mongolia. APU has registered the vodka trademark "Chinggis Khan" in

over 20 countries worldwide. On June 11, 2010, APU opened a new brewery

factory with a capacity of 58.4m litres/year of beer, after receiving a $25m loan

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.

Market presence: APU is the biggest player in the beer market. The other major

players in Mongolia are MCS and GEM. APU’s market share in the beer market has

increased dramatically in recent years.

Financial highlights: In the last 2 years, the company’s revenue increased 9 times

to $59.9m and total assets increased 1.8 times to $49.4m. Gross margin is robust

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.


2007 2008 2009

Sales 10,114 53,799 86,867

Net profit 367 3,856 8,070

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%


Net margin, % 4% 7% 9%

EV/EBITDA, (x) na na 7.6x

ROE, % 6% 29% 31%

Dividend yield, % nmf 5% 5%

Sales growth, % na 432% 61%

Stock data

Price, MNT 1,855

Price, US$ 1.53

The peak, MNT 2,000

52Wk Range, MNT 630 - 2,000

Mkt cap, MNTbn 138

Mkt cap, US$mn 114


Free float, % 8.10%


Key indicators

P/BV 4.35

P/E 17.31

ROE 31%

Gross margin 23%

Net debt/Equity 119%

EBITDA margin 13%

EV/EBITDA 7.58

Dividend yield 5%



Shareholders

0.0

0.5

1.0

1.5

2.0

2.5

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

/4/1

0

11

/4/1

0

12

/4/1

0

MN

T'0

00

52%40%

8% Shunkhlai

Two key

shareholders

Free float

As of 16 Dec 2010

Equity Research


January 24 2011


1.5 Mongolia Telecom

Company brief: Mongolian Telecom was established the under name of

Mongolian Telecommunication Company (MTC) in 1992. Then MTC was divided

into two separate companies, Information Communication Network Company

(ICNC) and Telecom Mongolia JSC. ICNC is currently a 100% state owned company

and Mongolian Telecom was partially privatized. Mongolia Telecom’s

shareholders are the Mongolian Government - 55%, Korean Telecom - 40% and

the rest is free float. Mongolia Telecom is a quasi-monopoly in the land line

telecommunications sector. The company has branches in all aimag and soum

centres in Mongolia. The company also offers Wireless Local Loop (WLL), internet

and internet based services. Mongolia Telecom is the leasing backbone from

(ICNC) and has its own fiber optic network along the railway. The WLL network of

Mongolia Telecom Company was introduced with South Korean LG Electronics

Company’s help. A network, with a capacity of over 10,000 users, 7 base stations

and a CDMA-based wireless network called “MY Phone”, was introduced on July

8th, 2002. Within its expansion of services, the company introduced CDMA

450MHz, NGN+CDMA+IN, payment systems at such banks as TDB, Khan and

Savings and extended its prepaid card distributor’s network with ATMs.

Market presence: The number of fixed telephone subscribers per 100 people is

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

of 3,100km of analogue, and approximately 900km of digital lines connecting

Ulaanbaatar and provincial centres. Mongolia Telecom has access to the INTELSAT

satellites in the Indian Ocean region and to the Express-6 satellite of the

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

introduced in May 1999. The Mobile phone market has undergone a remarkable

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

about 10% per annum.

Financial highlights: In current years, the company’s revenue has been decreasing

due to the shrinking fixed telephone market in Mongolia. The company’s

introduction of new services could not offset the decrease in revenue land line

services.


2007 2008 2009

Sales 31,471 26,655 24,657

Net profit 5,321 2,776 2,893

EPS, MNT 206 107 112

Total Asset 41,487 39,736 38,147


Net debt/Equity, % -3% -11% -11%


Net margin, % 17% 10% 12%

EV/EBITDA, (x) 19.6 9.3 16.6

ROE, % 16% 8% 9%

Sales growth, % na -15% -7%

Stock data

Price, MNT 3,626

Price, US$ 2.99

The peak, MNT 9,000

52Wk Range, MNT 2,100 - 4,000

Mkt cap, MNTbn 94

Mkt cap, US$mn 77

Avg daily turnover, US$ 800

Free float, % 5.30%


Key indicators

P/BV 2.82

P/E 17.75

ROE 9%

Gross margin 16%

Net debt/Equity 12%

EBITDA margin 14%

EV/EBITDA 16.6

Dividend yield -


Shareholders


2.0

2.5

3.0

3.5

4.0

4.5

1/4

/10

2/4

/10

3/4

/10

4/4

/10

5/4

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6/4

/10

7/4

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8/4

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9/4

/10

10

/4/1

0

11

/4/1

0

12

/4/1

0

MN

T'0

00

55%

40%

5% State

Korean

Telecom

Free Float

As of 16 Dec 2010

Equity Research


January 24 2011


1.6 Sharyn Gol

Company Brief: Sharyn Gol is the only MSE listed coal mine with an approved

JORC resource. In 1995, the company was partially privatized and floated on the

MSE and in 2005 it became a 100% private company. The company has a capacity

to extract 2mtpa of coal. It produces around 0.5mtpa and 80% of its coal is

supplied to Darkhan and Erdenet Thermal Power Plants (TPP). Currently, the

company is owned by a New York based Fund Firebird (54.4%), local management

team (38.8%) and the rest is free float. As the Major shareholders want to convert

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

drilling program to 30k meters.

Deposit: Sharyn Gol deposit is located 50km south of Darkhan city and 240km

north of Ulaanbaatar, and connected through railroad to the cities. The deposit’s

total license area is 1,8ha. According to the company management, the total

reserve is over 100-150mt of coal as a result of additional drilling of 16K meters.

Sharyn Gol recently found new coal seams, as well as highly mineralised

continuation of the current coal seams they are mining at the moment on the

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

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.

Financial highlights: The company’s EV/Reserve multiple of 0.53$/t is relatively

cheap compared to international peers. Regulated low coal prices and delays with

payments for delivered coal by the TPPs cause financial problems to the company.

In FY2009, despite the fact that company’s production decreased by 22% to 426kt,

net profit increased to the highest point of $180m since 1998 as a result of

reduced non-operational costs. As for exports, historically the company sold coal

to Russia and China (2006, 2007). For the company to be able to export coal to

China $70 million must be spent on infrastructure, in which case production

capacity could be increased to 2.5 mtpa.


2007 2008 2009

Sales 8,198 10,526 8,812

Net profit 173 61 219

EPS, MNT 24 8.5 30

Total Asset 12,590 10,790 9,535


Net debt/Equity, % 1005% 737% 545%


Net margin, % 2% 1% 2%

EV/EBITDA, (x) nmf nmf nmf

ROE, % 17% 5% 17%

Sales growth, % 17% 28% -16%

Stock data

Price, MNT 10,300

Price, US$ 8.49


52Wk Range, MNT 1,696 - 13,500

Mkt cap, MNTbn 74

Mkt cap, US$mn 61


Free float, % 8.14%


Key indicators

P/BV 51.66

P/E 337.04

ROE 17%

Gross margin 11%

Net debt/Equity 545%

EBITDA margin 4%

EV/EBITDA 63.16

EV/Resource 0.5

Dividend yield -


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1/4

/10

2/4

/10

3/4

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4/4

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5/4

/10

6/4

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7/4

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9/4

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10

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0

11

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0

12

/4/1

0

MN

T'0

00

Shareholders

54%

22%

14%

3%3%

1%

0%

3%

Master Fund/Firebird

Batmunkh Batkhuu

Sharyn Gol Energo

Batbold

MDR

Balihuu Dambachultem

Anod Bank

Free Float

As of 16 Dec 2010

Equity Research


January 24 2011


1.7 Gobi

Company brief: Gobi JSC is the leading producer of cashmere and camel wool

products in Mongolia and the 5th

largest manufacturer in the cashmere market

worldwide, with an annual capacity to process 1,000 tonnes of raw cashmere, 200

tonnes of raw camel wool and 40 tonnes of sheep and yak wool. The company’s

products are sold through its own stores and vendor companies in the domestic

market, and mostly through vendor companies in the international market. Even

though historically 80% of its products are exported to international markets,

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.

According to management estimates, in 2009 Gobi held 42% of market share in

the domestic finished products market.

Market presence: China and Mongolia are the two biggest pure cashmere

producers with 60% and 30% of the world’s pure cashmere market share

respectively. Chinese cashmere traders and companies buy as much as 75% of

Mongolian raw cashmere and the rest is bought by domestic cashmere

manufacturers. China is key to the Mongolian cashmere sector in terms of

cashmere products and raw cashmere purchases.

Financial highlights: Over the last 3 years, the company’s sales outside of

Mongolia decreased and domestic sales rose sharply. In 2009, domestic sales

increased 44% and foreign sales decreased 39%. However, the company has

activated marketing efforts internationally, opening their own shops in North

America and Europe. But in 2010, their product competitiveness in foreign

markets weakened on the appreciating national currency versus the greenback.

As a result, management’s ambitious goal to increase sales up to $100m by 2012,

recovering Gobi brand’s reputation and former market internationally, appears

challenging. Gobi’s vertically integrated business model allows it to control

production costs, with the exception of raw material costs.


2007 2008 2009

Sales 20,282 19,585 20,247

Net profit -732 689 1,501

EPS, MNT -93.92 88.35 192.51

Total Asset 27,069 30,778 34,018


Net debt/Equity, % 24% 34% 38%


Net margin, % -4% 4% 7%

EV/EBITDA, (x) na 15.4 13.2

ROE, % -3% 3% 6%

Sales growth, % 16% -3% 3%

Key indicators

P/BV 1.8

P/E 29.09

ROE 6%

Gross margin 27%

Net debt/Equity 38%

EBITDA margin 15%

EV/EBITDA 13.22

Dividend yield -


3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1/4

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2/4

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3/4

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4/4

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10

/4/1

0

11

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0

12

/4/1

0

MN

T'0

00

74%

11%

16%

Tavan Bogd

Foreign 2

stakeholders

Free float


Shareholders

Stock data

Price, MNT 5,749

Price, US$ 4.74

The peak, MNT 9,002.00

52Wk Range, MNT 3,850 - 7,700

Mkt cap, MNTbn 45

Mkt cap, US$mn 37


Free float, % 16%


As of 16 Dec 2010

Equity Research


January 24 2011


1.8 BDSec

Company brief: BDSec is a local brokerage firm in Mongolia. The company was

established in 1991 under the name of Bayandukhum in the Tuv aimag (Central

province) as a part of the privatization program in Mongolia. BDSec was the first

underwriter in Mongolia licensed by the Financial Regulatory Commission in 2004.

The company is now licensed with brokerage, dealer, underwriting and

investment advisory services. Major shareholders are Mr. Dayanbilguun,

Alexander Zwahr, Master fund-1 LLC and Master fund-2 LLC (together Firebird

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

domestic account holders and 47% of foreign account holders at the Securities

Clearing House and the Central Depository of Mongolia.

Financial highlights: In 2009, due to the crisis, the company’s total assets declined

17% to $3.96m. As the company revenue decreased 13% to $1.45m in 2009, gross

profit sharply fell and the company had net losses of $380k. As a result,

shareholder’s equity decreased 5% to $3.88m.


2007 2008 2009

Sales 2,020 2,023 1,765

Net profit 991 363 -455

EPS, MNT 121 33 -41

Total Asset 2,111 5,899 4,853


Net debt/Equity, % 3% 16% 1%


Net margin, % 49% 18% -26%


ROE, % 99% 10% -9%

Sales growth, % na 0% -13%

Stock data

Price, MNT 2,500

Price, US$ 2.06

The peak, MNT 4,000

52Wk Range, MNT 1,600 - 2,700

Mkt cap, MNTbn 28

Mkt cap, US$mn 23


Free float, % 19%


Key indicators

P/BV 5.69

P/E -

ROE -9%

Gross margin 5%

Net debt/Equity 1%

EBITDA margin -

EV/EBITDA -

Dividend yield -


1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

1/4

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3/4

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10

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0

11

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0

12

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0

MN

T'0

00

Shareholders

56%

25%

19%

Management

team

Master

Fund/Firebird

Free Float


As of 16 Dec 2010

Equity Research


January 24 2011


1.9 Aduunchuluun

Company brief: “Aduunchuluun” joint stock Company was established with

underground mining operations in 1954 to supply the Eastern Mongolian region

with coal and meet Choibalsan city’s electricity demand. Later in 1969, the current

open-pit mining was given a start with a capacity of producing 200ktpa of coal. In

1979, with research from Russian economists and technical analysis teams, the

scope of operations was expended and capacity increased to 600ktpa. The current

capacity, with innovative technology and equipment, allows a production of 1.5-

2mtpa. Today Aduunchuluun LLC, which functions with well trained workers and

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

importance. Choibalsan city is connected to Russia by railway. Aduunchuuun coal

products can also be delivered to China via Russian and Eastern Inner Mongolian

railways.

Deposit: Aduunchuluun deposit is located in 5km from Choibalsan city, a centre of

the Dornod province, 650 km east of Ulaanbaatar and 100 km from the

Mongolian-Chinese border. The total proven reserves and resources of brown coal

are 241.3mt and 423.8mt respectively with gross calorific value of 3,203Kcal/kg,

9.9% ash content, 38.7% moisture, 1% sulphur and 45.8% volatile matter. The coal

seam is 25.65m in thickness, consisting of two layers, and is positioned 40-42m

below the surface.

Financial highlights: The company’s gross margin is very high at 33% and

profitability is at 19%, even though the company sells their coal to local clients at

$6.6 per tonne.


2007 2008 2009

Sales

n/a 9.8 2,881

Net profit

n/a 1.5 409

EPS, MNT

n/a 0.47 130.00

Total Asset

n/a 2,495 3,150

Current Asset/Non-Current Asset, %

n/a 1.73 1.94

Net debt/Equity, %

n/a 16% 32%

Gross margin, %

n/a 22% 33%

Net margin, %

n/a 15% 14%

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

Stock data

Price, MNT 7,000

Price, US$ 5.77

The peak, MNT 8,331

52Wk Range, MNT 450 - 8,331

Mkt cap, MNTbn 22

Mkt cap, US$mn 18

Avg daily turnover, US$ 127

Free float, % 8%


Key indicators

P/BV 10.34

P/E 53.84

ROE 19%

Gross margin 33%

Net debt/Equity 14%

EBITDA margin -

EV/EBITDA 4.5

EV/Resource 0.82

Dividend yield -


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

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MN

T'0

00

Shareholders


54%38%

8% Management

team

Two

shareholders

Free float

As of 16 Dec 2010

Equity Research


January 24 2011


1.10 Mongolia Development Resources

Company brief: Mongolian Development Resources (MDR) was the first property

and non-resource sector investment and project development company listed on

the MSE, with a focus on high-growth investment opportunities in Mongolia. In

December 2006, the company was initially established under the name Tuul

Songino Usnii Nuuts (Tuul Songino Water Resources) dedicated to infrastructure

development with a number of projects such as a Technical Water Facility,

Drinking Water Facility and a Pumped Storage Power Station. In December 2007,

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

company decided to transform into a diversified investment company, stopping

three prior infrastructure projects due to the unviable nature of the three projects

caused by the state-regulated electricity tariff and the fact that the TPPs use fresh

water from aquifers at no cost.

Market presence: MDR pursues attractive investment opportunities across

various sectors (mainly finance, property, tourism, construction service and

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

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.

Financial highlights: Since IPO in December 2007, the main source of the

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

management team was appointed, the company’s main operation is transferred

to investment operation. Therefore, from 2010, the main revenue is to be derived

from investment yields they receive.


2007 2008 2009

Sales 26 - -

Net profit -90 487 -145

EPS, MNT -6.57 35.47 -10.58

Total Asset 27,798.06 28,341.76 13,324.43


Net debt/Equity, % -43% -33% -43%

Gross margin, % 90% na na

Net margin, % -338% na na

EV/EBITDA, (x) nmf 7.12 nmf

ROE, % 0% 2% -1%

Sales growth, % na na na

Stock data

Price, MNT 1,250

Price, US$ 1.03

The peak, MNT 1,410

52Wk Range, MNT 750 - 1,410

Mkt cap, MNTbn 17

Mkt cap, US$mn 14


Free float, %


Key indicators

P/BV 0.61

P/E 35.24

ROE -

Gross margin -

Net debt/Equity -

EBITDA margin -

EV/EBITDA 60.25

Dividend yield -


0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1/4

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2/4

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3/4

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12

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MN

T'0

00

Shareholders


As of 16 Dec 2010

27%

25%15%

12%

7%

7%7%

Mongolia Capital

Firebird Global

Mongol Discov. Fund

Opportunity Fund

East Investor

Urban resources

Other

Equity Research


January 24 2011


1.11 Mogoin Gol

Company brief: Mogoin Gol mine was established in 1970, and now supplies coal

mainly to the centres of Khuvsgul and Zavkhan provinces and eastern soums of

the Zavkhan province. In 1983, 1989 and 1995 production capacity was expanded

with investments in new mining equipment and machines, increasing to 200ktpa

of coal production. In 1995, the company was partially privatized, floating 49% of

the company on the MSE. Then the state owned 51% was transferred to the

provincial government’s ownership. Currently, the company has 74 employees. In

FY2009, Mogoin Gol JSC supplied 18K tonnes of coal to western provinces’ clients,

Zavkhan (71.4%) and Khuvsgul aimags (28.6%), providing them with energy and

heating.

Deposit: Located in the Tsetserleg soum of Khuvsgul aimag, 880km northwest

from Ulaanbaatar city and 209km west from the Khuvsgul province centre,

Mogoin Gol coal deposit is strategically important for the northern region of

Mongolia. The deposit covers an area of 89ha. Total reserve is a 13.6m tonnes of

coal with a calorific value of 5,200-7,100kcal/kg, 7.3% ash and 0.9% moisture, out

of which 3.6m is viable by open pit mining. Mogoin Gol’s average strip ratio is

about 5-7. According to the management of the company, the remaining total

reserve is 11.2m, out of which 3.1m was viable by open pit mining as of 2009.

Financial highlights: In 2009, the company sold 18k tonnes of coal and worked

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

of Mongolian western regions, and 2) delivery of coal to the nearby Russia to

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

investment, to be built on the basis of Mogoin Gol coal mine, was held on June 20,

2010. On Dec 29, 2009, Yuanda Group Ltd, a Mongolia-China joint venture, and

New Asia Mining LLC signed an Engineering, Procurement, Construction and

Management contract (EPCM) with the Mongolian Ministry of Mineral Resources

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

provinces of Mongolia including Zavkhan and Gobi-Altai with an average power

consumption of 15MW per year. According to the provincial government, once

the TPP operation starts, Mogoin Gol JSC will supply 200k tonnes of coal annually

to its prospective TPP, increasing current production volume 12 times.


2007 2008 2009

Sales

na 300 351

Net profit

na 4 4

EPS, MNT

na 4.8 4.8

Total Asset

na 1,053 3,172

Current Asset/Non-Current Asset, %

na 0.79 0.67

Net debt/Equity, %

na 69% 36%

Gross margin, %

na 24% 24%

Net margin, %

na 1% 1%

EV/EBITDA, (x)

na nmf nmf

ROE, %

na 1% 0%

Sales growth, %

na na 17%

Key indicators

P/BV 3.78

P/E nmf

ROE 0%

Gross margin 24%

Net debt/Equity 36%

EBITDA margin 3%

EV/EBITDA nmf

EV/Resource 0.59

Dividend yield -


Shareholders


0.0

2.0

4.0

6.0

8.0

10.0

12.0

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

/4/1

0

11

/4/1

0

12

/4/1

0

MN

T'0

00

Stock data

Price, MNT 10,349

Price, US$ 8.53


52Wk Range, MNT 1,970 - 11,367

Mkt cap, MNTbn 9

Mkt cap, US$mn 7


Free float, % 9%


51% 40%

9%

Provincial

government

Mogoin Gol

Energy/Transneft

Free Float

As of 16 Dec 2010

Disclaimers


January 24 2011


2 Disclaimers

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 The information provided in this report has been gathered from various sources

deemed to be reliable and accurate by ResCap. However, ResCap does not

guarantee the accuracy of the data and accepts no responsibility under any

circumstance for any financial losses or other that may be incurred through the

use of this information. Investment decisions should always be made based upon

individual personal circumstances and requirements, and preferably with the

advice of a qualified professional advisor.

© 2011 Resource Investment Capital. All rights reserved.

References


January 24 2011


3 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

� Eurasia Mongolia Guide 2009

� 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)

Contacts


January 24 2011


4 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