You are on page 1of 144

ResCap Res

January 24 2011

Resource Investment Capital

ResCap Cap
Mongolia 101
Initiating country coverage on one of the last remaining mining frontiers

ResCap
January 24 2011

Resource Investment Capital

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 freemarket 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.

ResCap Mongolia 101

P a g e |2

ResCap
January 24 2011

Resource Investment Capital

Abstract

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.

ResCap Mongolia 101

P a g e |3

led by the house Speaker. but had to struggle until 1921 to firmly establish de facto independence from China. which facilitated the greatest advancements in the economy.3 Foreign Relations “In developing its relations with other countries. Mongolia came under strong Soviet influence in 1921.1 Executive Summary History Chinggis Khan founded the Mongol Empire in 1206. With the demise of the Qing Dynasty in 1911. 1. After the collapse of the Soviet Union. The Mongolian People's Republic was declared in 1924. The biggest political parties are the Mongolian People's Party (MPP).” ResCap Mongolia 101 P a g e |4 . there has been continuous replacement of governments. formerly the Mongolian People's Revolutionary Party (MPRP). and the Democratic Party (DP). Mongolia saw its own peaceful Democratic Revolution in early 1990. The highest executive power is the Prime Minister. Mongolia is guided by universally recognized principles and norms of international law as defined in the UN charter. “The State Great Khural” or the “Parliament” is the legislative authority of Mongolia and consists of a single chamber with 76 seats. most of Mongolia had fallen under the rule of the Qing Dynasty. Since the Democratic Revolution. The current Prime Minister is Sukhbaataryn Batbold and the current President is Tsakhiagyn Elbegdorj. The President of Mongolia has limited powers but acts as the Head of State and Commander-in-Chief of Mongolia’s army.2 Government Mongolia follows a parliamentary type of governance. In 2008 a coalition government was formed between the MPP and DP.ResCap January 24 2011 Resource Investment Capital Executive Summary 1 1. 1. By the end of the XVII century. Mongolia declared independence.

The People’s Republic of Mongolia established diplomatic relations with North Korea in October 1948. ResCap Mongolia 101 P a g e |5 . Mongolia signed an economic cooperation agreement with the UK. and investment promotion and protection agreements with France and Germany. Canadian FDI thus far has been mainly flowing to the mineral resource sector of Mongolia. Russia helped Mongolia to ward off the Chinese invasion. Mongolia almost certainly has the strongest relationship with Russia. Mongolia and Russia signed an agreement to develop the Dornod uranium deposit. The ties were strengthened after the Democratic Revolution in Mongolia. The United States agency for International Development (USAID) has continuously been one of the key aid donors to Mongolia. Mongolia’s relationships with China began to improve.ResCap January 24 2011 Resource Investment Capital Executive Summary Mongolia has bilateral relations with 140 and diplomatic relations with 149 countries. until the US had approved a “Millennium Challenge Compact” aid worth $285 million in October 2007. As the Soviet Union had been Mongolia’s main ally and the most influential neighbouring power up until 1990. The People’s Republic of Mongolia established diplomatic relations with Japan in February 1972. In October 2007. Currently the PRC is the largest trading partner of Mongolia. In 1991. while Mongolia only has access to 34. 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. Russia holds 190 reports on Mongolia’s 6 uranium fields. Negotiations are ongoing on the signing of a foreign investment promotion and protection agreement (FIPA). Japanese geologists and scientists launched exploration of rareearth elements in Mongolia. Canada and Mongolia established bilateral ties in November 1973. the Mongolian government signed a Compact agreement with the Millennium Challenge Corporation (MCC) for the receipt of a grant worth $285 million. foreign relations between the PRC and Mongolia used to be predominantly determined by the PRC and USSR relations. Mongolia will soon have the capacity to supply 25-40 mtpa of coal to the PRC. In December 2010. Japan has historically been the largest aid benefactor to Mongolia. 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. With adoption of democracy and transition to a market economy.

7 million (both exports and imports were up around 53%) Inflation smoothed down to 13% in 2010 from the soaring 36% in August 2008. Each aimag is subdivided into a number of soums. Mongolia is about to experience a period of remarkable growth. but recent discoveries of mineral deposits have attracted large levels of foreign direct investment (FDI) into the mining sector. the MNT/USD rate gained in value 15% since January 2010. growing 82.7 Banking Sector The Mongolian financial sector consists of 14 commercial banks. making the winters extremely cold and summers very warm.56 million square km. It covers 1.6 Economy Economic activity in Mongolia has historically been focused on agriculture and herding.6 billion).4 Geography and Climate Mongolia is ranked 19 in the world by country size after Iran. FDI into the country has been growing 30% annually and is expected to reach $11 billion in the next four years. 1. general government budget showed a surplus of $611 million and the external trade deficit amounted to $378.1%. the total industrial output increased 10% to approximately $1.0 billion.3% (GDP reaching $6.5 Administrative Regions Mongolia is divided into 21 aimags. th 1.446. 1.6% yoy. The global economic downturn in late 2008/early 2009 had a harsh impact on Mongolia. ResCap Mongolia 101 P a g e |6 . In 2010.ResCap January 24 2011 Resource Investment Capital Executive Summary 1. the real GDP growth was 6. The IMF forecasts the real GDP growth to be over 25% in three years time driven by advancements in the mining sector.5 billion (at 2005 constant prices) compared to the previous year In December 2010. which made it the second best-performing currency against the dollar in 2010. In 2010. The climate is generally dry and the temperature varies significantly across the year. nominal growth was 25. when it was 1. By the end of December 2010 Mongolia’s official international reserves has exceeded $2. 188 NBFIs and 207 S&C (saving and credit) Cooperatives.

0 billion ($6. 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. VAT is 10%.10 Mongolian Stock Exchange Established in 1991 as a result of the first round of privatisations of state properties.3 billion in mid 2010 (51% increase yoy). Bank lending more concentrated. Business activities increased in 2010. 1. Nominal interest rates on lending and borrowing remained high as banks needed capital due to liquidity problems. In December 2010 the London Stock Exchange (LSE) has signed a contract agreement with ResCap Mongolia 101 P a g e |7 .ResCap January 24 2011 Resource Investment Capital Executive Summary The minimum capital requirement for commercial banks ordered by the Bank of Mongolia is MNT 8. the pledge is no longer unlimited 1. due to inflationary pressure. despite falling real interest rates on deposits. 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.4m) and 25% on corporation earnings over MNT 3bn.9 Mongolian Taxation System The general rate of tax in Mongolia is 10% income tax for individuals and corporation earnings under MNT 3bn ($2. MNT deposits continued to rise reaching $1. resulting in negative returns. especially on depository accounts. nevertheless. coping with the fundamental weaknesses of the banking sector in Mongolia remains a top priority for the officials in charge. General levels of NPLs were considerably high throughout 2010.4 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. with around 50 largest borrowers accounting for approximately 30% of total loans or $690 million.8 The Central Bank The Bank of Mongolia (BoM) is the central bank of Mongolia. Real interest rates plummeted. It reports to Parliament and is independent from the Government. owing to the Deposit Guarantee Law and greater currency appreciation expectations. yet the second best performing market in the world in 2010. the MSE is the second smallest bourse in the world by market cap. 1.

Initial production at Oyu Tolgoi mine is expected in Q3 2012 and commercial production in 2013. including copper. e.3 trillion. gold.4 billion tonnes of coking (25%) and thermal (75%) coal.5 million tonnes). Occurrences include over 60 types of minerals.11 Mining The estimated value of total reserves in Mongolia is US$1. silver. representing 26. iron ore. The LSE has been selected as the international partner to assist in reforming the MSE. zinc and fluorspar. By 2015 coal export to China is predicted to increase to 25-40 mtpa. Coal is now Mongolia’s number one export commodity. therefore. is about to be privatised in Q1 2011. Only around 27% of Mongolian land has been mapped to a scale of 1:50. 2010 crude exports reached $155 million in value (2.ResCap January 24 2011 Resource Investment Capital Executive Summary the Mongolian Stock Exchange (MSE). 32% of government revenue and 30% of GDP. Iron ore exports now account for 8. 2010 copper exports reached $771 million in value (586k tonnes).4% of total exports. Approximately 1. uranium.000 tonnes. the country’s resources remain largely untapped.170 mineral deposits and 7.000.7% of total exports. Marubeni Corporation in partnership with Toyo Engineering Corporation are about to construct a $600 million oil refinery in Mongolia.654 occurrences have been identified to date. 1. The government of Mongolia plans to attract up to US$25 billion in foreign investment for the mining projects in 2011-2015. 2010 coal exports reached $877 million in value (16.0 million barrels). Russia estimated the Mongolian uranium reserves at 30 thousand tonnes while the Mongolian government identifies the resources at 62. Copper was the former major export commodity of Mongolia.g. Total coal resources of Mongolia have been estimated at 152 billion tonnes. 15 deposits have been acknowledged by the government as strategically important. Tavan Tolgoi coal deposit. Mongolia was officially recognised as an oil producing country in 2008. There are numerous opportunities to invest in many large-scale investments. coal. Oil sector remains significantly under-explored. Oyu Tolgoi deposit contains 81 billion pounds of copper (37 million tonnes) and 46 million ounces of gold (1. which contains 6. The mining sector accounts for 81% of exports. Mongolia started producing iron ore in 2007. molybdenum. 2010 iron ore exports reached $251 million in value (3. Tavan Tolgoi (TT) coal deposit.6 million tonnes). ResCap Mongolia 101 P a g e |8 . tungsten.431 tonnes). tin.

the government in entitled to take up 34%-50% of the ownership rights. 11 million heads were lost due to 2010 ‘dzud’.12 Agriculture Agriculture in Mongolia is focused on animal husbandry. More than half of Ulaanbaatar residents live in ger districts surrounding the city.ResCap January 24 2011 Resource Investment Capital Executive Summary Mongolia has not started exporting uranium yet. Mongolia has recently become self-sufficient in grain and potatoes. If a deposit is of strategic importance. Livestock accounts for over 80% of agricultural production. The population of Ulaanbaatar increased 30% to 1. The government is working on a project to replace the ger districts with proper residential complexes. The Foreign Investment Law of Mongolia gives similarly positive treatment to both foreign and domestic investors with regard to control. In 2010 the number of total livestock reached 33 million (human population of Mongolia = 2. the authorities announced that 0. The government plans to construct 100. use and removal of their investments. In October 2010. especially considering the increasing number of expats and foreign executives arriving in Mongolia.13 Real Estate The capacity to build residential properties in Ulaanbaatar is enormous. 1. 1.7 million tonnes. Measures on environmental protection and rehabilitation issues have been strengthened in Mongolia recently. Construction and installation works implemented in Mongolia throughout 2010 grew 25. ResCap Mongolia 101 P a g e |9 . The Law on Minerals has been amended and now includes progressively increasing royalties on 23 types of minerals.000 apartments for lower-income people in Ulaanbaatar and provincial centres for an estimated budget of $6. In 2010 harvest production reached 1.6% from 2009 and reached around $281 million in total.8 million).07 Ha of land in ger districts can be exchanged for two-room apartments. only 1% of Mongolia’s arable land is cultivated with crops.2 billion.1 million in the three years from 2007.

The railway infrastructure plan has considered all major mineral deposits and around $3. or lack of it. of which $1. the Oyu Tolgoi team discovered an aquifer. is the one and only international airport of Mongolia.14 Infrastructure Mongolia’s infrastructure. ResCap Mongolia 101 P a g e | 10 . A $10 billion industrial complex in Sainshand is being built to increase the value of mineral reserves of Mongolia. located 15 km from Ulaanbaatar. water is a scarce resource in Mongolia.600 km of new railroads.3 billion is to be spent on mining services. Mining investments are to total $13 billion in the coming years. Production levels of all sorts of mines heavily depend on water supply. The construction of Sainshand Park and the associated industrialisation could increase Mongolian GDP to $41 billion over the next 11 years. 96. which will come into operation in Q1 2011. there are many ambitious projects and foreign investment commitments to improve the situation. Due to dry weather conditions. Infrastructure development requires around $5. Mongolia’s main rail line is the Trans-Mongolian railway (2. capable of ensuring 40 years of water supply to the mine. Mongolian authorities chose to build a new railroad in 2011 linking Mongolia’s largest coal deposit Tavan Tolgoi with Mongolia’s domestic rail network.7% of roads in Mongolia are unpaved.0 billion is to be spent on the first phase. which will create a new terminal with road and rail links. with very limited infrastructure.215 km in length).600 km of paved East-West road and 5. In late 2010. is the most serious inhibitor to developing its resource wealth.ResCap January 24 2011 Resource Investment Capital Executive Summary 1. Chinggis Khaan Airport. The Asian Development Bank (ADB) is funding a regional logistics development project at Zamiin-Uud with $45 million in loans and grants.2 billion in investments through 2011-2020. 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. rather than establishing a direct route straight to China from TT. MMC is also constructing a 245 km paved road with 18mtpa capacity from its Ukhaa Khudag deposit south to the Mongolian-Chinese border. The 2010 Global Competitiveness Report ranked Mongolia last for the quality of overall infrastructure out of 134 countries. However. Most large-scale deposits in Mongolia are located in isolated areas. The government is planning to build 2.

Currently. Anglo-Australian mining companies Rio Tinto and BHP Billiton. Sojitz Corp and Marubeni Corp. State properties to be privatised in 2011-2012: Baganuur coal deposit (1. including Poco and Korea Electric Power Corp. the London Stock Exchange (LSE) signed a contract agreement with the Mongolian Stock Exchange (MSE) for the latter’s restructuring. including. a joint venture of five state-run companies and others have expressed their interest to participate in Tavan Tolgoi bid. Sumitomo Corp.3billion tonnes of lignite coal) Erdenet Power Plant and TPP-3 (two out of the 5 power plants making up the Central Electricity System. 1. the direct access to Ulaanbaatar from major global financial centres is unavailable.. which covers the most populated area of the country.. but also to the non-resource sector boom of the fastest growing economy in the world. Brazil’s Vale. Seoul. a consortium of 10 South Korean companies. ResCap Mongolia 101 P a g e | 11 . a Russian consortium led by Gazprom. Tavan Tolgoi’s Eastern Block is to be privatised to domestic investors in Q1 2011. 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) .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. Berlin. Mongolia’s electricity deficit is expected to reach 500 MW by 2013. Moscow. The tender for strategic investors for Tavan Tolgoi’s Western Block has been th officially announced and closed on 17 January at 16:00. India’s International Coal Ventures Pvt.ResCap January 24 2011 Resource Investment Capital Executive Summary The Hong Kong market is expected to be opened up to Mongolia on a regular basis via direct flights starting in April 2011. The tender for contract miners for Tavan Tolgoi’s Eastern Block has been th officially announced and closes on the 27 January 2011. including Ulaanbaatar) MIAT or Mongolian Airlines (the largest carrier in the country which operates flights to Beijing. Itochu Corp. China’s Shenhua Energy Co. a consortium of four Japanese trading houses. Peabody Energy Corp from the US. and more In December 2010.

may soon merge and market their stock. ResCap Mongolia 101 P a g e | 12 . Korean. 85% of Mongolia’s population consist of ethnic Mongolians.ResCap January 24 2011 Resource Investment Capital Executive Summary In December 2010 an agreement was signed between the Mongolian and Russian Prime Minsters specifying the business plan for the Dornod Uranium JV. Erdenet and MongolRosTsvetMet. 30% are herders. Two existing Mongolian-Russian joint ventures. 1. 40% of Mongolia’s population live in Ulaanbaatar. The unemployment rate in Mongolia has been lower than 4% since 2002. 6% are Shamanist. 27% below the age of 14). Other widely spoken languages are Chinese. Japanese. 1. Baha'i and Christian. Spanish and Italian. the remaining 40% in rural areas. 40% are listed as having no religion.19 Equity Research Stock information of top 10 performers on the MSE (+1 mining company) is provided at the end of this report. French. and 4% are Muslims. 1. out of which 90% consist of Khalkha Mongols.8 million people (59% below the age of 30.17 Languages The official language in the country is Khalkha Mongolian. 1.18 Religion 50% of Mongolia's population follow the Tibetan Buddhism. Many Mongolians have a good grasp of Russian and English. During the peak of the economic crisis (2009) it reached 13% and now is returning to its regular levels.16 Demographics Mongolia’s population is 2. 20% in other urban areas.

2 333.8 6.0 1921.9 -0. index=100 in Dec 2000. Top-20 index.4 157.5 124.0 -2.9 21.0 2.0 47.5 264.4 4.8 3.6 10.4 1889.0 2446.6 -1.0 3.4 221.1 -411.9 2048.6 -102.2 1542.0 -14.7 658.3 3 Foreign exchange reserves.8 3.0 34.0 39. Yield of 14-day bills until 2006 and of 7-day bills for 2007.8 1267.8 1209.0 2006 8.8 2152.7 6055.3 11.8 102.4 120.8 1485.5 9.0 1551.0 3.5 24.0 52.2 382.1 16.0 1875.2 -11.5 1066.5 -52.8 15.6 1442.8 1.0 25.9 76.0 47.3 9. 4.6 -3.1 203.0 29.4 2.4 40.0 104.7 1181.3 -7.0 30.3 1.4 3085.0 33.8 -5.0 4.4 2. BOP and External Trade balance ($mn) Export of goods ($mn) (% yoy change) Copper exports (% yoy change) Imports of goods ($mn) (% yoy change) Current account balance ($mn) (% of GDP) Foreign direct investment ($mn) External debt (% of GDP) 2 1 2004 10.4 -12.4 -7.0 4 94.6 2780.1 3147.3 42.0 422.6 6020.9 -1.3 17.0 44.0 -9.0 5258.7 1. Source: IMF and World Bank ResCap Mongolia 101 P a g e | 13 .0 Notes: 1.0 19.3 -3. end of year.0 900.2 -4.0 722.8 78.ResCap January 24 2011 Resource Investment Capital Mongolia Key Statistics Mongolia: Key Indicators 2003 Output.0 136.7 -5.2 872.5 92.2 -5. On public and publicly guaranteed debt.7 826.6 -3.0 4203.1 7911.6 6. gross ($mn) In month of imports of g&s Financial markets Domestic credit (% yoy change) Short-term interest rate (% per annum) Exchange rate (MNT/USD) Real effective exchange rate (2006=100) (% yoy change) Stock market index (2000=100) Memo: Nominal GDP (MNT bn) Nominal GDP ($ mn) GDP per capita ($) 2 1168.0 22.3 0.2 19.0 - 7.0 3715.5 1660.1 -99.7 360.2 14.0 208.0 1491.0 30.8 1.0 1214.8 14.7 1021.7 2117.9 3.2 5.6 627.0 Mongolia Key Statistics 2005 7.1 1.0 583.8 5 151.1 -199.0 1599.7 -195. the Windfall Profit Tax and royalties.0 4600.0 3. Non-mining balance excludes revenues from corporate income tax and dividends from mining companies.1 0.0 -15.9 3.8 496.0 3.0 2.9 113.6 204.1 2.5 -805.4 27.6 25.4 1170.0 40.6 100.0 2008 8.0 4.9 2070. Employment and Prices Real GDP (%yoy change) Industrial production index (% yoy change) Unemployment (%) Consumer price index (% yoy change) Public Sector Government balance (% of GDP) Non-mining balance (% of GDP) Public Sector Debt Foreign Trade.6 109.6 7.0 1448.0 836.3 128.0 70.0 22.0 12.5 12.0 3156.8 -13. 2.1 1328.8 94.0 2007 10.0 2009 -1.1 131.4 -17.6 2.0 -14.4 10.3 3.6 45.0 3930.0 -26.0 102.3 -7.6 61. Increase is appreciation.0 289.8 -722.2 -5.0 -41.3 -639.3 3.0 39.0 3.4 -99.4 18.7 1221.6 3. 5.0 39.1 718.0 -613.6 18.0 2307.3 257.8 23.6 3.1 5.4 0.0 971.0 1814.4 8.0 2534.0 99.1 1001.0 2010 (f) 8. 3.8 2.2 110.0 93.1 1165.0 2.

............................. 8 AGRICULTURE ............................................................................4 1................................2 4..........1 6............................. 4 FOREIGN RELATIONS...................3 4...............1 6.........................................................................................ResCap January 24 2011 Resource Investment Capital Contents 3 Contents ABSTRACT 3 1 EXECUTIVE SUMMARY .......................................................................................................... 23 MONGOLIA PEOPLE’S PARTY AND DEMOCRATIC PARTY ...................................................................... 4 GOVERNMENT................................... 12 LANGUAGES ......................................17 1....................... 6 ADMINISTRATIVE REGIONS. 22 PRESIDENT...................1 4.................. 12 EQUITY RESEARCH....................................2 5............................................. 18 PRE-HISTORY ............................................................. 12 2 3 4 4..19 HISTORY........4 4.............................. 7 MINING ..................................3 1............................ 24 EGYPT......................... 21 5 5.................................. 19 UNDER THE QING ..........................1 1....................................................................................................... 7 MONGOLIAN STOCK EXCHANGE........................................ 18 EARLY HISTORY ................................... 22 POLITICAL SYSTEM AND RECENT HISTORY ....................5 1................. 23 PRIME MINISTER AND THE CABINET ..........................4 5..13 1................. 20 INDEPENDENCE.................................................................................................................... 20 MONGOLIAN PEOPLE'S REPUBLIC.................................................... 11 DEMOGRAPHICS ................................................... 9 INFRASTRUCTURE ...........................................................................15 1..........18 1........................................... 9 REAL ESTATE .. 24 AFRICA ......................................1.................................................................. 24 ASIA ................................... 4 GEOGRAPHY AND CLIMATE .....................................................................3 5...................................................16 1..................................................................8 MONGOLIA KEY STATISTICS .....................................................................................................................................................................5 GOVERNMENT ........... 19 MONGOL EMPIRE ........................7 1....................................................11 1............................ 23 THE STATE GREAT KHURAL ...................................................................12 1.......................2 FOREIGN RELATIONS ...................................2 1.......................... 19 POST-IMPERIAL PERIOD ......................... 25 ResCap Mongolia 101 P a g e | 14 ............................................... 6 THE CENTRAL BANK ......................6 4...................10 1...................................................................................................................... 21 DEMOCRATIC REVOLUTION ..................6 1................................................ 13 CONTENTS ......................................................... 10 PRIVATISATION OF STATE PROPERTIES ..............14 1....................................................................................................... 23 6 6............................................................................................... 4 1.............................................................................................................................................................5 4. 6 BANKING SECTOR............... 12 RELIGION ...7 4........................8 1.................................. 7 MONGOLIAN TAXATION SYSTEM .... 6 ECONOMY ..... 14 HISTORY OF MONGOLIA ..............1 5..........9 1...............

.................. 27 NORTH KOREA .......10 GEOGRAPHY AND CLIMATE ........ 63 ResCap Mongolia 101 P a g e | 15 .............2 RUSSIA ........8.......................................... 29 EUROPE ...................5 9.....................................2 9..................2 9......................................................8 10.....................................................3 6.................... 53 BANKING INTEREST RATES ..............2 11..........................................................................................................................4 6............................4..................1 11...........................................................3 9.......... 47 10 10.................................1 6..... 35 THE GLOBAL FINANCIAL CRISIS OF 2008/2009..................................1 9.................................................................................... 55 BANKING SYSTEM CAPITALISATION .............................................9 9.......................... 51 NON-PERFORMING LOANS (NPLS) ...........2......................1 6...... 59 11 11.......................2 6..........9 10.............. 36 CURRENT STATE OF THE ECONOMY ............................... 25 PEOPLE’S REPUBLIC OF CHINA (PRC) .....................6 9...... 30 USA................................................... 49 STRENGTHENING OF THE FINANCIAL SYSTEM ................................................4 THE CENTRAL BANK................................................1 9..................................1 10............................3 6......................................................... 44 IMPORTS ...........................................................7..........................1 10.. 39 BUDGET .............................................................................................6 10...2..........1 6.............3......................................7 10.......................................................................... 62 OBJECTIVES OF MONETARY POLICY..................................... 43 EXPORTS .................. 33 ADMINISTRATIVE REGIONS ................................................................4 10...................................................................................................................................................................... 46 FOREIGN DIRECT INVESTMENT ................................... 61 BANK OF MONGOLIA MONETARY POLICY .........................................10 BANKING SECTOR ...2................................ 36 GROSS DOMESTIC PRODUCT ..................................................3 11.............. 40 INFLATION ................................. 38 MONEY SUPPLY ...7............................................................................................... 62 COLLATERALIZED LOAN .................... 45 IMPLEMENTED POLICIES ......................... 42 TRADE ......................2 10............ 57 BANKING LAW OF MONGOLIA (2010) ......ResCap January 24 2011 Resource Investment Capital Contents 6......................................................................... 48 BANKING SECTOR PERFORMANCE DURING 2008/2009 FINANCIAL CRISIS ............................4......................4 9................... 31 7 8 9 9.................................................................................. 29 NORTH AMERICA ............8 9............7 9...... 29 UNITED KINGDOM ....... 57 SUMMARY OF THE AMMENDED BANKING LAW ........... 26 JAPAN........... 61 BANK OF MONGOLIA POLICY RATE ....................................................3.................................................................. 59 BANKING SECTOR PROSPECTS ....................................................... 61 CENTRAL BANK’S NON-STANDING FACILITIES ............3 10...... 50 DEPOSITS AND LOANS . 57 BANKING SECTOR 2010 SUMMARY ............................. 53 BANK ASSET QUALITY ...............................................................1 11........................................... 30 CANADA................. 48 BACKGROUND ............................4 6...1 10.................. 34 ECONOMY.................................................................................................................2.........4............................................5 10........ 47 CURRENCY .................................

.......................................... 68 13 13......2 MONGOLIAN STOCK EXCHANGE ................. 65 CORPORATE INCOME TAX .......1 14.................................. 65 GENERAL TAXATION ..................................4.......................5 14............................... 67 VALUE ADDED TAX (VAT) ......4 14.............4 12..............................................................................................3 14................2 12........................2 14...................... 64 12 12...........6 BANK OF MONGOLIA STANDING FACILITIES ...........................1 17.......................5................................................ 107 WATER ............................................................................9...........3.. 101 INFRASTRUCTURE ............ 66 TAX EXEMPTION.......2 17...................................................................................................... 107 ResCap Mongolia 101 P a g e | 16 .....................................................9...............................................3................................................... 65 TAX RATE ...1 12...............................2............. 67 TAX RATE AND AMOUNT ......1 14............................ 68 SCOPE OF VAT ................................................................... 90 OVERVIEW OF FOREIGN INVESTMENT........2 11.......................... 99 DZUD ..............3 12.....8 14...................... 67 TAXPAYER................... 100 16 17 17........................................................................ 65 TAXPAYERS ...........................................................................................7 14.........1 MONGOLIAN TAXATION SYSTEM.................................................. 73 MINING SECTOR ......................................................... 83 OYU TOLGOI (COPPER-GOLD.......... 65 TAXPAYERS ..................................................2............................................................................2 12........9........... 69 OVERVIEW.......................4........... 85 OIL ............................................... MONGOLIA)........4 REAL ESTATE ..................................................2 12....................1 13...............1 14.........................3 17.................................................................... 63 CENTRAL BANK BOND RATE .....................................2.............................................................................................................................................................................................................................. 94 PROGRESSIVE ROYALTIES ON MINERALS .............................................................................................9.............. 84 IRON ORE ........................ResCap January 24 2011 Resource Investment Capital Contents 11............................................................ 77 COAL ....................................................1......................... 69 THE SECOND BEST PERFORMING MARKET IN THE WORLD ...... 76 LICENSES .......................................................... 73 EXPLORATION AND GEOLOGICAL MAPPING ........................................4 MINING ..................................................................3 14........ 106 RAILWAY ..............................5.....................................6 14..... 63 REPO FINANCING ......................... 87 URANIUM................. 93 FOREIGN INVESTMENT IN MINING .....5..................... 97 15 15................................................................................ 81 COPPER/GOLD ............................................ 63 OVERNIGHT LOAN ................. 71 14 14........................1 12.......................................2 14................ 78 TAVAN TOLGOI ..9 14........1 AGRICULTURE .......................1 14.................... 106 ROADS ....................................1 12............................................ 66 PERSONAL INCOME TAX LAW OF MONGOLIA ............................................ 107 AIRPORTS ..................3 12...... 90 STRATEGICALLY SIGNIFICANT DEPOSITS ......................................5 11..............1 11.......................................................1 12............................................................... 89 MINERALS LAWS AND TAXES ....................................

.........................................................................................................9 1........... 130 EQUITY RESEARCH.................................................................................................. 139 MONGOLIA DEVELOPMENT RESOURCES ............. 144 ResCap Mongolia 101 P a g e | 17 ......................................................... 117 DETAILED MAPS OF PLANNED PRIVATISATIONS .............................................................................................. 125 19 20 21 1 1..............................5 17............................................................................................................ 135 SHARYN GOL...................... 136 GOBI ...................1...........1 1....................6 17..... 108 INDUSTRIAL PARK IN SAINSHAND ................................................................. 117 2011-2012 PRIVATISATION STRATEGY ...............11 DEMOGRAPHICS ............................................ 129 RELIGION . 127 LANGUAGES .................................................................. 143 CONTACTS ............................................................ 141 2 3 4 DISCLAIMERS ...........4 PRIVATISATION OF STATE PROPERTIES ......................6 1..................................... 115 18 18....... 131 TAVAN TOLGOI ................................ 112 RECENT DEVELOPMENTS ..........1...............................................................1........................................................................................................1 18.8 MINING BOOM AND INFRASTRUCTURE DEVELOPMENT .7 17..... 137 BDSEC.........7 1............2 18..................................................................................................................... 132 SHIVEE OVOO ............................... 142 REFERENCES .....1 18............. 117 NEAR TERM PRIVATISTAION TARGETS ..........................................................................................ResCap January 24 2011 Resource Investment Capital Contents 17.. 113 MINING BOOM AND AIR INDUSTRY .......................................... 133 APU ................................ 140 MOGOIN GOL ............8 1.................................... 138 ADUUNCHULUUN ........................................................................2 1........................................ 134 MONGOLIA TELECOM ................. 124 RECENT DEVELOPMENTS ....3 1.....................10 1...... 131 BAGANUUR............... 120 STATE PROPERTY COMMITTE...........................................4 1..........................3 18.........................................................................................................5 1........................................1....

Mongolia. 5500-3500 BC: horse-riding nomadism became dominant lifestyle 2300-1000 BC: development of pastoral nomadism and metalworking Cultivation of crops continued since the Neolithic period. male Scythian warrior with blond hair is believed to be 2. Andronovo culture (2300-1000 BC) and Karasuk culture (1500-300 BC). whereas modern humans reached Mongolia approximately 40. and only gained international recognition of it in 1945. Afterwards. most of Mongolia had fallen under the rule of the Qing Dynasty. Following the collapse of the Yuan Dynasty. and the on-going transition to a market economy. where it remained until the 18th century CE. bloodless democratic revolution. The wheeled vehicles found in burials have been dated to before 2200 BC.000 years ago. free market economy… 1206: The Mongol Empire 1921: Independence 1945: International recognition 1924: Soviet influence.ResCap January 24 2011 Resource Investment Capital History of Mongolia CHINGGIS KHAN 4 History of Mongolia Horse nomadism. but has always remained small-scale compared to pastoral nomadism. Pastoral nomadism and metalworking became more and more developed with the Okunev Culture (2nd millenium BC).1 Modern humans reached Mongolia 40. Russian liberation. After the breakdown of communist regimes in Eastern Europe in late 1989. Tocharians (Yuezhi) and Scythians inhabited western Mongolia during the Bronze Age. and became the dominant lifestyle during the Copper and Bronze Age (3500-2500 BC). communism. which led to a multi-party system. Chinggis Kahn. and was found in the Altai. the Mongols returned to previous behaviour of constant internal conflict and raids on the Chinese borderlands. Neolithic agricultural settlements (c. Mongolia came under strong Soviet influence. Qing dynasty. in 1924. the Mongolian People's Republic was declared. 5500-3500 BC) preceded the introduction of horse-riding nomadism. culminating with the Iron Age Xiongnu Empire in 209 BC. which was first introduced from the West. Mongolia came under the influence of Tibetan Buddhism in the 16th and 17th centuries. but had to struggle until 1921 to firmly establish de facto independence from China. As horse nomadism was introduced into Mongolia the political center of the Eurasian Steppe shifted with it to Mongolia. With the demise of the Qing Dynasty in 1911. Mongolia declared independence.000 years ago during the Upper Paleolithic period.500 years old.000 years ago Pre-History Homo erectus inhabited Mongolia 800. a new constitution in 1992. but by the end of the 17th century. socialism 1990: Democratic revolution The Mongol Empire was founded by Chinggis Khan in 1206. ResCap Mongolia 101 P a g e | 18 . Mongolia saw its own peaceful Democratic Revolution in early 1990. 4. and Mongolian politics began to follow the same patterns as that of the Soviet Union at the time. The mummy of a 30-40 year old.

100 million people 1368: Collapse of the Mongol Empire Mongol Empire During the chaos of the late 12th century. with the Mongol court fleeing north. the empire was subdivided into four kingdoms (“Khanates”). and waged a series of brutal and ferocious military campaigns. which eventually became semi-independent after Möngke's death in 1259. He took the title Chinggis Khan In 1206. 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. covering 13 million square miles (or 22% of the Earth's total land area) and included a population of over 100 million people. Under his successors it stretched from present-day Poland in the west to Korea in the east. and forming the largest contiguous land empire in the history of the world.2 The Modu Shanyu confederation forced the Qin Dynasty to construct the Great Wall of China Early History Since pre-historic times. 4.the largest contiguous land empire in the history of the world: . The Mongolic Rouran Khaganate (330-555) ruled a massive empire before being defeated by the Gokturks (555-745) whose empire was even larger. During the Liao Dynasty (907-1125) the Mongolic Khitans ruled Mongolia after which the Khamag Mongol (1125-1206) rose to prominence. As the Ming armies pursued the Mongols into their homeland. and became the Yuan Dynasty under Chinggis Khan’s Grandson. 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. 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 4. included the Mongol homeland and China. His capital was in present day Beijing. but after a century the Yuan was superseded by the Ming Dynasty in 1368. The Oirads. throwing Mongolia back into anarchy and wiping out cultural progress made by the Mongolians during their imperial period.ResCap January 24 2011 Resource Investment Capital History of Mongolia 4. sweeping through much of Asia. One of the khanates. were brought together to form a confederation by Modu Shanyu in 209 BC. During Marshal Meng Tian's tenure it was guarded by up to 300. and in the process captured the ResCap Mongolia 101 P a g e | 19 .4 Following centuries: violent power struggles between various fractions Post-Imperial Period The centuries that followed were marked by violent power struggles between various factions and there were numerous Chinese invasions. the "Great Khaanate". Kublai Khan. among other cities.3 1206: Chinggis Khan assembled the Mongol Empire The Mongol Empire . the Xiongnu.33 million sq. a chieftain named Temüjin united the Mongol tribes between the Altai Mountains and Manchuria.000 soldiers in order to defend against the destructive Xiongnu raids. Following the death of Chinggis Kahn. Mongolia has been inhabited by nomads who occasionally formed great confederations that rose to prominence. They soon emerged as the greatest threat to the Qin Dynasty. They were followed by the Uyghur Khaganate (745-840) who were in turn defeated by the Kyrgyz. The first of these. they sacked the Mongol capital of Karakorum. forcing the latter to construct the Great Wall of China. and from Siberia in the north to the Gulf of Oman and Vietnam in the south. km .

He died on his way to Tibet in 1634.5 Ligden Khan: the last Mongol Khan Under the Qing 1636: most Inner Mongolian tribes submitted to Manchu 1691: Khalkha Mongol submitted to Qing Empire Ligden Khan was the last Mongol Khan (early 17th century). The Dzungars were virtually wiped out in 1757–58 by several wars. where in February 1921 he defeated the Chinese at Niislel Khüree (Ulaanbaatar). The eighth Jebtsundamba Khutuktu (Bogd Khaan) ResCap Mongolia 101 P a g e | 20 . Mongolia's independence was once again declared on July 11. The area controlled by the Bogd Khaan was approximately that of the former Outer Mongolia.6 1911: independence from Qing Dynasty Independence Following the collapse of the Qing Dynasty. Mongolia declared independence in 1911 under Bogd Khaan. This behaviour of Mongolia's nobility resulted in poverty becoming ever more widespread. Bolshevik Russia supported the establishment of a communist Mongolian government and army to reduce the threat posed by Ungern. “Ambans”. Batumongke Dayan Khan reunited the entire Mongols under the Chinggisids in the early 16th century and in 1557. most Inner Mongolian tribes had submitted to the Manchu and the Khalkha eventually submitted to the Qing in 1691. whilst attempting to destroy the Yellow Hat sect of Buddhism and evading the Manchu. By 1636.ResCap January 24 2011 Resource Investment Capital History of Mongolia 16 century: Mongolia reunited th Chinese Emperor. and was worsened by the usurious practices of Chinese traders and the collection of imperial taxes in silver instead of livestock. During the 19th century. Manchu high officials. The Manchu maintained control of Mongolia until 1911 with a combination of military and economic measures. intermarriages and alliances. and Russian and Mongolian troops arrived in Khüree on July 6. Grandson of Batumöngke. the Borjigids were recovered when Esen was murdered in 1454. feudal lords cared more about representation than the responsibilities of their subjects. 1578: Second introduction of Tibetan Buddhism 4. founded Hohhot. Chinese troops occupied Mongolia. However. Mongolian culture remained in tact because The Manchus forbade mass Chinese immigration. and the 49 hoshuns of Inner Mongolia expressed their willingness to join the new country. He alienated most of the Mongol tribes and got into conflicts with the Manchu over the looting of Chinese cities. In 1919. in October 1920 as a result of the Russian Civil War. were installed around territories and the country was subdivided into ever more feudal and ecclesiastical fiefdoms. Abtai Khan converted to buddhism in 1585 and founded the Erdene Zuu monastery. led by Xu Shuzheng. after the October Revolution in Russia. the White Russian adventurer Baron Ungern led his troops into Mongolia. Until 1911: the Manchu maintained the control of Mongolia 4. This Mongolian army took the Mongolian part of Kyakhta from the Chinese on March 18. However. 1921. but to no avail. Altan Khan of the Tümed. the newly established Republic of China claimed the territory of Mongolia as part of its own. thus bringing all but the west of today's Mongolia under Beijing's rule. However. His meeting with the Dalai Lama in 1578 sparked the second introduction of Tibetan Buddhism to Mongolia.

Mongolia remained closely aligned with the Soviet Union over the next seven decades. murder of monks. destruction of monasteries. Both countries confirmed mutual recognition on October 6.000 Soviet troops were based in Mongolia. 750 monasteries were functioning in Mongolia. 55. the destruction of Buddhist monasteries and the murder of monks and other “enemies of the people”.The transition to a market economy was often rocky. a new constitution was introduced and the "People's Republic" was dropped from the country's name. Mongolian forces also took part in the Soviet Manchurian Strategic Offensive Operation of August 1945 in Inner Mongolia. Stalinism 1945: China recognised Outer Mongolia’s independence 1945 onwards: Mongolia aligned closely with USSR 4. Bogd Khan. because of the Soviet threat of seizing parts of Inner Mongolia.ResCap January 24 2011 Resource Investment Capital History of Mongolia 1921: full independence from China 1921. He instituted collectivisation of livestock. The signing of the Oyu Tolgoi copper/gold mine contract is considered a major cornerstone in recent Mongolian history. the Soviet Union successfully defended Mongolia against Japanese expansionism. By the beginning of the 20th century. provided a referendum was held. The referendum took place in October 1945 and 100% of the electorate voted for independence. 1924 onwards: centrally planned economy. especially as relations worsened between the PRC and the USSR in the late 1950s. Khorloogiin Choibalsan rose to power. introduction of multi-party system & market economy 1992: new constitution Democratic revolution 1993: the first election wins for non-communist parties 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. a Mongolian People's Republic was proclaimed with support from the Russians. In the 1980s.7 1924: Mongolian People’s Republic established Mongolian People's Republic Following the death in 1924 of the king and religious leader. However. 1949 following the establishment of the PRC. Mongolia continued to align itself closely with the Soviet Union. leading to the peaceful Democratic Revolution. Japanese imperialism became even more alarming following the invasion of neighbouring Manchuria in 1931. The Mongolian People's Revolutionary Party dropped the “Revolutionary” from its name in 2010. the introduction of a multi-party system and a market economy. 4. according to official numbers.000 people dead. with the early 1990s seeing food shortages and high inflation. In 1992. during the Soviet-Japanese Border War of 1939. The Stalinist purges in Mongolia beginning in 1937 left more than 30. The first election wins for non-communist parties came in the 1993 Presidential elections and the 1996 parliamentary elections. and during the 1920s approximately one third of the male population were monks. China agreed to recognize Outer Mongolia's independence.8 1990: peaceful Democratic Revolution. In 1928. ResCap Mongolia 101 P a g e | 21 .

there has been continuous replacement of governments Mongolian politics is established under the framework of a parliamentary democracy. Mr Bayar resigned his position in October of 2009 due to ill-health. ‘State Great Khural’. but was defeated by the Democratic Party in 1996. he was replaced by MPRP leader Enkhbold Miyeegombo as Prime Minister. but allegations of electoral fraud by the opposition led to the first ever riots and several damages to property and deaths arose. and so there have been six parliamentary and Presidential elections since 1991. was formed in 2004. the most significant two being the Mongolian People's Party (MPP. the long tenure of MPRP politicians in the Presidential seat was ended when the Democratic Party figure Elbegdorj Tsakhia was elected President. and was replaced by the current Prime Minister. who remained in office after the 2004 elections. elections in 2012… The biggest political parties: The Mongolian People's Party (MPP) The Democratic Party (DP) Mongolia exists as a parliamentary republic.1 Political System and Recent History Sukhbaatar Square in front of the Saaral Ordon that houses the offices of the Prime Minister and President Since Democratic Revolution. The MPRP won the parliamentary and Presidential elections in 1992. who was previously Minister of Foreign Affairs. Current Prime Minister: Sukhbaataryn Batbold Current President: Tsakhiagyn Elbegdorj 2008: coalition government formed between the MPP and DP ResCap Mongolia 101 P a g e | 22 . Elections are held every four years. From 2004 there were numerous changes of Prime Minister. In May 2009. whose government is elected by parliament. 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 2000 parliamentary election returned the MPRP to dominant power. Mongolia's constitution guarantees full freedom of expression and religion and Mongolia has a number of competing political parties. 5. Consequently. In January 2006. Again the MPRP won a majority in the 2008 parliamentary elections. coalition government between the MPP & the DP. but with reduced representation. formerly the MPRP) and the Democratic Party (DP). In November of 2007. The President of Mongolia has limited executive powers but acts as the Head of State and Commander-in-Chief of Mongolia’s army. A coalition government headed by the leader of the Democratic Party. the MPRP invited opposition members into the Cabinet forming the coalition government that exists today. who in turn resigned his position following his failure to be re-elected as MPRP Chairman. which is in turn elected by the people. Elbegdorj Tsakhia. and was superseded by Bayar Sanjaa.ResCap January 24 2011 Resource Investment Capital Government 5 Government Democracy. Sukhbaataryn Batbold. a new cabinet was formed with members of several different parties.

There are ministers of each department (finance.) and those offices constitute the Prime Minister's cabinet. and his deputy Prime Minister is Norovyn Altankhuyag. A key position of present. was the dominant governing party in the coalition formed from 1996-2000 and approximately an equal partner in the coalition formed from 2004-2006. Then. 2009. with the peaceful democratic revolution. after which it formed a coalition with the Democratic Party and two others. is the Minister of Minerals and Energy. Mongolia's constitution provides three requirements for taking office as President. Parliament can then over-rule the veto with a two-thirds majority vote. and since then has formed two other coalitions. etc. President of Mongolia. 46 The Democratic Party. labour. or DP. and consists of a single chamber with 76 seats with a house speaker who acts as Chairman. given the importance of mining to the economy. the candidate must be at least 45 years old. and in November 2010. be a native-born Mongolian and have resided in Mongolia for five years prior to taking office.2 President Mongolia's President. Sukhbaataryn Batbold. Tsakhiagyn Elbegdorj 5. He was elected as President on May 24. or MPRP. The party continued governing until 1996. was twice formerly the Prime Minister and member of the Democratic Party. currently held by Minister D.3 The State Great Khural “The State Great Khural” is the name of the parliament. 5. as nominated by the Prime Minister in consultation with the President and confirmed by the State Great Khural. came a multi-party system.4 PARLIAMENTARY SEATS 3 Mongolia People’s Party and Democratic Party 27 The Mongolia People’s Republic Party.Zorigt. MPP Democratic Party Others 5. agriculture. The current President. or MPP.ResCap January 24 2011 Resource Investment Capital Government 5.5 Prime Minister and the cabinet The current Prime Minister. governed the country in a oneparty system from 1921 to 1990. The members of parliament are elected every four years. as Head of State. defense. Tsakhiagiin Elbegdorj. assumed office on 29 October 2009. The MPRP won the last round of parliamentary elections in June 2008. and from 2000 to 2004. now known simply as the Mongolia People’s Party. The President is required to formally resign his or her party membership when he takes office. the party reverted to its initial name of 1921 by removing the “revolutionary” title. initiating the change both times and remaining the dominant party. ResCap Mongolia 101 P a g e | 23 . but with the power to block Parliament's decisions. has a largely symbolic role.

They signed an executive protocol for agreements on economic cooperation. the Mongolian President Natsagiin Bagabandi met with the Egyptian President. June 2001: cooperation agreement was signed In April 2004.1 Africa 6. North Korea (amicable relationship) & Japan (interests in rare earth expansion) Mongolia maintains bilateral relations with 140 and diplomatic relations with 149 countries. air services and investment protection. In developing its relations with other countries. In March 2007. since then the countries have signed various bilateral corporation agreements. in Egypt and discussed ways to improve bilateral relations. the government has put much emphasis on encouraging foreign investment into Mongolia. In October 2008.ResCap January 24 2011 Resource Investment Capital Foreign Relations 6 Foreign Relations Key relations with Russia (largest importer into Mongolia. 2007: enhanced cooperation between the two countries discussed ResCap Mongolia 101 P a g e | 24 . The Mongolian officials said they welcomed the technical support provided by the fund in training and other economic benefits. 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.1. the Egyptian Minister of International Cooperation visited Ulaanbaatar where he met Mongolian Prime Minister Miyeegombyn Enkhbold. China (85% of Mongolian exports). The only Mongolian embassy on the African continent is in Cairo. Hosni Mubarak. Mongolia is guided by universally recognized principles and norms of international law as defined in the UN charter.1 Egypt Relations between Egypt and Mongolia officially began in 1964. Mongolia has bilateral relations with 140 countries and diplomatic relations with 149 countries. 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. uranium & rail JVs). as well as problems in Iraq and Palestine. Recently. 6.

Mongolian invasions in the 13 century bought much of Russia into the Mongol Empire.500km border. 6.2 Asia 6. the Soviets helped establish the Mongolian People’s Republic after helping to ward off the Chinese invasion. However. and a significant portion of the Russian population were killed. in particular petroleum and diesel imports. In 1921. Background Russia and Mongolia share a 3. Russia and China. Mongolia supported Russia during the Sino-Soviet split of the 1950s. Both are members of the Organization for Security and Co-operation in Europe.ResCap January 24 2011 Resource Investment Capital Foreign Relations Security cooperation 2001 and 2008: enhancement of security cooperation Mongolia and Egypt have cooperated on security exercises and operations. and as a result its economics and politics are directly influenced by the two. and a large number of soviet troops were permanently deployed in Mongolia through fear of Chinese expansionism. The majority of imports come from Russia.1 Russia Mongolia almost certainly has the strongest relationship with Russia. Communist era Close bilateral relations due to both communist regimes 1986: treaty of peace. Modern era Collapse of Soviet Union. Plans for the withdrawal of Russian troops from Mongolia were finalised in 1989. today the majority of imports come from Russia. and they two countries share a 3. Russia’s trade with Mongolia decreased by 80% almost overnight and China’s influence over Mongolia increased. such as Mongolian policeman visiting Egypt in 2001 to train for techniques in prevention of drug-trafficking and anti-terrorism. Mongolia has an embassy in Moscow and Russia has one in Ulaanbaatar. in particular petroleum and diesel. friendship and cooperation was signed between the two nations in 1986. and over the next 70 years the Soviet Union was the country’s greatest ally. th ResCap Mongolia 101 P a g e | 25 .500km border Russia helped Mongolia to ward off the Chinese invasion The Mongolian People's Republic was established under the Soviet influence in 1921 Mongolia shares its borders with only two countries.2. who it has been close with ever since the Russians helped liberate Mongolia from the Chinese in 1921. friendship and cooperation signed Both nations forged close relations during soviet times with strong industrial trade links. Most of Russia remained under Mongol rule for the following 300 years. Mongolia's trade with Russia declined by 80% Following the end of the cold war and dissolution of the Soviet Union. and a treaty of peace. and in 2008 Mongolian officials visiting Egypt to learn of the role of anti-corruption officers. In the past.

Uranium exploration and recent Joint Venture Russia holds 190 reports on Mongolia’s 6 uranium fields. Russia’s government-run ARMZ Uranium Holding. The expected Mongolian reserves are 30. which was the first visit by a Russian head of state since Leonid Brezhnev in 1974. In December 2010. provoking the Chinese to build their Great Wall to defend against the Mongols. the Soviet Union discovered 6 uranium deposits in which it estimated 1. The ruling of the Qing dynasty came to an end in 1911. Mongolians will remain in control. foreign relations between the PRC and Mongolia used to be predominantly determined by the PRC and USSR relations. Russia has become an adept student of Mongolian geology and mining potential. with the action plan stating that the JV would begin to function around June. Mongolia and Russia signed an agreement to develop the Dornod uranium resource. Although in 1919 China regained control over the region.8% of Mongolian debts which had accumulated during soviet times . a meeting between Ruissian PM Vladimir Putin and his Mongolian counter-part S. With adoption of democracy and transition to a market economy.5mt of reserves in Mongolia. Russian government writes off 98% of Mongolia's state debt 6.2. and first production is expected in 2011. Mongolia’s state-owned KOO MonAtom and the country’s Nuclear Energy Agency (NEA) signed the agreement in Moscow.. whereas the Mongolians have only been given copies to 34 of these reports.ResCap January 24 2011 Resource Investment Capital Foreign Relations 2000: Vladimir Putin renewed a major bilateral treaty In 2000. Mongolia only has access to 34 Through the decades of former Soviet exploration in Mongolia in the second half of the last century. mine and process the uranium. in 1921 the USSR forces helped Mongolia to Mongolia and China wars ResCap Mongolia 101 P a g e | 26 . Currently the PRC is the largest trading partner of Mongolia. the Qing dynasty of Manchu invaded th Mongolia in the 18 century. Russia now finds itself positioned again as a very important player participating in Mongolian uranium exploration. and the new company will survey. The Russians will invest $300 million in the first stage. Although Khubilai Khaan conquered the majority of China and established the Mongolian capital at the location of modern Beijing. Mongolia’s relationships with China also began to improve. Vladimir Putin (then President of Russia) made a visit to Mongolia to restrengthen a bilateral treaty. All 190 reports on the discoveries are currently held in Russia. with 51% of the share to Monatom and 49% going to ARMZ. of which Mongolia would only be asked to pay back $3. From 1970-1990.2 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. Recently.000 tons. when Mongolia declared its independence. Russia’s nuclear power company. Mongolia’s biggest untapped uranium field. Rosatom Corp.$172m. Batbold led to Russia writing off 97. Background Mongolia and China instigated many wars throughout history.8m in a single transfer.

China has been continuously making effort to strengthen its bilateral ties with Mongolia with all due respect to the latter’s autonomy.ResCap January 24 2011 Resource Investment Capital Foreign Relations reclaim its independence. Mongolia requested for further support from the USSR due to security concerns. Today. 6. was tension over bilateral relations relaxed. Recent News 25-40 mtpa of coal from Mongolia to China Dairy and flour factories to be developed in rural Mongolia The latest news informs that around 15 million tonnes of coking coal has been lost in Queensland floods in Australia. prompting the later formation of the Mongolian People’s Republic. Various agreements to improve trade and create air and transport links were signed in 1986. Modern period 1994: treaty of friendship and cooperation Mongolia given access to Tianjin port Since the end of the Cold War. It has been continuously noted that there are great opportunities for mutually beneficial cooperation between the two countries. the largest exporter of coal to China. Only in 1984. and the two nations started to set apart their borders.2010 2006 1972: diplomatic relations with Japan Capitalism in Mongolia strengthened further ties First ever visits by Mongolian and Japanese Prime Ministers • Contracts for SME development and environmental protection project were signed. Mongolia established diplomatic relations with the PRC. negotiations are taking place on the establishment of dairy and flour factories in rural Mongolia. The ties were strengthened after the Democratic Revolution in Mongolia. an official development assistance loan to Mongolia was approved (JPY 3 billion/$36 million) Over 80 members of the Japanese Diet visited Mongolia • ResCap Mongolia 101 P a g e | 27 . In 1994. when a highpower delegation from China visited Mongolia. especially since Mongolia has abundant natural resources and China has the market. Communist era 1949: diplomatic relations with PRC 1962: border treaty signed 1984: demarcation of border 1986: further agreements 1988: border treaty verified In October 1949. A treaty on border control was verified in 1988. 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. Japan-Mongolia relations over 2006 . Mongolia will soon have the capacity to supply 25-40 mtpa of coal to the PRC.3 Japan The People’s Republic of Mongolia established diplomatic relations with Japan in February 1972. Although a border treaty was signed in 1962. Currently. the two countries signed a treaty of friendship and cooperation.2.

later was extended to focus on the development of infrastructure projects and to facilitate selfsufficiency in certain sectors of the economy. until the US had approved a “Millennium Challenge Compact” aid worth $285 million in October 2007.ResCap January 24 2011 Resource Investment Capital Foreign Relations 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. 2008 Speaker of the Mongolian Great Khural visits Japan A project for a new international airport near to Ulaanbaatar was approved. investment and joint utilisation of mineral resources. China controls more than 95% of the world’s rare-earth output) Japanese geologists and scientists launched exploration of rare-earth elements in Mongolia. The cooperation. At first. however. Japan has historically been the largest aid benefactor to Mongolia. 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 rareearth metals are imported from China and the latter restricted their export quotas by 72% and 35% in H2 2010 and Q1 2011 respectively. • Economic cooperation Economic ties strengthened after 1990 Japan – former largest aid donor to Mongolia From humanitarian aid to larger-scale projects The economic relations of Mongolia and Japan have been significantly expanded since the former’s transition to a market economy in 1991. ResCap Mongolia 101 P a g e | 28 . who were struggling to bypass the transition period. economic cooperation between the two nations was mainly in the form of humanitarian aid to support the population of Mongolia.

3. In 2006 rumours went that the Mongolian government allocated 1. Mr. a Mongolian citizen who later died from health problems. The July 2007 visit by the Presidium of the Supreme People's Assembly of the Democratic People's Republic of Korea.Khurts. Mongolia signed an economic cooperation agreement with the UK. violating the Law of the European Union. was the first high-status visit to Mongolia by a North Korean delegate in 19 years. and investment promotion and protection agreements with France and Germany. but the Mongolian Prime Minister of that time. In 1991. Mr. The first cooperation and friendship treaty between the two countries was signed in 1986.Enkhbat.3 square km of land to North Korean refugees for the establishment of a camp in 40 km from Ulaanbaatar.1 United Kingdom Recent Controversy On September 17. such that in 1995 the previously signed cooperation treaty was cancelled and North Korea closed their embassy in Ulaanbaatar in 1999. from France as the suspect in a high government official’s murder. Mongolia is one of the few countries in the world that maintains warm relations with the Democratic People's Republic of Korea (DPRK). officially rejected such a postulation.4 North Korea The People’s Republic of Mongolia established diplomatic relations with North Korea in October 1948. He was accused of kidnapping D. M. Khurts and his three associates’ action was deemed as alleged kidnapping.2. after which Kim II-Sung paid an official visit to Mongolia in 1988.ResCap January 24 2011 Resource Investment Capital Foreign Relations 6. Kim Yong Nam. Enkhbold. 2010 the Mongolian Chief of Administration at the National Security Council. Abandonment of socialism and transition to democracy caused the two nations’ diplomatic relations to collapse. when the former acknowledged the Soviet-backed government of Kim II-Sung. 1991: cooperation agreements with UK. History During the 1950s’ civil war in Korea. Mongolia supported North Korea by providing assistance. 6. B. 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.3 Europe Mongolia endeavours to maintain close relationships with European countries. 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 6. France and Germany ResCap Mongolia 101 P a g e | 29 . was arrested at Heathrow Airport while paying an official visit to the United Kingdom.

6 million ($2. After the collapse of the USSR. Recent News Canadian FDI – mostly into mining Canadian FDI thus far has been mainly concentrated in the mineral resource sector of Mongolia.ResCap January 24 2011 Resource Investment Capital Foreign Relations Sep 2010: Mr. Batbold also paid a visit to the Toronto Stock Exchange (TSX).57 million) in 1999 to CAD163. the Mongolian Prime Minister Sukhbaataryn Batbold cancelled his official visit to London which was scheduled for 27 November 2010. who was diplomatically immune. 19 companies that are actively engaged in mining and exploration businesses in Mongolia are listed on the TSX.8 million ($162 million) in 2009. 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: 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 ResCap Mongolia 101 P a g e | 30 .1 Canada Canada and Mongolia established bilateral ties in November 1973.4. Representatives of the most influential mining companies with assets in Mongolia gathered at the conference. Negotiations are ongoing on the signing of a foreign investment promotion and protection agreement (FIPA) between the two nations. 1973: bilateral relations with Canada Post-1990: strengthened relations 2000-2009: FDI x 60 The two countries’ diplomatic relations were intensified when the CanadaMongolia Society was founded in 1980. SouthGobi Resources and Centerra Gold are the major players in the Mongolian mining industry. 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. while Canada has an Honorary Consulate in Ulaanbaatar and an Embassy in nearby Bejiing (China). 6.4 North America 6. Khurts arrested at Heathrow Nov 2010: Mongolian PM cancelled his visit to UK After the incident. in 1999 – 2009 the bilateral merchandise trade between the two nations rose over 60x from CAD2. Some see this as an expression of Mongolia’s discontentment with the arrest of Mr. the Mongolian Prime Minister (PM) Sukhbaataryn Batbold attended the Canada-Mongolia Investors' Forum held in Toronto. Mongolia operates an Embassy in Ottawa and an Honorary Consulate in Toronto. The stock exchange officials expressed their willingness to help develop the Mongolian Stock Exchange (MSE). According to the estimates. Mr. Toronto-based mining companies such as Ivanhoe Mines. and the refusal of the British government to release him upon Mongolia’s request. the Canadian FDI into Mongolia reached CAD 601 million (around $594 million). In September 2010. At the end of 2009. Canada started supporting Mongolia by providing aid through its non-governmental organizations and other specialised development agencies. Khurts.

public health and youth th th education. Sep 2010: MOU on improvement of civil services A memorandum of understanding (MOU) was signed between the two countries to promote cooperation on civil services in Mongolia. The Peace Corps from the US. as Russia and China applied significant pressure. As stated by the organization. Mongolia sent troops to Afghanistan and Iraq 2008: troops withdrawn from Iraq 1991: Peace Corps in Mongolia MCC: grant = $285 mn ResCap Mongolia 101 P a g e | 31 . efficient utilisation of natural resources. private sector-led economic growth and more effective and accountable governance”. operates with around 100 volunteers in Mongolia. USAID – key aid donor to Mongolia 1991-2008: USAID = $174. which is mainly focused on English teaching and training work. the United States Department of Agriculture granted Mongolia food aid worth $4. The 100 troops sent to Iraq were withdrawn in 2008.5 mn In 2006.5 million in total. In 2011. improvement of vocational training. so that the value of their extracted minerals could be significantly enhanced.ResCap January 24 2011 Resource Investment Capital Foreign Relations development.2 USA US Assistance The United States agency for International Development (USAID) has continuously been one of the key aid donors to Mongolia. Recent News Agreement reached in uranium sector cooperation In November 2010.4. the program will celebrate its 50 anniversary and its 20 anniversary in Mongolia. The US also supports Mongolia’s reforms in defence. 6. two Mongolian Parliament Members and the Director of MonAtom.2 million with the intention to improve the livelihood of herders and encourage entrepreneurship in the agricultural sector of the economy. and in 2005 it also deployed armed peacekeepers to UN and NATO missions. Since 2003 Mongolia has been contributing small numbers of troops to support US operations in Afghanistan and Iraq. the Mongolian government signed a Compact agreement with the Millennium Challenge Corporation (MCC) for the receipt of a grant worth $285 million. similar to those in Canada. The budget allocated in 2007 amounted to $6. The organisation is also active in such fields as SME development. The PM pledged that Mongolia will continue supporting Canadian investors and recommended that companies start building processing plants in Mongolia. cost-effective agriculture. The program primarily focuses on “sustainable.6 million and comprised projects in various fields. The program comprises projects in railroad development. and high-quality public governance and education systems. In October 2007. in 1991-2008 USAID granted Mongolia $174. The visitors learnt about the United States’ uranium exploration and enrichment experience. upgrade of health services and establishment of a property registration system in Mongolia. a state organization accountable for all uranium licenses in Mongolia. visited the USA for discussions on partnership in the mining 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. ResCap Mongolia 101 P a g e | 32 . A consensus was reached on how the USA could contribute to the training and development of the Mongolian workforce recruited in the uranium field.ResCap January 24 2011 Resource Investment Capital Foreign Relations methods of efficient utilization of resources for fuel production and their regulatory system in the uranium sector.

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). Mongolia receives little precipitation. There are many occasions when Mongolia is hit hard by exceptionally cold winters called “dzud”.374m) situated in the far western massif. referring to the dry terrain that has deficient foliage to be able to support livestock. The climate is generally dry and the temperature varies significantly across the year. th Ulaanbaatar – coldest capital city in the world 275 out of 365 days sunny Little precipitation Gobi means desert steppe ResCap Mongolia 101 P a g e | 33 . averaging 10-20 cm per year. mountainous region in the north to the Gobi desert in the south.56 million square km. Precipitation is the highest in the Northern region.ResCap January 24 2011 Resource Investment Capital Geography and Climate 7 Geography and Climate A large. while it is the lowest in the Southern region.56 km ) Khuiten Peak – the highest altitude (4. The highest altitude of Mongolia is the Khuiten Peak (4. Tavan Bogd. and is especially windy due to its high altitude above sea level. land-locked country with long. making the winters extremely cold and summers very warm. “Gobi” means desert steppe in Mongolian. harsh winters but with highest number of blue-sky days… the “Nomad Empire of Eternal Blue Sky” 19th largest country (1. Explanation of “dzud” is given in the Agriculture section of this report. On average. as a result of short and dry summers.374m) Winter: −40 °C (−40 °F) Summer: +35 °C (+95 °F) 2 Mongolia is ranked 19 in the world by country size after Iran. averaging 25-30 cm per year. In January. 257 out of the 365 days of the year are cloudless and the heaviest atmospheric pressure falls on the central region of Mongolia. except camels. Ulaanbaatar has been named the coldest capital city in the world. Mongolia’s geography varies from a cold. It covers 1. It is the country of steppes. Sometimes there may be no rainfall in a year in parts of the Gobi desert.

Dundgovi 12. Dornod 10. An exception is the capital city Ulaanbaatar. Darkhan-Uul 9. Arkhangai 5. Zavkhan 2. Töv 4. Khentii 15. Orkhon 18. Sükhbaatar 3. Uvs ResCap Mongolia 101 P a g e | 34 . Dornogovi 11. Bulgan 8. which is administered city. Khövsgöl 17. Govi-Altai 13. separately LIST OF AIMAGS 1. Bayan-Ölgii 6.ResCap Res January 24 2011 Resource Investment Capital Administrative Regions 8 Administrative Regions 21 a aimags (provinces). Selenge 21. Bayankhongor 7. where it is located. Aimag means "tribe” in Mongolian. All aimags are governed as separate municipalities. separate from Töv Aimag (Central Province). Övörkhangai 20. Govisümber 14. Khovd 16. 329 soums (sub-provinces) provinces) Mon Mongolia is divided into 21 aimags. Each aimag is subdivided into a number of s soums. Ömnögovi 19.

From 2000-02. as well as free-market economics. GDP grew at a compounded 9%. legislation was finally passed to develop the Oyu Tolgoi gold/copper project. Approximately 85% of all exports go to China.000 businesses operating in Mongolia. aided by the IMFs $242 million Stand-by Arrangement. ‘08 inflation peaked at 36% ‘08 Financial crisis: lower inflation. Expected GDP growth in 2013 in excess of 25% (IMF). coal. revenues & spending Oct 09: landmark agreement to develop OT. the country again entered recession due to particularly harsh winters and summer droughts which led to large-scale livestock fatalities. gold. but recent discoveries of mineral deposits have attracted large levels of foreign direct investment (FDI) into the mining sector. Livestock typically consist of sheep. inflation reached the highest levels in over a decade. hitting 36% in August. fluorspar. subsistence herding employs most of the workforce. Mongolia began to recover from the crisis. Up until the dismantlement of the Soviet Union in 1990-1991. which is also the largest contributor to government receipts.000 businesses in Mongolia ResCap Mongolia 101 P a g e | 35 . forcing cuts in spending. 95% of petroleum products and a large proportion of Mongolia’s electricity come from Russia. Large reserves of copper. There are over 30. 85% of Mongolian exports to China Over 30. mainly because of increased gold production and high copper prices. Mongolia joined the WTO in 1997. the majority of which are operational in Ulaanbaatar. Outside of the capital city. and was compounded by falling prices for primary sector exports and opposition to privatization. leaving it vulnerable to Russian price hikes. In early 2009. world’s largest untapped copper deposit In 2004-08. cattle. horses and camels. but by the end of the year the price levels dropped as commodity prices fell and the global financial crisis took hold. soviet assistance used to account for up to a third of GDP. On the other hand. In October 2009. reduced govt. 2004-2008: CAGR 9% due to high Cu prices and new Au projects. reform and privatization lead to economic growth. 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 Economic activity in Mongolia has historically been focused on agriculture and herding.ResCap January 24 2011 Resource Investment Capital Economy 9 Economy The Largest contributors to the Economy are mining and agriculture. although instability remained in the banking sector. before almost disappearing overnight. In 2008. the world’s largest untapped copper deposit. The decade that followed saw natural disasters and political inaction cause deep recession. uranium. Russia and China. goats. Mongolia’s economy continues to be significantly influenced by neighbouring behemoths. molybdenum. and China accounts for over half of all Mongolian external trade. Government revenues fell.

and the combination of these measures resulted in exchange rate stabilisation and the ability of the Bank to replenish its foreign currency reserves. ResCap Mongolia 101 P a g e | 36 . being at the time the country’s largest export. were copper prices. combined with moderate growth in imports. To prevent an overshooting of the exchange rate. The Central Bank rate was hiked from 9. a record high for Mongolia. and the deficit further increased to 15% of GDP in the first half of 2009. Real GDP growth of 6. 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. Most crucial to Mongolia.7% of GDP in 2007 compared to a deficit of 14% of GDP in 2008. a good sign of improved liquidity in the market.75% to 14% in March of 2009.75-14% in March 2009 to restore confidence in local currency 9. measures were taken including the introduction of a transparent. including zinc.ResCap January 24 2011 Resource Investment Capital Economy 9. bi-weekly foreign exchange auctioning mechanism and abandoning the de-facto peg to the dollar.700/tonne in April 2008.1% in 2010 was driven by strong growth in PRC (whose reported GDP was up 10. International reserves has exceeded $2. which held its price on account of its status as a safe-haven investment. to $3000/tonne in March 2009.2 Current state of the economy 2010 GDP growth = 6. 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 2009.0 billion as of the end of December 2010 (82. The fall in price of commodities was combined with a fall in demand for commodities by China. This resulted in a contraction in Chinese demand for Mongolian copper imports by around 50% in the first half of 2009. which fell from $8. and the only exception was gold. crude oil. Other commodities essential to Mongolia’s export industry fell. coal and cashmere. and yearon-year growth in industrial production shrunk from 16% in mid 2008 to 5% in the first quarter of 2009. primarily due to copper prices falling as much as 65% 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. led to a significant shift in the balance of payments in late 2008/early 2009.1% Mongolia continues on the road to a market economy.6%. which accounts for 85% of Mongolian exports. This resulted in the bank losing $500 million in foreign currency reserves between July 2008 and February 2009. The current account showed a surplus of 6. The Mongolian Tugrik depreciated by 38% between the end of October 2008 and the middle of March 2009 due to a currency flight.6% in 2009. and in 2010 saw significant growth in its industrial and services sectors. Mongolia saw its demand for exports and export revenue decrease.3% in 2010). and the GDP growth of 8. a 65% reduction.7% of GDP in 2007 to deficit of 14% in 2008 MNT fell 38% from Oct08 – Mar09 $500m in foreign reserves were lost De-facto peg abandoned BoM raised IRs from 9. China’s growth slowing from 16% to 5% led to decreased demand for Mongolian exports Current account moved from surplus of 6.1 In 2009 economy contracted by 1.6% growth yoy).9% seen in 2008 was following by a contraction in the economy by 1. despite the significant impact of the global financial crisis. The sharp fall in exports.

metal foundries.2% . a 11. Inflation smoothed down to 13% in 2010 from the soaring 36% in August 2008.9%) for the manufacturing sector compared to the previous year. assistance from the international community including the $242 million stand-by loan facility from the IMF (of which only $194 million was actually drawn).3x increase in products such as steel casting.3 trillion Inflation 13% FDI growing at 30% annually & expected to total $11bn in 4 years Budget surplus $611mn External trade deficit $373. manufacture of wearing apparel. the global economic recovery. general government budget showed a surplus of $611 million and the external trade deficit reached $373. manufacture of wood and wooden products (35. juice.5bn (at 2005 constant prices) ResCap Mongolia 101 P a g e | 37 . high copper prices and strong growth from the PRC.91.6%). 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. and has established a fiscal framework with the focus on macroeconomic stability for 2011. cement. This increase was mainly due to a 16. Fiscal framework approved for 2011 to encourage economic stability Oct 2009: milestone agreement between government.2%). sawn wood.0%).7% . manufacture of food products and beverages (24. manufacture of rubber and plastics products (84. Ivanhoe Mines and Rio Tinto over the development of the vast Oyu Tolgoi copper/gold prospect in the South Gobi desert. manufacture of tobacco products (2. the total industrial output increased 169. production of non-metallic mineral products (54.7 billion MNT ($135. solid concrete. soft drinks.3 trillion. According to Montsame. in 2010. manufacture of basic metals (29. The IMF forecasts the real GDP growth to be over 25% in three years time.5 times). In 2010.6%). metal steel. The estimated value of untapped mineral assets in the country is around $1. and iron ore. A major milestone for developing Mongolia’s resource wealth was the eventual signing of the investment agreement in October 2009 between the Government. alcohol.5 billion) at 2005 constant prices compared to the previous year. driven by advancements in the mining sector.8% increase in main mining and quarrying products such as crude oil. Mongolia is about to experience a period of remarkable growth. In 2010. The Government at the end of 2010 made plans to increase its spending given the increased revenue and availability of budget financing.874. milk. It is pursuing plans for structural reforms and has adopted a comprehensive fiscal responsibility law. flour.8 million (exports and imports were both up 53% yoy). Industry experts talk of the success and efficiency of recently implemented domestic policies which took the country out of recession.8%). publishing. printing and reproduction of recorded media (7.7 million) or 10% to 1. and a 2. Ivanhoe & Rio Tinto to develop OT Value of mineral assets in country estimated at $1.4%).8mn Industrial output up 10% to $1. fodder. fluor spar concentrate and coal.5%). dressing and dyeing of fur (17.6 billion MNT ($1. manufacture of chemicals and chemical products (18.0%).0% increase in manufacturing products such as copper.69. Industrial output (at 2005 constant prices) showed increases in mining of coal and lignite extraction of peat (91. extraction of crude petroleum and natural gas (16.5%).7%) for the mining and quarrying sector. yoghurt. other mining and quarrying (19.ResCap January 24 2011 Resource Investment Capital Economy Recovery attributable to policy response and IMF loan facility of $242m The strong recovery may be attributable to a number of factors including the strong policy response from the authorities. lime. manufacture of office accounting and computing (5.1x 2.6%).

but the agriculture sector experienced large losses when 11. this figure grew at a CAGR of 8.2% 22.6bn 2005 – 2008 annual growth rate = 8. gold and iron th 2010 nominal GDP = $6.80% 2009 21.0% 10.7% from 2005 to 2008.5% of the economy was attributable to the mining sector. but recently focus has changed to mining.ResCap January 24 2011 Resource Investment Capital Economy There was an increase in production of electricity.0% 23. particularly in the mining industry ii) increased commodity prices. Trade in service. (The IMF prediction of real GDP growth for 2010 was 8.2% of Mongolia’s GDP was attributable to agriculture whereas 22.3 million livestock died during the winter dzud. chiefly copper.745.1% 7. However. and in excess of 25% in 2013. the greatest contributors to GDP were livestock.40% 2008 21. thermal energy.5% 5. while income per capita is expected to reach $3.30% Source: National Statistics Office 2009 Expected real GDP growth 8.3%.9% 21.0% 19.4%) [Montsame].9% in 2011. 2010 real GDP growth = 6.5%). at $6. and steam (6. The mining sector is by far the largest source of foreign currency inflows.5% 22. the NSO officially announced that the 2010 real GDP growth was 6.5% 6.5% 29.5% 6. 9.6bn. Mongolia is an emerging market whose GDP is comparatively small. The IMF forecasts the real GDP growth to be over 25% by 2013 driven by advancements in the mining sector.2% 23. and contributed to 85% of exports in 2008 and 82% of exports in 2009. and nominal growth was 25.2% 7.1%. primarily driven by i) increased FDI cash in-flows.1% On 13 January 2011.6% 22. 21.3 Gross Domestic Product Historically. ResCap Mongolia 101 P a g e | 38 . processing industry and mining had high profits.500 in 2015 compared to the current level of $1. In 2009.7% NOMINAL GDP COMPOSITION BY SECTOR 2007 Agriculture Mining Manufacturing Trading Services Other 20.9% 6. agriculture and animal husbandry.

$ 3504 3101 2693 2051 1670 1343 1745 2192 3500 3000 2500 2000 1500 1000 500 0 2008 2009 2010 2011 2012 2013 2014 2015 Source: World Bank estimate.829%.ResCap January 24 2011 Resource Investment Capital Economy 14 12 11.7 trillion tugrik ($3. IMF forecast 9. In 1990. up 1.45 billion) or 62% from the previous year.4 30 25 20 15 10 5 0 -5 2008 2009 2010 2011 2012 2013 2014 2015 10 8 6 4 2 0 Source: IMF 4000 Income per capita. the M2 supply of money was $5.6 billion.8 trillion tugrik ($1.2 7.8 4.1 5.5 7. % GDP.8 billion). this means in 1990-2010 the amount of money in circulation increased 83.4 Money Supply By the end of December 2010. $ billions .2 5.0 9.7 12. money supply had reached 4. ResCap Mongolia 101 P a g e | 39 Real GDP growth.

$ MILLIONS 3500 3000 2500 2000 1500 1000 500 0 Dec-97 Nov-98 Sep-00 Aug-01 Jan-97 Oct-99 M1 M2 Jul-02 Jun-03 May-04 Apr-05 Mar-06 Feb-07 Dec-08 Mar-10 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. while expenditures increased 23% owing to cash handouts delivered to 50’000 civilians. the M2 money supply increased from $1. $ MILLIONS 3500 3000 2500 2000 1500 1000 500 0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 May-10 M1 M2 Source: Bank of Mongolia (calculated at constant 2010 USD:MNT exchange rate) 9. in August 2010 the fiscal deficit fell to 0.6% a year ago.86bn (52% rise) MONEY SUPPLY.88bn to $2.5 In August 2010.4% of GDP. gov revenues were up 56% YTD and expenditures up 23% YTD Budget According to the World Bank estimates.ResCap January 24 2011 Resource Investment Capital Economy MONEY SUPPLY. The figures indicate overall the improving economy and positive ResCap Mongolia 101 P a g e | 40 Nov-09 Jan-08 . Total government revenues were up 56% YTD due to rebounding commodity prices and the infamous Windfall Tax. compared to 10.

According to their view. The amended royalties on copper will not be applied to Oyu Tolgoi production. worth $48 million. excessive spending worth 52% of GDP would fuel the already existing inflation in the form of wage-price spirals. Income is mainly to be generated by copper. gold and coal exports. the Windfall Tax will no longer bring revenues to the government. 30% on copper ore and 15% on copper concentrate if their prices exceed 9000$/t. govt revenue to be 42% of GDP. government revenues are to be 42% of GDP. infrastructure and agriculture. the World Bank had been continuously warning about the possible inflationary pressure likely to be caused by the adoption of such a fiscal policy. which were the years of boom and excessive spending. i..ResCap January 24 2011 Resource Investment Capital Economy Windfall tax abolished. The bank mentioned about the possibility of the 2006-2008 mistakes being replayed. There is to be an increase in spending on wages of 22% and an increase in spending on transfers of 50%.e. govt expenditure 52% of GDP On the 1st of December 2010. Expenditures are mainly about to hike due to project-financing costs related to mining. Parliament approved a new budget for 2011.etc. revenues grew sharply 150 100 50 0 Tax revenue WPT VAT Wages and salaries Import duties Excise taxes Royalty -50 -100 Corporate income tax Non-tax revenues Social sec cont'ns Source: World Bank In 2011 budget. which is responsible for cash handouts and the provision of student tuition fees. exploitation of oil reserves and privatizations of state properties. Financing of the Human Development Fund. Worth noting. will bring some income boost. but the recently approved progressive royalties on minerals. government expenditures 52% of GDP and the fiscal deficit 9. Before the budget was officially approved. the abolishment of the 68% Windfall Tax has been in full st effect since the 1 of January 2011. 300 250 200 YTD % INCREASE IN GOVERNMENT REVENUE Aug-09 Aug-10 Due to recovery in commodity prices and domestic demand. The IMF approved an 18-month 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$/oz . 5% on gold if the gold price exceeds 1. In 2011. effective from 01 Jan 2011 prospects. ResCap Mongolia 101 P a g e | 41 .300$/oz. According to the estimates. during which no government funds were saved to cushion against frictions in the economy and following which the 2008-2009 collapse occurred in Mongolia.. finding it unnecessary as the country did not use the remaining two tranches of the IMF’s Stand-by Agreement (SBA). pushing inflation towards 25%. Also the World Bank and the IMF are not planning to secure any more lending to Mongolia. is to take up 11% of GDP.9% of GDP.

0 35. Despite these issues and the World Bank’s warnings.0 10. However unfortunate it is. the spending plans in overall seem to be highly unconstrained. there are always precautionary warnings coming from the expert financial institutions. destroying ample of livestock and escalating meat prices.0 15. Therefore. and not surprisingly.0 20. whereas the parliament makes their resolutions based on their own estimates and specialist advisors. Food and energy prices climbed up due to adverse weather effects in Russia. as demand side inflation is also creeping up. while the bank’s intervention could predominantly soothe the demand side inflation.0 Inflation reached 36% in Sep 08 Deflation occurred in Q4 2009 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Source: Bank of Mongolia Food prices are given the heaviest weighting in the consumer price index. was 13%.0 30. Such an excuse will no longer work in the future. ResCap Mongolia 101 P a g e | 42 Sep-10 . therefore supply-side shocks in food prices have the greatest effect on calculated inflation levels in Mongolia. INFLATION.0 -5. which boosted grain prices. inflation resumed its upward trend yet again by the end of 2010.0 5. Higher volatility of the CPI index points to greater instability of the overall economy. inflation as stated by the Bank of Mongolia.0 25. 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). 9.8% in July 2010. The central bank justifies its incompetence in handling inflation on the grounds that the price increases were mainly due to the supply side. due to pressures from government’s 30% public sector wage hike & public handouts Inflation After falling to as low as 8. the World Bank predicts two-digit inflation figures over the year 2011. The parliament members justified their move by asserting that no matter what the government decides.6 2010 inflation: 13% Supply side shocks in food prices main contributor to increased inflation towards end of 2010 Demand side inflation increasing.ResCap January 24 2011 Resource Investment Capital Economy SBA in April 2009 for an amount equivalent to $242 million. The overall 2010 CPI. and a disastrously cold winter in Mongolia. ANNUAL % CHANGE IN CPI 40. this usually is the case with transition economies.0 0. Main factors behind the price increases mostly belonged to the supply side.

200 Source: World Bank ResCap Mongolia 101 P a g e | 43 . the external trade balance showed a deficit of $378.000 -1. $ MILLION (12 MONTH ROLLING SUM) Exports 4.2bn.500 2.500 1. up 50% Trade In 2010.1% compared to 2009.ResCap January 24 2011 Resource Investment Capital Economy PROPORTIONAL CPI BASKET OF GOODS 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Apr-06 Sep-06 Feb-07 Jul-07 May-08 Mar-09 Aug-09 Dec-07 Oct-08 Jan-10 Jun-10 Restaurants Education Recreation & Transport Medical care Electricity.000 2. total external trade turnover reached $6. an increase of $2.000 3.2 billion.7 2010 trade turnover = $6. Water Housing Clothing Food Food makes up over 40% of the CPI basket of goods Source: Bank of Mongolia 9.500 3. TRADE. up $126.4 million or 50. up 54% 2010 trade deficit = $379m. However.5% over 2009.7m in 2010.000 1.000 500 0 May-08 May-09 May-10 Aug-07 Nov-07 Feb-08 Aug-08 Nov-08 Feb-09 Aug-09 Nov-09 Feb-10 Aug-10 Imports Trade balance (right axis) 0 -200 -400 -600 -800 -1.15 million or 53.

though by August this had reduced to only 9%. and approximately 85% of all Mongolian exports go to China. gold exports were down.3% 26.4% 1. Mineral products.6 million tonnes 568. The dollar value of coal shipments in August had increased year-on-year by 172%.7. despite gold prices once again reaching record heights. This was most likely a result of the abolishment of the st 68% windfall profit tax coming into play on January 1 2011. copper contributed 53% to export growth. whereas coal contributed 40 percentage points of the 59% that was the year on year August growth. textiles & textile articles live animals.9 63.5 million tonnes 5. reflecting the effects of the devastating “dzud” last winter that destroyed livestock.7% 6. up from 16% the previous year. In February.1% 5.ResCap January 24 2011 Resource Investment Capital Economy 9. $ million 877. natural or cultured stones. The contribution of copper to export growth is levelling off. raw & processed hides. and hence gold producers were withholding stocks until this time.0 244.5 250. 2010 I-XII EXPORTS Coal Copper concentrate Iron ore Gold Crude oil Zinc ore concentrate Greasy cashmere Fluorspar ore/concentrate Combed cashmere Molybdenium ore/concentrate Rest exports Volume 16. coins. fur & articles thereof accounted for 98% of the total export value amount. up 53. for an increase in total shipment volume of 146%.1 million barrels 119k tonnes 3k tonnes 376k tonnes 977 tonnes 4.8k tonnes Value.6% 8. precious metal.9bn.8 52. skins.9 178.6% 2.3% 4.3 154. up 54% Exports The latest update informs that In 2010.6 770. animal origin products.2 68. Mongolian exports totalled $2.1 2010 exports = $2. and coal made up 27% of all goods exported from Mongolia.1 104.9 134. accounting for 30% of all exports Source: National Statistics Office of Mongolia ResCap Mongolia 101 P a g e | 44 .8% from 2009. Cashmere export remained low.6% 3.0 % of total exports 30.8% 8. whereas has become the leading contributor to growth in exports.7k tonnes 3.2% 2. Gold and cashmere exports down On the other hand.4% Coal now Mongolia’s largest export commodity. jewellery.1 tonnes 2.9 billion.

148.9 9. IN % China 100 80 60 85% of exports go to China 40 20 0 Mar-01 May-00 May-05 Mar-06 Jan-97 Nov-97 Sep-98 Jul-99 Jan-02 Nov-02 Sep-03 Jul-04 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Russia Other Source: Bank of Mongolia 9. in particular machinery and equipment Imports Largest imports: diesel and petroleum from Russia Imports have continued to grow as the economy recovers. The increase in demand for imported goods was primarily driven by rising demand for machinery and transport equipment. EXPORTS.6 1000. $230 million worth of petroleum in 2010.1% 1.5 199.3% 42.0% 30.3% 6.1 43.8 1.9 % of total 9.386. Mongolia imported $400 million worth of diesel.3% on 2009.7% 1.0% 33. and are supplied by The Russian Federation.7% 35. goods and services of value $3. reflecting increased industrial activity involved in mining.5% 3. which are the country’s largest import products.5 3.ResCap January 24 2011 Resource Investment Capital Economy China is Mongolia’s biggest trading partner.2 Imports rising as economy recovers.277.3 billion were imported.2 121. Currently around 85% of exports go to the PRC.7.3% 0.8 49.7 197. These activities also added to petroleum and diesel imports.2 1. construction and agriculture. up 53.090. In 2010. 2010 I-XII IMPORTS EU countries Other countries of Europe of which Russia Northeast Asia of which Japan of which China Southeast Asia Other countries of Asia Africa America Australia Total Source: National Statistics Office $ million 318.5% ResCap Mongolia 101 P a g e | 45 .3% 6.6 1.

Mongolia’s recovery after the crisis was largely due to strong policy responses made by the authorities and substantial aid coming from international communities.5% came from China.7 billion (29% of GDP) in September 2010. 3) Parliament approved a revised banking law that strengthened the regulatory framework. 30% from PRC 40% 20% 0% Jan-97 Nov-97 Sep-98 Jul-99 May-00 Mar-01 Jan-02 Nov-02 Sep-03 Jul-04 May-05 Mar-06 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Russia Other Source: Bank of Mongolia 9. a number of successful policies have been implemented: 1) A flexible exchange rate regime adopted in early 2009. 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. including a loan from the IMF itself. Successful policies included adopting and stabilising a flexible exchange rate by increasing policy rate 400bps.3% of all imports came from Russia in 2010. 2) Fiscal adjustments were made in 2009 and continued in 2010 creating financing constraints and bringing down fiscal deficit to 0. The figure below displays historical proportions of imports that came from the two neighbouring giants. IN % China 100% 80% 60% 34% of imports from Russia. fiscal responsibility laws and revised banking laws ResCap Mongolia 101 P a g e | 46 . supported by a forthright 400 bps increase in the policy rate. maintaining the situation of Russia being the primary supplier and China being the major buyer. IMPORTS FROM RUSSIA AND CHINA.ResCap January 24 2011 Resource Investment Capital Economy 33.4% of GDP.8 Recovery after crisis due to strong policy response and IMF loans Implemented Policies As the IMF judges. and 30. The new regime efficiently stabilized the foreign exchange market and Mongolia’s foreign reserves reached $1. Parliament passed a comprehensive fiscal responsibility law in 2010. According to the IMF.

5 3 2. Net value in 2007 was 500 million USD.5 2 1. which made it the second best-performing currency against the dollar in 2010.ResCap January 24 2011 Resource Investment Capital Economy 9. Prior to 2005. $ billion 4 3. In December 2010. the overall supply of products came primarily from imports. the de facto peg of the MNT against USD in all probability was the most sensible way of protecting the currency from continuous depreciation. with the increasing amount of mining related foreign capital flowing into the country. MNT/USD 1600 1500 1400 1300 1200 1100 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 P a g e | 47 Source: Bank of Mongolia ResCap Mongolia 101 .446. 67% of which was accounted for by mining alone and 22% by trade and food. when exports were insignificant.10 Currency A flexible exchange rate regime was adopted in early 2009. the MNT/USD rate gained in value 15% since January 2010. MNT second best performing currency against the dollar in 2010 Recently. the manufacturing industry was almost non-existent.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. when it was 1. the Mongolian Tugrik started appreciating.5 1 0. EXCHANGE RATE.5 0 2007 2008 2009 2010(f) 2011(f) 2012(f) 2013(f) 2014(f) FDI is expected to total around $11 billion over the next 4 years Source: Trade and Development Bank 9. and the supply of international reserves were highly deficient. FDI.

188 NBFIs and 207 S&C (saving and credit) Cooperatives. Xac bank. 188 NBFIs. S&C Cooperatives mostly provide micro-finance lending. promoting an efficient financial system. institutional weaknesses in the new banks. 10. state ownership in banks gradually divested and foreign ownership in the banking sector increased to help improve competition and efficiency. the Mongolian financial sector consists of 14 commercial banks. NBFIs provide similar products and services to banks such as loans to small borrowers. As Mongolia transitioned into a free-market economy in 1991. inadequate regulatory frameworks and general macroeconomic problems resulted in eventual deposit runs. soviet-style single bank system in which the State Bank of Mongolia performed all banking duties within the country. although they do not take deposits. several banking crises occurred in 1994. Many banks faced severe liquidity issues and public confidence in the banking system fell. The commercial banks that emerged inherited nonperforming loans from the former state bank and also approved loans to poorly performing enterprises. the FRC was formed by the Government to regulate all financial institutions. Previously insolvent banks were rehabilitated. 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 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. Several banking crises occurred during the transition period in Mongolia in 1994. 1996 and 1998 due to high levels of nonperforming loans. 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. of which the biggest are Golomt Bank. ResCap Mongolia 101 P a g e | 48 . In 2006. 1996 and 1998 as increasing NPLs damaged the solvency of the banking system. money transfers and FX trading.1 Background During the transition from Soviet style mono-banking to commercial banking. with the exception of commercial banks which remained under the Bank of Mongolia’s supervision. Khan Bank and TDB (Trade & Development Bank) 14 commercial banks. who in turn took over all lending activities to the public. 207 saving & credit (S&C) cooperatives According to the Trade and Development Bank.ResCap January 24 2011 Resource Investment Capital Banking Sector 10 Banking Sector 14 commercial banks active in Mongolia. Mongolia’s banking industry grew from a centrally planned. the Government initiated financial sector reforms. To restore confidence in the banks. In addition.

The liquidity of banks became an issue due to the economic downturn. began to slow as a result of the government’s blanket guarantee on deposits. To provide liquidity support. However.500 2.3% in 2009 compared to 2008.46bn and grew by 34. which had begun to decrease in October 2008. all of which were repaid by the end of 2009.6 percentage points to 38.000 Total assets.6m to banks via new financial instruments such as reverse repo. Zoos Bank’s loan portfolio deteriorated significantly. and consequently the acid ratio of the banking sector grew by 16.25m was given to 5 banks. who in turn lent $44. th 80 70 60 50 40 30 20 10 0 Total assets/GDP ratio.ResCap January 24 2011 Resource Investment Capital Banking Sector 10. BANKING SECTOR ASSETS AND FINANCIAL INTERMEDIATION 3.57bn from the previous year. of which foreign currency appreciation was responsible for 13.500 1. However. Until 25 November 2012. Total funding of $66. Although this has beneficial effects for the banking system.9m to 23 companies to support the gold mining activities and improve their liquidity. and tugrik depreciation which lasted until Q2 2009. and in November 2009 was taken into state ownership. the collapse did not negatively affect the overall confidence of depositors.3 out of the 21 percent of this growth.5%. and they soon reached pre-crisis levels of $2bn. collateralized loan and foreign currency swaps.000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Note: 1. the total assets of the banking sector grew by 21.1% $3. Exchange rate as of 31 Dec 2009 Source: Bank of Mongolia The govt guarantee on deposits reduced outflow of deposits The rate of decline in deposits. the potential costs for the government (up to $2.5bn or 40% of GDP) could place pressure on the state budget. the insolvency of Anod Bank.2 Banking sector performance during 2008/2009 financial crisis In 2009. the government’s blanket guarantee covers all money on deposit. The Mongolian government put a total of $53m on deposit into three banks.500 3. because in 2009 total deposits totalled $1. $ million1 2. being unable to fully commit to repayment of customers' money because of violating the limit of a single borrower’s exposure. % Bank deposits grew by 34.000 1.5% in 2009 ResCap Mongolia 101 P a g e | 49 . the Bank of Mongolia extended interbank loans of $77.

42 billion and had further increased to $2.4 billion by mid 2010. grew to $2. better enforcement and supervision. loans grew 6 fold Banks could further increase their loan portfolios Capital adequacy ratio for banking system (mid 2010) = 14% Max loan exposure to single borrower = 20% of bank’s total capital ResCap Mongolia 101 P a g e | 50 . loans which totalled $360 million in 2003.ResCap January 24 2011 Resource Investment Capital Banking Sector 10. Regulations have been tightened on lending to related and other parties. Bank’s undergo risk assessments. The committee ensures public awareness of possible financial crises. loan loss reserve requirements have increased (1% reserve for performing loans. Similarly. 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. Capital adequacy principles for banks in Mongolia are very similar to international standards. Total deposits in the banking system from 2003-2009 increased 5x from $460 million to $2. For the tier 1 ratio.15 billion in 2009 at a CAGR of 35% for the six year period. deposits grew 5 fold. and had further increased to $2. and prudential norms were introduced to the Mongolian banking sector in 1996. loan classification and loan loss provisioning systems. exceeding the minimum central bank requirement of 12%. a financial stability committee was established in 2005. and increased by 21% to $226 million by mid 2010. interacts directly with the management of financial institutions. Loan reserve requirements increased From 2003-2009. 5% for overdue loans – up from 1%). 2005: Financial stability committee To monitor the stability of the financial system. Some of the measures taken by the central bank include: introducing prudential norms. Banking sector capital (prepaid tax deducted) reached $190 million at the end of 2009.3 Strengthening of the Financial System Bank examinations more driven by risk assessments Degree of prudence in the financial system in Mongolia has increased over the last ten years.5m and failure to comply results in revocation of the bank’s license. The Central Bank also increased the minimum paid-in capital required for commercial banks to the current level of $6. and gives financial support when needed. not just on whether the principal is up to date. and total loans to a single related party must not exceed 5% of a bank’s total capital. These figures have increased from 2% and 4% respectively. 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%.87 billion by mid 2010. Loans are classified as overdue if the interest payments are overdue. while total loans to a single borrower must not exceed 20% of the bank’s total capital. and particular focus has been placed on detecting potential problems relating to loans. the minimum capital adequacy for commercial banks is currently 6% and the total capital ratio is 12%.

081 32. % 353 91.9% 16.2% 3.9 814 44.7% Golomt Bank 23.1 2005 688 41.350 13.4 563 23.825 30.6% 9.9 2.8 90.3 2008 2.5 2006 977 42.8% 22.8% 33. Golomt Bank. Golomt Bank.7% Source: Public filings made by each bank.9% 18.5 83.2% 14.385 33.3 2009 2.1 2010 1 2. mid 2010 TOTAL LOANS OUTSTANDING ($m) 2500 2000 1500 1000 500 0 Oct-97 Oct-00 Oct-03 Oct-06 Apr-99 Apr-02 Apr-05 Apr-08 Oct-09 Jan-97 Jul-98 Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Source: Bank of Mongolia ResCap Mongolia 101 P a g e | 51 .8 2.2 2004 485 37.6 84.ResCap January 24 2011 Resource Investment Capital Banking Sector 10.4% Khan Bank 28. and their market shares are shown in the following table: TDB Assets Loans Deposits 16.0 1.108 28.0 457 63.1 118.2 Assumed MNT/USD rate = 1250. Source: Bank of Mongolia. mid 2010 TBD.7 77. except percentages 2003 Loans % yoy Deposits % yoy Loan/Deposit.5% 22. Deposits include current.781 64.8 89.644 68. Khan Bank & Xac Bank are the most significant commercial banks There are 4 banks who dominate commercial and retail banking in Mongolia who extend approximately 70% of all loans 73% of all deposits.2 1.8 92. savings and time deposits.9% Xac Bank 6. Khan Bank and Xac Bank.3 1.2 86.4 Deposits and Loans The following table sets forth the year-on-year credit and deposit growths of the banking sector: LOANS AND DEPOSITS AS OF 31 DECEMBER $ millions. These banks are TDB.4 2007 1.124 0.782 0.

DISTRIBUTION OF LOAN PORTFOLIO BY ECONOMIC SECTOR 5.4% Other Source: Bank of Mongolia 63% of credit extended to private sector 36% to individuals 1. % yoy P a g e | 52 Note: 1.50 Total loans outstanding.Assumed exchange rate: 1USD=1250MNT Source: World Bank ResCap Mongolia 101 . $ billion1 2. commercial bank competition.4% in 2010 (in 1999 this peaked at 51%).00 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 80 70 60 50 40 30 20 10 0 -10 Default rate = 8.1% of loans were extended to private the public sector.69 billion by mid 2010.42 billion and further increased to $2.86 billion in 2010.00 1.1.% to public sector In 2001 the Government relaxed regulation on private real estate ownership.ResCap Res January 24 2011 Resource Investment Capital Banking Sector Largely increasing deposits into banks Appreciation of the tugrik. 2.1% Construction Motor vehicles Real estate 18.50 1.50 0. Current billion account balances totalled $840 million while time deposits totalled $1.0% 14.00 0.4% Annual growth.8% 26.7% from $464 million to $2. which led to an expansion in credit for housing. total deposits grew by a CAGR of 31. rising incomes and improved macroeconomic conditions have all helped increase bank deposits in recent times.5% 7. From 2003 to 2009.0% 13. The rate of default was 8. In 2010.2% Agriculture Mining Manufacturing 15. 36% to individuals and a mere 1. 63% of credit was lent to the private sector.

0 5.0 15. $33 million in trading. reaching $435 million. and $28 million in the mining sector and total number of NPLs went up almost three fold within 2009.5 Banking Interest Rates INTER-BANK INTEREST RATES. who in turn limited extension of new loans due to the increased levels of risk. The NPL ratio in the year went from 7.8 percentage points to 20% 10. As of 2009.8 fold The 2008/2009 financial crises and economic slowdown led to a decline in turnover and an increase in the rate of defaulting loans. NPL ratio (% of total) Other sectors Wholesale and retail Construction Manufacturing Mining and quarrying Agriculture 0 Source: World Bank 5 10 15 20 25 30 35 Loans (% of total) In 2009. NPLs increased by $60 million in the construction sector.ResCap January 24 2011 Resource Investment Capital Banking Sector 10. $48 million in the manufacturing sector. eroding bank profits.1 Non-Performing Loans (NPLs) In 2009.2% to 20%. NPL ratio grew by 12.0 0.4.0 20.0 10. % 25.0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Source: Bank of Mongolia ResCap Mongolia 101 P a g e | 53 . number of default loans increased 2.

% Time Deposit IR. WEIGHTED AVERAGE OF TIME DEPOSIT INTEREST RATES (12 MONTHS). MNT 15. USD Source: Bank of Mongolia Commercial bank interest rates offered for MNT time deposits are persistently higher (approximately twice the rate) than those offered for USD time deposits. % Current account IR.0 12.0 11.0 5.0 Apr-09 Jun-09 Aug-09 Oct-09 Apr-10 Apr-10 Dec-08 Feb-09 Dec-09 Feb-10 Jun-10 Jun-10 Current account IR.0 1.0 7.5 0.5 3.0 14. USD Source: Bank of Mongolia ResCap Mongolia 101 P a g e | 54 .5 2.ResCap January 24 2011 Resource Investment Capital Banking Sector Commercial bank interest rates offered for MNT sight deposits are persistently higher (approximately twice the rate) than those offered for USD sight deposits.0 6.0 0.0 13.0 2.0 Apr-09 Aug-09 Dec-08 Feb-09 Jun-09 Oct-09 Dec-09 Feb-10 Time Deposit IR.0 8. WEIGHTED AVERAGE OF CURRENT ACCOUNT INTEREST RATES.0 9.0 10.5 1. MNT 3.

0 20. The top four commercial banks’ non-performing loan ratios fell to 3.0 0.4 billion. mid 2010 Q1 2010: Agric.7% Loan rate. performing loans and non-performing loans (NPLs) grew by $268 million (16. TDB Impairment Ratio 5.0% Golomt Bank 2.0 40. in February 2010 the monthly loan interest rates fell to around 20% in MNT and 14% in USD.0 Feb-98 Nov-98 Aug-99 May-00 Feb-01 Nov-01 Aug-02 May-03 Feb-04 Nov-04 Aug-05 May-06 Feb-07 Nov-07 Aug-08 May-09 Feb-10 1.6 Bank Asset Quality Three banks dominate the Mongolian banking sector. mining and quarrying.4% Xac Bank H2 2010: Total loans: $2.7% on average in H2 2010 from 4.1%) and $46 million (16. all compared to the same period the previous year.ResCap January 24 2011 Resource Investment Capital Banking Sector While back in February 1998 it cost 48% to borrow money from a bank in MNT and around 40% in USD.0 50.0 10. manufacturing.5%). AVERAGE MONTHLY LOAN RATES.4 bn Performing loans grew 16% yoy NPLs grew 16. USD Paid rate Source: Bank of Mongolia Assumed exchange rate throughout this section: 1USD = 1250MNT 10. Such good news implies improvement of asset quality in Mongolia.5% Khan Bank 5. in August 2010 loans totalled around $2.5%) respectively. According to Trade and Development Bank estimates. The ResCap Mongolia 101 P a g e | 55 . % Loan rate. MNT 60.5% yoy Source: Public filings made by each bank. jointly accounting for 61% of total credit.0 30. constituting around 69% of the country’s total banking assets. sector loans = $124m In 2009 the sectors with greatest loans were retail.9% in H2 2009. Agriculture sector loans have increased at a 40% CAGR since 2004 and reached $124 million in Q1 2010. while past-due loans declined by $29 million (25.

4% Source: Bank of Mongolia ResCap Mongolia 101 P a g e | 56 .6% 99.8% 23.6% 0.4% 92.9% 81.6% 0.2% 3.9% 85.5% 5.1% 98.1 36.3% 5. EIU Mongolia Country Report August 2010 ASSET QUALITY BY INDUSTRY. waste management and remediation activities Construction Wholesale and retail trade.2% 90.7% 1.9% 5.2% 15. compulsory social security Education Human health and social work activities Other Total 84. AS OF 31 DECEMBER 2008 Performing Agriculture.7% 92.4% 78.4% 6.0% 0.3% 8.6% 18.6% 73.8% 2.4% 0.5% 5.3% 78. 2008 Loans (% of GDP) Deposits (% of GDP) 40.4% Past due 4.4% 5.6% 91.3% 0.0% 62.7% 90.1% 1.3% 1.6 Source: Bank of Mongolia.5% 72. scientific and technical activities Administrative and support service activities Public administration and defence.0% 1.1% 7.7% 95.5% 0.8% 93.3% 5.1% 4.7% 30.9% 91.8% 17.9% 97.0% 1.0% 76. steam and air conditioning supply Water supply.8% 12. forestry and fishing Mining and quarrying Manufacturing Electricity.4% 0.8% 10.9% 1.4% 17.1% Nonperforming 11.0% 76. sewerage.6% 96.1% 7.5% 6.2% 0.6% 2.9% 85.ResCap January 24 2011 Resource Investment Capital Banking Sector table below shows loans and deposits in the banking sector as percentage of GDP for 2008 and 2009.0% 4.5% 9.1% 81.4% 8.2% 9.0% 19.7% 4.3% 7.1% 80.6% 87.2% 82.1% 16.0% 67.9% 94.7% 3.3 2009 37.7% 7.5% 11.8% 19.9% 74.1% 7.6% 3.3% 6.5% Nonperforming 24.5% 92.9% 0.6% 0.5% 25.6% 3.2% 4.2% 3.9% 83.5% 94.6% 4.5% 15.7% 74. repair of motor vehicles and motorcycles Transportation and storage Accommodation and food services activities Information and communication Financial and insurance activities Real estate activities Professional.3% 1. hunting.0 52.7% 11.3% 89.7% 2.8% 2009 Past due 2. gas.9% 88.2% 1.1% 1.5% 3.0% 2.6% 1.9% 24.6% 3.8% 13.5% Performing 73.8% 94.7% 8.

following the dividend payment.0 billion ($6. 10.1 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.5% Khan Bank 17.0 billion ($6. Commercial banks and their activities are governed by the Banking Law of Mongolia. 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” • • ResCap Mongolia 101 P a g e | 57 .ResCap January 24 2011 Resource Investment Capital Banking Sector 10. the banking system’s average capital adequacy ratio increased to 14% in 2010 (2. adequacy ratio = 14% (2. Mongolian banks are in general very well capitalised and according to the Trade and Development Bank indicators.7 Banking System Capitalisation Minimum cap.3% above required) The minimum capital requirement for commercial banks ordered by the Bank of Mongolia is MNT 8. requirement = $6.3% in 2008. 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.2% Xac Bank 13. A bank may distribute dividends only if.4 million).4 million at 1USD = 1250 MNT exchange rate).9% Golomt Bank 14.8 Banking Law of Mongolia (2010) The following information has been provided by the Trade and Development Bank of Mongolia.8. mid 2010 10. A new Banking Law was adopted in March 2010 for better implementation of state policies and stability and efficiency of the banking sector.4mn 2010 general cap.3% above the minimum requirement) from 13. along with related parties. • Capital requirements • Minimum amount of paid-in capital for banks as determined by the BoM is MNT 8. TDB Capital Adequacy Ratio 13.9% Source: Public filings made by each bank.

ResCap January 24 2011 Resource Investment Capital Banking Sector • Allocation of funds from “the reserve fund” will be administered by the BoM and the Ministry of Finance (MoF) Law on Deposit Guarantee (2008) • In line with the Deposit Guarantee Law effective until November 2012. 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. loans from bank and non-bank entities. 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. The National Association of Certified Public Accountants (200 associate unlicensed accountants) The Union of Finance Specialists Association (MoF accountants) ResCap Mongolia 101 P a g e | 58 . 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. 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 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). other equivalent services.

commercial banks in Mongolia at present have the possibility to develop a firm basis for continued growth by improving their internal control.10 Banking sector prospects Weaknesses of the banking sector remains a priority Business activities increased in 2010. The extent of the guarantee has also been limited. such that each bank’s operations will be examined independently and in stages. despite falling real interest rates on deposits. On account of the ongoing mining boom and expected economic prosperity. Nevertheless. 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. According to the July 2010 amendments to the Deposit Guarantee Law. Bank lending further concentrated with around 50 largest borrowers accounting for approximately 30% of total loans or $690 million. corporate governance and risk management solutions. MNT deposits continued to rise reaching $1.3 billion in mid 2010 (51% increase yoy).5% of cashable deposits in order to be entitled for future government’s protection against insolvency.r. coping with the fundamental weaknesses of the banking sector in Mongolia remains a top priority for the officials in charge.9 Banking Sector 2010 Summary Trade and Development Bank inferences inform that: NPLs as % of total loans fell to 17% Levels of NPLs were high Real i. remained high • In Q3 2010 non-performing loans with arrears in principals as percentage of total outstanding loans declined to 17% from 25% in November 2009. The Bank of Mongolia is working on implementing a better supervisory system. banks will have to pay a fee equivalent to 0. Real interest rates plummeted. Based on the experience gained from the recent turmoil. Demand for credit will substantially increase in the coming five years as greater necessity for capital will spread across all sectors in the economy. Protection provided by the Deposit Guarantee Law is not indefinite. the following items have been removed from the coverage: Great possibilities in front of commercial banks Credit demand will increase Banks must be restructured Increasing supervision from BoM Limited coverage of Deposit Guarantee ResCap Mongolia 101 P a g e | 59 . plummeted Bank lending more concentrated MNT deposits rose 51% yoy Nominal i.ResCap January 24 2011 Resource Investment Capital Banking Sector 10. especially on depository accounts. General levels of NPLs were considerably high throughout 2010. 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. The scope of this move taken by the government to rescue the banking industry on the verge of its collapse has now been confined. The collapse Anod and Zoos sent an essential signal that financial institutions in Mongolia have to be restructured to a certain degree.r. due to inflationary pressure. 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. resulting in negative returns.

ResCap January 24 2011 Resource Investment Capital Banking Sector current accounts and deposits assembled from the interbank market. ResCap Mongolia 101 P a g e | 60 . 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. foreign banks and financial institutions current accounts and deposits of individuals and their related parties who have loans and other assets guarantees and letters of credit and other contingent liabilities in a specific bank cashable deposits with interest rate that exceeds the BoM’s refinancing rate Amendments to Deposit Guarantee in line with international principles These amendments were made in line with international principles.

All other rates are derived from the policy rate: ResCap Mongolia 101 P a g e | 61 .1 Bank of Mongolia Monetary Policy Final decision making at the BoM on monetary policy is done by the President of the Bank. and additions or amendments on existing regulations Discussing state monetary policy. monetary policy works by taking excess money out of the economy and placing it in the Central Bank Bill. According to the Bank of Mongolia. and it is not only the indicator of the monetary direction of Mongolia but also the inter-bank rate. 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. 11. organising inter-bank payments and settlements. presenting the decisions to the parliament and getting approval Forecasting economic indicators Balancing foreign exchange rates according to monetary policy Source: Bank of Mongolia 11. their main objectives are to formulate and implement monetary policy by regulating money. although his decision is supposed to be based on the advice of the 12 strong management board. It reports to Parliament and is independent from the Government.2 Bank of Mongolia Policy Rate In the case of the Bank of Mongolia. holding and managing the State’s foreign currency reserves and issuing currency into circulation. monitoring and evaluating current results. 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. The Central Bank bill has a 7 day term at fixed interest and is traded every Wednesday on the inter-bank market. The Bank is headed by a Governor. managed by a 12-man Board of Directors and has a representative office in London.ResCap January 24 2011 Resource Investment Capital The Central Bank 11 The Central Bank The Bank of Mongolia (BoM) is the central bank of Mongolia. supervising banking activities.

In 2009.35% and by a further 0. June and September of 2009 to 10%.25%.00% Sep ’09 10.1 Collateralized loan BoM can provide 90 day loans to banks in financial difficulty.00% In July 2007.5% in September 2008.40% Oct ‘07 7. the Central Bank’s collateralised loan balance was $84 million. from April 2010 the Human Development Fund started to allocate money to people.3. it was 9. The Bank rate was subsequently reduced in May. Due to the particularly harsh winter of 2009/2010 (‘dzud”). and so the BoM rate was hiked to 14%. By the end of 2008/start of 2009 the global slowdown resulted in inflation reaching 34% in Mongolia.0 8. $77 million was extended according to “The Deposit Insurance Law” and $6.0 9.0 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Source: Bank of Mongolia 11.75% Sep ’08 10. in March 2008 it increased 1. resulting in rising inflation.25% (inflation = 34%) Mar ’09 14. BANK OF MONGOLIA POLICY RATE.0 11.40% Nov ’07 8.40% Mar ’08 9.3 million of it extended according to “Collateralised Loan Regulation” ResCap Mongolia 101 P a g e | 62 . The collateralised loan rate was 8% higher than the policy rate at the start of 2010. and it is now at 11%.00% Apr ’10 11.4%. In October and November of 2007 the Bank increased it by 1%.ResCap January 24 2011 Resource Investment Capital The Central Bank Repo rate (15%) = policy rate +4% Collateralized loan rate (19%) = policy rate +8% Overnight rate (20%) = policy rate +9% Source: Bank of Mongolia Policy Rate Jul ‘07 6.0 13.0 10. but with collateral backing. % 14. the initial Bank of Mongolia policy rate was 6.0 12.75%. The Bank of Mongolia increased the policy rate by 1%. and thus it reached 10.3 Central Bank’s non-standing facilities 11. 2009 collateralised loans = $84m Banks that have good long-term liquidity but get into short term problems can be lent money up to 90 days. By November 2008.0 7.

government bonds.2 Repo financing $367m was given through repo financing in 2009 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.4 Objectives of monetary policy No restrictions on inflows or outflows of foreign currency in Mongolia A goal of the Bank of Mongolia is to insure the stability of the Tugrik.5 Bank of Mongolia Standing Facilities 11. 11.84%. 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. at present. If CPI remains lower than 8% and exchange rate fluctuations are kept at a sensible level then Inflation and exchange rate stability are assumed.5. $367 million was given through repo financing in 2009 at an average rate of 16.ResCap January 24 2011 Resource Investment Capital The Central Bank 11. CPI is not supposed to exceed 8% according to the State Monetary Policy Guidelines (2010). and only a combination of 2 can be controlled. The capital account is open in Mongolia. the BoM only focuses on keeping inflation in check and lets the exchange rate be determined by market forces. or bonds of the Mortgage Corporation of Mongolia (MIK).5. respectively.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. Because inflation and exchange rate stability usually takes five or more years to harmonise. ResCap Mongolia 101 P a g e | 63 . An open capital account. meaning there are no restrictions on inflow or outflow of international currencies or international investment or trade. 11.

0 35. The Central Bank Bond is preferred.0 5. ResCap Mongolia 101 P a g e | 64 .0 20.0 10.0 Jan-98 Oct-98 Apr-00 Jan-01 Oct-01 Apr-03 Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Apr-09 Jan-10 Jul-99 Jul-02 Jul-08 Source: Bank of Mongolia Mongolian bond market highly underdeveloped The Mongolian economy is 95% reliant on the banking industry. and the bond market is very primitive.0 25. % (1998-2010) 40.ResCap January 24 2011 Resource Investment Capital The Central Bank 11. As a result.0 0.6 Central Bank Bond Rate CENTRAL BANK BOND RATE. are hardly ever used. despite being the least risky investment vehicle.0 15.0 30. government bonds.

ResCap January 24 2011 Resource Investment Capital Mongolian Taxation System 12 Mongolian Taxation System The general rate of tax in Mongolia is 10% income tax for individuals and corporation earnings under MNT 3bn ($2. property in possession.2 Corporate Income tax 12. fees and payments. a non-resident person who gains income in Mongolia. Permanent resident taxpayer in Mongolia means the following corporate entity: A corporate entity incorporated under the laws of Mongolia.1 General Taxation A taxpayer is the Mongolia tax system comprises of taxes.1 Taxpayers • A corporate entity is a taxpayer. business entity or organization. but gains income in this country. and rights: 1) A citizen of Mongolia. A taxpayer defined above can be either a permanent resident or nonresident taxpayer of Mongolia. which have taxable income.1. 2) A foreign resident and a stateless person in the territory of Mongolia.1 Taxpayers The following individual. • • ResCap Mongolia 101 P a g e | 65 . A foreign corporate entity with its head office located in Mongolia. organization and fund in the territory of Mongolia. 12. legal person which is not located in the territory of Mongolia.2. notwithstanding the absence of taxable profits. The State Great Khural (Parliament) of Mongolia is authorized to introduce or amend taxes by law. VAT is 10% 12. 12.4m) and 25% on corporation earnings over MNT 3bn. provided it produces revenue subject to tax at the end of each accounting year or is bound to pay tax under this law. 3) Foreign and domestic business entity. 4) A Representative Office of a foreign business entity or organization which gains income in Mongolia.

Income from sale or rental of erotic publication. it shall be taxed at the rate of 10 percent. 12. Taxpayer's income is taxed at the following rates: Income from dividend at 10%. Income from interest at 10%. rent. Income stated in paragraph 1. payment for administrative expenses. Income from goods sold. A mine that extracts oil.ResCap January 24 2011 Resource Investment Capital Mongolian Taxation System • Non-resident taxpayer in Mongolia is the following corporate entity: A foreign corporate entity that conducts its business in Mongolia within the frame of its representative office. 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.2. Loan interest and guarantee payments Income from royalty. ResCap Mongolia 101 P a g e | 66 . 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. management expenses. natural gas or other natural resources. Income from royalty at 10%. Income from gaming and lottery at 40%. If annual taxable income exceeds 3 billion MNT. and income from use of tangible and intangible asset. Plant. Income from sale of immovable property at 2%.2 Tax Rate • If annual taxable income is 0-3 billion MNT. of the previous section and income from divided earned by a non-resident.2. section). it shall be taxed at 300 million MNT plus 25% of income exceeding 3 billion MNT. Income from sale of right at 30%. Trade and/or service unit. work performed and services provided in the territory of Mongolia. leasing interest. and video recording and erotic performance at 40%. • 12. book. If a representative office of a foreign company transfers its profits overseas.3 Tax exemption The following income of a taxpayer is tax exempt: • • Interest of government notes payable (bond).

3. and prizes is 5%. 12. organizing and participating in a sports competition and cultural performance. product prototype.3 Personal income tax law of Mongolia 12. innovating a new work.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%. The taxpayer is classified as a resident taxpayer of Mongolia and nonresident taxpayer of Mongolia.1 Taxpayer • • A citizen 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. must be a taxpayer. A civil servant of Mongolia appointed to work overseas. An individual who resides in Mongolia for 183 or more days in a tax year. even though the same income is not earned. literature. A foreign national appointed at a foreign diplomatic mission. Tax rate on income earned by creating a scientific. ResCap Mongolia 101 P a g e | 67 . and on income from rewards from a sports competition and cultural performance. Income of a cooperative earned from sale of its member's products through intermediary services. and art work. and their branches and his/her family members who reside in Mongolia are not considered residents of Mongolia. A resident taxpayer of Mongolia • The following individuals are a resident taxpayer of Mongolia: An individual with a residence in Mongolia. consulate.ResCap January 24 2011 Resource Investment Capital Mongolian Taxation System • • Taxpayer operating in the territory of Mongolia under a product-sharing contract in oil industry and derived from sale of its share of product. 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. 12. the United Nations.3. and advantageous design.

All goods imported into Mongolia to be sold or used. ResCap Mongolia 101 P a g e | 68 .4.ResCap January 24 2011 Resource Investment Capital Mongolian Taxation System Tax rate on income from quiz. and on imports into Mongolia.1 Scope of VAT VAT is levied on the following in Mongolia: Work performed and services rendered in Mongolia. and lottery is 40% 12. gambling.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 Goods exported from Mongolia for use or consumption outside Mongolia. 12.

only 30 stocks actively traded 325 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Financial Regulatory Committee (FRC) Since 1996: $233m raised in govt bond. During the first phase of privatization between 1991 and 1995.8bn ($32. the secondary market began by establishing 28 brokerage firms. taking single control of the companies.1m) had been traded and a few people had bought a large proportion of the shares.ResCap January 24 2011 Resource Investment Capital Mongolian Stock Exchange 13 Mongolian Stock Exchange The second smallest bourse in the world by market cap. As the Mongolian Parliament enacted the law of Securities and Exchange and The Corporate Law in 1994 and 1995 respectively. As of the end of November 2010.7bn ($233.1 Overview 1991 MSE established 475 companies initially floated after privatization of state property In 1991. $17m of state assets were privatized by distributing vouchers worth $8 to every citizen of Mongolia. 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. and 475 companies were floated on the MSE. yet the second best performing market in the world in 2010 13. shares worth over MNT38. NUMBER OF LISTED COMPANIES 475 458 436 430 418 410 401 403 402 395 392 387 383 376 358 1994: Law of Securities and Exchange 1995: The Corporate Law 1996-2004: $32m shares traded in this period. corporate bond and public offerings Since 1996. There are around 30 stocks actively traded on the MSE. a corporate bond and a public offering of shares through the MSE. 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%. But during the start of the secondary market between 1996 and 2004. A few had gained large stakes in the companies Nov 2010: 325 companies on MSE. MNT275.2m) has been raised by issuing a government bond. The first government bond trading was held in 1996 and corporate bond trading was ResCap Mongolia 101 P a g e | 69 2010 .

0 150. MNT BILLION 14. MNT BILLION 250.7 21.81 2.0 200.0 2.0 50.96 2.0 0.60 0.0 6.ResCap January 24 2011 Resource Investment Capital Mongolian Stock Exchange introduced in 2001. 2004 ResCap Mongolia 101 P a g e | 70 .0 4. 1 IPO was unsuccessful. GOVERNMENT BONDS.5 30.0 0.92 2001-2010 11.42 0.0 100. government bonds worth MNT200. there have been 14 IPOs raising a total of $51m.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 1996-2010 12.0 2.0 8.2bn ($171m) and corporate bonds worth of MNT12.8 41.5 1.6 12. Out of them.0 12.2 200. two companies were bankrupted and one company changed operation.20 2001 2002 2003 1.0 10.74 1.9bn ($11m) have been issued. To date.1 30.5 6.8 4.7 39.1 0.0 Source: MSE CORPORATE BONDS.50 2005 2006 2007 2008 2009 Source: MSE 14 IPOs raising $51m: 1 IPO was unsuccessful Since the first IPO on the MSE completed in 2005 by Hotel Mongolia.69 0.

0 40. electronic trading and audited financials published in English. and Tavan Tolgoi. the Mongolian Stock Exchange is still the second smallest bourse in the world after Laos. the biggest risk of portfolio investment into the MSE is the intention of major shareholders of some blue-chips to buy out shares cheaply. 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). the London Stock Exchange won the bid for tender of the management of the MSE with its reforming vision that includes normal custody. are expected to bring in 2 to 3 times the current GDP in direct investment into this small. Recently.40 16.70 0. causing a significant spill-over effect. with a Market Cap/GDP ratio of only 15%. undeveloped coal deposit in the world. narrowly based economy.01 62. LSE recently won bid for tender of management 13. Penetration rate is very low compared with other emerging and frontier markets. world-class mineral projects such as Oyu Tolgoi.0 50. become a member of Federation of Euro-Asian Stock Exchanges (FEAS) and the Asia Oceania Stock Exchanges Federation (AOSEF).42 0. but the Mongolian stock exchange has already stepped towards the verge of a new development era.0 30.0 0. the largest copper deposit in Asia. 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.0 2005 2006 2007 2008 2009 2010 2005-2010 8.95 34.ResCap January 24 2011 Resource Investment Capital Mongolian Stock Exchange FUND RAISING THROUGH IPO.0 10.0 60. ResCap Mongolia 101 P a g e | 71 . MNT BILLION 70. the second largest. In the short term.2 The second best performing market in the world ‘Top-20’ index up 6 fold in 3yrs The MSE’s benchmark index called ‘Top-20’ surged six-fold over the last 3 years due to the following very positive factors: 1) Enormous.04 2. signed an MOU with 7 stock exchanges.0 20.52 Source: MSE Market Cap/GDP = 15% Although in recent years the MSE has had formal connections with over 10 Exchanges.

there are just 15 mining companies.ResCap January 24 2011 Resource Investment Capital Mongolian Stock Exchange In last year: Tavan Tolgoi (biggest company on MSE. On the MSE. Shivee Ovoo. another strategically important deposit and the second largest company at on the MSE. one of the strategically important deposits of Mongolia. the biggest company on the MSE and a coking coal mine exporting coal to China. In addition to the potential development of the domestic capital market. is up $52m or 525% YTD. Sharyn Gol. the first coal mine among the MSE listed mining companies which made an internationally recognized JORC resource statement on their deposit. Baganuur. But only 6 of them are over $5m market cap companies. which surged $170m or 300% in the last year. coking coal) up 300% ($170m) Shivee Ovoo up 325% ($115m) Baganuur up 185% ($110m) Sharyn Gol up 525% ($52m) The best contributors to the growth in 2010 were mostly coal miners such as Tavan Tolgoi (known as “small TT”). rose $115m or 325% in the last year. increased $110m or 185%. out of them 10 are coal miners and the remaining 5 are geological exploration companies. there are 18 mining companies operating in the Mongolian mining sector listed on the international stock exchanges. and all Mongolian leading business groups are still not listed on the domestic market. 15 mining companies on MSE Additional 18 mining companies operating in Mongolia listed abroad ResCap Mongolia 101 P a g e | 72 . worth over $29bn or 5 times the Mongolian GDP.

studied later in this section. During the era teams when Mongolia has been a Republic and a satellite state of the Soviet Union. a copper concentrate producing Mongolia Russian joint venture. Some of them were brought into function. copper Although the Russians did some work.1 Mongolia’s resources remain mostly untapped Mining Sector Only 27% of the Mongolian land has been mapped to a scale of 1:50000 Possibilities to invest in many large-scale investments. 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 teams first came to the country over a century ago. Since the shift towards a market economy. including the Tavan large-scale Tolgoi coal deposit. especially throughout the past decade. efficient and fast. Today the copper factory remains a key constituent of the government revenue and is one of the biggest copper deposits in the world. 14. biggest there is a good number of other large scale investments. which is about to be privatised in 2011. including Tavan Tolgoi Mongolia is now in the spotlight for something other than Chinggis Khan’s name. the developments in the mining sector have been consistent. including Erdenet Mining Corporation (EMC). 2006: Windfall Profit Tax set 1990: Mongolia opened: Foreign Investment Law passed 1998: Areva signs uranium exploration deal June 2002: Cameco gol buys Boroo gold Jul 2008: Protests in Ulaanbaatar 2009: Windfall Profit Tax repealed 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Oct 2009: Chinese CIC invests $500 million in SGQ coal and $700 million in iron ore 1994: QGX Gold enters Mongolia 1997: Minerals Law passed May 2000: Ivanhoe enters Mongolia 2004: Western Prospector enters Mongolia 2009: Chinese buy Western Prospector (uranium) 2009: Oyu Tolgoi investment agreement signed Source: Business Council of Mongolia ResCap Mongolia 101 P a g e | 73 . Only around 27% of Mongolian land has been mapped to a scale of 1:50000. The Oyu Tolgoi deposit has been named the biggest undeveloped copper and gold deposit in the world.ResCap Res January 24 2011 Resource Investment Capital Mining 14 Mining Mongolia is considered one of the last mining frontiers. Apart from Oyu Tolgoi. Russian scientists discovered numerous mineral deposits with significant reserves. much remains to be done. the resources remain mostly untapped. located in Mongolia-Russian the city of Erdenet. therefore.

ROLE OF MINING SECTOR IN NATIONAL ECONOMY.ResCap January 24 2011 Resource Investment Capital Mining Estimated value of total reserves = $1. especially in gold.3trillion Mining sector: 81% of exports 32% of government revenue 30% of GDP Mongolia is rich in natural resources. tin. tungsten and oil deposits.3 136t 264mt - Probable Reserve 152bt 1.39mt 0 2009 13.18mt 0 2007 8. some are even willing to invest into very seed-stage projects. Japanese and Korean consortiums to participate in the privatisation and development of the country’s largest coal deposit. coal. coal. uranium. 32% of government revenue and 30% of GDP. which represents around 5% of the country’s total work force. copper. The government’s attempt to create a favourable investment environment within the country through reformed tax regime and other legal frameworks is paying off.26mt 0 2008 9. While the agricultural sector was the former largest contributor to government revenue. all indicate towards Mongolia turning into one of the top performing mining investment destinations of today and tomorrow.8mt 0. Involvement of mining giants like Rio Tinto. molybdenum. Now the mining sector accounts for approximately 81% of Mongolia’s total exports. the role of the mining sector in the economy continues to grow. The latest updates inform that the industry employs 45 thousand people in total.2mt 0.000t 1. The estimated value of total resources is $1. copper and gold have attracted the majority of investments thus far. Numerous small and large-scale investors are being attracted to Mongolia these days.3 trillion.37mt 17t 0.000t Source: National Statistics Office & Mineral Resources Authority of Mongolia ResCap Mongolia 101 P a g e | 74 .37mt 22t 0. IN % 100 In GDP In manufacturing industry In export 50 0 2002 2003 2004 2005 2006 2007 2008 2009 Source: National Statistics Office Annual Production Commodity Coal Copper Gold Iron ore Uranium 2006 8mt 0. Among the commodities.2bt 125.37mt 10t 1.38mt 0 Proven Reserve 20bt 67. Shenhua.6bt 62. and interests of Peabody. making it the current major force behind Mongolia’s economic growth and development.36mt 15t 1.8mt 0.

M1-M8 2010).2010 400 300 200 100 0 Gold Coal Crude oil Iron ore Molybdenum Fluoride Copper Zinc 133 85 98 137 35 41 Source: Ministry of Mineral Resources and Energy of Mongolia ResCap Mongolia 101 P a g e | 75 .ResCap January 24 2011 Resource Investment Capital Mining MAJOR PLAYERS Coal ErdenesTavan Tolgoi SouthGobi Resources Energy Resources QGX Mongolia Energy Corp. Xanadu Mines MAK Copper Erdenet Ivanhoe Mines/Rio Tinto Gold Centerra Gold MAK Western Prospector Cameco Areva Voyager Resources Iron ore Darkhan Steel Iron Mining International North Asia Resources Haranga Resources Altain Khuder Uranium Khan Resources Western Prospector Cameco Areva REVENUE FROM EXPORTS. $ MILLION 600 500 500 485 2009 2010 Mining revenues climbed massively from 2009 . Peabody Energy Aspire Mining Gobi Coal and Energy Prophecy Resource Corp. (M1-M8 2009 vs.

000 Average 0.ResCap January 24 2011 Resource Investment Capital Mining 14. The geological mapping of 27.000 The geological mapping of 27.1% of Mongolia based on the general exploration work has been carried out at a scale of 1:50.5% of Mongolia covered by gravimetric survey at scales of 1:200.1% of Mongolia based on the general exploration work has been carried out at a scale of 1:50.000 1:500.000 and 1:25.4% of the territory is subject to new mapping projects every year Source: Mineral Resources Authority of Mongolia ResCap Mongolia 101 P a g e | 76 .000 The aerial magnetic survey has been conducted for 60% of Mongolia at a scale of 1:200.000 scale map covers the basic geology for hydro-survey of 84% of Mongolia 22.000 have been produced using aerial multi-spectral survey for 32% of Mongolia.1% of Mongolia has been produced at a scale of 1:200.000 Two maps of scales of 1:50.2 Exploration and Geological Mapping The geological map for 99.000 and 1:100.

97 Mining License Quantity 746 339 1.22 0. Ha million 0.89 16.659 Source: Mineral Resources Authority of Mongolia (1 Jan 2010) Source: Mineral Resources Authority of Mongolia ResCap Mongolia 101 P a g e | 77 .087 3. Ha million 22.318 1.744 Area.46 st Total Quantity 3.ResCap January 24 2011 Resource Investment Capital Mining The aerial magnetic survey has been conducted for 60% of Mongolia at a scale of 1:200.30 39.426 4.24 0.000 Source: Mineral Resources Authority of Mongolia 14.085 Area.08 38.572 1. Ha million 23.13 16.43 Domestic Companies Foreign Companies Total 2.3 Licenses Exploration license Quantity Area.

ResCap January 24 2011 Resource Investment Capital Mining 14. Russia and China.4bn t coal Total: 152bn t coal By the amount of reserves. the magnetism has shifted towards coal riches now. Except for TT. however. Initially miners were attracted to the country’s gold. MILLION TONNES Source: National Statistics Office and Trade and Development Bank COAL RESOURCES Source: Mineral Resources Authority of Mongolia Tavan Tolgoi: 6. The value of its immense coal reserves has increased threefold.4 billion tonnes of coal. copper and molybdenum reserves. as the country is located right in between two of the world’s biggest resource consumers. a quarter of which consists of high quality coking coal. Tavan Tolgoi (TT) is Mongolia’s biggest coal deposit. A majority of reserves. 30 20 10 0 2007 2008 2009 2010 2011(f) 2012(f) COKING COAL EXPORTS TO CHINA. giving Mongolia the new title of “The Saudi Arabia of Coal”. although proven. have not been developed due to lack of investment ResCap Mongolia 101 P a g e | 78 . there are many other attractive coal deposits and the total reserves of the country is estimated to be 152 billion tonnes.4 Coal Mongolia’s number one export Coal Coal is now Mongolia’s number one export. with around 6.

The company is faced with some logistics problems. containing an estimated reserve of 1. Baganuur is currently operating at a production scale significantly below its potential and is incapable of spending capital on new equipments. 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). in October 2010. investing in new wash plant MAK JV with Chinese Qinhua Corp ResCap Mongolia 101 P a g e | 79 . MAK has also created a joint venture with Qinhua Corporation of China and obtained another license nearby its main project. representing 8% of the country’s total consumption. They were the first Mongolian company to be listed on the Hong Kong stock exchange. Mongolia Mining Corporation has obtained all necessary permission to put a railway south to the Mongolian-Chinese border from their Ukhaa Khudag mine. raising $748 million (15% higher than the planned $650 million). Nariin Sukhait is an open-pit mine. 3) Another major private coal supplier is Mongolyn Alt Corp. (MAK). in general.ResCap January 24 2011 Resource Investment Capital Mining and infrastructure. Baganuur is included in the list of state properties to be privatised in 2011-2012. Mongolia Mining Corporation’s (formerly Energy Resources) advancements in coking coal production have attracted immense attention from global investors. which is currently extracting coal from its 500 million tonnes Ukhaa Khudag deposit. The PRC has stopped exporting coal in 2007 and its imports of coking coal grew from 8. low-ash and low-sulphur coal reserves. located in the Tavan Tolgoi region. Among the producing ones. The company began operations in the gold sector.3 billion tonnes of brown coal. 2) Foreign investors are mostly attracted to coking coal reserves of Mongolia. 50km from Chinese border Open-pit mine Production capacity=3mtpa due to infrastructure constraints No rail link. Mongolia Mining Corporation = 500mt coking coal. The mine is located 245 km from the Mongolian-Chinese border. MAK is constructing a coal wash plant in order to increase the value of its product. supplies domestic market 1) The largest player in the economy and the main supplier to local consumers is Baganuur coal mine. the following are the most notable coal mines: Baganuur = 1. The mine is. 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. like the majority of other coal mines in Mongolia. Due to government control and necessity to maintain the sale prices at artificially low levels for local consumers. The construction of a paved road by the company is under way and is expected to be completed in Q1 2011. Baganuur was founded during Soviet times. The Chinese provided the required capital enabling further growth of the company.5 million tonnes in 2008 to 50 million tonnes in 2010. 900km south of UB. as there is growing demand coming from China. The company. one of the main inputs to steel production. has grown tremendously since its establishment in 2005. as the Mongolian side of the border mainly consists of earth road. and contains 134 million tonnes of high-rank. suffering from under-investment as no investor is interested in a loss-generating. 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.3bn t brown coal. 245km from Chinese border Obtained approval for railway construction Paved road to be completed Q1 2011 1 Mongolian company to be listed on HKEx ($748m) st Mongolyn Alt Corp = 134mt coal. South Gobi province. state controlled company.

at least 2mtpa to be sold to Winsway Coal supply agreement with NAEG for 450kt in 2011 with a large international company for 500kt in 2011 4) SouthGobi Resources’ (SGQ) Ovoot Tolgoi project is certainly one of the largest foreign investments in the coal field of Mongolia.1mt thermal and coking coal 2010: 4mtpa 2012: 8mtpa Off-take agreement signed with Winsway for 3.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 COAL PRODUCTION. SouthGobi owns 18 more exploration licenses and intends to spend around $20 million annually on continuous exploration. the coal sales to China could reach 30-50 mtpa by 2015.0 4.0 2010 coal exports: 16. which purchases more than 70% of its coal exports. On top of their main project.2 mln tonnes of coal with Winsway Coking Coal.0 6. MILLION TONNES Owns 20% of Aspire Mining 2010 revenue from coal = $877m 2015 coal exports to China 30-50mtpa Mongolia to replace Australia as main coal supplier to PRC Source: Ministry of Mineral Resources and Energy of Mongolia In 2010 Mongolian coal exports reached 16. According to forecasts. However. Also. Mongolia borders with the PRC. total coal exports reached $877 in value.0 8. it could soon be replaced by Mongolia as the latter is located closer and has plenty to offer. Ivanhoe Mines and China Investment Corporation currently own around 54% and 13% of SGQ respectively.0 0.9% of the company. South Gobi signed an off-take agreement worth 3.1 million tonnes of thermal and coking coal. in Dec 2010. with an expected increase to 8 mtpa in 2012. The reported production target for 2010 was 4 mtpa. with proven and probable reserves of 114. SGQ completed its private placement with Aspire Mining and currently owns around 19. Recently. In Dec 2010. which would be the driving force behind this underdeveloped country’s future growth.0 2.0 12. The deposit is situated 42 km from the Mongolian-Chinese border pass Shiveekhuren. China is the main buyer of SGQ’s coal. 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. growing by 135% in volume and 187% in value from 2009. The company is listed on Toronto and Hong Kong stock exchanges.6 million tonnes. As Mongolia has vast mineral reserves and large areas of unpopulated land.2mt. ResCap Mongolia 101 P a g e | 80 . which contains 331 million tonnes of JORC resources. making it the closest coal supply to the PRC. Aspire is an ASX listed company focused on developing the Ovoot coking coal project. In 2010. 14. located in Northern Mongolia.ResCap January 24 2011 Resource Investment Capital Mining SouthGobi Resources = 114.6mt 10. 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. Historically. Australia has been the major coal supplier to the PRC. in late December 2010. the country is in need of foreign investments.

It is located 550 km south of Ulaanbaatar and 200 km from the Mongolian-Chinese border.1 Tavan Tolgoi Total Reserve: 6. as it had the necessary capital when many others did not.4. ResCap Mongolia 101 P a g e | 81 . the company stopped exploration and Energy Resources LLC (currently Mongolia Mining Corporation). Mongolia’s riches are not limited to TT. However.ResCap January 24 2011 Resource Investment Capital Mining Beyond Tavan Tolgoi. a quarter of which consists of high quality coking coal. 200 km from Chinese border Discovered by Soviet exploration teams Tavan Tolgoi (TT) is one of the largest unexploited coking and thermal coal deposits in the world.4bn t 25% of reserves: coking coal Ownership: 100% Government (Erdenes MGL) A strategic deposit 550 km south of Ulaanbaatar. Apart from the mentioned mines. After the 1990 Democratic Revolution and a transition to market economy.4 billion tonnes. The Mongolian government approved amendments to the Minerals Law in 2006 by identifying fifteen resource-rich areas as Strategic Deposits.. with total estimated resources of 6. BHP Billiton took the initiative and started drilling. The deposit was discovered by Soviet exploration teams in 1950 and the initial drilling work continued throughout the 1960s and 1970s. Although Tavan-Tolgoi is one of the world’s largest unexploited coal deposits.(7): numbers indicate reserves as defined by China Reality Research Source: World Bank. private sector explorers were allowed to search for more mineralization in the area. Ministry of Fuel and Energy of Mongolia and China Reality Research 14. a consortium of major Mongolian companies. including Tavan Tolgoi. MAJOR COAL DEPOSITS IN MONGOLIA Note: (8) – (14): numbers indicate resources as reported by the companies (1) . there are dozens of other coal resources in the country. US Geological Survey.. acquired the licenses.

ResCap January 24 2011 Resource Investment Capital Mining 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. In early 2010. and in 2009 it was announced that the state would delegate 49% of ownership rights to private mining companies. Funds raised through domestic and international IPO will be devoted to financing the infrastructure and working capital of the Eastern Block. electricity and water supply. Anglo-Australian Rio Tinto Plc and BHP Billiton. while strategic investors will be obliged to transfer a portion of their future income to the government of Mongolia. and all other related parties including investment banks. leaving only the Ukhaa Khudag block in the company’s possession. and border crossing arrangements. a joint venture of five state-run companies. Sources inform that the government is planning to extract 15 mtpa through contract mining from the Eastern Block in 2012. which is still effective today.g. mine infrastructure and coal marketing. By the end of 2010. In Q1 2011. the Mongolian government put forward a new arrangement to both strategic investors and contract miners. infrastructure challenges remain in the Tavan Tolgoi region. 10% of ownership rights of the Eastern Block is to be distributed to the citizens of Mongolia for free. will be handed over to strategic investors who will assume entire responsibility for the block’s development. strategic investors. HKEx) 51% to government Western Block: To strategic investors who will assume full responsibility. conduct of an adequate bidding process and. 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. The Tavan Tolgoi coking coal deposit has attracted interest from many of the international mining giants. Peabody Energy Corp from the US. Eastern and Western. The th deadline for contract miners to express their interest is the 27 January 2011. 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. selection of the best suited contract miners. through Erdenes-Tavan Tolgoi LLC. In late 2010. however. including railway construction. Brazil’s Vale. a Russian consortium led by Gazprom. another 10% is to be sold to private enterprises on the Mongolian Stock Exchange. above all. independent from the government of Mongolia. including infrastructure development In 2007. legal advisors. auditors and so forth. The government acquired back the majority of TT ownership from Energy Resources in March 2008. Although construction of a paved road to the Chinese border is almost complete by now. a state-owned limited liability company was established to represent the state interest in utilization of strategic deposits. however. the government reversed its statement by declaring that a 100% government ownership would be retained. Various expansion options for Tavan Tolgoi have been evaluated since then.. Contract miners will be able to participate in the development of the Eastern Block for a fixed service fee. India’s International Coal Ventures Pvt. The th deadline for investors to submit their proposals was 17 January 2011. 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 ResCap Mongolia 101 P a g e | 82 . The Western Block. The overall deposit has been divided into two blocks. Challenges include the preparation of draft contracts. including China’s Shenhua Energy Co. Erdenes MGL LLC.

Mongolia exported 568k tonnes of copper concentrate totalling $771 million in value.dominant producer of gold BG reserves almost depleted OT development to change everything Thus far the dominant company in the gold sector has been Boroo Gold (BG). Ivanhoe Mines have announced that the commercial production at Oyu Tolgoi mine will begin in 2013 following an initial start-up in late 2012.26 million oz of gold. whose reserves are almost depleted by now. In 2010. worth $771m (26. The exploration license for Gatsuurt deposit with proven reserves of 1 million oz of gold also belongs to Centerra Gold. Mongolia is ranked 2 in the world by copper reserves. nd EMC – current largest producer of Cu ore and concentrate Mongolia – 2 largest in world by Cu reserves Oyu Tolgoi = Erdenet x3 nd High copper and coal exports. a Mongolian-Russian joint venture established in 1978. respectively. and in 2003-2009 the company extracted around 1. a magnificent upcoming event is the full development of the Oyu Tolgoi project. compared to modest exports of gold Source: European Bank of Reconstruction and Development Centerra Gold . 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.ResCap January 24 2011 Resource Investment Capital Mining 14. Currently the largest Mongolian copper mine in production is Erdenet Mining Corporation (EMC). OT is considered to be three times larger than EMC. Contrary to BG. soon to be fully developed Oyu Tolgoi (OT) copper and gold deposit. 51% and 49% owned by the Mongolian and Russian governments. a wholly owned subsidiary of Centerra Gold and one of the earliest foreign investment agreement deals in Mongolia. In November 2010.5 2010: 568k t of Cu exported. Boroo Gold started production in 2003. Whether or not the Mongolian government will allow the company to proceed with the development of the deposit remains unclear. including its massive. the Ministry of Mineral Resources and Energy of Mongolia announced that 1. which contains 46 million oz of gold.5% of total exports.782 mining licenses held by private companies and Gatsuurt deposit: 100% owned by Centerra Gold Mining in Gatsuurt not allowed ResCap Mongolia 101 P a g e | 83 .4% of exports) Copper/Gold Copper has been the top Mongolian export commodity up until very recently. That represented 26. The deposit is included in the top ten list of the world’s largest copper-molybdenumporphyry mineralisation areas. and is situated 400 km north-west of Ulaanbaatar.

According to the terms of the Agreement.1 Oyu Tolgoi (copper-gold. Four small licenses of Centerra Gold were included in the revocation list. Ivanhoe Mines expects commercial production to start in 2013. the Oyu Tolgoi deposit contains around 81 billion lbs (37 million tonnes) of copper and 46 million (1.Ivanhoe Mines (42% owned by Rio Tinto) March 2010: Investment Agreement took full legal effect Resources: 81bn lbs Cu (37mt) 46m oz Au (1. the contract came into full legal effect in March 2010. A copper concentrator plant and other facilities are being built around the area. The international mining giant Rio Tinto became Ivanhoe Mines’ strategic partner in 2007 and currently owns 42% of the company. 34% of Oyu Tolgoi ownership belongs to the state and the remaining 66% belongs to Ivanhoe Mines. Based on Ivanhoe Mines’ estimates. After the government’s assessment of progresses made after the initial signing of the Investment Agreement. At ResCap Mongolia 101 P a g e | 84 . Mongolia) Oyu Tolgoi is the world's largest undeveloped copper-gold deposit.431 tonnes) oz of gold in measured.ResCap January 24 2011 Resource Investment Capital Mining 254 alluvial-gold licenses would be revoked. indicated and inferred resources. Ivanhoe Mines and Rio Tinto in October 2009 for the development of Oyu Tolgoi copper and gold mine. 2012 Commercial production to commence in 2013 Southern Oyu open pit mine: 100k Cu t/day from Q3 2012 A long-term Investment Agreement has been signed between the Mongolian government.431t) Initial production expected in Q3. The Southern Oyu part of the project is being developed as an open pit mine. It is situated 550 km south of Ulaanbaatar and in 80 km from the Mongolian-Chinese border. Source: Ivanhoe Mines Oct 09: Oyu Tolgoi Investment Agreement signed 34% . 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.5. OT = world’s largest undeveloped copper-gold deposit 14.Mongolian government 66% .

and now accounts for 8. Oyu Tolgoi is a strategic deposit and qualifies for 30 years of stabilized taxes. exploration and mining license fees.5 2 1.6 Iron ore production commenced in 2007 Iron ore Iron ore mining in Mongolia commenced in 2007. In accordance with the Minerals Law of Mongolia. including corporate income tax.5 1 0. Steel production is expanding at an accelerated rate in China and the country is increasing its imports of iron ore from Mongolia. the processing capacity of the copper concentrator will be expanded. ResCap Mongolia 101 P a g e | 85 .7% of all Mongolian exports. royalties. the Hugo North deposit will produce 85k tonnes of ore per day.ResCap January 24 2011 Resource Investment Capital Mining full capacity. value-added tax. immovable property and/or real estate taxes. There is an option to extend the terms of the Investment Agreement by an additional 20 years. Hugo North underground mine: 85k Cu t/day from 2015 The Hugo North division of the project is being developed as a block-cave mine. the Southern Oyu open-pit mine will provide 100k tonnes of ore per day. At full capacity. 30-50 years of stable tax and regulatory provisions 14. and other regulatory provisions. IRON ORE PRODUCTION. excise tax. When the underground mine comes into operation.5 0 2007 2008 2009 2010 (I-X) Source: Trade and Development Bank Iron ore exports = 8. customs duty. which will yield the first output in 2015. MILLION TONNES 3 2.7% of total exports Iron ore extraction is rapidly growing in Mongolia.

However. however currently there is no news on their progress with the intended listing.5 million tonnes of iron ore. 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. Iron Mining International was planning an IPO in early 2011. in partnership with Hopu Investment. In mid December 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. Eruu Gol deposit contains 304 million tonnes of iron ore in reserves. All three funds are of substantial size. MAJOR PLAYERS Large Iron ore investors in Mongolia: 2008-2010 was a period of substantial investments in the iron ore sector of Mongolia. bought by NAR Haranga Resources with five iron ore projects raised $25m from ASX IPO ResCap Mongolia 101 P a g e | 86 . Singapore’s sovereign wealth fund.ResCap January 24 2011 Resource Investment Capital Mining IRON ORE EXPORTS. 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 projects are located close to the existing and planned infrastructure and the target market for Haranga Resources’ iron ore production is mainland China. In 2008. This means that iron ore exports could reach over $350 in value by the end of 2011.5 billion and $300 billion respectively. The first deposit contains 79 million tonnes of proven iron ore reserves and its license had been issued for thirty years in 2007. managing portfolios of $120 billion. a private equity fund.5mt ($251m) The Trade and Development Bank (TDB) of Mongolia made their forecasts in October 2010. Another notable player in the industry is Haranga Resources. The TDB’s 2011 forecast has already been realised in 2010. endowed $300 million in Iron Mining International (formerly Lung Ming) which owns the Eruu Gol iron ore asset in Mongolia. a majority owner and developer of five iron ore mining projects in Mongolia. the December figures from the National Statistics Office suggest that in 2010 Mongolia exported 3. China Investment Corporation (CIC) invested another $700 million in the same company in October 2009. $ MILLION 400 2012: iron ore exports to reach $375m in value 300 200 100 0 2008 2009 2010 (I-X) 2011 (f) 2012 (f) Source: Trade and Development Bank 2010 iron ore exports = 3. worth $251 million. predicting the iron ore exports from Mongolia to rise to $250 million in value in 2011. $2.

XXII) from Soco International Plc. Petro Matad is the parent company of an oil exploration group and its main shareholder is Petrovis LLC. Compared to 2009. a London-based oil producing company. for $93 million.ResCap January 24 2011 Resource Investment Capital Mining 2010. In July 2010. an AIM-listed. EBRD took an equity position of 17% in Petro Matad by investing $6 million in December 2009. Construction and Urban Development of Mongolia 14. which is the largest importer and distributor of petroleum products in Mongolia with widespread retail and wholesale network. As informed by the management. In 2010. XXI. this was an increase of 7% in volume and 34% in value. are divided into 25 blocks. and the company’s share prices soared 55% on the AIM market. the company discovered significant amounts of oil from its first well Davsan Tolgoi-1 located in block XX. The current oil exporting capacity is insignificant because of infrastructure constraints. PetroChina’s investment started in 2005 when they purchased three exploration blocks (XIX. Mongolian company. Mongolia exported 2 million barrels of crude oil worth $155 million.7 June ’08: Mongolia is an oil producer Oil sector under-explored Largest explorers: • • PetroChina Petro Matad (London AIM listed) Oil Although Mongolia started exporting crude oil in 1998. 2010 crude exports = 2. The existing capacity for further oil exploration is immense as Mongolia remains significantly under-explored.0m barrels ($155m) EBRD invested $6m in Petro Matad Oil discovered from the first well ResCap Mongolia 101 P a g e | 87 . Transportation. Both companies have heavily invested in their respective oil projects. The major players in the industry are PetroChina and Petro Matad. it was officially recognised as an oil producing country in June 2008. Mongolia’s total oil exploration prospects. the company raised $25 million in an Australian Stock Exchange IPO. the initial offering was heavily oversubscribed. covering an area of 614 thousand square km. IRON ORE DEPOSITS Note: map also includes the planned East-West railway Source: Ministry of Road.

Chinese oil demand is expected to grow to 9. is the world’s second largest consumer of oil after the US. By 2011.5 1 0. Target market: China.3 million barrels per day in 2009. the PRC’s consumption reached 8. it was announced that Japan’s Marubeni Corporation and Toyo Engineering have agreed to construct an oil refinery in Mongolia. In October 2010. This justifies the presumption that oil blocks in Mongolia have the potential to be highly profitable once they start producing. The plant is to commence producing in autumn 2014 with a daily capacity of 44k barrels. Mongolia’s southern neighbour. The estimated project cost is $600 million and the two companies are planning to assume full responsibility for maintenance and operation of the refinery.5 0 2008 2009 2010 Source: Trade and Development Bank ResCap Mongolia 101 P a g e | 88 . China. the world’s second largest consumer Marubeni Corp + Toyo Engineering = oil refinery in Mongolia ($600m) CRUDE OIL EXPORTS TO CHINA. Half satisfied by imports. MILLION BARRELS 2.6 million barrels per day taking up 37% of the global increase in demand.5 2 1. 200 km north of Ulaanbaatar.ResCap January 24 2011 Resource Investment Capital Mining Goal: self-sufficiency in oil 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.

had two exploration licenses for uranium mines in the Dornod province of Mongolia. Therefore. like TavanTolgoi and Oyu Tolgoi. Historical Russian exploration work lay at the heart of the claim for ownership of the licenses. The recent controversy surrounding the uranium sector in Mongolia has caught the attention of many. The main deposit was producing occasionally from 1988 to 1995 under Soviet administration. Khan Resources. since 1995.ResCap January 24 2011 Resource Investment Capital Mining OIL AND GAS DEPOSITS Note: map also includes the planned East-West railway Source: Ministry of Road. Transportation.8 Controversy around Khan Resources’ licenses unresolved Uranium Russia estimated the Mongolian uranium reserves at 30 thousand tonnes while the Mongolian government identifies the resources as 62. Construction and Urban Development of Mongolia 14. no further mining has occurred in the area. a Toronto-based company. Dornod is a strategic deposit ResCap Mongolia 101 P a g e | 89 .000 tonnes. the government of Mongolia is entitled to a maximum of 50% ownership rights of the resources. The Dornod uranium deposits are included in the list of the fifteen strategic deposits. However.

zinc and fluorspar. including capital invested during the Soviet times. including copper.1 Strategically Significant Deposits Identified: 1. Fifteen deposits have been acknowledged by the government as strategically important.9 Stronger measures on environmental protection and rehabilitation Minerals Laws and Taxes Recently. 14. The occurrences include over 60 types of minerals.9. Now the local administrative bodies are given more regulatory power and private license holders have many more duties to comply with. molybdenum. tin. government takes up to 34%-50% of ownership rights has an influence on Mongolia’s national security.654 occurrences 60 types of minerals Approximately 1. a deposit is considered to be strategically important. if it: 15 strategic deposits • • • If a deposit is strategic. Transportation. if the exploration work has been financed purely with private funds. According to the Minerals Law (2006). if the exploration work has been financed partially with state funds. and up to 50% of ownership rights. the government is allowed to acquire up to 34% of ownership rights from the license holder. measures on environmental protection and rehabilitation issues have been strengthened in Mongolia.ResCap January 24 2011 Resource Investment Capital Mining URANIUM DEPOSITS Note: map also includes the planned East-West railway Source: Ministry of Road.170 deposits 7. 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. uranium.654 occurrences have been identified in Mongolia to date.170 mineral deposits and 7. gold. ResCap Mongolia 101 P a g e | 90 . iron ore. Construction and Urban Development of Mongolia 14. silver. coal. tungsten.

ResCap Res January 24 2011 Resource Investment Capital Mining DEPOSITS OF STRATEGIC IMPORTANCE Source Mineral Resources Authority of Mongolia Source: ResCap Mongolia 101 P a g e | 91 .

49% Russian Gov 100% private (four private companies) 100% private (Boroo Gold) 100% private (Tsairminerals JV) 100% Mongolrostsvetmet (50% SPC.a.5.001 mn t at 0.0% P2O5 0.0 mtpa - 5 Mardai Uranium 0.016 mn t at 0.018% Mo 1.2 bn t at 0. 66% Ivanhoe Mines US$ 6 bn 10 Tsagaan Suvarga Copper. State Property Committee of Mongolia ResCap Mongolia 101 P a g e | 92 .15% Fe Feasibility study 6 7 Dornod Gurvan Bulag Tomortei Uranium Uranium Feasibility study Feasibility study Total US$ 200 mn 8 Iron ore Feasibility study US$ 100 mn 9 Oyu Tolgoi Copper.152% O3U8 229.53% Cu/0. 58% Khan Resources 100% private (Chinese company) 100% Darkhan Metallurgical factory (100% owned by SPC) 3 Estimated capex US$ 2. molybdenum 10. 0. MAKQinhua JV) 75% SPC .3 mn t at 51.08g/t Ag Source: Worley Parsons.6 in the first 3 years) N/A 1 6.7 mn t at 11.025 mn t at 1.6 mn t of oxides at 0. 2. rampup in 2011.8 mtpa - 4 Shivee Ovoo Lignite coal 646.ResCap January 24 2011 Resource Investment Capital Mining OVERVIEW OF STRATEGIC ASSETS State of development.07 mn t of zinc Feasibility study 51% SPC. 10% locally listed (operational part). rest owned by Erdenes MGL 100% private (Khan Resources) 21% SPC. output p.4 bn (US$ 1.0 mn t 2 Production. mn t 3 600.6g/t Au 7. start date. 240. ore Zinc Production. 1. 25% locally listed 90% SPC.2 mn t Production.42% Cu/0. 50% Russian Gov) US$ 150 mn for downstream plant US$ 500 mn US$ 47 mn 15 Silver 6.011% Mo. Ministry of Mineral Resources and Energy.012% Mo 300 mn t at 19.51% Cu/ 0.5% Zn Feasibility study 100% private (MAK) US$ 200 mn 11 12 13 14 Erdenet Burenkhaan Boroo Tomortein Ovoo Asgat Copper. 15-30 mtpa Feasibility study Deposit Tavan Tolgoi Nariin Sukhait Baganuur Minerals Metallurgical coal Metallurgical coal Lignite coal Reserves and quantity Ownership structure 100% Erdenes MGL 1 LLC 100% private (South Gobi Resources.4 mn t at 351. 2.1 mn t sulphides at 0. molybdenum Phosphorite Gold. 21% Russian Gov.431 t of gold Commercial production in 2013 34% Erdenes MGL.4 bn t 2 125. Partial production.029 mn t at 0.175% O3U8 0. gold 37 mn t of copper. 569k t of concentrate Feasibility study Close to depletion Production.119% O3U8 0.

2 Overview of Foreign Investment (The following information has been provided by legal firms active in Mongolia. SPC – State Property Committee of Mongolia 14. Erdenes MGL – state owned limited liability company 2. revenues. The FIL gives similarly positive treatment to both foreign and domestic investors with regard to control. Other sources estimate Baganuur reserves at 1.ResCap January 24 2011 Resource Investment Capital Mining Note: 1. 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 minimum amount accepted as foreign investment is US$ 100k. 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. A Stability Agreement (i.3 billion tonnes 3. 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. use and removal of their investments. debt service and lease payments are easily convertible and transferrable in various currencies. profits. According to the Law. the eligibility for and terms of which depend on the degree of investment. stabilization of taxes) is obtainable. 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) ResCap Mongolia 101 P a g e | 93 . including Dewey & LeBoeuf) The Mongolian Foreign Investment Law (FIL) was adopted in 1993 and subsequently amended.e.9. Foreigners can repatriate income and profits earned.

5 per Ha annually 4th to 6th year miners must spend at least US $1.3 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 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 • ResCap Mongolia 101 P a g e | 94 . New York Convention) Mongolia is a signatory to the Convention on the Settlement of Investment Disputes (CSID.5 per Ha annually Mining Licenses Initially granted for 30 years The license can be extended twice.9.0 per Ha annually 7th to 9th year miners must spend at least US $1. 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. 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.ResCap January 24 2011 Resource Investment Capital Mining Resolving Disputes • • • • Mongolia is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (CREFAA.

mining and environmental issues Maximum duration of the Investment Agreement: for investments worth US$ 50 . geology.100 million: 10 years for investments worth US$ 100 .ResCap January 24 2011 Resource Investment Capital Mining 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.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 • ResCap Mongolia 101 P a g e | 95 .

to maintain the uranium assets that the government will demand back from the current rights holders Revoked all uranium exploration and mining licenses. Parliament revoked an exemption on VAT taxes of 10% on equipments used to bring a mine into production st • 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. 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 • • • ResCap Mongolia 101 P a g e | 96 .ResCap January 24 2011 Resource Investment Capital Mining Recent Changes to the Mongolian Tax Code • • Effective from the 1 of January 2007. a new state-owned holding company. 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. 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 2009.600/t st The Parliament abolished the Windfall Profits Tax. the Tax Code creates a level playing field between foreign and domestic investors In 2009. effective from the 1 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.

9.0 0.0 2.0 0.0 0. PROGRESSIVE ROYALTIES ON MINERALS Threshold market price.4 Progressive royalties on minerals The State Information Digest was published on the 27 December 2010. According to the new release.0 13.0 12.0 26.0 1.0 0. US$ ore 1 Copper tonnes 0-5000 5000-6000 6000-7000 7000-8000 8000-9000 Above 9000 2 Gold ounce 0-900 900-1000 1000-1100 1100-1200 1200-1300 Above 1300 6 Iron tonnes 0-60 60-70 70-80 80-90 90-100 Above 100 7 Zinc tonnes 0-1500 1500-2000 2000-2500 2500-3000 3000-3500 Above 3500 11 Raw coal tonnes 0-25 25-50 50-75 0.6 2.0 3.8 1.4 2.4 3.8 3.0 1.0 3.0 28.0 24.4 0.0 3. the Law on Minerals has been amended and now includes progressively increasing royalties on 23 types of minerals.0 2.6 2.0 3.0 15.1 2.0 1.0 5.0 11.2 1.0 30.6 2.0 1.0 0.0 4.0 4.ResCap January 24 2011 Resource Investment Capital Mining The state can issue distinct licenses for uranium exploration on a property otherwise dedicated to other mineral and metals exploration 14.0 0.0 4.0 4.8 1.0 5.0 5.0 0.0 2.0 2.4 0.0 14.0 1.0 product 0.2 4.8 1.0 0.0 0.7 1.0 0.0 22.0 2.0 th No Mineral Unit Percent levy concentrate 0.5 0.0 5.0 ResCap Mongolia 101 P a g e | 97 .0 0.2 1.

coke chemical product) tonnes 0-160 160-190 190-210 210-240 240-270 Above 270 3. coke.0 2.0 5.5 2.0 0.0 4.0 0.5 3. liquid fuel. gas.5 1.0 0.0 1.0 2.0 1.5 Source: State Information Digest ResCap Mongolia 101 P a g e | 98 .0 1.5 2.ResCap January 24 2011 Resource Investment Capital Mining 75-100 100-125 Above 125 12 Processed coal tonnes 0-100 100-130 130-160 160-190 190-210 Above 210 13 Final product (half-coke.

the agriculture sector formerly has been the backbone of Mongolia’s economy and the major driver for people’s living standards. According to the National Statistics Office.5 million sheep and 13. by the end of 2010. is primarily focused on sheep.2 million cattle. Previously around 80% of the total territory used to be occupied with pastureland. yet the output is enough to satisfy the demand coming from 2.9 million goats in Mongolia. especially around the Orkhon and Selenge river basins. goat. The majority of vegetables and food products. To date.1% increase yoy). Around 80% of cropland is devoted to cultivation of grains such as wheat. only 1% of Mongolia’s arable land is cultivated with crops. However. cattle. this proportion is decreasing due to the current advancements in the mining sector. The remaining part is primarily devoted to fodder crops or hay. 2. 270 thousand camels. accounting for more than 20% of the country’s GDP and representing around 14% of foreign currency revenue. 168 thousand tonnes of potatoes (11. owing to moister land. are imported from China. horse. there were 1. the largest state-owned farms spread over an area of 270 square kilometres and normally encompass some livestock production. the number of cooperatives were increased and their sizes expanded in the mid 1950s. summing to 32. Mongolia has recently become self-sufficient in grains and potatoes. Agriculture focused on animal husbandry Pastureland is the backbone of agriculture 1% of land cultivated with crops Self-sufficiency in grains and potatoes The agriculture sector formerly has been the largest contributor to Mongolia’s economy.8m heads 80% of cropland devoted to grain cultivation Crop cultivation yields are low and inconsistent Largest farms: 270 sq km 2010: 1. camel.7 million people residing in the country. which accounts for more than 80% of agriculture production. The livestock sub-sector. 82 thousand tonnes of Livestock accounts for over 80% of agriculture First cooperatives founded in 1930s 2010: total livestock 32. In total 11. With assistance from the Soviet Union. The subsector generates rather low yields that vary heavily each year depending on the weather conditions.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. In 2010. with greatest concentration of horses and cattle in the north-central regions and of goats and camels in the west-southern regions of Mongolia. On average.7mt of harvest ResCap Mongolia 101 P a g e | 99 .ResCap January 24 2011 Resource Investment Capital Agriculture 15 Agriculture Currently replaced by mining. barley and oat. Mongolia produced 355 thousand tonnes of cereal (9. A trivial fraction of the crop land is occupied by gardening of potatoes. yak and pig husbandry. therefore pastureland is the backbone of Mongolia’s agriculture. long winters and insufficient precipitation. The overall sector is mainly focused on animal husbandry. Livestock is extensively distributed throughout the entire territory.9 million horses.77 million heads of livestock. except livestock. 14. The earliest agricultural cooperatives were founded in the 1930s following the government’s policy to systematize herders with their livestock. The industry development has been and still is largely constrained by harsh climatic conditions.3% decrease yoy).

3 million heads. freezing all the hay. 5. regardless of the previous months’ harvest. the total loss increased to 11.8m livestock lost. 4 79 Fallow. 1.3% decrease yoy). 147 Unused.9% decrease yoy).1% increase yoy). 45.ResCap January 24 2011 Resource Investment Capital Agriculture vegetables (5. the second type is caused by heavy snow falls.000 people left without animals 2009: livestock = 16% of GDP Dzud can easily slay over 1 million heads of animals.5 thousand horses (301% decrease yoy). In 2009. THOUSAND HA Sown.1% increase yoy) and 31 thousand tonnes of hand-made fodder (21.7 million of harvest.1 million tonnes of hay (24. 195 Abandoned.4% decrease yoy).5 thousand camel (2.7%. According to the National Statistics Office. including 13. over 7. the total number of agricultural animals in Mongolia fell by 25. by the end of 2010. livestock perish through malnourishment. According to UN estimates. livestock accounted for around 16% of GDP. throughout which livestock perish from starvation as it becomes impossible to find fodder.8 million sheep (24. Q4 2009 – Q1 2010: 7.8 million heads of livestock (around 17% of total livestock) were lost and 9.7% decrease yoy). 376 Source: Ministry of Food Agriculture and Light Industry of Mongolia 15.000 households (45.000) were left without animals. The first type is caused by low growth of fodder crop in summer followed by a cold winter. CULTIVATED CROP LAND USE . 423 thousand cattle (16. 4. The third type is a consequence of heavy rain falls which create an ice coverage on top of the soil. Herder households sometimes categorise the phenomenon as black.1 Dzud = cold and windy winters Animals perish from dzud Dzud Dzud is a terminology explaining extremely cold and windy winters. 7. the white dzud which occurred in late 2009 and early 2010 had a cruel impact and by the end of April 2010. 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. Compared to 2009. totalling 1. As a result of each type of dzud.5% increase yoy). white and ice dzuds.8 million goats (29. ResCap Mongolia 101 P a g e | 100 .

after which they fell to 2007 levels as a result of the global recession. Mongolian Properties ResCap Mongolia 101 P a g e | 101 Tashkent Moscow Bishkek Almaty Baku Kiev .500 2.500 1.000 1.550 1. the average price per square meter of an apartment in Ulaanbaatar was $800 [Eurasia Capital]. Eurasia Capital. Mongolian Properties COMPARATIVE RESIDENTIAL PRICES ($/sqm) 5.000 500 0 4. DYNAMICS OF RESIDENTIAL PRICES IN ULAANBAATAR ($/sqm) 1200 1000 800 600 400 200 0 2002 2003 2004 2005 2006 2007 2008 2009 250 330 400 450 590 800 1100 800 Source: Global Property Guide. In the beginning of 2010. Eurasia Capital.200 800 650 475 Ulaanbaatar Source: Global Property Guide.000 3.000 2.000 4. 2002-2008: residential property prices quadrupled Residential property prices rose four fold during the period 2002-2008.900 1.500 3.500 4.ResCap January 24 2011 Resource Investment Capital Real Estate 16 Real Estate The capacity to build residential properties in Ulaanbaatar is enormous. especially considering the increasing number of expats and foreign executives arriving in Mongolia.500 1.

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. with accommodation prices rising 30% yoy. increasing living standards and greater number of wealthy citizens Lack of contemporary apartments. The master plan is to construct residential complexes in those areas comprising 75 thousand apartments for lower-income people.000 foreign residents and 4.000 expats in Mongolia Figures suggest that in 2008. the residential property yields in Mongolia were among the highest in all of Asia. some of which are 2009: property prices fell 30% Oyu Tolgoi agreement. The banking sector experienced a collapse of two banks and commercial banks in general stopped providing loans to the citizens. over 15 thousand foreigners and 4 thousand expats were residing in Ulaanbaatar.07 Ha of land in ger districts. 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. hovering around 15% to 18%.000 apartments for low-income people to be constructed ($6. economic development and higher foreign direct investment.1 persons Child benefits and population growth Migration of rural households to Ulaanbaatar Difficult living conditions in ger districts 2008: 15. Because of the global recession and plunging copper prices. The government is working on a project to replace the ger districts with proper residential complexes.07 Ha land 100. More than half of the residents live in ger districts surrounding the city. over 1 million people residing in Ulaanbaatar (40% of the population). Other projects designated for 25 thousand households are to be developed in provincial areas across Mongolia. The top banks of Mongolia started offering mortgage loans by the end of 2009.2 billion. laying the foundation for complete economic recovery and robust future growth. As a result. The capacity to build residential properties in Ulaanbaatar is enormous. residential property prices in Mongolia fell by around 30% in 2009. economic recovery. The two-room replacements are meant to be a temporary provision of accommodation for the land owners. having on average 4. more foreign executives and diplomats coming to Mongolia. An announcement has been made in October 2010 that the authorities are willing to exchange two-room apartments for 0. Being aware of such possibilities. provision of mortgage loans Demand expected to increase 2007-2010: Ulaanbaatar population increased 30% Offer to exchange 2-room apartments for 0. Foreign residents are allowed to own a property in Mongolia. several real estate suppliers have started constructing new large-scale residential buildings.1 million in three years from 2007. who will be entitled to obtain housing from the new complexes once they are fully constructed. The signing of the Oyu Tolgoi Investment Agreement (Oct 2009) facilitated substantial inflow of foreign capital into the mining sector. especially considering the increasing number of expats and foreign executives arriving in Mongolia. The estimated budget for the construction of all 100 thousand apartments is $6.2bn) Substantial existing capacity ResCap Mongolia 101 P a g e | 102 . which was the main export commodity of that time.ResCap January 24 2011 Resource Investment Capital Real Estate Factors behind the real estate industry growth: Mining boom. 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. in 2008.

Mongolian Properties is the largest real estate company based Properties in Ulaanbaatar.ResCap Res January 24 2011 Resource Investment Capital Real Estate Numerous large-scale ongoing projects complete by now. which is owned by Asia Pacific Investment Partners. Figures indicate that around 100 real estate developers are currently active in Mongolia. 100 real estate developers. With further economic growth and development of the financial sector. which ow Golomt Bank. rising number of expats and improvement in living standards. provision of mortgage loans by banks is expec expected to increase substantially. Tenants are now allowed to move into the former complex. The demand for adequate accommodation and commercial property is high and expected to hike further due to the mining boom. only 10 are professional Source: Trade and Development Bank Property market. Bodi Group. number ResCap Mongolia 101 P a g e | 103 . is also building a 84-villa complex in the Sanzai area outside of owns villa Ulaanbaatar. recent research Lack of residential property Currently there is a significant lack of supply in the residential property market throughout Mongolia. an investment company focused on opportunities in Mongolia. Mongolian Properties has just finished the construction of the Regency Residence (9 apartments) and is (97 currently working on the Olympic Residence (135 apartments) project. inflow of capital. The latter project is to be finished by 2013. out of which 10 can be considered as professional. one of the largest companies in Mongolia.

000 10. Eurasia Capital.000 15.200 20.000 20. Savills.500 7.000 200% 150% 100% 50% 0% -50% Source: Broker research Large-scale property projects are to be developed in the South Gobi province of Mongolia.000 5.700 Source: CBRE.100 1. a home to grand deposits like Oyu Tolgoi and Tavan Tolgoi. Global Property Guide.ResCap January 24 2011 Resource Investment Capital Real Estate Number of expats 30.000 5.000 15.900 5.150 3.000 0 2008 2009 2010 2011 2012 2013 Expat population growth 35.900 9.000 0 Bangkok Seoul Hong Kong Singapore Ho Chi Minh Shanghai Almaty Beijing Perth Kuala Lumpur Ulaanbaatar 11.000 4.500 3.000 22.050 6.200 5. LUXURY RESIDENTIAL PROPERTY PRICES ($ per 1 sqm) 25.000 25.000 10. Krisha Magazine ResCap Mongolia 101 P a g e | 104 .

is immense. Property developers and financiers should see the mine sites as the main destination for real estate related investments. There are approximately 18.000 people residing in the city and most of them live in traditional gers. The park will contain a coal handling and processing plant (CHPP). Domestic construction companies executed 93% of those (30% increase in activity yoy).000 by 2015. For instance. the centre of the South Gobi province. In 2000. the Mongolian GDP was $1 billion. which is equivalent to what an average resident of Shanghai earns today. whereas in 2010 it has transformed into a contemporary city with an extraordinary boom in real estate development. Krisha Magazine In 2000. The latest update informs that construction and installation works implemented in Mongolia throughout 2010 grew 25. industrial complexes. the numbers have grown to over $6.6 billion. Ulaanbaatar was a soviet-style city with little construction activity taking place. The country’s GDP per capita is expected to rise faster than the PRC’s. reaching $5. The capacity for new residential developments in the main cities. the GDP per capita was $456 and Ulaanbaatar’s population was 791 thousand. According to the IMF estimates. including Ulaanbaatar. Another example is Sainshand city. an iron pellets plant. Savills.6% yoy) ResCap Mongolia 101 P a g e | 105 . where construction of new housing. offices and hospitals will be required. while foreigners accounted for the remaining 7%. Dalanzadgad. Global Property Guide.ResCap January 24 2011 Resource Investment Capital Real Estate GRADE A OFFICE RENTAL PRICES ($ per 1 sqm) 70 60 50 40 30 20 10 0 Hong Kong Perth Beijing Kuala Lumpur Singapore Ho Chi Minh Shanghai Bangkok Almaty Taipei Seoul Ulaanbaatar 38 31 31 30 24 24 23 22 63 61 57 54 Source: CBRE. respectively. an oil refinery and other facilities. where a $10 billion industrial complex (park) is being developed which will increase the value of Mongolian mineral resources.6% from 2009 and reached 351 billion MNT (around $281 million) in total.1 million.000 by 2012 and $12. will be the next main destination for domestic and foreign workforce. In 2010. however. Ulaanbaatar – the capital city of Mongolia (2000) Ulaanbaatar – the capital city of Mongolia (2010) 2010: construction/installation works nationwide $281m (up 25. a copper smelter. Mongolia’s real GDP growth is to exceed 25% by 2013-2014. 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.745 and 1. $1.

passes through Ulaanbaatar. including a contract on the enlargement of the Ulaanbaatar Railway capital at equal contribution. 17. which is Mongolia’s main rail link connecting the Trans-Mongolian country’s borders with Russia and China. the governments of Mongolia and Russia signed nine cooperation agreements. where it joins the Chinese railway. is responsible for the operation of the main line. stretches across 2. The line starts at Ulan Ude town. which will help modernize the company and facilitate the development of the required infrastructure in development Mongolia. the centre of the Dornod province. 50% owned by the Russian Trans-Siberian government. Ulaanbaatar Railway. a short link Trans-Mongolian connects the eastern city Choibalsan. there are many ambitious projects and foreign investment commitments to improve the situation. then reaches Zamiin-Uud and Ulan-Ude Zamiin Erenhot. Apart from the Trans Mongolian railway.215 km.ResCap Res January 24 2011 Resource Investment Capital Infrastructure 17 Infrastructure Mongolia’s infrastructure. with the Trans Siberian railway of Russia.1 Trans-Mongolian railway (2. In December 2010.215 km) is Mongolia’s main rail line Railway The Trans Mongolian railway. Agreement signed on improvement of Ulaanbaatar Railway company ResCap Mongolia 101 P a g e | 106 . There are a few diverted short routes joins branching out from the main line that link passengers to the main cities such as Erdenet and Darkhan. is the most serious inhibitor to developing its resource wealth. However. or lack of.

ResCap
January 24 2011

Resource Investment Capital

Infrastructure
17.2 96.7% of roads unpaved Major investments expected 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.

New paved road by Mongolia Mining Corporation

17.3 Only one international airport

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 is a scarce resource in Mongolia

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

Water is vital in mine development

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

ResCap Mongolia 101

P a g e | 107

ResCap
January 24 2011

Resource Investment Capital

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

Source: Trade and Development Bank Estimated costs for developing water resources: • • • Water resources for Gobi: $300 million for ground resources Diverting waters from northern rivers: $400 million Solving Ulaanbaatar’s needs: $300 million Total: $1 billion

Source: World Bank

17.5

Mining boom and infrastructure development

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

ResCap Mongolia 101

P a g e | 108

ResCap Res
January 24 2011

Resource Investment Capital

Infrastructure
Largest deposits located in isolated areas Poor access to basic infrastructure Most of the la large-scale deposits are located in isolated areas, with very limited scale 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 constantly. ACCESS TO BASIC INFRASTRUCTURE (DAYS SPENT) 25 20 15 10 5 0
Mongolia Kazakhstan Russia East Pacific Asia China

Obtain electrical connection

Water supply failures

Power outages

Source: World Bank, “Mongolia Sources of Growth Country Economic Memorandum”, July 26 2007 Ranked last for quality of infrastructure As informed by the Business Council of Mongolia, the 2010 Global Competitiveness Report ranked Mongolia last for the quality of overall Mongolia infrastructure out of 134 countries. There are no paved roads from Ulaanbaatar to the Mongolian Chinese border. Because of underinvestment, the country’s overall Mongolian-Chinese railway capacity is substantially restrained. In addition, the half-Russian ownership addition, half 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.

88.4% - earth road 3.3% - paved road

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

Source: Business Council of Mongolia

ResCap Mongolia 101

P a g e | 109

MINING INVESTMENT REQUIREMENTS. COAL CASE.2 billion in investments from 2011 2011-2020.3 billion is to be spent on mining services. of which $1.ResCap Res January 24 2011 Resource Investment Capital Infrastructure Supply chain development potentials Planned mining expenditures: $13bn Mining service expenses: $1. ResCap Mongolia 101 P a g e | 110 .3bn Planned mining expenditures are to total $13 billion in the coming years. % OF TOTAL 12% 16% 26% 600MW power plant Open-cut coal mining Railway 24% 22% Coal beneficiation Others Note: Under 30 mtpa production scenario Source: Business Council of Mongolia 2011-2020: investment in infrastructure $5. Source: Business Council of Mongolia 2011-2015: expected FDI in mining $25bn The government of Mongolia hopes to attract up to $25 billion in foreign investment for mining projects in 2011 2011-2015.2bn Infrastructure development requires around $5.

0bn st The railway infrastructure plan has considered all major mineral deposits.7 billion $1. Construction and Urban Development of Mongolia ResCap Mongolia 101 P a g e | 111 . 893 km: Nariin Sukhait . Tavan Tolgoi (Ukhaa Khudag) – Gashuun Sukhait Phase III (2012-2015).5 billion $800 million $262 million $5.2 billion Railway construction. around 3. Around $3.ResCap January 24 2011 Resource Investment Capital Infrastructure REQUIRED INVESTMENT IN MINING INFRASTRUCTURE (2011-2020) Electricity Town development Land transport Water resource Total 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).Shivee Khuren. Source: Ministry of Road.600km: the western railway lines from Tavan Tolgoi (Ukhaa Khudag) through Nariin Sukhait $2. 1 phase $3.Choibalsan route providing access to Russian far eastern ports Phase II (2011-2012). 1040 km: Tavan Tolgoi – Sainshand .0 billion is to be spent on the first phase. Transportation.

i. which is located at the crossroads of the Trans-Mongolian and East-West rail lines. through the Trans-Siberian rail route. a copper smelter.6 $10bn industrial complex in Sainshand Industrial Park in Sainshand An industrial complex is being built in Sainshand city. an iron pellets plant. Construction and Urban Development of Mongolia The Industrial Park is to include a CHPP (coal handling and processing plant). The latter is currently under development and will link Tavan Tolgoi deposit with the Russian far-eastern seaports. PARK Source: Ministry of Road. SAINSHAND IND. Vladivostok.e. an oil refinery and other facilities which will increase the value of Mongolian mineral resources. Projected capex of the entire complex is $10 billion. PLANNED PROJECT DEVELOPMENT PHASES Source: State Property Committee ResCap Mongolia 101 P a g e | 112 . Transportation.ResCap January 24 2011 Resource Investment Capital Infrastructure 17.

MMC is also seeking to export their product to other seaborne markets via the Gashuun Sukhait border pass. compared to the current level of $6. Mongolia Mining Corporation (Energy Resources) 2011-2012: new railway. the construction of Sainshand Park and associated industrialisation could increase the Mongolian GDP to $41 billion over the next 11 years.2 billion throughout the next 10 years. it also seeks to delegate some of the responsibility to individual companies. Construction and Urban Development of Mongolia. 15mtpa Mongolia Mining Corporation (MMC) has obtained rights to construct a railway directly from its Ukhaa Khudag deposit to Gashuun Sukhait (the MongolianChinese border) in 2011-2012. The new railway will be roughly 240 km in length.7 Recent developments The overall infrastructure investment needs are estimated to be around $5. The road is to be completed in Q1 2011 and will have a capacity of 18 mtpa. however. The new rail link is expected to convey 15 mtpa at full capacity. primarily satisfying the company’s own coal transportation needs. The project is intended to increase MMC’s transportation capacity and reduce the related costs directly affecting the company’s profitability. 18mtpa ResCap Mongolia 101 P a g e | 113 . Although the Mongolian government plans to spend around $3.ResCap January 24 2011 Resource Investment Capital Infrastructure Sainshand Park can increase Mongolia’s GDP to $41bn According to the estimates of the Ministry of Road. will be allowed to use the railway in case of excess capacity. Q1 2011: new paved road. 240 km. It will be used as a principal coal haulage channel prior to the construction of their railway. Other mining companies. Transportation. Although the target market for Ukhaa Khudag’s coal is mainland China. Cumulative GDP growth over 2010-2021 is 45% higher under processing and export scenario $ billion Extraction and exports (unprocessed) Losses due to higher transportation costs Value added in transportation Value added in processing and construction Value added in power Value added in other industries Manufacturing and exports Source: Boston Consulting Group. The company is doing so in order to increase their operational efficiency and reduce transportation costs. Oct 2010 26 -4 3 11 3 1 40 17. Mongolia Mining Corporation has also started putting a 245 km paved road south to the Gashuun Sukhait border pass from its Ukhaa Khudag mine.0 billion on the first phase of railway construction.6 billion.

Approximately $3. from Tavan Tolgoi to Choibalsan city. which will create a new terminal with road and rail links. which is linked to the Trans-Siberian railway through Sainshand.China 2011: new railroad from Tavan Tolgoi to Choibalsan. through which the majority of current export and import products pass. Once completed. which would have been much cheaper. Tavan Tolgoi. The project is located only 42 km from the Chinese border. engaged in coal exploration and mining activity. hence a railway was deemed “not essential”. The approved rail route will stretch 1. Zamiin-Uud is a remote south-eastern Mongolia-Chinese border crossing. The principal reason was the back-up of Sainshand Industrial Park’s development. SouthGobi’s plan to build a railway terminated In May 2010. who were greatly concerned that this would cause heavier economic dependency of Mongolia on China.040 km. would protect Mongolia from the possible economic and political pressure from China if it becomes the principal importer of Tavan Tolgoi coal.0 billion will be spent on the development. which will make transit times shorter and increase capacity. Impediments to infrastructure development by individual companies MMC’s plan to build a railway impeded Mongolia Mining Corporation’s plan to put a railway south to China from its Ukhaa Khudag mine has been impeded by resistance from some political leaders. especially after being controlled by the Manchu dynasty for 200 years. capex $3. Via the new route. 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 selected option. 1. with Mongolia’s domestic rail network. A number of factors influenced the choice of such an expensive option. the new terminal will offer contemporary customs and quarantine facilities. as explained by political leaders.0bn Authorities of Mongolia have selected a more expensive infrastructure development option with the purpose of strengthening Mongolia’s sovereignty.040 km north to Russia. Numerous Mongolians do not trust China’s intentions towards their motherland. coal will be transported from Tavan Tolgoi to Sainshand. rather than narrower Chinese gauges that are common in many countries. Asian Development Bank ADB is funding a logistics project at Zamiin-Uud ($45m) The Asian Development Bank (ADB) is funding a regional logistics development project at Zamiin-Uud with $45 million in loans and grants. The alternative option was a direct route south to China. ADB will also participate in Choibalsan is linked to Trans-Siberian railway New route will help develop Sainshand Park ResCap Mongolia 101 P a g e | 114 . International advisors and a group of parliament members voted in favour of the alternative option. SouthGobi Resources. Recently it has been announced that a new railroad will be constructed in 2011 linking Mongolia’s largest coal deposit. Management will be delegated to a contract operator.ResCap January 24 2011 Resource Investment Capital Infrastructure Mongolia – Russia . Russian wide-gauges will be used in the construction.

International air routes are split between numerous carriers • MIAT (Beijing/Berlin/Irkutsk/Seoul/Osaka/Tokyo) • Aeroflot (Moscow) • Korean Air (Seoul) • Air China (Beijing) Domestic air routes are split between two carriers • Aero Mongolia • Eznis Dalanzadgad (South Gobi centre) airport can handle international routes Requirement for new international routes is split evenly between domestic and international carriers.8 Mining boom and air industry Domestic airports are soon to start handling international routes International air travel from Mongolia is limited to a number of destinations. The alliance is aimed at securing Mongolian Railway’s long-term growth. ADB’s funding will take up 63% of the total costs of $71.6 million. $40m in loans $5m in grants 17. formed a strategic alliance to improve the railway infrastructure of Mongolia in September 2010. CADEX will help Mongolia to catch new business opportunities. develop a stable freight transportation system and achieve efficient exploitation of mineral resources. The rest $5 million be given as a grant.5%. By using its project management experience in Asia. a state-owned company. 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. 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). and human resources base. This means that there is an existing paved runway at the Oyu Tolgoi mine site capable of handling Airbus A320 and Boeing 737 aircraft. ResCap Mongolia 101 P a g e | 115 . $40 million of the assigned $45 million will be a 32-year loan with a 1% interest rate rising to 1. CADEX KK Sep 2010: CADEX KK and Mongolian Railway strategic alliance CADEX KK of Japan and Mongolian Railway. large network. The government is planning to transform four domestic airports into international airports by 2014.ResCap January 24 2011 Resource Investment Capital Infrastructure the training and support program of the government employees who will oversee and implement the project. Domestic airport infrastructure is already in place to begin handling of international routes from remote mine sites. According to the agreement.

Planned charter flights from MIAT (beginning April 2011) • Twice per week service from Ulaanbaatar to Hong Kong will be organised beginning from April 2011 • The plan is to use existing Boeing 737-800 (with 162 seats) to fly to Hong 800 Kong • The return fare will be approximately $600-650 International air travel to Mongolia is expected to arise from expat growth at mine sites and business tourist demand linking Ulaanbaatar with Australasia through Hong Kong. • The return fare was $550. Currently. ong ResCap Mongolia 101 P a g e | 116 . MIAT planned 8 charter flights to Hong Kong but only completed 7. the direct access to Ulaanbaatar from major global financial centres is unavailable. • Mongolian travel agent Juulchin World Tours Corporation and Miramar Travel in Hong Kong acted as agents. Note: London and New York time differences vary based on daylight savings time Trial charter flights from MIAT (Summer 2010) • During summer 2010.ResCap Res January 24 2011 Resource Investment Capital Infrastructure Hong Kong market to open up to Mongolia The Hong Kong market is expected to be opened up to Mongolia on a regular basis starting in 2011. Fragmented demand due to irregular flight times and lower tourist season were seen as the cause for cancellation of the final flight.

which also ended up going bankrupt swallowing a good portion of the middle-income population’s savings. 1990-2010: SOEs were privatised 2011-2012: several SOEs to be privatised. the Mongolian government started privatising state owned enterprises (SOE) through bidding. The coal mine satisfies 100% of TPP-2 (Thermal Power Plant – 2).ResCap January 24 2011 Resource Investment Capital Privatisation of State Properties 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. 1990: first round of privatisations.0+ mtpa 75% state owned 15% owned by Firebird 1. the Mongolian Government implemented a project to modernize and expand the production capacity of Baganuur. brown coal. This upcoming share issuance of Tavan Tolgoi will not be the first experience in Mongolia. a 6. the exercise was seen as unsuccessful.3bn tonnes Current production 3.0 mtpa Capacity 4. Afterwards. Baganuur is the biggest coal supplier to coal consumers in Mongolia. but also to the non-resource sector boom of the fastest growing economy in the world. a quarter of which consists of high quality coking coal. The country went through the first round of privatizations in 1991 with pink and blue vouchers. Sugar. including Tavan Tolgoi.3 billion tonnes of brown coal. and management and ownership contracts over the past twenty years. 1.1m and $50.1. Between 1996-2004. A number of state properties are on the list to be privatised in the following 2 years.1 Near term privatistaion targets Baganuur. at the "Mongolia: raising capital" conference in June 2010. the Chairman of the State Property Committee (SPC). including Tavan Tolgoi In order to facilitate expansion of the economy based on private sector development.4 billion tonne coal mine. “Baganuur” JSC 53% of the Mongolian central electricity system depends on the Baganuur coal supply.9m in loans from the World Bank and the Japanese government respectively. taking $31. Due to lack of involvement and participation of citizens. international tender.1 2011-2012 privatisation strategy 18. As a result. unsuccessful exercise International investors to benefit from privatisations 18. The 2011-2012 privatisation plan for the SOEs has been presented by Mr. Containing estimated reserves of 1. 100% of TPP-3 and 50% of TPP-4’s (the biggest power plant in Mongolia) coal needs. the ResCap Mongolia 101 P a g e | 117 . 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. people turned to high interest rate savings at Credit and Savings Cooperatives.

8 786. which covers the most populated area of the country.0 24.0 mtpa.773. which is provided by five main power plants in Ulaanbaatar.4 Darkhan Erdenet Total CES 1961-1991 1966. including Ulaanbaatar.5 48.0 265.0 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. ResCap Mongolia 101 P a g e | 118 .0 1. Ulaanbaatar CES consumes 80% of domestic coal supply Constant power outages and water supply failures All five plants are coal-fired and of Soviet design.7 38. 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. 1986 1987-1989 - Source: Energy Efficiency Technical Report. The installed capacity of the CES area is 786. The largest one is the Central Energy System (CES).0 4.0 477.3 MW.ResCap January 24 2011 Resource Investment Capital Privatisation of State Properties company’s exploitation capacity reached 4.3. 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. which possesses over 15% of the shares.523. Power Plant Installed Capacity (MWe) 709.0 318.3 Available Capacity (MWe) 554. 80% of domestic demand for coal is consumed by the CES.0 District Heating (MWth) 1. the rest is free float.3 Capacity Boilers (MWth) 3.6 21.0 Indus. heating and steam. Stream (MWth) 192.0 210.0 614.0 140. However.873.978. currently Baganuur extracts only around 3. They are used in the production of electricity.0 Commissioning year Ulaanbaatar TTP-2.3 MW “Erdenet Power Plant” and TPP-3 The electricity system in Mongolia consists of three independent grids. then implemented Method: • Up to 51% of the current state-owned shares will be issued and offered for sale 2. Erdenet and Darkhan. Mongolian electricity supply = 3 grids Largest grid – CES CES = 5 power plants CES capacity: 786.0 28.0 49. hot water. 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.

as a result of Mongolia’s economic growth and mining related industrialisation. Method: • 3. MIAT flies to Beijing. It has 200k customers in the land line telephone segment and 20 thousand users in the mobile phone segment. The contract terms will be announced in early 2011. Method: Privatization will be implemented via a management contract. a state-owned company. ResCap Mongolia 101 P a g e | 119 . and intranet network sectors. radio and TV broadcasting. state-owned Privatization will be implemented via concession agreements Mongolian Airlines MIAT MIAT or Mongolian Airlines. Mongolian Telecom MTC – national telecommunications company 200+20 thousand customers 23% of total internet users Mongolia Telecom Company (MTC) is the Mongolian national telecommunications company that offers a variety of services to its customers. leading to a deficit of more than 120 MW. cable TV. data network. In October 2010. An experienced team will assume administration of the stock exchange. is the largest carrier in the country and currently offers only international flights. Currently Mongolia is connected to 150 countries via MTC. 23% of total internet users in Mongolia are MTC’s customers. The company is planning to organise charter flights to Hong Kong from Ulaanbaatar starting in summer 2011. 4. 5. Mongolian Stock Exchange (MSE) LSE to manage MSE The description of the MSE has been provided earlier in this report.ResCap January 24 2011 Resource Investment Capital Privatisation of State Properties Current supply: 650MW Current deficit: 120MW 2013 deficit: 500MW SPC’s conditions of privatisation: • Investment must be made to improve technology: Heating capacity must be increased Costs must be reduced The Mongolian electricity system currently produces 650MW. The company also operates in mobile phone. Method: Privatization will be implemented via an international management and ownership contract. The deficit is covered by expensive imports from Russia and has been forecasted to increase to 500 MW by 2013. Berlin. MIAT – largest carrier. the London Stock Exchange was selected as the international partner to assist in reforming the MSE. Seoul and Tokyo.

New Joint Stock companies will be established in the process. when a Mongolian-Korean joint Mongolian venture was formed. 18.1. 6. If an agreement can not be reached. Mineral resources The government will bundle in groups the state owned shares from the 15 strategic deposits by types of minerals and certain percentages of them will be sold through domestic and international stock exchanges. Share ownership structure after the first privatisation: • 54% of shares owned by the Mongolian government • 40% of shares owned by South Korean KT Corporation rean • 6% of shares owned by the citizens of Mongolia Method: The state will offer its portion of shares to be privatised to the Korean KT Corporation first on a contractual basis.ResCap Res January 24 2011 Resource Investment Capital Privatisation of State Properties The company was partially privatized in 1995. the state will open a tender. Korean Telecommunications Company acquired 40% ownership.2 Detailed maps of planned privatisations The following are the detailed maps of the planned privatisation processes: Source: State Property Committee ResCap Mongolia 101 P a g e | 120 .

Contract miners will be able to participate in the development of the Eastern block for a fixed service fee. 34% of Nariin Sukhait. Eastern block to contract miners Western block to strategic investors Source: State Property Committee The State Property Committee will bundle the coal assets it holds from the Property strategic deposits. however. while strategic investors will be obliged to transfer a portion of their future income to the government of Mongolia. retaining 70% of the shares and releasing the remaining 30% on the domestic and international stock exchanges through an international IPO. Erdenes ErdenesTavan Tolgoi Ltd. Erdenes MGL is intending to retain 51% ownership of the Eastern Block and privatise the rest by splitting 20:29 between Eastern Mongolian and international investors. In October 2010. mine infrastructure and coal marketing independently from the government of Mongolia. 10% sold to Mongolian private enterprises at a substantial price and 29% released through domestic and international stock exchanges (IP0). 75% of Baganuur. and partially privatise that. ResCap Mongolia 101 P a g e | 121 . 10% will be distributed to the citizens of Mongolia at no cost.ResCap Res January 24 2011 Resource Investment Capital Privatisation of State Properties Tavan Tolgoi coal mine (TT) is currently 100% owned by Erdenes MGL LLC which is ful controlled by the State Property Committee. fully Tavan Tolgoi privatisation: 10% to citizens 10% to Mongolian companies 29% to IPO The SPC is going to split the deposit into two blocks. That is. Funds raised through IPO will be devoted to financing the infrastructure and working capital of the Eastern block. is going to be estern handed over to strategic investors who will assume entire responsibility for the block’s development. The Coal Asset Company will in turn own 90% of Shivee Ovoo. was set up for the development and operation of the TT coal deposit. to create a Coal Asset Joint Stock Company. except Tavan Tolgoi. and 34% or higher stake of other coal deposits. The Western block. a subsidiary of Erdenes MGL.

then according to the Investment Agreement between the government of Mongolia and Ivanhoe Mines: Ivanhoe Mines must provide Rio Tinto's (or its affiliates) proprietary p technologies held in joint venture with Outokumpu. 50% of Tsagaan Suvarga copper/molybdenum deposit and 34% of the Oyu Tolgoi deposit. for the operation of Outokumpu the smelter. retaining 70% of the shares and releasing the remaining 30% on the domestic and international stock exchanges through an stock IPO.ResCap Res January 24 2011 Resource Investment Capital Privatisation of State Properties Source: State Property Committee The State Property Committee will bundle the copper and silver assets it holds from the strategic deposits to create a Copper and Silver Joint Stock Company. ResCap Mongolia 101 P a g e | 122 . Copper smelter in Sainshand to increase valu of Cu resources The plan is to construct a copper smelting factory in Sainshand to increase the value of copper mines. 100% of Asgat silver deposit. The private sector will be the driving force for the development of the project. The Copper and Silver Company will in turn own 51% of Erdenet copper factory. If the government of Mongolia arranges for construction of a copper smelter. and partially privatise that.

34% of Temurtein Company Ovoo zinc deposit. Source: State Property Committee ResCap Mongolia 101 P a g e | 123 . 100% of Temur Tolgoi iron ore deposit. and 100% of Darkhan Metallurgical plant. The Iron Assets Company will in turn own 100% of Temurtei iron ore deposit. retaining 70% of the shares and releasing the remaining 30% on the domestic and international stock exchanges through an IPO. and partially privatise that.ResCap Res January 24 2011 Resource Investment Capital Privatisation of State Properties Source: State Property Committee The State Property Committee will bundle the iron ore assets it holds from the strategic deposits to create an Iron Assets Joint Stock Company.

8 part time members. storage and protection of the state property and monitor its implementation. Negotiate with relevant organization and determine planning.3 State Property Committe (The following bullet points have been highlighted by the SPC) Structure. a subsidiary of Areva). duties and team • • The State Property Committee is a Government agency with the functions to own. According to the Uranium Law (2009). profit and revenue distribution. • • • • • • ResCap Mongolia 101 P a g e | 124 . Provide professional and methodological assistances to manage local properties. Other powers specified in the law. The privatisation plan is similar to the previous cases. 51% of Gurvan Bulag uranium deposit. The State Property Committee operates with a total of 65 employees including a Chairman. Full powers of the State Property Committee • • Administer the activities on improvement of ownership. 51% of Mardai uranium deposit (also owned by Khan Resources). 3 departments and 4 divisions. the State is entitled to control 51% of all uranium assets in Mongolia. Mon Atom will in turn own 51% of Central Asia Uranium Company (58% owned by Khan Resources).ResCap January 24 2011 Resource Investment Capital Privatisation of State Properties The State Property Committee has already bundled the uranium assets it holds from the strategic deposits and created a Uranium Assets company – MonAtom LLC. Manage and oversee the recording of primary accounting documents. Manage privatization of State Owned Enterprises based on a list approved by the Government and report performance. to retain 70% of the business and release the remaining 30% on domestic and international stock exchanges through an IPO. remuneration norms and normative of a state owned legal body. 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. and 51% of Gurvan Saikhan uranium deposit. The Government designates a Committee member based on the proposal of the Chairman. 34% of Coge Gobi LLC (a joint Mongolia-French company. use and protect state owned properties.1. monitor and control its use and take measures to improve its efficiency. 18. Assign a state property representative in a state owned legal body and monitor its activities. census and balance sheets of the state property.

according to which the joint venture would start functioning in 160 days. a consortium of 10 South Korean companies. According to the latest update. on his last visit to Moscow. Anglo-Australian mining companies Rio Tinto and BHP Billiton. Peabody Energy Corp from the US. have expressed their interest to participate in the bid. Erdenet and MongolRosTsvetMet. 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. and India’s International Coal Ventures Pvt. An agreement was signed specifying the business plan for the uranium deposit. a subsidiary of the State Property Committee owned Erdenes MGL. China’s Shenhua Energy Co.4 Recent developments Mongolian Stock Exchange Contract agreement signed between MSE and LSE In December 2010. 9 cooperation agreements signed between Mongolia and Russia: Debt settlement Dornod Uranium JV Erdenet + MonRosTsvetMet = merger & IPO In December 2010. may merge and market their stock. sole owner of the deposit. mine camps. afterwards IPO Deadline for strategic investors: 17 Jan 2011 Deadline for contract miners: 27 Jan 2011 The tender for strategic investors for the Western Block has been officially th announced and closed on 17 January at 16:00. including water supply.1. 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. Together the two ResCap Mongolia 101 P a g e | 125 . holds 15bn shares. is the current fully authorised owner of TT licenses and holds 15 billion shares. It was informed that LSE officials will arrive in Mongolia in the third week of January.ResCap January 24 2011 Resource Investment Capital Privatisation of State Properties 18. The negotiations included settlements on the Mongolian debts to Russia and the national level joint venture. including. It also informed that the two existing Mongolian-Russian joint ventures.. the London Stock Exchange (LSE) signed a contract agreement with the Mongolian Stock Exchange (MSE). power plant and roads. Sumitomo Corp.. a consortium of four Japanese trading houses. Tavan Tolgoi Erdenes – Tavan Tolgoi. Brazil’s Vale. Erdenet Factory. Sojitz Corp.. afterwards IPO Erdenes –Tavan Tolgoi (TT) LLC. a joint venture of five state-run companies. The tender for contract miners for the Eastern Block has been officially announced th and is about to close on the 27 January 2011. and Marubeni Corp. 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. MongolRosTsvetMet and Dornod Uranium 14 December 2010.. when the terms of the contract agreement will be announced to the public. Tender for the contract miner of the Eastern Block is ongoing. Dornod Uranium. Itochu Corp. the Mongolian Prime Minister Sukhbaataryn Batbold has signed nine cooperation agreements with his Russian counterpart. Vladimir Putin. Eastern block privatisation to domestic investors in Q1 2011. including Posco and Korea Electric Power Corp. Eastern block privatisation to domestic investors in Q1 2011. a Russian consortium led by Gazprom.

ResCap
January 24 2011

Resource Investment Capital

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

ResCap Mongolia 101

P a g e | 126

ResCap
January 24 2011

Resource Investment Capital

Demographics

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

2009: 2.8m people (NSO estimate) 59% below 30 27% below 14

Population growth rate 1.2%

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. POPULATION, IN THOUSANDS 2800 2700 2600 2500 2400 2300 2200 2100 2000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: National Statistics Office UNEMPLOYMENT RATE, % OF TOTAL LABOUR FORCE 14 12 10 8 6 4 2 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: IMF ResCap Mongolia 101 P a g e | 127

ResCap
January 24 2011

Resource Investment Capital

Demographics
13% unemployment rate in 2009 The unemployment rate in Mongolia has been lower than 4% since 2002. However, during the peak of the economic crisis (2009) it reached 13% and now is returning to its regular levels. Since the transition into a market economy, the overall fertility rate (children per 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 19701975 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. Seminomadic 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.

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

ResCap Mongolia 101

P a g e | 128

speak fluent Russian. 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. can speak fluent German.ResCap January 24 2011 Resource Investment Capital Languages 20 Languages Many Mongolians have a good grasp of Russian and English Official language – Khalkha Mongolian Cyrillic script adopted in 1937 The official language in the country is Khalkha Mongolian. Currently English is gradually replacing Russian. especially due to the possibility to get access to Japanese government funded scholarship programs. especially the older population. who studied in Germany during the Soviet times. making it the most popular foreign language in the country. before which they used to write in their traditional vertical script. Plenty of youth are learning Chinese with growing importance of China as the other neighbouring power. German and Italian. Mongolians adopted the Cyrillic alphabet from Russia in 1937. Older Mongolian academics. Japanese is also widely spoken. Traditional Mongolian script Widely spoken languages: Russian English Chinese Korean Japanese Western European ResCap Mongolia 101 P a g e | 129 . prompting the Korean language to also gain popularity in Mongolia. The western region of Mongolia is occupied by Kazakhs and Tuvans who speak languages of Turkic origin. Speakers of Khamnigan Mongolian also exist. One can encounter other dialects such as Oiratian (spoken by Durbet) and Buryatian across the country. A substantial number of Mongolians work and live in South Korea. being preferred among the younger generation. The majority people.

Buddhists 40% . The Buddhist Temples were a replication of the pre-socialist feudal system and the Khaan of Mongolia was the th head of the Temple (The 8 Jebtsundamba Khutuktu Bogd Khaan). Following the Communist influence. religious practices were largely restrained by the government. Collapse of the Soviet Union and the Democratic Revolution of 1990 restored the legitimacy of religious practices.Muslims According to the CIA World Factbook and the U. then Democracy (resumption of religious practices) ResCap Mongolia 101 P a g e | 130 .not religious 6% . Baha’i & Christianity 4% .follow Shamanism. 50% . various forms of Shamanism have been practiced and widely accepted as the main religion by the Mongolian nomads. In 1930. Statistics suggest that the number of Christians rose from just 4 in 1989 to 40. then Socialism (destruction of monasteries). then Buddhism.000 monks (lamas) were killed under the regime led by “Marshal” Choibalsan.ResCap January 24 2011 Resource Investment Capital Religion 21 Religion Religious practices were largely impeded by the Communist regime. 6% are Shamanist. including Islam and Christianity. throughout the XX century. During the Mongol Empire Islam was also favoured and the three khanates (independent states of that time) adopted Islam. While in 1924 there were around 100. Other religious streams were also resumed. although Shamanism is still popular. and 4% are Muslims. Baha'i and Christian. Department of State. 40% are listed as having no religion. by 1990 the number decreased to only 110. 50% of Mongolia's population follow the Tibetan Buddhism. The Tibetan Buddhism again became the most practiced religion in Mongolia. Historically.S. most of Mongolia’s 700 Buddhist temples were destroyed and around 18. who held a position equivalent to today’s Prime Minister.000 in 2008. Tibetan Buddhism was first introduced to Mongolia during the ruling of Yuan Dynasty and currently is the most commonly practiced religion. First Shamanism.000 Buddhist monks.

% Net margin.ResCap January 24 2011 Resource Investment Capital As of 16 Dec 2010 Equity Research 1 Equity Research Stock data Price.8 301% 2008 47.53 116% 58% -62% 59% 1 3. gross margin at 58% and net margin at 44.5% moisture. In 2004. MNT Mkt cap. Share price performance. MNT 52Wk Range.467 11. In 2009.519 638% -37% 52% 40% 0.984 808% -8% 45% 34% 2. MNT million unless otherwise stated Sales Net profit EPS. % Gross margin. which is very low compared to international peers. MNT 700 600 MNT'000 500 400 300 200 100 10/4/10 11/4/10 12/4/10 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 Shareholders Key financials.863 24.8%. Broad (1 mining license). the company sold over 2. Although in Gansu and Inner Mongolia semi-soft coal and hard coking coal prices are around $85/t and $155/t respectively.1 530.5mt of coal to both foreign markets and local clients.55 61% Company brief: There are two companies named Tavan Tolgoi (TT). and worked with $65.753 81. Financial highlights: In the last few years. % EV/EBITDA.86 670.8m revenue and $29. Daitsuki (1 mining license) and Tavan Tolgoi JSC with 2 mining licenses.797 16.636 23. Tavan Tolgoi JSC mine’s profitability is great (ROA at 103%. US$ The peak.5m tonnes and the resource is 60m tonnes of coking coal with a calorific value of 6.178 58.2 47% 2009 95. as of FY2009).5m of net profit. MNT Price.134 30. % YTD performance. total revenue increased due to the company’s investment of $1. Deposit: Tavan Tolgoi JSC’s license area is 169ha located in the South Gobi region of Mongolia. MNT Total Asset Current Asset/Non-Current Asset. The company cooperates with Tavan Tolgoi Trans private company in transporting coal to China.000 279 230 8. % Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA EV/Resource Dividend yield 1. ROE at 116%. (x) Sales growth.5/t to the local market due to the state-regulated sale prices and is exporting at around $25-35/t.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 company is still selling their coking coal at $7.500kcal/kg. 20% ash and 8. Since 2007 the company almost tripled the extracting capacity to 2mtpa. they extracted over 2m tonnes with 170 employees.0 100% 8% 7% Provincial governor Ajnai Corporation 51% 34% Board members Retail shareholders Source: Company data and SCH&CD ResCap Mongolia 101 P a g e | 131 . US$ Free float.835 1091% -62% 58% 45% 1. US$mn Avg daily turnover.564 12. Revenue has surged 12 times since 2006 and 65 times since 2003.0m into new technology and equipments.000 . MNTbn Mkt cap. Moril Luu (1 mining license).000 436.425 15.90% 293% Tavan Tolgoi 5. As a result of the low cost. The South Gobi provincial government owns 51% of TT JSC and the rest is privately held. One is the 6. The total proven reserve is 20.27 6.436 42.000 120. In 2009. % 2007 32. % Net debt/Equity. The main Tavan Tolgoi deposit complex is partially owned by Erdenes MGL (6 mining licenses). TT JSC is the biggest company on the MSE by market capitalization and the third largest coal miner in Mongolia by production volume. Mongolia Mining (1 mining license). the Company signed a coal export contract with a Chinese client and since then its coal export to China has substantially increased.500-7. 250km from the Mongolian border with China and 550km from Ulaanbaatar. Cash cost per tonne of Tavan Tolgoi JSC coal mine is approx $11-12.670.

general coal seam: 10. Currently the company has $54. % Sales growth. SG&A and other costs were $0. In 2009. The coal mine satisfies 100% of TPP-2 (Thermal Power Plant – 2). SCH&CD and ResCap 12/4/10 ResCap Mongolia 101 P a g e | 132 .308 -7. MNT million unless otherwise stated Sales Net profit EPS. 12. % EV/EBITDA. US$ The peak. 100% of TPP-3 and 50% of TPP-4’s (the biggest power plant in Mongolia) coal needs.5m.ResCap January 24 2011 Resource Investment Capital As of 16 Dec 2010 Equity Research 1.472 71% 11% -18% na na 0% 15% MNT'000 9/4/10 10/4/10 11/4/10 Shareholders 14% 11% State Master Fund/Firebird 75% Free Float Source: Company data.500kcal/kg.54).3 billion tonnes of brown coal.0 4. US$ Free float.9% ash and 32.2 10.0 1/4/10 2/4/10 3/4/10 4/4/10 5/4/10 6/4/10 7/4/10 8/4/10 Baganuur 51% 11% -541% -15% 0. % Dividend yield.483 -9.39$/t. The total proven reserve is 600mt of coal with a calorific value of 3. % Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA EV/Resource Dividend yield Share price performance. holding over 14%.0 3. the company’s exploitation capacity reached 4mtpa.0 2.9m in loans from the World Bank and the Japanese government respectively.3-17. Key financials. % 2007 34. the rest is free float. MNT Total Asset Current Asset/Non-Current Asset.5m or $10. coal seam in the central part: 25-96m). MNT Price. an operating margin of 1% (due to the slight relaxation the sale price to $12.0 7.74 11. % YTD performance. (x) ROE.37% 203% Stock data Price.776 109% 6% -26% na na 0% 26% 2009 49. Containing an estimated reserves of 1.174 -11.9m. Baganuur JSC purchased two additional 100t capacity trucks for $2.0 8.0 9.2m. the reserve based valuation of Baganuur is significantly low compared to international peers. Financial highlights: Despite the mine making losses due to the regulated coal prices.0 11. MNT 52Wk Range. Baganuur is the biggest coal supplier to coal consumers in Mongolia. old equipments and financial constraints.11.0 6.466 105% -1% -21% na na 0% 7% 2008 43. MNT Mkt cap. the company produced 3mt of coal at COGS of $30. as part of the State’s investment plan of $8. US$mn Avg daily turnover. % Gross margin. the Parliament made a decision to cover all losses acquired from the exchange rate risk.3m (due to exchange rate adjustments of debt and interest rate payments).600 8.000 222 183 71. Baganuur’s strip ratio is around 1:1 to 6:1. Baganuur JSC is included in the 2011-2012 privatization plan. waste:10-60m on average. In December 2010. Currently the mine extracts 3mtpa due to central-region demand. the company operated with a gross margin of 11%. In 2009.184 -342 61.39 - Company brief: 53% of the Mongolian central electricity system depends on Baganuur coal supply.000 2. % Net margin.6ha. inducing Baganuur’s shareholder equity to increase by around $13.8m. Baganuur’s EV/Reserve multiple is 0. approved by the parliament of Mongolia.800 .15/t mining cost. MNT 12.3m of long term debt on the balance sheet. In 2010. From 19962004.97/t.077 -528 64.0 10. net losses of $6.2003. The State owns 75% of the company and the biggest private shareholder is Firebird investment fund.121 -435 75.1m and $50. As a result. the Mongolian Government modernized and expanded production at Baganuur by acquiring $31. The mine is located 139km east of Ulaanbaatar and has access to railway. Deposit: Baganuur coal deposit is one of the strategically important deposits of Mongolia (area: 0.023 11. MNTbn Mkt cap.0 5.9% moisture.

048 -823 92.800 10. however. US$mn Avg daily turnover.4mtpa of coal. an open pit mine. Zuun Mod and others.244 45% 10% -68% na na 0% 10% Source: Company data.202 -11. 8.063 1% 288% 37% 8% -1268% -68% 0. and the remainder goes to Ulaanbaatar Railway.6m loan from the Japanese government obtained in 1998-2004. 80% of Shivee Ovoo coal production is supplied to TPP-4. one of the strategically important deposits of Mongolia.900 172 142 3. % Dividend yield. 564mt is economically viable. MNT million unless otherwise stated Share price performance. 2008 and 2009 respectively. MNT 16. the Parliament of Mongolia established a cooperation contract to build a thermal power plant relying on Shivee Ovoo coal deposit. The Mongolian Government owns 90% of the company through Erdenes MGL and 9. Financial highlights: At present.3 Shivee Ovoo Stock data Price. Total proven reserve is 600mt of brown coal and 2.0 MNT'000 10. MNT 52Wk Range. even though the company incurred net losses due to the exchange rate adjustments of long term debt.400 . from which 4500MW would be exported to China and the rest supplied to local consumers. the biggest power plant in Mongolia. which will utilise 4mtpa of Shivee Ovoo’s coal.ResCap January 24 2011 Resource Investment Capital As of 16 Dec 2010 Equity Research 1. Sainshand. The company has accumulated $63. MongolRosTsevetment. 40% ash content. Bor Undur.55 14. In December 2010. the demand is inevitably increasing. 0.0 12.813 -566 -42 68. US$ Free float. which was obtained in 1998-2004 to increase the company’s mining capacity.407kcal/kg calorific value. Out of the proven reserve. (x) ROE. % 2007 10. Production capacity of the company increased to 2mtpa owing to the $67. inducing Shivee Ovoo’s shareholder equity to increase by around $13. SCH&CD and ResCap ResCap Mongolia 101 P a g e | 133 . % YTD performance.5% of moisture. satisfies 25% of coal consumption in Mongolia. 5% and 7% in 2007. The Mongolian and Chinese governments signed an agreement to erect a 4800MW thermal power plant.0% is held by Firebird Fund. % Gross margin.261kWh per capita (3 times.08 - Company Brief: Shivee Ovoo. Deposit: Shivee Ovoo coal deposit.7m of debt on the balance sheet as a result of the long term loan. The Mongolian electricity consumption is 1. the Parliament made a decision to cover all losses acquired from the exchange rate risk.14.1m.0 14.0 2.900 2.318 -471 70. covers 4. resources of the deposit is significantly undervalued considering the uncertainty over future dealing pipeline of Shivee Ovoo and regulated tariffs on electricity and coal prices. The company produces 1. Russia and Canada respectively). 6 times and 13 times lower than Kazakhstan. MNTbn Mkt cap. % EV/EBITDA. The coal mine had operational margins of 1%.5% sulphur and 43% volatile material. US$ The peak. In 2010.242 55% 8% -43% na na 0% 36% 2009 16. one of the stops of the Trans-Mongolian rail line.731 -6.0 8. The Mongolian government plans to build TPP-5 in UB.963-4.0 6.0 10/4/10 11/4/10 12/4/10 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 Shareholders 1% 9% State Master Fund/Firebird 90% Free Float Sales Net profit EPS. % Net margin.7bn tonnes of resources. MNT Price.325 49% 3% -5% na na 0% 10% 2008 14. located 260km southeast of Ulaanbaatar and in 20km from the Choir railway station. MNT Total Asset Current Asset/Non-Current Asset.0 4. Key financials. % Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA EV/Resource Dividend yield 12. % Sales growth. MNT Mkt cap.293ha with a width of 35km and a length of 15km. Coal contents are 2.

the company expanded sales into urban markets. US$ The peak.0 MNT'000 1.4m litres/year of beer.5 1. after receiving a $25m loan from the EBRD in May 2010. on the back of net sales increasing 61% and high leverage of 1.10% 194% Stock data Price. APU’s market share in the beer market has increased dramatically in recent years. MNTbn Mkt cap.5 2.114 367 5 39. Market presence: APU is the biggest player in the beer market. In 2009.0 0. 2010. Gross margin is robust at 22%. The company has an intensive plan to double its brewery capacity by 2014.58 5% Share price performance. On June 11.31 31% 23% 119% 13% 7. APU produced 230.918 0.9m and total assets increased 1.000 630 . MNT Mkt cap. SCH&CD and ResCap ResCap Mongolia 101 P a g e | 134 . It is the leading brewery and alcohol producer in Mongolia.2. (x) ROE.000 138 114 18. % Gross margin. MNT 52Wk Range.070 109 71. the largest distribution network in Mongolia. MNT Price.5 0. Financial highlights: In the last 2 years.24 x of D/E ratio.84 517% 20% 4% na 6% nmf na 2008 53. % Dividend yield. The company distributes their products through over 6000 trade and shopping centres nationwide. % YTD performance.612 8.855 1. % EV/EBITDA.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 10/4/10 11/4/10 12/4/10 Shareholders Key financials. % Net margin. MNT million unless otherwise stated Sales Net profit EPS.63 127% 21% 7% na 29% 5% 432% 2009 86.856 52 47.01 119% 23% 9% 7. taking up over 50% of beer and over 40% of vodka markets.799 3. % Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA Dividend yield APU Company brief: APU is the fourth largest company on the MSE by market cap. APU has registered the vodka trademark "Chinggis Khan" in over 20 countries worldwide. ROE reached 31%. the highest in the company’s history. % 2007 10.000 hectolitres of beer with about 700 employees.4 1. In 2009. The other major players in Mongolia are MCS and GEM.4m. % Net debt/Equity.ResCap January 24 2011 Resource Investment Capital As of 16 Dec 2010 Equity Research 1. % Sales growth. APU opened a new brewery factory with a capacity of 58. the company’s revenue increased 9 times to $59. US$ Free float. In FY2009.35 17.751 0. US$mn Avg daily turnover. MNT 2.53 2.867 8.6x 31% 5% 61% 8% Shunkhlai 40% 52% Two key shareholders Free float Source: Company data. MNT Total Asset Current Asset/Non-Current Asset.8 times to $49. 4.858 1.

ResCap
January 24 2011

Resource Investment Capital

As of 16 Dec 2010

Equity Research
1.5
3,626 2.99 9,000 2,100 - 4,000 94 77 800 5.30% 58%

Stock data Price, MNT Price, US$ The peak, MNT 52Wk Range, MNT Mkt cap, MNTbn Mkt cap, US$mn Avg daily turnover, US$ Free float, % YTD performance, % Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA Dividend yield Share price performance, MNT

Mongolia Telecom

2.82 17.75 9% 16% 12% 14% 16.6 -

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.

4.5 4.0 MNT'000 3.5 3.0 2.5 2.0 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 10/4/10 11/4/10 12/4/10

Shareholders

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

40%

Korean Telecom 55% Free Float

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101

P a g e | 135

ResCap
January 24 2011

Resource Investment Capital

As of 16 Dec 2010

Equity Research
1.6 Sharyn Gol

Stock data Price, MNT Price, US$ The peak, MNT 52Wk Range, MNT Mkt cap, MNTbn Mkt cap, US$mn Avg daily turnover, US$ Free float, % YTD performance, % Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA EV/Resource Dividend yield

10,300 8.49 13,500 1,696 - 13,500 74 61 31,282 8.14% 507%

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 fullscale 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 semisoft 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.

51.66 337.04 17% 11% 545% 4% 63.16 0.5 -

Share price performance, MNT
16.0 14.0 MNT'000 12.0 10.0 8.0 6.0 4.0 2.0 0.0 10/4/10 11/4/10 12/4/10 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

Shareholders
Master Fund/Firebird 54% 22% Batmunkh Batkhuu Sharyn Gol Energo Batbold 14% 3% 1% 3% 0% 3% MDR Balihuu Dambachultem Anod Bank Free Float

Key financials, MNT million unless otherwise stated
Sales Net profit EPS, MNT Total Asset Current Asset/Non-Current Asset, % Net debt/Equity, % Gross margin, % Net margin, % EV/EBITDA, (x) ROE, % Sales growth, % 2007 8,198 173 24 12,590 2.84 1005% 9% 2% nmf 17% 17% 2008 10,526 61 8.5 10,790 2.10 737% 10% 1% nmf 5% 28% 2009 8,812 219 30 9,535 2.22 545% 11% 2% nmf 17% -16%

ResCap Mongolia 101

P a g e | 136

ResCap
January 24 2011
As of 16 Dec 2010

Resource Investment Capital

Equity Research
1.7 Gobi

Stock data Price, MNT Price, US$ The peak, MNT 52Wk Range, MNT Mkt cap, MNTbn Mkt cap, US$mn Avg daily turnover, US$ Free float, % YTD performance, % Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA Dividend yield Share price performance, MNT
8.0 7.5 7.0 6.5 MNT'000 6.0 5.5 5.0 4.5 4.0 3.5 3.0 1/4/10 2/4/10 3/4/10 4/4/10 5/4/10 6/4/10 7/4/10 8/4/10

5,749 4.74 9,002.00 3,850 - 7,700 45 37 13,764 16% 42%

1.8 29.09 6% 27% 38% 15% 13.22 -

Company brief: Gobi JSC is the leading producer of cashmere and camel wool th products in Mongolia and the 5 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.

9/4/10

10/4/10

11/4/10

12/4/10

Shareholders

Key financials, MNT million unless otherwise stated
Sales Net profit EPS, MNT Total Asset Current Asset/Non-Current Asset, % Net debt/Equity, % Gross margin, % Net margin, % EV/EBITDA, (x) ROE, % Sales growth, % 2007 20,282 -732 -93.92 27,069 2.22 24% 8% -4% na -3% 16% 2008 19,585 689 88.35 30,778 1.92 34% 18% 4% 15.4 3% -3% 2009 20,247 1,501 192.51 34,018 1.48 38% 27% 7% 13.2 6% 3%

74%

Tavan Bogd

Foreign 2 stakeholders 11% 16% Free float

Source: Company data, SCH&CD and ResCap

ResCap Mongolia 101

P a g e | 137

5 10/4/10 11/4/10 12/4/10 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 Shareholders Key financials.853 0. Dayanbilguun.9 1. SCH&CD and ResCap ResCap Mongolia 101 P a g e | 138 .88m. % Sales growth. They serve 17% of domestic account holders and 47% of foreign account holders at the Securities Clearing House and the Central Depository of Mongolia. the company’s total assets declined 17% to $3. The company is now licensed with brokerage. Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA Dividend yield 5.91 16% 64% 18% na 10% 0% 2009 1. MNT 2.8 BDSec Stock data Price. MNT million unless otherwise stated Sales Net profit EPS. MNT 52Wk Range. The company was established in 1991 under the name of Bayandukhum in the Tuv aimag (Central province) as a part of the privatization program in Mongolia. due to the crisis.45m in 2009.020 991 121 2. % Net debt/Equity.7 2. Master fund-1 LLC and Master fund-2 LLC (together Firebird Fund) Market presence: BDSec is the largest brokerage firm by transactions made on the MSE with a market share of 50% in total trading turnover. % 2.9 2. % EV/EBITDA.700 28 23 7.69 -9% 5% 1% - Share price performance. MNT Total Asset Current Asset/Non-Current Asset. US$ Free float.111 2. Major shareholders are Mr. As the company revenue decreased 13% to $1.023 363 33 5. US$mn Avg daily turnover.600 .96m. gross profit sharply fell and the company had net losses of $380k. % YTD performance.7 1. (x) ROE. US$ The peak.000 1.500 2. % 2007 2. Alexander Zwahr.ResCap January 24 2011 Resource Investment Capital As of 16 Dec 2010 Equity Research 1.5 MNT'000 2.3 2.765 -455 -41 4.36 3% 100% 49% na 99% na 2008 2.95 1% 5% -26% na -9% -13% Management team 56% Master Fund/Firebird 25% 19% Free Float Source: Company data. % Net margin.899 0. BDSec was the first underwriter in Mongolia licensed by the Financial Regulatory Commission in 2004. MNT Price. MNTbn Mkt cap.1 1.267 19% 56% Company brief: BDSec is a local brokerage firm in Mongolia. dealer. underwriting and investment advisory services.06 4.2. As a result. % Gross margin. shareholder’s equity decreased 5% to $3. Financial highlights: In 2009. MNT Mkt cap.

0 MNT'000 6. MNT 52Wk Range.0 3. consisting of two layers.ResCap January 24 2011 Resource Investment Capital As of 16 Dec 2010 Equity Research 1. The deposit is included in the list of Mongolia’s tier-2 deposits of strategic importance. The coal seam is 25. the scope of operations was expended and capacity increased to 600ktpa. US$ The peak. MNT Total Asset Current Asset/Non-Current Asset.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 7.0 2. the current open-pit mining was given a start with a capacity of producing 200ktpa of coal. MNT Mkt cap. % Net debt/Equity. and is positioned 40-42m below the surface.150 1.331 22 18 127 8% 1334% 10.0 0. with innovative technology and equipment.331 450 .7% moisture. % Dividend yield. The total proven reserves and resources of brown coal are 241.881 409 130. 38.00 3.0 5.203Kcal/kg. a centre of the Dornod province. which functions with well trained workers and skilled managers. % 2007 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 2008 9.0 8. allows a production of 1. Later in 1969.94 32% 33% 14% 4. even though the company sells their coal to local clients at $6.5 0. (x) ROE. % EV/EBITDA.82 - Company brief: “Aduunchuluun” joint stock Company was established with underground mining operations in 1954 to supply the Eastern Mongolian region with coal and meet Choibalsan city’s electricity demand. 650 km east of Ulaanbaatar and 100 km from the Mongolian-Chinese border.5 0. MNT Price.9 Aduunchuluun Stock data Price.5 19% nmf 8% Management team Two shareholders Free float 38% 54% Source: Company data. MNTbn Mkt cap. Deposit: Aduunchuluun deposit is located in 5km from Choibalsan city. is fully capable of satisfying Dornod Power Plant’s long term coal needs.8mt respectively with gross calorific value of 3. Today Aduunchuluun LLC.8% volatile matter. % Net margin. with research from Russian economists and technical analysis teams.0 7. In 1979.8 1.34 53.8.000 5. % Sales growth. 9.47 2.52mtpa. US$ Free float.0 1. Choibalsan city is connected to Russia by railway.65m in thickness. Financial highlights: The company’s gross margin is very high at 33% and profitability is at 19%. % Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA EV/Resource Dividend yield Share price performance. % YTD performance. % Gross margin.84 19% 33% 14% 4.0 4. 1% sulphur and 45.73 16% 22% 15% nmf 0% 10% n/a 2009 2.77 8. SCH&CD and ResCap ResCap Mongolia 101 P a g e | 139 . US$mn Avg daily turnover.3mt and 423.9% ash content. MNT 9. MNT million unless otherwise stated Sales Net profit EPS.495 1. 9/4/10 10/4/10 11/4/10 12/4/10 Shareholders Key financials.6 per tonne. The current capacity. Aduunchuuun coal products can also be delivered to China via Russian and Eastern Inner Mongolian railways.

MNT 1. Over 70% of the company stake is owned by international investors mainly from the USA. Share price performance.1 1. SCH&CD and ResCap ResCap Mongolia 101 P a g e | 140 .8 1/4/10 2/4/10 3/4/10 4/4/10 5/4/10 6/4/10 7/4/10 8/4/10 9/4/10 10/4/10 11/4/10 12/4/10 Shareholders Key financials.1.12 2% na 2009 -145 -10. % 1.410 17 14 10.24 60. with the Bank of New York Mellon. media.57 27.58 13. % Net margin.678 26% Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA Dividend yield 0. Drinking Water Facility and a Pumped Storage Power Station.16 -43% na na nmf -1% na 7% 7% 12% 15% 25% 7% 27% Firebird Global Mongol Discov. Tuul Songino Water Resources conducted an IPO. Since a new management team was appointed.60 -33% na na 7. MNT Mkt cap. the company decided to transform into a diversified investment company.03 1. % 2007 26 -90 -6.250 1. Market presence: MDR pursues attractive investment opportunities across various sectors (mainly finance. In December 2006. agriculture.4 1. 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. consumer goods. Europe and Asia. In December 2007.3 MNT'000 1.410 750 . (x) ROE. professional service.324.06 0.25 - Company brief: Mongolian Development Resources (MDR) was the first property and non-resource sector investment and project development company listed on the MSE.61 35. % YTD performance. Fund Opportunity Fund East Investor Urban resources Other Source: Company data.798.43 5.10 Mongolia Development Resources Stock data Price.2 1. MNT Total Asset Current Asset/Non-Current Asset. The company is to launch a non capital raising Global Depositary Receipt program.5 1. mining and metal and health care) in Mongolia and provides diversified exposure to the Mongolian economy for local and international investors.0 0. % EV/EBITDA. tourism. construction service and materials.9 0. in order to attract new international investors. the main revenue is to be derived from investment yields they receive. MNT Price. from 2010. with a focus on high-growth investment opportunities in Mongolia. According to an extraordinary shareholders meeting held in December 2009. MNT 52Wk Range. % Gross margin. US$mn Avg daily turnover.341. US$ The peak. Financial highlights: Since IPO in December 2007. US$ Free float. an advanced capital market instrument. MNTbn Mkt cap.79 -43% 90% -338% nmf 0% na 2008 487 35. property. MNT million unless otherwise stated Mongolia Capital Sales Net profit EPS. % Net debt/Equity.76 0. % Sales growth.ResCap January 24 2011 Resource Investment Capital As of 16 Dec 2010 Equity Research 1. the company’s main operation is transferred to investment operation.47 28. Therefore. 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. 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.

The deposit covers an area of 89ha. out of which 3.053 0.0 4. Mogoin Gol’s average strip ratio is about 5-7. US$ Free float. floating 49% of the company on the MSE. On Dec 29.6m is viable by open pit mining. a Mongolia-China joint venture. the company was partially privatized. % 2007 na na na na na na na na na na na 2008 300 4 4. In 1983.0 MNT'000 6. % Net debt/Equity. (x) ROE. Mogoin Gol JSC will supply 200k tonnes of coal annually to its prospective TPP. 880km northwest from Ulaanbaatar city and 209km west from the Khuvsgul province centre.8 3.67 36% 24% 1% nmf 0% 17% Source: Company data.021 9% 425% Company brief: Mogoin Gol mine was established in 1970. Yuanda Group Ltd.200-7. % YTD performance.6%). It is expected that the commercial operation of the TPP will start in early 2012. % Sales growth. providing energy to two western provinces of Mongolia including Zavkhan and Gobi-Altai with an average power consumption of 15MW per year. 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. MNT Price. the first ever TPP in Mongolia with private investment.11 Mogoin Gol Stock data Price. However.53 11.100kcal/kg. MNT Mkt cap. Total reserve is a 13. was held on June 20. US$mn Avg daily turnover. Currently. gross margin of 24% and net margin of 1%. MNT million unless otherwise stated Key indicators P/BV P/E ROE Gross margin Net debt/Equity EBITDA margin EV/EBITDA EV/Resource Dividend yield 3. providing them with energy and heating. The opening ceremony of a 60MW thermal power plant (TPP). Deposit: Located in the Tsetserleg soum of Khuvsgul aimag. MNTbn Mkt cap.367 9 7 1. and 2) delivery of coal to the nearby Russia to cover for lost production caused by Raspadskaya accident. Key financials. increasing to 200ktpa of coal production.8 1. Then the state owned 51% was transferred to the provincial government’s ownership. the company has 74 employees.376 1.9% moisture. the remaining total reserve is 11. According to the management of the company. MNT Total Asset Current Asset/Non-Current Asset.1m was viable by open pit mining as of 2009. and now supplies coal mainly to the centres of Khuvsgul and Zavkhan provinces and eastern soums of the Zavkhan province.0 0. SCH&CD and ResCap ResCap Mongolia 101 P a g e | 141 . Procurement. MNT 52Wk Range.0 10. % EV/EBITDA. Mogoin Gol coal deposit is strategically important for the northern region of Mongolia. the company sold 18k tonnes of coal and worked with $280k of revenue. 1989 and 1995 production capacity was expanded with investments in new mining equipment and machines. In FY2009.0 2. to be built on the basis of Mogoin Gol coal mine. once the TPP operation starts.2m.6m tonnes of coal with a calorific value of 5.4%) and Khuvsgul aimags (28.0 10/4/10 11/4/10 12/4/10 1/4/10 2/4/10 3/4/10 4/4/10 5/4/10 6/4/10 7/4/10 8/4/10 9/4/10 Shareholders Provincial government 51% 40% Mogoin Gol Energy/Transneft 9% Free Float Sales Net profit EPS. % Gross margin. Financial highlights: In 2009. In 1995.ResCap January 24 2011 Resource Investment Capital As of 16 Dec 2010 Equity Research 1.11.349 8.59 - Share price performance. Mogoin Gol JSC supplied 18K tonnes of coal to western provinces’ clients. and New Asia Mining LLC signed an Engineering. According to the provincial government.3% ash and 0. out of which 3. % Net margin.0 8. Zavkhan (71.78 nmf 0% 24% 36% 3% nmf 0.970 . increasing current production volume 12 times. % 10.79 69% 24% 1% nmf 1% na 2009 351 4 4. 2009.172 0. 7. 2010. MNT 12. Construction and Management contract (EPCM) with the Mongolian Ministry of Mineral Resources and Energy to construct the 60MW TPP. US$ The peak.

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.ResCap January 24 2011 Resource Investment Capital Disclaimers 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. project development. ResCap Mongolia 101 P a g e | 142 . ResCap is based in Ulaanbaatar. public and private capital raisings and other strategic matters. is or will be. Important Disclosures Resource Investment Capital ("ResCap") is a boutique corporate finance advisor working with clients in connection with mergers and acquisitions. However. Investment decisions should always be made based upon individual personal circumstances and requirements. directly or indirectly. Disclaimer The information provided in this report has been gathered from various sources deemed to be reliable and accurate by ResCap. We also certify that no part of our respective compensation was. related to the specific recommendations or views expressed in this research report. All rights reserved. Mongolia with a dedicated focus advising on Mongolian-related transactions. and preferably with the advice of a qualified professional advisor. © 2011 Resource Investment Capital.

Managing Mongolia’s Growth: The Role of The Central Bank National Statistics Office. Presentation Dewey & Le Boeuf (Nov 2010). Technical Report EBRD (Nov 2010). Mongolia’s Investment Needs and Opportunities. Agriculture and Light Industry of Mongolia.ResCap January 24 2011 Resource Investment Capital References 3 References IMF (Oct 2010). Mongolia Investment Summit in London. Mongolian Mining. Press Release No. Governor of the Bank of Mongolia and IMF staff Mission. Presentation Energy Efficiency Study of Thermal Power Plant #4 (2006). Overview of the Legal Framework for Foreign Investment in Mining and Infrastructure in Mongolia. Transportation. Mongolia Quarterly Economic Update CIA – The World Factbook Bank of Mongolia. 10/166 World Bank (Oct 2010). IMF Country Report No. Joint Statement by Mongolia’s Minister of Finance. Mongolia: Joint IMF/World Bank Debt Sustainability Analysis Under the Debt Sustainability Framework for Low-Income Countries. Presentation Eurasia Mongolia Guide 2009 State Property Committee of Mongolia (Oct 2010). Presentation Engineering and Mining Journal (Aug 2010). Mongolia: Building a Sustainable Economic Growth through Downstream Industries and Rail Infrastructure. Information Memorandum Oct. Monthly Statistical Bulletin Bank of Mongolia (Nov 2010). Agricultural Policy (2008-2010) Business Council of Mongolia (Nov 2010). Presentation Trade and Development Bank Information Memorandum (October 2010) Ministry of Road. Global Business Reports Eurasia Capital Management (Oct 2010). Mongolia Development Resources: Property and Infrastructure Developer in Mongolia. Construction and Urban Development of Mongolia (Oct 2010). Monetary Policy Guide for 2011 Bank of Mongolia (Nov 2010). Presentation PricewaterhouseCoopers (2010). Mongolia Mining Supply Chain. Privatizing Mongolia’s State Owned Assets and What This Means for Investors. Tax Law) ResCap Mongolia 101 P a g e | 143 . Monthly Bulletin (Dec2010) Trade and Development Bank of Mongolia (Dec 2010). 10/387 IMF (Jun 2010). Presentation Ministry of Food. 2010) International Monetary Fund Price Waterhouse Cooper (esp. 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.

Mongolia Tel/Fax: +976 70100095 www.resource-cap.orgodol@resource-cap.com +976 99094282 ResCap Mongolia 101 P a g e | 144 .ResCap January 24 2011 Resource Investment Capital Contacts 4 Contacts ResCap 3rd Floor.hanbury@resource-cap.com +976 99007069 Uyanga Orgodol uyanga.com +976 99998853 Enkhbayar Davaatseren enkhbayar@resource-cap. Ulaanbaatar.com David Hanbury david. Monnis Tower 15 Chinggis Avenue 1st Khoroo Sukhbaatar District 210648.