Igata mongolia investment outlook aug 2011s

Securities)

MONGOLIA INVESTMENT OUTLOOK

Opportunities for Investing in Mongolia
By Masa Igata, Founder & CEO Frontier Securities

August 2011

Agenda

Page

Mongolia’s economic outlook 1

!  Country profile, GDP trend, segment breakdown
!  Exports statistics
!  Overview of inflation and currency

Coal mining industry and major mining project 9

MSE top 10 and foreign-listed companies 13

Appendix 23

PR E S E NTATI O N MATE R IAL
1

Mongolia: key facts

Young, democratic and resources-rich country sandwiched by Russia and China !!
Territory: 19th largest country - 1,565,000 km2
Population: 137th in the world
2,805,000 citizen (2011)
1.8 people/km2 on average
180 people/km2 in the capital, Ulaanbaatar city

Political structure: Parliamentary democracy from 1991,
2 large parties – Mongolian People’s Party (MPP) and
Democratic Party
Current Prime Minister: S.Batbold (MPP),
2009 election results: MPP 46, DP 27, others 3

Current President: Ts. Elbegdorj (nominated from DP) in
office since 2009
Next Elections: June 2012

Main Religions: Buddhist (90%), Muslim (5%), Shamanist
and Christian (5%)
Life expectancy: Men – 66 yrs; Women – 71 yrs
Literacy rate: 95%

Currency: Tögrög (1,243₮=1USD as of August 18th, 2011)
Inflation: 10.1% (YoY July 2011, BOM)
Central Bank discount rate: 11.50% July 2011, BOM)
GDP: $6.7B (2010, World Bank)
No capital controls, free press and internet

2

With only 17% of territory properly explored, Mongolia is already among
top 10 mineral richest countries in the world

Commodity reserves and production !!

Annual Production
Commodity Proven Reserve Probable Reserve
2007 2008 2009 2010
Coal 8.8 mt 9.8 mt 13.2 mt 25.2 mt 20,000 mt 152,000 mt
Copper 0.37 mt 0.36 mt 0.37 mt 0.36 mt 67.3 mt 1,200 mt
Gold 17 t 15 t 10 t 6t 136 t 125,000 t
Iron ore 0.26 mt 1.39 mt 1.38 mt 3.20 mt 264 mt 1,600 mt
Uranium 0 0 0 0 - 62,000 t (resource)

Major players by type of minerals !!

• Centerra gold • MMC • Darkhan Steel • Dornod
Coal

Copper

Iron

Uranium
Gold

• Erdenet
• Gatsurt • MAK • Ivanhoe Mines • Iron Mining • Cameco
• Monpolymet • Tavan Tolgoi JSC & Rio Tinto International / • Areva
• Southgobi Energy • MAK BTEG
Resources • QGX •  Altain Khuder
•  Hunnu • Monzol
•  Prophecy
• MEC
• Erdenes TT

Source: National Statistics Office (NSO) and Mineral Resources Authority of Mongolia (MRAM)

3

Mongolia’s GDP surged 14.3% half-year 2011, and robust growth is
expected to continue

With OT and TT operating at full capacity, Mongolia is the fasting-growing economy in the next 5 years!

Tavan$Tolgoi$
full$$capacity$

Oyu$Tolgoi$

2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F

Mongolia %
GDP Growth 8.9% -1.3% 6.1% 9.8% 7.1% 23.1% 15.8% 9.0% 15.6%

Source: IMF estimates (April 2011)

4

Mining industry is the major growth driver for the Mongolian economy

Emerging opportunities in other sectors exist, given the rising purchasing power of the Mongolian!

GDP&per&sector&(MNT&bn)&

Mining&and&quarrying&
+40%& 21.8%
Agriculture,&forestry&and&ﬁshing& +25%& 15.9%
Net&taxes&on&products& 12.1%
Transporta,on&and&storage& 8.1%
Wholesale&and&retail™&repair&of&motor&vehicles&and& 7.2%
Manufacturing& 6.5%
Real&estate&ac,vi,es& 6.2%
Educa,on& 4.2%
Public&administra,on&and&defence&compulsory&social&security& 3.6%
3.2%

Informa,on&and&communica,on&
Electricity,&gas,&steam&and&air&condi,oning&supply& 2.4%
Financial&and&insurance&ac,vi,es& 1.9%
Human&health&and&social&work&ac,vi,es& 1.7%
Construc,on& 1.3%
Administra,ve&and&support&service&ac,vi,es& 1.2%
Professional,&scien,ﬁc&and&technical&ac,vi,es& 0.9%
Accommoda,on&and&food&service&ac,vi,es& 0.7%
Water&supply;&sewerage,&waste&management&and&remedia,on& 0.4%
Arts,&entertainment&and&recrea,on& 0.4%
Other&service&ac,vi,es& 0.3%

0$ 200$ 400$ 600$ 800$ 1000$ 1200$ 1400$ 1600$ 1800$ 2000$

!  The mining sector increased 40% in 2010 versus a 25% expansion in agriculture.
!  Construction is only 1.3% of GDP: in constant prices the sector has decreased by 30% since 2007.
Source: National Statistics Office (NSO)

5

Mongolian exports resume its promising growth prospect after 2009
recession

The China factor accounts for as much as 40% of the country’s DGDP!

Mineral Exports Breakdown (Q1: 2011) 2466
Exports by country (US$ mm)

Cashmere 2009 2010
Fluor spar
Others
1394
Molybdeni
um
Zinc

Gold 147 142
135 144 68 83 127 67
Iron Ore 14 6
Oil
China Other Canada Russia UK USA

Export and Trade Balance ( US$ mm)
3500
Coal Copper
3000

2500

2000

1500

1000

500

0

-500

-1000
Exports Trade Balance

Source: National Development and Innovations Committee (NDIC) & National Statistics Office (NSO)

6

Constantly rising inflation, an ongoing concern for Mongolian economy

Current inflation is 8.9% annualized with upside risk!

35%$ Annual Inflation and Money Growth 90%

80%
30%$
70%
25%$
60%

20%$

M2 yoy Growth
M1 yoy Growth

50%

15%$ 40%

30%

10%$
20%
5%$
10%

0%$
0%

!5%$ -10%

Inflation Core CPI M1 Growth M2 Growth

To counter inflation, !  To keep CPI at single digit figures
BOM has 2 objectives !  To smooth exchange rate volatility and accumulate foreign reserves

Source: Bank of Mongolia (BOM)

7

The Mongolian Tögrög (MNT) appreciated by 13% vs USD in 2010: world’s
second best performing currency

Appreciating trend of MNT is expected to continue, as the economy will be flooded with FDI!

2400 MNT Exchange Rate per foreign unit 24

2200 22

2000 20
USD/EUR

1800 18

JPY
1600 16

1400 14

1200 12

1000 10

USD EUR JPY

!  Foreign inflows are volatile so BOM smoothens exchange rate through
bi-weekly auction
In attempt to !  Large mining investments need to be settled in MNT
stabilize MNT… !  High interest rate combined with expected appreciation attracts
foreign money
!  No capital controls
Source: Bank of Mongolia (BOM)

8

Agenda

Page


Coal mining industry and Tavan Tolgoi mining project 9

!  Coal consumption outlook
!  Mongolia’s coal reserves
!  Tavan Tolgoi


Appendix 23

9

World coal consumption on upward projectile

Coal demand mainly comes from Non-OECD countries!

World Marketed energy use by the fuel type World Coal Consumption by region
250 (quadrillion Btu*) (quadrillion Btu*)
Liquids$ 160
Non-OECD
200 140
Coal$
120
150
Natural$Gas$ 100

80
100 Renewables$
60
Rest of World

Nuclear$ 40
50
20
North America
0 0
1990 2000 2007 2015 2025 2035 1990 2000 2007 2015 2025 2035

Note: * 1 quadrillion Btu is a technical unit of energy. For illustrative purpose, 1 quadrillion Btu equals 45 mm tons of coal. In 1988, for example, the world’s
total energy consumption was 1 quadrillion Btu every 26 hours

!  Coal is the world’s 2nd biggest source of energy after liquid fuels.

!  World coal demand for energy is expect to outstep 180 quadrillion Btu

!  Non OECD countries and transition economies will be major coal importers

10

Mongolian coal reserves and key facts

Highlights: Mongolian coal reserves! South Gobi Resources!

!  Mongolia contains vast coal resources within !  Tavan Tolgoi 6.4 bn tons
15 large-scale coal bearing basins !  Thermal coal 4.6 bn tons
!  Coking coal 1.8 bn tons
!  There are around 320 coal deposits and
occurrences (80 deposits and 240 !  Baruun Naran 155 mn tons of thermal coal and
occurrences) met coal
!  Feasibility study is completed
!  Coal deposits and occurrences are located
throughout the country, but most of the coal !  Nariin suhait identified 250 mn tons of
resources are concentrated in the east, central bituminous
and south areas.

!  Ovoot Tolgoi
!  Other major coal deposits: !  extension of Nariin Suhait
!  Shivee-Ovoo (2.7 bn tons of brown !  Indicated reserve 150 mn tons
coal)
!  Tugrug nuur and Tsaidam nuur (2.0 bn
tons of brown coal)

!  Mongolia’s total inferred coal resources as predicted around 152 bn tons ranking
top 15 globally
Key estimates! !  The preliminary and detailed exploration activities resulted in about 23 bn tons
of coal reserves
!  The proved coal reserves are 12.2 bn tons including 2 bn tons of coking coal
and 10.1bn tons of thermal coal
Source: Presentation by Ministry of Fuel and Energy of Mongolia

11

Tavan Tolgoi

The world’s second largest coalfield is set to be privatized by Q1: 2012!

Coal Production Projection Total reserve: 6.4 billion tonnes
Full capacity: expected to be reached by 2016
70
Estimated CapEx: 2.4 billion USD
60
50 •  new workplaces, railroad, power supply
40 Current ownership: 100% Govt (SOE Erdenes TT)
30
20
10 2 blocks with separate governance structures
0 - Western block: license owned by Erdenes,
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016
production rights and development costs to bidders
2 preliminary winners: China's Shenhua (40%),
Others TT
Peabody Energy (24%) and a Russian-Mongolian

consortium (36%) (as of August 2011, the final decision
Breakdown of TT coal reserves
is still pending at GOM)..
Thermal
Self-coking coal - Eastern block: owned and operated by Erdenes
coal 2.4 bt MGL through contract mining firms
1.8 bt
ETT IPO is expected to launch by Q1: 2012
Global coordinator: Goldman Sachs, Deutsche Bank
Joint bookrunner: Macquarie, BNP Paribas
Erdenes TT’s Easter block ownership rights:
-  51% owned by Mongolian Government
Amenable
to coke -  10% of shares to the Mongolian citizens
production -  10% own by national enterprises
2.2 bt
-  29% to IPO on foreign exchange

Source: Sum of various companies’ projections

12

Agenda

Page




!  Overview of Mongolian Stock Exchange (MSE)

!  MSE top 10
!  Foreign-listed mining majors

Appendix 23

13

MSE: the world’s best performing stock market in 2010

5-year trend of MSE performance is promising!

5-year Compounded Annual Growth Rate = 77.2%

136% gain over 2010

14

336 MSE-listed companies account for slightly over US$1 billion in
market cap

Top 10 Market Capitalization (MNT billion May 2011)

Tavan Tolgoi

Baganuur

Shivee Ovoo

APU

Shariin Gol

Telecom Mongolia

BDSec

Gobi

Mogoin Gol

Aduun chuluun

0 50 100 150 200 250 300 350 400 450

15

Mongolia-related mining companies

Growth of MSE! Key challenges!

MSE Market Cap (MNT bn) MSE still encounters a number of obstacles
3500 500% that undermine investor confidence and
446%$ further expansion, including
3000 400%
!  Lack of liquidity
2500
300%
2000 116%$
200%
!  Under-developed legal and technology
1500 128%$ infrastructure
136%$
87%$ 100%
1000 21%$
500
:28%$
0% !  Weak corporate governance
0 -100%
!  Misuse of insider information

!  Inadequate transparency
Market Cap (billion MNT)

% Change (from Previous period) !  Regulatory uncertainty

Government of Mongolia and regulatory bodies implement a number of reform measures to nurture the
development of the country’s capital market.

16

Despite the growth of MSE, the Exchange faces a number of hurdles

Foreign-listed companies with Mongolian assets!

Petro&
Matad&

M&Growth&G&

Ivanhoe&

CG&

Mongol&M&
Other&Mining&Companies:2

Prophecy&
SouthGobi& Mongolia&
Energy&

Company Market Market Cap Some of the world’s largest mining
Ivanhoe Mines TSX/ NYSE 16.9 Billion (NYSE) companies own strategic assets in
Centerra Gold Inc. TSX 4.4 Billion Mongolia. This investment inflow
Mongolian Mining Corp HKEx 4.2 Billion represents a tremendous growth for the
SouthGobi Energy overall economy, and wealth of the nation.
Resources TSX/ HKEx 2.2 Billion (HK) The next slides highlight mining majors
Mongolia Energy Corp. HKEx 1.33 Billion that Frontier has established relationship
Petro Matad LSX 485 Million with.
Prophecy Resources Corp TSX 125 Million
Mongolia Growth Group CNSX 65 Million

17

Ivanhoe Mines (IVN: TSX, NYSE, NASDAQ)

Ivanhoe Mines Ltd. is a mining company Key developments on the Oyu Tolgoi deposit:
focused on the development of its discoveries •  30-year investment agreement signed with
in the Asia-Pacific Region. government: will insure stabilized tax rates and
Core assets are composed of: regulatory provisions for the construction and
-  66% interest in the Oyu Tolgoi copper and operation of the Oyu Tolgoi copper-gold mining
gold mine development project in Southern complex;
Mongolia; •  Oyu Tolgoi to contain approximately 81 billion
-  57% interest in Mongolian coal miner pounds of copper and 46 million ounces of gold in
SouthGobi Resources (SGQ: TSX, measured, indicated and inferred resources;
1878:HK); •  $2bn invested over the last 4 years & $4.5bn
-  50% interest in Altynalmas Gold Ltd. to budgeted over the next 3 years for completion of
develop the Kyzyl Gold Project in first phase;

Kazakhstan; •  Production to be ramped up to 450,000t of copper
-  62% interest in Ivanhoe Australia (IVA:ASX, and 330,000 ounces of gold annually within 5 years
TSX). from the expected initial production date in 2013.
Shareholders' structure
Rio Tinto Plc

27%$ Friedland
42%$
Fidelity
2%$
2%$ Caisse De Depot Et
Placement Du
5%$ 6%$ Quebec
16%$ Goldman Sachs

Source: Ivanhoe Mines website & CNBC (June 1st, 2011)

18

Oyu Tolgoi (66% owned by Ivanhoe Mines)

OT Gold Production Projection OT Copper Production Projection

1.2 1800
1600
1
1400
Ounces (Millions)

Lbs. (Millions)
0.8 1200
1000
0.6
800
0.4 600
400
0.2
200
0 0

Total Reserve: 81 billion lbs. of copper, 46 million oz of gold Oyu Tolgoi Investment Agreement
Expected production: 2013 (In full legal effect since March 2010)
Projected investment: 4.6 billion USD in pre-production -Integrated Development Plan is released
capital - Stabilized custom regime
NPV at today’s metal prices: 15 billion USD - Abolishment of Windfall tax
Benefits/contribution to Mongolian economy: - Government ownership 34%
- average 34% increase in real GDP over 30 years - Private investment in auto roads
- average 71.6% increase in export - Loss rollover period of 4-8 years
- average 10.3% increase in employment - Stabilized tax regime
- up to 48 thousand new workplaces over the project life - 95% Mongolian employees
time

OT has the mineral resources to become one of the world’s top 3 copper-gold producers
Source:$Ivanhoe$Mines$IDP:10$&$FronGer$SecuriGes’s$projecGons$
19

SouthGobi Resources (SGQ:TSX, 1878:HK)

SouthGobi Resources is a premium coal Key data on the Oyoot Khural basin:
production and development company focused •  *Permian-age coal bearing basin only 40 km from
on exploration and development of its China
Permian-age metallurgical and thermal coal
•  *Rail infrastructure and coal loader constructed by
deposits in Mongolia's South Gobi Region to
Chinese to access
supply a wide range of coal products to
markets in Asia.

SouthGobi owns three significant coal projects
in Mongolia: a producing mine, the Ovoot
Tolgoi Mine; and two development projects, SouthGobi's leadership in the Ovoot Khural Basin:
the Soumber Deposit and the Ovoot Tolgoi •  *Substantially covered by SouthGobi's exclusive
Underground Deposit. In addition, SouthGobi mining and exploration licences

holds mineral exploration licenses in Mongolia.
•  *89% of SouthGobi's resources located there
•  *Operating infrastructure in place

Shareholder structure as of May 1st, 2011

29%$
Ivanhoe Mines Ltd

China Investment Corp
57%$
Other public float
14%$

20

Mongolian Mining Corporation (0975HK)

MMC is the first Mongolian company which •  The company currently has 499.9 million tonnes of
has carried out a global equity offering at Hong measured and indicated resources and 286 million
Kong Stock Exchange with a total of 719.42 tonnes of proven and probable reserves measured by
million shares at range of HK$ 10.92 per share JORC standards. MMC received 30 years of mining
on February 8th , 2011. rights for the UHG deposit and MV11952 license
covers 2960 hectares, which could also be extended
. twice every twenty years.
•  MMC’s Ukhaa Khudag (UHG) open pit coking coal
mine is located 240km away from the Mongolia-
Chinese border at Gashuun Sukhait where it will
Projected Production further transport coking coal to high end users of
China at a comparably lower price.
•  Company highlights fact that it is a low cost

producer.

Corporate Structure of MMC
MCS Mining Group Limited

20%$ Petrovis Resources Inc.

Shunkhlai Mining LLC
45%$
6%$ EBRD

9%$ Kerry Mining

Ancora Investment No 2
Limited
3%$ 12%$ Public
5%$

21

Prophecy is producing coal now and expects to sell power in 2014

Prophecy Outlook: Shipping Ulaan Ovoo Coal now,
•  Coal: Ulaan Ovoo fully funded, fully Selling Chandgana Power by 2014
commissioned
• Top quartile low cost coal producer with 1b tons supply
•  500,000 tonnes in 2011
• Commenced coal production, permitting power plant
•  Exposure to strong seaborne pricing
Shareholder Structure
•  Power: Chandgana Power Plant license
expected in Q3 2011
•  Conclude PPA in early 2012
•  Construction early 2013

•  PGM: Canadian assets spin off Q2 2011 to
PCY Platinum
•  Significant investment portfolio Company’s&own&projected&produc,on&(mt)&
•  TSX Main Board (Q3 2011) / Asian Listings
(2012)

22

Agenda

Page




Appendix 23

!  MSE’s collaboration with LSE
!  SOE privatization plan
!  Strategic mining projects in Mongolia
!  Railway construction

23

MSE reforms in partnership with London Stock Exchange

Under the agreement LSEG will collaborate with the SPC in a number of areas, including:

!  LSEG will appoint a management team at the MSE to oversee its development and privatization.
!  LSEG’s Millennium IT, the leading global exchange technology provider, will provide trading,
surveillance and post trading infrastructure to the MSE.
!  Using the LSEG Academy, both parties will conduct a comprehensive training program on capital
markets infrastructure and legislative framework for MSE officers, clients and officers of the Mongolia
Financial Regulatory Commission.
!  LSEG will advise the MSE on the modernization of market rules, procedures, structure and operation
at the MSE.

!  LSEG will provide assistance in the broadening of tradable asset classes at the MSE, to derivatives

and ETFs.
!  LSEG will work to implement an international standard Mongolian market index.

Source: NDIC

24

SOE privatization plan

Effective Standards of Efficient & Transparent Legal
Corporate Governance Frameworks
Frameworks

-  National Program of
-  Integrate mandatory permits,
Corporate Governance
and reduce number of permits
-  Amendments to the
- Protect Investors
Company Law

Well-resourced and
Competitive Independent, &
Independent Media
Transparency

Transparent Banking System
-  Freedom of Expression
exists
Successful - New Banking Law
-  Media are independent, Privatization -  Government actions to bailout

but controlled by private strategic banks
interests Environment -  Deposit guarantee
Market Efficiency

Efficient Stock Exchanges Competitive Capital & Output
Markets

-  Stock Market Law - Government Bonds to be sold
-  Independent Information in international markets
Database - Master plan to develop
-  Stock Market border port
privatization plan -  Foreign Trade Clearance

Source: Citigroup (Framework) & NDIC (Masterplan: Action Plans)

25

Major mining development sites are located in the South, next to China

Prophecy Ltd.
(Ulaan Ovoo, coal) Iron Ore
International
Mining Ltd.
MEC Ltd. (Eruun Gol, iron
(Khushuut, coal) ore)

Khuushuut Prophecy Ltd.
(coal) Eruu Gol (Chandgana,
iron ore Coal)
mine
North Asia
Resources (Oyut
SouthGobi Ovoo, iron ore)
(Ovoot Tolgoi & Ovoot Tolgoi

Soumber, coal) (coal)
Energy Resources
Ltd. (Ukhaa Khudag
Soumber coal)
MAK (coal)
(Nariin Sukhait,
coal) Hunnu Coal
(Khuree-2, coal)

Nariin Sukhait Oyu
(coal) Tolgoi
Tavan (copper,
tolgoi gold)
(coal)
QGX Ltd. Ivanhoe Mines
(Baruun Naran, coal) (Oyu Tolgoi, gold-copper)

26

Major mining development sites are located in the South, next to China

Source: NDIC

27

Railway construction plans: Figure 1

Planned railways connecting major Mongolian cities

!  Parliament
approved to build
broad gauge
railway for South
Gobi region to
Sainshand.

!  First stage of 920
km long rail-way
project would be

drawn from
Tavan Tolgoi to
Sainshand.

Source: World Bank

28

Railway construction plans: Figure 2

2010 – 2015 projected construction

29

Disclaimer

Information in this presentation does not constitute invitation or application or investment advice or service provision
for sale and purchase of any stock, future, option or other financial product by Frontier Securities and its related
company. This presentation is not the recommendation to make a specific trade and guarantee for a specific product
whether it is appropriate or adequate for buyers. Also, although this presentation is prepared from the various
information sources we deem reliable, we shall not guarantee their accuracies and rightness. Moreover, past
performances do not suggest or guarantee for the future results. Thus, the Company shall not take responsibility for
the loss out of the decision based on its content. When making a contract on trades using the information in this
presentation, please consult with your business advisor, lawyer, tax & accounting advisor about investment product
prices, compatibility, value or other items beforehand. Information and services in this presentation and its provision or
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presentation may not be applied for all the legal frames or not all customers may not use. Also, the Company may
change or delete information or others items in this presentation without previous notice.

Contact:
Frontier Securities
Email: STAFF@frontier.mn
Tel: +976-70119999
Address: #705, Blue Sky Tower
Peace Avenue 17, 1st khoroo
Sukhbaatarl District,
Ulaanbaatar, Mongolia


Igata mongolia investment outlook aug 2011s

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