rescap mongolia 101 v2
TRANSCRIPT
Initiating country coverage on one of the
last remaining
January 24 2011
ResCap
Mongolia 101
Initiating country coverage on one of the
last remaining mining frontiers
Res
Cap
Mongolia 101
Initiating country coverage on one of the
mining frontiers
ResCap Resource Investment Capital
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 2
ResCap Mongolia 101 – One of the Last Remaining Mining Frontiers Mongolia - One of the Key Global Economic and Mining Stories of 2011 Nestled between two political giants - China and Russia, Mongolia is a vastly
undeveloped resource rich country on the brink of an economic transformation.
Thanks to positive recent political and economic developments, Mongolia is set
for spectacular growth which is becoming noticed globally. And backed by its
resource rich landscape of world class deposits, Mongolia has been coined the
“Saudi Arabia of Coal” with strong parallels to previous natural resource booms
around the world.
The Mongol Rally Has Literally Just Begun
A rally to attract foreign investment, re-develop the stock exchange, re-urbanize
much of the population into sustainable housing and reignite a process to unlock
much of the country’s wealth in state owned mineral assets, has brought many
foreigners rallying into Ulaanbaatar. The potential for discovery of more world
class assets such as Oyu Tolgoi has unlocked a wave of financiers and geologists
flooding into Mongolia. But quite simply the fascination of the unknown in a
country not very well understood but linked with enormous potential has
naturally played into human nature and curiosity – root to many visitors arriving
in Ulaanbaatar, financiers and tourists alike.
Patriotism and History Underpinning Development
Modern humans first arrived in Mongolia over 40,000 years ago and battled
through waves of liberation, bloodless democratic revolution and one of the
harshest climates on earth, now prospering through a young but developing free-
market economy. Mongolia is a nation proud to have partners but also very
proud to remain unique and independent and central to success in Mongolia is
prospering through strong, local partnerships.
ResCap Mongolia 101 Country Guide
2011 will be a fascinating year and a potential turning point for Mongolia. As
investors continue to ask the questions of “how, what, where and when” in
Mongolia, ResCap has developed a user guide to the country. This ResCap
Mongolia 101 is an account of Mongolia in a detailed handbook as part of our
initiation of coverage on one of the last remaining mining frontiers.
Abstract
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Abstract
Mongolia's national identity has been dominated by the talismanic figure of
Chinggis Khan. This legendary warrior-nomad conquered vast tracts of Central
Asia in the 13th century to found the Mongol Empire, which remains the largest
contiguous empire to have existed in the history of the world. He remains the
subject of great national pride, and understanding the history, the culture, the
laws, politics and the economy can not only help investors understand the nature
of these proud, nomadic people and Mongolian society, but also help them better
judge where to put capital to work in this large, resource-rich country.
Executive Summary
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1 Executive Summary
1.1 History
� Chinggis Khan founded the Mongol Empire in 1206.
� By the end of the XVII century, most of Mongolia had fallen under the rule of
the Qing Dynasty.
� With the demise of the Qing Dynasty in 1911, Mongolia declared
independence, but had to struggle until 1921 to firmly establish de facto
independence from China.
� Mongolia came under strong Soviet influence in 1921. The Mongolian
People's Republic was declared in 1924.
� After the collapse of the Soviet Union, Mongolia saw its own peaceful
Democratic Revolution in early 1990.
1.2 Government
� Mongolia follows a parliamentary type of governance.
� The highest executive power is the Prime Minister.
� The President of Mongolia has limited powers but acts as the Head of State
and Commander-in-Chief of Mongolia’s army.
� The biggest political parties are the Mongolian People's Party (MPP), formerly
the Mongolian People's Revolutionary Party (MPRP), and the Democratic
Party (DP).
� Since the Democratic Revolution, there has been continuous replacement of
governments.
� The current Prime Minister is Sukhbaataryn Batbold and the current President
is Tsakhiagyn Elbegdorj.
� In 2008 a coalition government was formed between the MPP and DP, which
facilitated the greatest advancements in the economy.
� “The State Great Khural” or the “Parliament” is the legislative authority of
Mongolia and consists of a single chamber with 76 seats, led by the house
Speaker.
1.3 Foreign Relations
� “In developing its relations with other countries, Mongolia is guided by
universally recognized principles and norms of international law as defined in
the UN charter.”
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� Mongolia has bilateral relations with 140 and diplomatic relations with 149
countries.
� Mongolia almost certainly has the strongest relationship with Russia. Russia
helped Mongolia to ward off the Chinese invasion. In December 2010,
Mongolia and Russia signed an agreement to develop the Dornod uranium
deposit. Russia holds 190 reports on Mongolia’s 6 uranium fields, while
Mongolia only has access to 34.
� As the Soviet Union had been Mongolia’s main ally and the most influential
neighbouring power up until 1990, foreign relations between the PRC and
Mongolia used to be predominantly determined by the PRC and USSR
relations.
� With adoption of democracy and transition to a market economy, Mongolia’s
relationships with China began to improve. Currently the PRC is the largest
trading partner of Mongolia. Mongolia will soon have the capacity to supply
25-40 mtpa of coal to the PRC.
� The People’s Republic of Mongolia established diplomatic relations with Japan
in February 1972. The ties were strengthened after the Democratic
Revolution in Mongolia.
� Japan has historically been the largest aid benefactor to Mongolia, until the
US had approved a “Millennium Challenge Compact” aid worth $285 million
in October 2007.
� 96% of Japan’s rare-earth metals are imported from China and the latter
restricted their export quotas by 72% and 35% in H2 2010 and Q1 2011
respectively. Japanese geologists and scientists launched exploration of rare-
earth elements in Mongolia.
� The People’s Republic of Mongolia established diplomatic relations with
North Korea in October 1948. Mongolia is one of the few countries in the
world that maintain warm relations with the Democratic People's Republic of
Korea (DPRK).
� Mongolia endeavours to maintain close relationships with European
countries. In 1991, Mongolia signed an economic cooperation agreement
with the UK, and investment promotion and protection agreements with
France and Germany.
� Canada and Mongolia established bilateral ties in November 1973. Canadian
FDI thus far has been mainly flowing to the mineral resource sector of
Mongolia. Negotiations are ongoing on the signing of a foreign investment
promotion and protection agreement (FIPA).
� The United States agency for International Development (USAID) has
continuously been one of the key aid donors to Mongolia. In October 2007,
the Mongolian government signed a Compact agreement with the Millennium
Challenge Corporation (MCC) for the receipt of a grant worth $285 million.
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1.4 Geography and Climate
� Mongolia is ranked 19th
in the world by country size after Iran. It covers 1.56
million square km.
� The climate is generally dry and the temperature varies significantly across
the year, making the winters extremely cold and summers very warm.
1.5 Administrative Regions
� Mongolia is divided into 21 aimags. Each aimag is subdivided into a number of
soums.
1.6 Economy
� Economic activity in Mongolia has historically been focused on agriculture and
herding, but recent discoveries of mineral deposits have attracted large levels
of foreign direct investment (FDI) into the mining sector.
� The global economic downturn in late 2008/early 2009 had a harsh impact on
Mongolia.
� Mongolia is about to experience a period of remarkable growth. The IMF
forecasts the real GDP growth to be over 25% in three years time driven by
advancements in the mining sector. In 2010, the real GDP growth was 6.1%,
nominal growth was 25.3% (GDP reaching $6.6 billion), general government
budget showed a surplus of $611 million and the external trade deficit
amounted to $378.7 million (both exports and imports were up around 53%)
� Inflation smoothed down to 13% in 2010 from the soaring 36% in August
2008.
� FDI into the country has been growing 30% annually and is expected to reach
$11 billion in the next four years.
� In 2010, the total industrial output increased 10% to approximately $1.5
billion (at 2005 constant prices) compared to the previous year
� In December 2010, the MNT/USD rate gained in value 15% since January
2010, when it was 1,446, which made it the second best-performing currency
against the dollar in 2010.
� By the end of December 2010 Mongolia’s official international reserves has
exceeded $2.0 billion, growing 82.6% yoy.
1.7 Banking Sector
� The Mongolian financial sector consists of 14 commercial banks, 188 NBFIs
and 207 S&C (saving and credit) Cooperatives.
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� The minimum capital requirement for commercial banks ordered by the Bank
of Mongolia is MNT 8.0 billion ($6.4 million)
� In Q3 2010 non-performing loans with arrears in principals as percentage of
total outstanding loans declined to 17% from 25% in November 2009.
� General levels of NPLs were considerably high throughout 2010.
� Real interest rates plummeted, resulting in negative returns, especially on
depository accounts, due to inflationary pressure.
� Bank lending more concentrated, with around 50 largest borrowers
accounting for approximately 30% of total loans or $690 million.
� MNT deposits continued to rise reaching $1.3 billion in mid 2010 (51%
increase yoy), despite falling real interest rates on deposits, owing to the
Deposit Guarantee Law and greater currency appreciation expectations.
� Nominal interest rates on lending and borrowing remained high as banks
needed capital due to liquidity problems.
� Business activities increased in 2010, nevertheless, coping with the
fundamental weaknesses of the banking sector in Mongolia remains a top
priority for the officials in charge.
� Demand for credit will substantially increase in the coming five years as
greater necessity for capital will spread across all sectors in the economy.
� Deposit Guarantee Law has been amended, the pledge is no longer unlimited
1.8 The Central Bank
� The Bank of Mongolia (BoM) is the central bank of Mongolia. It reports to
Parliament and is independent from the Government. The BoM’s aim is “to
insure the Tugrik’s stability” in terms of external stability of the exchange rate
and internal stability of the consumer price index.
1.9 Mongolian Taxation System
� The general rate of tax in Mongolia is 10% income tax for individuals and
corporation earnings under MNT 3bn ($2.4m) and 25% on corporation
earnings over MNT 3bn. VAT is 10%.
1.10 Mongolian Stock Exchange
� Established in 1991 as a result of the first round of privatisations of state
properties, the MSE is the second smallest bourse in the world by market cap,
yet the second best performing market in the world in 2010. In December
2010 the London Stock Exchange (LSE) has signed a contract agreement with
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the Mongolian Stock Exchange (MSE). The LSE has been selected as the
international partner to assist in reforming the MSE.
1.11 Mining
� The estimated value of total reserves in Mongolia is US$1.3 trillion.
� Approximately 1,170 mineral deposits and 7,654 occurrences have been
identified to date.
� Occurrences include over 60 types of minerals, including copper, gold, coal,
molybdenum, iron ore, uranium, tin, tungsten, silver, zinc and fluorspar.
� 15 deposits have been acknowledged by the government as strategically
important.
� The mining sector accounts for 81% of exports, 32% of government revenue
and 30% of GDP.
� Only around 27% of Mongolian land has been mapped to a scale of 1:50,000,
therefore, the country’s resources remain largely untapped.
� There are numerous opportunities to invest in many large-scale investments,
e.g. Tavan Tolgoi (TT) coal deposit.
� The government of Mongolia plans to attract up to US$25 billion in foreign
investment for the mining projects in 2011-2015.
� Coal is now Mongolia’s number one export commodity.
� Total coal resources of Mongolia have been estimated at 152 billion tonnes.
� 2010 coal exports reached $877 million in value (16.6 million tonnes).
� By 2015 coal export to China is predicted to increase to 25-40 mtpa.
� Tavan Tolgoi coal deposit, which contains 6.4 billion tonnes of coking (25%)
and thermal (75%) coal, is about to be privatised in Q1 2011.
� Copper was the former major export commodity of Mongolia.
� 2010 copper exports reached $771 million in value (586k tonnes),
representing 26.4% of total exports.
� Oyu Tolgoi deposit contains 81 billion pounds of copper (37 million tonnes)
and 46 million ounces of gold (1,431 tonnes).
� Initial production at Oyu Tolgoi mine is expected in Q3 2012 and commercial
production in 2013.
� Mongolia started producing iron ore in 2007.
� 2010 iron ore exports reached $251 million in value (3.5 million tonnes).
� Iron ore exports now account for 8.7% of total exports.
� Mongolia was officially recognised as an oil producing country in 2008.
� Oil sector remains significantly under-explored.
� 2010 crude exports reached $155 million in value (2.0 million barrels).
� Marubeni Corporation in partnership with Toyo Engineering Corporation are
about to construct a $600 million oil refinery in Mongolia.
� Russia estimated the Mongolian uranium reserves at 30 thousand tonnes
while the Mongolian government identifies the resources at 62,000 tonnes.
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� Mongolia has not started exporting uranium yet.
� Measures on environmental protection and rehabilitation issues have been
strengthened in Mongolia recently.
� The Law on Minerals has been amended and now includes progressively
increasing royalties on 23 types of minerals.
� If a deposit is of strategic importance, the government in entitled to take up
34%-50% of the ownership rights.
� The Foreign Investment Law of Mongolia gives similarly positive treatment to
both foreign and domestic investors with regard to control, use and removal
of their investments.
1.12 Agriculture
� Agriculture in Mongolia is focused on animal husbandry, only 1% of
Mongolia’s arable land is cultivated with crops.
� Livestock accounts for over 80% of agricultural production.
� In 2010 the number of total livestock reached 33 million (human population
of Mongolia = 2.8 million). 11 million heads were lost due to 2010 ‘dzud’.
� In 2010 harvest production reached 1.7 million tonnes.
� Mongolia has recently become self-sufficient in grain and potatoes.
1.13 Real Estate
� The capacity to build residential properties in Ulaanbaatar is enormous,
especially considering the increasing number of expats and foreign executives
arriving in Mongolia.
� The population of Ulaanbaatar increased 30% to 1.1 million in the three years
from 2007.
� More than half of Ulaanbaatar residents live in ger districts surrounding the
city.
� The government is working on a project to replace the ger districts with
proper residential complexes.
� In October 2010, the authorities announced that 0.07 Ha of land in ger
districts can be exchanged for two-room apartments.
� The government plans to construct 100,000 apartments for lower-income
people in Ulaanbaatar and provincial centres for an estimated budget of $6.2
billion.
� Construction and installation works implemented in Mongolia throughout
2010 grew 25.6% from 2009 and reached around $281 million in total.
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1.14 Infrastructure
� Mongolia’s infrastructure, or lack of it, is the most serious inhibitor to
developing its resource wealth. However, there are many ambitious projects
and foreign investment commitments to improve the situation.
� Mongolia’s main rail line is the Trans-Mongolian railway (2,215 km in length).
� 96.7% of roads in Mongolia are unpaved.
� Chinggis Khaan Airport, located 15 km from Ulaanbaatar, is the one and only
international airport of Mongolia.
� Due to dry weather conditions, water is a scarce resource in Mongolia.
� Production levels of all sorts of mines heavily depend on water supply.
� In late 2010, the Oyu Tolgoi team discovered an aquifer, capable of ensuring
40 years of water supply to the mine.
� Most large-scale deposits in Mongolia are located in isolated areas, with very
limited infrastructure.
� The 2010 Global Competitiveness Report ranked Mongolia last for the quality
of overall infrastructure out of 134 countries.
� Mining investments are to total $13 billion in the coming years, of which $1.3
billion is to be spent on mining services.
� Infrastructure development requires around $5.2 billion in investments
through 2011-2020.
� The government is planning to build 2,600 km of paved East-West road and
5,600 km of new railroads.
� The railway infrastructure plan has considered all major mineral deposits and
around $3.0 billion is to be spent on the first phase.
� A $10 billion industrial complex in Sainshand is being built to increase the
value of mineral reserves of Mongolia.
� The construction of Sainshand Park and the associated industrialisation could
increase Mongolian GDP to $41 billion over the next 11 years.
� Mongolia Mining Corporation (MMC) has obtained all necessary permissions
to build a 240 km railway with 15mtpa capacity from its Ukhaa Khudag
deposit located in the Tavan Tolgoi region south to the Mongolian-Chinese
border.
� MMC is also constructing a 245 km paved road with 18mtpa capacity from its
Ukhaa Khudag deposit south to the Mongolian-Chinese border, which will
come into operation in Q1 2011.
� Mongolian authorities chose to build a new railroad in 2011 linking
Mongolia’s largest coal deposit Tavan Tolgoi with Mongolia’s domestic rail
network, rather than establishing a direct route straight to China from TT.
� The Asian Development Bank (ADB) is funding a regional logistics
development project at Zamiin-Uud with $45 million in loans and grants,
which will create a new terminal with road and rail links.
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� The Hong Kong market is expected to be opened up to Mongolia on a regular
basis via direct flights starting in April 2011. Currently, the direct access to
Ulaanbaatar from major global financial centres is unavailable.
� Mongolia’s electricity deficit is expected to reach 500 MW by 2013.
1.15 Privatisation of State Properties
� 2011-2012 privatisation plans will allow international investors to gain access
not only to some of the world's largest unexploited mineral resources, but
also to the non-resource sector boom of the fastest growing economy in the
world.
� State properties to be privatised in 2011-2012:
- Baganuur coal deposit (1.3billion tonnes of lignite coal)
- Erdenet Power Plant and TPP-3 (two out of the 5 power plants making up
the Central Electricity System, which covers the most populated area of
the country, including Ulaanbaatar)
- MIAT or Mongolian Airlines (the largest carrier in the country which
operates flights to Beijing, Berlin, Moscow, Seoul, Tokyo and Irkutsk)
- Mongolian Stock Exchange
- Mongolian Telecom Company (a national telecommunications company
offering variety of services)
- Strategic deposits (the government will bundle in groups the state owned
shares from the 15 strategic deposits by types of minerals and certain
percentages of those will be sold through domestic and international
stock exchanges)
- ... and more
� In December 2010, the London Stock Exchange (LSE) signed a contract
agreement with the Mongolian Stock Exchange (MSE) for the latter’s
restructuring.
� Tavan Tolgoi’s Eastern Block is to be privatised to domestic investors in Q1
2011.
� The tender for strategic investors for Tavan Tolgoi’s Western Block has been
officially announced and closed on 17th
January at 16:00.
� The tender for contract miners for Tavan Tolgoi’s Eastern Block has been
officially announced and closes on the 27th
January 2011.
� China’s Shenhua Energy Co, Peabody Energy Corp from the US, a Russian
consortium led by Gazprom, a consortium of four Japanese trading houses,
including, Itochu Corp, Sumitomo Corp, Sojitz Corp and Marubeni Corp, a
consortium of 10 South Korean companies, including Poco and Korea Electric
Power Corp, Anglo-Australian mining companies Rio Tinto and BHP Billiton,
Brazil’s Vale, India’s International Coal Ventures Pvt, a joint venture of five
state-run companies and others have expressed their interest to participate in
Tavan Tolgoi bid.
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� In December 2010 an agreement was signed between the Mongolian and
Russian Prime Minsters specifying the business plan for the Dornod Uranium
JV.
� Two existing Mongolian-Russian joint ventures, Erdenet and
MongolRosTsvetMet, may soon merge and market their stock.
1.16 Demographics
� Mongolia’s population is 2.8 million people (59% below the age of 30, 27%
below the age of 14).
� The unemployment rate in Mongolia has been lower than 4% since 2002.
During the peak of the economic crisis (2009) it reached 13% and now is
returning to its regular levels.
� 40% of Mongolia’s population live in Ulaanbaatar, 20% in other urban areas,
the remaining 40% in rural areas. 30% are herders.
� 85% of Mongolia’s population consist of ethnic Mongolians, out of which 90%
consist of Khalkha Mongols.
1.17 Languages
� The official language in the country is Khalkha Mongolian. Many Mongolians
have a good grasp of Russian and English.
� Other widely spoken languages are Chinese, Korean, Japanese, French,
Spanish and Italian.
1.18 Religion
� 50% of Mongolia's population follow the Tibetan Buddhism, 40% are listed as
having no religion, 6% are Shamanist, Baha'i and Christian, and 4% are
Muslims.
1.19 Equity Research
� Stock information of top 10 performers on the MSE (+1 mining company) is
provided at the end of this report.
Mongolia Key Statistics
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2 Mongolia Key Statistics
Notes: 1. Non-mining balance excludes revenues from corporate income tax and dividends from mining
companies, the Windfall Profit Tax and royalties. 2. On public and publicly guaranteed debt. 3. Yield of
14-day bills until 2006 and of 7-day bills for 2007. 4. Increase is appreciation. 5. Top-20 index, end of
year, index=100 in Dec 2000. Source: IMF and World Bank
Mongolia: Key Indicators
2003 2004 2005 2006 2007 2008 2009 2010
(f)
Output, Employment and Prices
Real GDP (%yoy change) 7.0 10.6 7.3 8.6 10.2 8.9 -1.6 8.5
Industrial production index - - - 100.0 110.4 113.4 109.6 -
(% yoy change) - - - - 10.4 2.8 -3.3 -
Unemployment (%) 3.4 3.6 3.3 3.2 2.8 2.8 3.3 -
Consumer price index (% yoy change) 4.6 10.9 9.6 5.6 14.1 23.2 11.2 12.0
Public Sector
Government balance (% of GDP) -3.7 -1.8 2.6 3.3 2.8 -5.0 -5.4 -2.2
Non-mining balance (% of GDP)1 -5.9 -5.8 -1.3 -7.3 -13.4 -15.1 -12.9 -11.2
Public Sector Debt 3.1 1.4 0.1 1.0 0.5 0.0 3.7 19.3
Foreign Trade, BOP and External
Trade balance ($mn) -199.6 -99.2 -99.5 136.2 -52.4 -613.0 -195.0 -639.0
Export of goods ($mn) 627.0 872.0 1066.0 1542.0 1889.0 2534.0 1875.0 2446.0
(% yoy change) 19.7 39.0 22.2 44.8 22.4 34.0 -26.0 30.4
Copper exports (% yoy change) - - 14.7 94.8 27.7 12.1 39.9 40.4
Imports of goods ($mn) 826.9 971.3 1021.1 1485.6 2117.3 3147.0 2070.0 3085.0
(% yoy change) 21.6 17.5 16.0 25.4 42.5 70.8 -41.1 30.5
Current account balance ($mn) -102.4 24.1 29.7 221.6 264.8 -722.0 -411.0 -805.0
(% of GDP) -7.1 1.3 1.3 7.0 6.7 -14.0 -9.8 -14.0
Foreign direct investment ($mn) 131.5 128.9 257.6 289.6 360.0 836.0 496.0 422.0
External debt (% of GDP)2 92.6 76.0 61.2 45.1 40.1 33.7 47.1 39.0
Foreign exchange reserves, gross ($mn) 204.0 208.0 333.0 718.0 1001.0 658.0 1328.0 1599.0
In month of imports of g&s 2.4 2.0 2.6 4.3 3.8 3.0 4.3 3.0
Financial markets
Domestic credit (% yoy change) 157.3 25.8 18.8 -3.1 78.4 52.5 -7.6 47.1
Short-term interest rate (% per annum) 3
- 15.8 3.7 5.1 8.4 9.8 - -
Exchange rate (MNT/USD) 1168.0 1209.0 1221.0 1165.0 1170.0 1267.5 1442.8 -
Real effective exchange rate (2006=100)4 94.2 93.9 99.6 102.8 104.8 124.4 102.4 -
(% yoy change) -4.8 -0.4 6.1 3.2 1.9 18.7 -17.7 -
Stock market index (2000=100)5 151.5 120.8 203.6 382.0 2048.0 1181.6 - -
Memo:
Nominal GDP (MNT bn) 1660.0 2152.0 2780.0 3715.0 4600.0 6020.0 6055.0 7911.0
Nominal GDP ($ mn) 1448.0 1814.0 2307.0 3156.0 3930.0 5258.0 4203.0 -
GDP per capita ($) 583.0 722.0 900.0 1214.0 1491.0 1921.0 1551.0 -
Contents
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3 Contents
ABSTRACT 3
1 EXECUTIVE SUMMARY .......................................................... 4
1.1 HISTORY ................................................................................................ 4
1.2 GOVERNMENT ........................................................................................ 4
1.3 FOREIGN RELATIONS ................................................................................ 4
1.4 GEOGRAPHY AND CLIMATE ....................................................................... 6
1.5 ADMINISTRATIVE REGIONS........................................................................ 6
1.6 ECONOMY ............................................................................................. 6
1.7 BANKING SECTOR.................................................................................... 6
1.8 THE CENTRAL BANK ................................................................................ 7
1.9 MONGOLIAN TAXATION SYSTEM ................................................................ 7
1.10 MONGOLIAN STOCK EXCHANGE ................................................................. 7
1.11 MINING ................................................................................................ 8
1.12 AGRICULTURE ........................................................................................ 9
1.13 REAL ESTATE .......................................................................................... 9
1.14 INFRASTRUCTURE .................................................................................. 10
1.15 PRIVATISATION OF STATE PROPERTIES ....................................................... 11
1.16 DEMOGRAPHICS ................................................................................... 12
1.17 LANGUAGES ......................................................................................... 12
1.18 RELIGION ............................................................................................ 12
1.19 EQUITY RESEARCH ................................................................................. 12
2 MONGOLIA KEY STATISTICS ................................................. 13
3 CONTENTS ...................................................................... 14
4 HISTORY OF MONGOLIA ..................................................... 18
4.1 PRE-HISTORY ....................................................................................... 18
4.2 EARLY HISTORY .................................................................................... 19
4.3 MONGOL EMPIRE ................................................................................. 19
4.4 POST-IMPERIAL PERIOD ......................................................................... 19
4.5 UNDER THE QING ................................................................................. 20
4.6 INDEPENDENCE ..................................................................................... 20
4.7 MONGOLIAN PEOPLE'S REPUBLIC ............................................................. 21
4.8 DEMOCRATIC REVOLUTION ..................................................................... 21
5 GOVERNMENT ................................................................. 22
5.1 POLITICAL SYSTEM AND RECENT HISTORY .................................................. 22
5.2 PRESIDENT ........................................................................................... 23
5.3 THE STATE GREAT KHURAL ..................................................................... 23
5.4 MONGOLIA PEOPLE’S PARTY AND DEMOCRATIC PARTY ................................ 23
5.5 PRIME MINISTER AND THE CABINET .......................................................... 23
6 FOREIGN RELATIONS .......................................................... 24
6.1 AFRICA ............................................................................................... 24
6.1.1 EGYPT ................................................................................................. 24
6.2 ASIA ................................................................................................... 25
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6.2.1 RUSSIA ............................................................................................... 25
6.2.2 PEOPLE’S REPUBLIC OF CHINA (PRC) ........................................................ 26
6.2.3 JAPAN ................................................................................................. 27
6.2.4 NORTH KOREA ..................................................................................... 29
6.3 EUROPE .............................................................................................. 29
6.3.1 UNITED KINGDOM ................................................................................ 29
6.4 NORTH AMERICA .................................................................................. 30
6.4.1 CANADA .............................................................................................. 30
6.4.2 USA ................................................................................................... 31
7 GEOGRAPHY AND CLIMATE .................................................. 33
8 ADMINISTRATIVE REGIONS .................................................. 34
9 ECONOMY....................................................................... 35
9.1 THE GLOBAL FINANCIAL CRISIS OF 2008/2009 .......................................... 36
9.2 CURRENT STATE OF THE ECONOMY ........................................................... 36
9.3 GROSS DOMESTIC PRODUCT ................................................................... 38
9.4 MONEY SUPPLY .................................................................................... 39
9.5 BUDGET .............................................................................................. 40
9.6 INFLATION ........................................................................................... 42
9.7 TRADE ................................................................................................ 43
9.7.1 EXPORTS ............................................................................................. 44
9.7.2 IMPORTS ............................................................................................. 45
9.8 IMPLEMENTED POLICIES ......................................................................... 46
9.9 FOREIGN DIRECT INVESTMENT ................................................................. 47
9.10 CURRENCY ........................................................................................... 47
10 BANKING SECTOR ............................................................. 48
10.1 BACKGROUND ...................................................................................... 48
10.2 BANKING SECTOR PERFORMANCE DURING 2008/2009 FINANCIAL CRISIS ........ 49
10.3 STRENGTHENING OF THE FINANCIAL SYSTEM .............................................. 50
10.4 DEPOSITS AND LOANS ............................................................................ 51
10.4.1 NON-PERFORMING LOANS (NPLS) .......................................................... 53
10.5 BANKING INTEREST RATES ...................................................................... 53
10.6 BANK ASSET QUALITY ............................................................................ 55
10.7 BANKING SYSTEM CAPITALISATION ........................................................... 57
10.8 BANKING LAW OF MONGOLIA (2010) ...................................................... 57
10.8.1 SUMMARY OF THE AMMENDED BANKING LAW ........................................... 57
10.9 BANKING SECTOR 2010 SUMMARY .......................................................... 59
10.10 BANKING SECTOR PROSPECTS .................................................................. 59
11 THE CENTRAL BANK ........................................................... 61
11.1 BANK OF MONGOLIA MONETARY POLICY .................................................. 61
11.2 BANK OF MONGOLIA POLICY RATE ........................................................... 61
11.3 CENTRAL BANK’S NON-STANDING FACILITIES .............................................. 62
11.3.1 COLLATERALIZED LOAN ........................................................................... 62
11.4 OBJECTIVES OF MONETARY POLICY ............................................................ 63
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11.5 BANK OF MONGOLIA STANDING FACILITIES ................................................ 63
11.5.1 OVERNIGHT LOAN ................................................................................. 63
11.5.2 REPO FINANCING .................................................................................. 63
11.6 CENTRAL BANK BOND RATE .................................................................... 64
12 MONGOLIAN TAXATION SYSTEM........................................... 65
12.1 GENERAL TAXATION .............................................................................. 65
12.1.1 TAXPAYERS .......................................................................................... 65
12.2 CORPORATE INCOME TAX ....................................................................... 65
12.2.1 TAXPAYERS .......................................................................................... 65
12.2.2 TAX RATE ............................................................................................ 66
12.2.3 TAX EXEMPTION.................................................................................... 66
12.3 PERSONAL INCOME TAX LAW OF MONGOLIA .............................................. 67
12.3.1 TAXPAYER............................................................................................ 67
12.3.2 TAX RATE AND AMOUNT ......................................................................... 67
12.4 VALUE ADDED TAX (VAT) ...................................................................... 68
12.4.1 SCOPE OF VAT ..................................................................................... 68
13 MONGOLIAN STOCK EXCHANGE ............................................ 69
13.1 OVERVIEW ........................................................................................... 69
13.2 THE SECOND BEST PERFORMING MARKET IN THE WORLD ............................... 71
14 MINING ......................................................................... 73
14.1 MINING SECTOR ................................................................................... 73
14.2 EXPLORATION AND GEOLOGICAL MAPPING ................................................ 76
14.3 LICENSES ............................................................................................. 77
14.4 COAL .................................................................................................. 78
14.4.1 TAVAN TOLGOI ..................................................................................... 81
14.5 COPPER/GOLD ..................................................................................... 83
14.5.1 OYU TOLGOI (COPPER-GOLD, MONGOLIA) ................................................. 84
14.6 IRON ORE ............................................................................................ 85
14.7 OIL .................................................................................................... 87
14.8 URANIUM............................................................................................ 89
14.9 MINERALS LAWS AND TAXES ................................................................... 90
14.9.1 STRATEGICALLY SIGNIFICANT DEPOSITS ..................................................... 90
14.9.2 OVERVIEW OF FOREIGN INVESTMENT ........................................................ 93
14.9.3 FOREIGN INVESTMENT IN MINING ............................................................ 94
14.9.4 PROGRESSIVE ROYALTIES ON MINERALS ..................................................... 97
15 AGRICULTURE .................................................................. 99
15.1 DZUD ............................................................................................... 100
16 REAL ESTATE ................................................................. 101
17 INFRASTRUCTURE ............................................................ 106
17.1 RAILWAY ........................................................................................... 106
17.2 ROADS .............................................................................................. 107
17.3 AIRPORTS .......................................................................................... 107
17.4 WATER ............................................................................................. 107
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17.5 MINING BOOM AND INFRASTRUCTURE DEVELOPMENT ................................ 108
17.6 INDUSTRIAL PARK IN SAINSHAND ........................................................... 112
17.7 RECENT DEVELOPMENTS ....................................................................... 113
17.8 MINING BOOM AND AIR INDUSTRY ......................................................... 115
18 PRIVATISATION OF STATE PROPERTIES .................................. 117
18.1 2011-2012 PRIVATISATION STRATEGY ................................................... 117
18.1.1 NEAR TERM PRIVATISTAION TARGETS ...................................................... 117
18.1.2 DETAILED MAPS OF PLANNED PRIVATISATIONS .......................................... 120
18.1.3 STATE PROPERTY COMMITTE................................................................. 124
18.1.4 RECENT DEVELOPMENTS ....................................................................... 125
19 DEMOGRAPHICS ............................................................. 127
20 LANGUAGES .................................................................. 129
21 RELIGION ...................................................................... 130
1 EQUITY RESEARCH ........................................................... 131
1.1 TAVAN TOLGOI ................................................................................... 131
1.2 BAGANUUR ........................................................................................ 132
1.3 SHIVEE OVOO .................................................................................... 133
1.4 APU ................................................................................................ 134
1.5 MONGOLIA TELECOM .......................................................................... 135
1.6 SHARYN GOL ...................................................................................... 136
1.7 GOBI ................................................................................................ 137
1.8 BDSEC .............................................................................................. 138
1.9 ADUUNCHULUUN ................................................................................ 139
1.10 MONGOLIA DEVELOPMENT RESOURCES .................................................. 140
1.11 MOGOIN GOL .................................................................................... 141
2 DISCLAIMERS ................................................................. 142
3 REFERENCES .................................................................. 143
4 CONTACTS .................................................................... 144
History of Mongolia
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4 History of Mongolia Horse nomadism, Chinggis Kahn, Qing dynasty, Russian liberation, communism, bloodless democratic revolution, free market economy…
The Mongol Empire was founded by Chinggis Khan in 1206. Following the collapse
of the Yuan Dynasty, the Mongols returned to previous behaviour of constant
internal conflict and raids on the Chinese borderlands. Mongolia came under the
influence of Tibetan Buddhism in the 16th and 17th centuries, but by the end of
the 17th century, most of Mongolia had fallen under the rule of the Qing Dynasty.
With the demise of the Qing Dynasty in 1911, Mongolia declared independence,
but had to struggle until 1921 to firmly establish de facto independence from
China, and only gained international recognition of it in 1945.
Afterwards, Mongolia came under strong Soviet influence; in 1924, the Mongolian
People's Republic was declared, and Mongolian politics began to follow the same
patterns as that of the Soviet Union at the time. After the breakdown of
communist regimes in Eastern Europe in late 1989, Mongolia saw its own peaceful
Democratic Revolution in early 1990, which led to a multi-party system, a new
constitution in 1992, and the on-going transition to a market economy.
4.1 Pre-History
Homo erectus inhabited Mongolia 800,000 years ago, whereas modern humans
reached Mongolia approximately 40,000 years ago during the Upper Paleolithic
period.
Neolithic agricultural settlements (c. 5500-3500 BC) preceded the introduction of
horse-riding nomadism, and became the dominant lifestyle during the Copper and
Bronze Age (3500-2500 BC). The wheeled vehicles found in burials have been
dated to before 2200 BC. Pastoral nomadism and metalworking became more and
more developed with the Okunev Culture (2nd millenium BC), Andronovo culture
(2300-1000 BC) and Karasuk culture (1500-300 BC), culminating with the Iron Age
Xiongnu Empire in 209 BC.
Tocharians (Yuezhi) and Scythians inhabited western Mongolia during the Bronze
Age. The mummy of a 30-40 year old, male Scythian warrior with blond hair is
believed to be 2,500 years old, and was found in the Altai, Mongolia. As horse
nomadism was introduced into Mongolia the political center of the Eurasian
Steppe shifted with it to Mongolia, where it remained until the 18th century CE.
Cultivation of crops continued since the Neolithic period, but has always remained
small-scale compared to pastoral nomadism, which was first introduced from the
West.
1206: The Mongol Empire 1921: Independence 1945: International recognition
CHINGGIS KHAN
1924: Soviet influence, socialism 1990: Democratic revolution
Modern humans reached Mongolia 40,000 years ago
5500-3500 BC: horse-riding nomadism became dominant lifestyle
2300-1000 BC: development of pastoral nomadism and metalworking
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4.2 Early History
Since pre-historic times, Mongolia has been inhabited by nomads who
occasionally formed great confederations that rose to prominence. The first of
these, the Xiongnu, were brought together to form a confederation by Modu
Shanyu in 209 BC. They soon emerged as the greatest threat to the Qin Dynasty,
forcing the latter to construct the Great Wall of China. During Marshal Meng
Tian's tenure it was guarded by up to 300,000 soldiers in order to defend against
the destructive Xiongnu raids.
The Xiongnu empire (209 BC-93 AD) was superseded by the Mongolic Xianbei
empire (93-234) which ruled over a larger area than present-day Mongolia. The
Mongolic Rouran Khaganate (330-555) ruled a massive empire before being
defeated by the Gokturks (555-745) whose empire was even larger. They were
followed by the Uyghur Khaganate (745-840) who were in turn defeated by the
Kyrgyz. During the Liao Dynasty (907-1125) the Mongolic Khitans ruled Mongolia
after which the Khamag Mongol (1125-1206) rose to prominence.
4.3 Mongol Empire
During the chaos of the late 12th century, a chieftain named Temüjin united the
Mongol tribes between the Altai Mountains and Manchuria. He took the title
Chinggis Khan In 1206, and waged a series of brutal and ferocious military
campaigns, sweeping through much of Asia, and forming the largest contiguous
land empire in the history of the world. Under his successors it stretched from
present-day Poland in the west to Korea in the east, and from Siberia in the north
to the Gulf of Oman and Vietnam in the south, covering 13 million square miles
(or 22% of the Earth's total land area) and included a population of over 100
million people.
Following the death of Chinggis Kahn, the empire was subdivided into four
kingdoms (“Khanates”), which eventually became semi-independent after
Möngke's death in 1259. One of the khanates, the "Great Khaanate", included the
Mongol homeland and China, and became the Yuan Dynasty under Chinggis
Khan’s Grandson, Kublai Khan. His capital was in present day Beijing, but after a
century the Yuan was superseded by the Ming Dynasty in 1368, with the Mongol
court fleeing north. As the Ming armies pursued the Mongols into their homeland,
they sacked the Mongol capital of Karakorum, among other cities, throwing
Mongolia back into anarchy and wiping out cultural progress made by the
Mongolians during their imperial period.
4.4 Post-Imperial Period
The centuries that followed were marked by violent power struggles between
various factions and there were numerous Chinese invasions. The Oirads, under
Esen Tayisi, gained the upper hand in the early 15th century and raided China in
1449 in a conflict over Esen's right to pay tribute, and in the process captured the
The Modu Shanyu confederation forced the Qin Dynasty to construct the Great Wall of China
Previous monarchs: 209 BC-93 AD: Xiongnu 93-234: Mongolic Xianbei 330-555: Mongolic Rouran Khaganate 555-745: Gokturks 745-840: Uyghur Khaganate 907-1125: Mongolic Khitans 1125-1206: Khamag Mongol
1206: Chinggis Khan assembled the Mongol Empire
The Mongol Empire - the largest contiguous land empire in the history of the world: - 33 million sq. km - 100 million people
1368: Collapse of the Mongol Empire
Following centuries: violent power struggles between various fractions
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Chinese Emperor. However, the Borjigids were recovered when Esen was
murdered in 1454.
Batumongke Dayan Khan reunited the entire Mongols under the Chinggisids in the
early 16th century and in 1557, Altan Khan of the Tümed, Grandson of
Batumöngke, founded Hohhot. His meeting with the Dalai Lama in 1578 sparked
the second introduction of Tibetan Buddhism to Mongolia. Abtai Khan converted
to buddhism in 1585 and founded the Erdene Zuu monastery.
4.5 Under the Qing
Ligden Khan was the last Mongol Khan (early 17th century). He alienated most of
the Mongol tribes and got into conflicts with the Manchu over the looting of
Chinese cities. He died on his way to Tibet in 1634, whilst attempting to destroy
the Yellow Hat sect of Buddhism and evading the Manchu. By 1636, most Inner
Mongolian tribes had submitted to the Manchu and the Khalkha eventually
submitted to the Qing in 1691, thus bringing all but the west of today's Mongolia
under Beijing's rule. The Dzungars were virtually wiped out in 1757–58 by several
wars. Mongolian culture remained in tact because The Manchus forbade mass
Chinese immigration.
The Manchu maintained control of Mongolia until 1911 with a combination of
military and economic measures, intermarriages and alliances. Manchu high
officials, “Ambans”, were installed around territories and the country was
subdivided into ever more feudal and ecclesiastical fiefdoms. During the 19th
century, feudal lords cared more about representation than the responsibilities of
their subjects. This behaviour of Mongolia's nobility resulted in poverty becoming
ever more widespread, and was worsened by the usurious practices of Chinese
traders and the collection of imperial taxes in silver instead of livestock.
4.6 Independence
Following the collapse of the Qing Dynasty, Mongolia declared independence in
1911 under Bogd Khaan. However, the newly established Republic of China
claimed the territory of Mongolia as part of its own. The area controlled by the
Bogd Khaan was approximately that of the former Outer Mongolia, and the 49
hoshuns of Inner Mongolia expressed their willingness to join the new country,
but to no avail. In 1919, after the October Revolution in Russia, Chinese troops
occupied Mongolia, led by Xu Shuzheng.
However, in October 1920 as a result of the Russian Civil War, the White Russian
adventurer Baron Ungern led his troops into Mongolia, where in February 1921 he
defeated the Chinese at Niislel Khüree (Ulaanbaatar). Bolshevik Russia supported
the establishment of a communist Mongolian government and army to reduce the
threat posed by Ungern. This Mongolian army took the Mongolian part of Kyakhta
from the Chinese on March 18, 1921, and Russian and Mongolian troops arrived
in Khüree on July 6. Mongolia's independence was once again declared on July 11, The eighth Jebtsundamba
Khutuktu (Bogd Khaan)
Ligden Khan: the last Mongol Khan
1636: most Inner Mongolian tribes submitted to Manchu
1691: Khalkha Mongol submitted to Qing Empire
Until 1911: the Manchu maintained the control of Mongolia
16th
century: Mongolia reunited 1578: Second introduction of Tibetan Buddhism
1911: independence from Qing Dynasty
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1921. Mongolia remained closely aligned with the Soviet Union over the next
seven decades.
4.7 Mongolian People's Republic
Following the death in 1924 of the king and religious leader, Bogd Khan, a
Mongolian People's Republic was proclaimed with support from the Russians.
By the beginning of the 20th century, 750 monasteries were functioning in
Mongolia, and during the 1920s approximately one third of the male population
were monks. In 1928, Khorloogiin Choibalsan rose to power. He instituted
collectivisation of livestock, the destruction of Buddhist monasteries and the
murder of monks and other “enemies of the people”. The Stalinist purges in
Mongolia beginning in 1937 left more than 30,000 people dead. Japanese
imperialism became even more alarming following the invasion of neighbouring
Manchuria in 1931. However, during the Soviet-Japanese Border War of 1939, the
Soviet Union successfully defended Mongolia against Japanese expansionism.
Mongolian forces also took part in the Soviet Manchurian Strategic Offensive
Operation of August 1945 in Inner Mongolia. China agreed to recognize Outer
Mongolia's independence, provided a referendum was held, because of the Soviet
threat of seizing parts of Inner Mongolia. The referendum took place in October
1945 and 100% of the electorate voted for independence, according to official
numbers. Both countries confirmed mutual recognition on October 6, 1949
following the establishment of the PRC.
Mongolia continued to align itself closely with the Soviet Union, especially as
relations worsened between the PRC and the USSR in the late 1950s. In the 1980s,
55,000 Soviet troops were based in Mongolia.
4.8 Democratic revolution
Mongolian politics was strongly influenced by the introduction of perestroika
(restructuring) and glasnost (openness and freedom of speech) by Mikhail
Gorbachev in the early 90s, leading to the peaceful Democratic Revolution, the
introduction of a multi-party system and a market economy. In 1992, a new
constitution was introduced and the "People's Republic" was dropped from the
country's name. The first election wins for non-communist parties came in the
1993 Presidential elections and the 1996 parliamentary elections.The transition to
a market economy was often rocky, with the early 1990s seeing food shortages
and high inflation. The signing of the Oyu Tolgoi copper/gold mine contract is
considered a major cornerstone in recent Mongolian history. The Mongolian
People's Revolutionary Party dropped the “Revolutionary” from its name in 2010.
1921: full independence from China
1924: Mongolian People’s Republic established
1924 onwards: centrally planned economy, destruction of monasteries, murder of monks, Stalinism
1945: China recognised Outer Mongolia’s independence
1945 onwards: Mongolia aligned closely with USSR
1990: peaceful Democratic Revolution, introduction of multi-party system & market economy
1992: new constitution
1993: the first election wins for non-communist parties
Government
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5 Government Democracy, coalition government between the MPP & the DP, ‘State Great Khural’, elections in 2012…
Mongolia exists as a parliamentary republic, whose government is elected by
parliament, which is in turn elected by the people. Mongolia's constitution
guarantees full freedom of expression and religion and Mongolia has a number of
competing political parties, the most significant two being the Mongolian People's
Party (MPP, formerly the MPRP) and the Democratic Party (DP).
5.1 Political System and Recent History
Mongolian politics is established under the framework of a parliamentary
democracy, in which the State Great Khural (Parliament) holds legislative powers
and the executive branch is headed by the Prime Minister who appoints a
Cabinet. The President of Mongolia has limited executive powers but acts as the
Head of State and Commander-in-Chief of Mongolia’s army. Elections are held
every four years, and so there have been six parliamentary and Presidential
elections since 1991. The MPRP won the parliamentary and Presidential elections
in 1992, but was defeated by the Democratic Party in 1996. The 2000
parliamentary election returned the MPRP to dominant power, who remained in
office after the 2004 elections, but with reduced representation.
From 2004 there were numerous changes of Prime Minister. A coalition
government headed by the leader of the Democratic Party, Elbegdorj Tsakhia, was
formed in 2004. In January 2006, he was replaced by MPRP leader Enkhbold
Miyeegombo as Prime Minister, who in turn resigned his position following his
failure to be re-elected as MPRP Chairman, and was superseded by Bayar Sanjaa.
In November of 2007, a new cabinet was formed with members of several
different parties. Again the MPRP won a majority in the 2008 parliamentary
elections, but allegations of electoral fraud by the opposition led to the first ever
riots and several damages to property and deaths arose. Consequently, the MPRP
invited opposition members into the Cabinet forming the coalition government
that exists today.
In May 2009, the long tenure of MPRP politicians in the Presidential seat was
ended when the Democratic Party figure Elbegdorj Tsakhia was elected President.
Mr Bayar resigned his position in October of 2009 due to ill-health, and was
replaced by the current Prime Minister, Sukhbaataryn Batbold, who was
previously Minister of Foreign Affairs.
Sukhbaatar Square in front of the Saaral
Ordon that houses the offices of the
Prime Minister and President
The biggest political parties: The Mongolian People's Party (MPP) The Democratic Party (DP)
Current Prime Minister: Sukhbaataryn Batbold Current President: Tsakhiagyn Elbegdorj
2008: coalition government formed between the MPP and DP
Since Democratic Revolution, there has been continuous replacement of governments
Government
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5.2 President
Mongolia's President, as Head of State, has a largely symbolic role, but with the
power to block Parliament's decisions. Parliament can then over-rule the veto
with a two-thirds majority vote. The President is required to formally resign his or
her party membership when he takes office. The current President, Tsakhiagiin
Elbegdorj, was twice formerly the Prime Minister and member of the Democratic
Party. He was elected as President on May 24, 2009. Mongolia's constitution
provides three requirements for taking office as President; the candidate must be
at least 45 years old, be a native-born Mongolian and have resided in Mongolia
for five years prior to taking office.
5.3 The State Great Khural
“The State Great Khural” is the name of the parliament, and consists of a single
chamber with 76 seats with a house speaker who acts as Chairman. The members
of parliament are elected every four years.
5.4 Mongolia People’s Party and Democratic Party
The Mongolia People’s Republic Party, or MPRP, governed the country in a one-
party system from 1921 to 1990. Then, with the peaceful democratic revolution,
came a multi-party system. The party continued governing until 1996, and from
2000 to 2004, after which it formed a coalition with the Democratic Party and two
others, and since then has formed two other coalitions, initiating the change both
times and remaining the dominant party. The MPRP won the last round of
parliamentary elections in June 2008, and in November 2010, the party reverted
to its initial name of 1921 by removing the “revolutionary” title, now known
simply as the Mongolia People’s Party, or MPP.
The Democratic Party, or DP, was the dominant governing party in the coalition
formed from 1996-2000 and approximately an equal partner in the coalition
formed from 2004-2006.
5.5 Prime Minister and the cabinet
The current Prime Minister, Sukhbaataryn Batbold, assumed office on 29 October
2009, and his deputy Prime Minister is Norovyn Altankhuyag. There are ministers
of each department (finance, defense, labour, agriculture, etc.) and those offices
constitute the Prime Minister's cabinet, as nominated by the Prime Minister in
consultation with the President and confirmed by the State Great Khural. A key
position of present, given the importance of mining to the economy, is the
Minister of Minerals and Energy, currently held by Minister D.Zorigt.
President of Mongolia, Tsakhiagyn
Elbegdorj
46
27
3
PARLIAMENTARY SEATS
MPP Democratic Party Others
Foreign Relations
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6 Foreign Relations Key relations with Russia (largest importer into Mongolia, uranium & rail JVs), China (85% of Mongolian exports), North Korea (amicable relationship) & Japan (interests in rare earth expansion)
In developing its relations with other countries, Mongolia is guided by universally
recognized principles and norms of international law as defined in the UN charter.
Mongolia has bilateral relations with 140 countries and diplomatic relations with
149 countries. Recently, the government has put much emphasis on encouraging
foreign investment into Mongolia.
6.1 Africa
6.1.1 Egypt
Relations between Egypt and Mongolia officially began in 1964, since then the
countries have signed various bilateral corporation agreements. The only
Mongolian embassy on the African continent is in Cairo.
Recent Official Visits
A Mongolian parliamentary delegation visited Egypt in June 2001 in order to sign
an agreement to try to boost Mongolian students attending Egyptian courses.
In April 2004, the Mongolian President Natsagiin Bagabandi met with the Egyptian
President, Hosni Mubarak, in Egypt and discussed ways to improve bilateral
relations, as well as problems in Iraq and Palestine. They signed an executive
protocol for agreements on economic cooperation, air services and investment
protection.
In March 2007, the Egyptian Minister of International Cooperation visited
Ulaanbaatar where he met Mongolian Prime Minister Miyeegombyn Enkhbold.
In October 2008, the Secretary General of the Egyptian Fund for Technical
Cooperation with the Commonwealth visited Ulaanbaatar where he met with
ministers and discussed enhanced cooperation between Egypt and Mongolia. The
Mongolian officials said they welcomed the technical support provided by the
fund in training and other economic benefits.
Mongolia maintains bilateral relations with 140 and diplomatic relations with 149 countries.
June 2001: cooperation agreement was signed
2007: enhanced cooperation between the two countries discussed
Foreign Relations
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Security cooperation
Mongolia and Egypt have cooperated on security exercises and operations, such
as Mongolian policeman visiting Egypt in 2001 to train for techniques in
prevention of drug-trafficking and anti-terrorism, and in 2008 Mongolian officials
visiting Egypt to learn of the role of anti-corruption officers.
6.2 Asia
6.2.1 Russia
Mongolia almost certainly has the strongest relationship with Russia, who it has
been close with ever since the Russians helped liberate Mongolia from the
Chinese in 1921, and over the next 70 years the Soviet Union was the country’s
greatest ally. Both are members of the Organization for Security and Co-operation
in Europe, Mongolia has an embassy in Moscow and Russia has one in
Ulaanbaatar.
Background
Mongolia shares its borders with only two countries, Russia and China, and as a
result its economics and politics are directly influenced by the two. The majority
of imports come from Russia, in particular petroleum and diesel, and they two
countries share a 3,500km border.
In the past, Mongolian invasions in the 13th
century bought much of Russia into
the Mongol Empire, and a significant portion of the Russian population were
killed. Most of Russia remained under Mongol rule for the following 300 years. In
1921, the Soviets helped establish the Mongolian People’s Republic after helping
to ward off the Chinese invasion.
Communist era
Both nations forged close relations during soviet times with strong industrial trade
links, and a large number of soviet troops were permanently deployed in
Mongolia through fear of Chinese expansionism. Mongolia supported Russia
during the Sino-Soviet split of the 1950s, and a treaty of peace, friendship and
cooperation was signed between the two nations in 1986. Plans for the
withdrawal of Russian troops from Mongolia were finalised in 1989.
Modern era
Following the end of the cold war and dissolution of the Soviet Union, Russia’s
trade with Mongolia decreased by 80% almost overnight and China’s influence
over Mongolia increased. However, today the majority of imports come from
Russia, in particular petroleum and diesel imports.
2001 and 2008: enhancement of security cooperation
Russia and Mongolia share a 3,500km border
Russia helped Mongolia to ward off the Chinese invasion
The Mongolian People's Republic was established under the Soviet influence in 1921
Close bilateral relations due to both communist regimes
Collapse of Soviet Union, Mongolia's trade with Russia declined by 80%
1986: treaty of peace, friendship and cooperation signed
Foreign Relations
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In 2000, Vladimir Putin (then President of Russia) made a visit to Mongolia to re-
strengthen a bilateral treaty, which was the first visit by a Russian head of state
since Leonid Brezhnev in 1974.
Recently, a meeting between Ruissian PM Vladimir Putin and his Mongolian
counter-part S. Batbold led to Russia writing off 97.8% of Mongolian debts which
had accumulated during soviet times - $172m, of which Mongolia would only be
asked to pay back $3.8m in a single transfer.
Uranium exploration and recent Joint Venture
Through the decades of former Soviet exploration in Mongolia in the second half
of the last century, Russia has become an adept student of Mongolian geology
and mining potential. From 1970-1990, the Soviet Union discovered 6 uranium
deposits in which it estimated 1.5mt of reserves in Mongolia. All 190 reports on
the discoveries are currently held in Russia, whereas the Mongolians have only
been given copies to 34 of these reports. Russia now finds itself positioned again
as a very important player participating in Mongolian uranium exploration.
In December 2010, Mongolia and Russia signed an agreement to develop the
Dornod uranium resource, Mongolia’s biggest untapped uranium field. Rosatom
Corp., Russia’s nuclear power company, Russia’s government-run ARMZ Uranium
Holding, Mongolia’s state-owned KOO MonAtom and the country’s Nuclear
Energy Agency (NEA) signed the agreement in Moscow. Mongolians will remain in
control, with 51% of the share to Monatom and 49% going to ARMZ.
The Russians will invest $300 million in the first stage, and first production is
expected in 2011, with the action plan stating that the JV would begin to function
around June. The expected Mongolian reserves are 30,000 tons, and the new
company will survey, mine and process the uranium.
6.2.2 People’s Republic of China (PRC)
As the Soviet Union had been Mongolia’s main ally and the most influential
neighbouring power up until 1990, foreign relations between the PRC and
Mongolia used to be predominantly determined by the PRC and USSR relations.
With adoption of democracy and transition to a market economy, Mongolia’s
relationships with China also began to improve. Currently the PRC is the largest
trading partner of Mongolia.
Background
Mongolia and China instigated many wars throughout history, provoking the
Chinese to build their Great Wall to defend against the Mongols. Although
Khubilai Khaan conquered the majority of China and established the Mongolian
capital at the location of modern Beijing, the Qing dynasty of Manchu invaded
Mongolia in the 18th
century. The ruling of the Qing dynasty came to an end in
1911, when Mongolia declared its independence. Although in 1919 China
regained control over the region, in 1921 the USSR forces helped Mongolia to
Russia holds 190 reports on Mongolia’s 6 uranium fields, Mongolia only has access to 34
Mongolia and China wars
2000: Vladimir Putin renewed a major bilateral treaty
Russian government writes off 98% of Mongolia's state debt
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reclaim its independence, prompting the later formation of the Mongolian
People’s Republic.
Communist era
In October 1949, Mongolia established diplomatic relations with the PRC.
Although a border treaty was signed in 1962, Mongolia requested for further
support from the USSR due to security concerns. Only in 1984, when a high-
power delegation from China visited Mongolia, was tension over bilateral
relations relaxed, and the two nations started to set apart their borders. Various
agreements to improve trade and create air and transport links were signed in
1986. A treaty on border control was verified in 1988.
Modern period
Since the end of the Cold War, China has been continuously making effort to
strengthen its bilateral ties with Mongolia with all due respect to the latter’s
autonomy. In 1994, the two countries signed a treaty of friendship and
cooperation. Today, the PRC has become the major trading partner of Mongolia
and the greatest contributor in mining related foreign investments. China’s
decision to allow Mongolia to use its Tianjin port was a significant move bolstering
the landlocked country’s trade with the Asia Pacific region.
Recent News
The latest news informs that around 15 million tonnes of coking coal has been lost
in Queensland floods in Australia, the largest exporter of coal to China. Mongolia
will soon have the capacity to supply 25-40 mtpa of coal to the PRC. It has been
continuously noted that there are great opportunities for mutually beneficial
cooperation between the two countries, especially since Mongolia has abundant
natural resources and China has the market. Currently, negotiations are taking
place on the establishment of dairy and flour factories in rural Mongolia.
6.2.3 Japan
The People’s Republic of Mongolia established diplomatic relations with Japan in
February 1972. The ties were strengthened after the Democratic Revolution in
Mongolia.
Japan-Mongolia relations over 2006 - 2010 2006 First ever visits by Mongolian and Japanese Prime Ministers
• Contracts for SME development and environmental protection project
were signed, an official development assistance loan to Mongolia was
approved (JPY 3 billion/$36 million)
• Over 80 members of the Japanese Diet visited Mongolia
1949: diplomatic relations with PRC 1962: border treaty signed 1984: demarcation of border 1986: further agreements 1988: border treaty verified
1994: treaty of friendship and cooperation Mongolia given access to Tianjin port
25-40 mtpa of coal from Mongolia to China Dairy and flour factories to be developed in rural Mongolia
1972: diplomatic relations with Japan Capitalism in Mongolia strengthened further ties
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2007 Mongolian President visits Japan
� Basic action plan for Mongolia-Japan cooperation over the following ten
years was signed
� An agreement was signed to hold a two-stage Public-Private Joint
Consultative Meeting for promotion of trade, investment and joint
utilisation of mineral resources.
2008
Speaker of the Mongolian Great Khural visits Japan
� A project for a new international airport near to Ulaanbaatar was
approved. A contract for an official development assistance loan to
Mongolia for the airport project was signed (JPY 29 billion/$349 million)
2009
Mongolian Prime Minister and Foreign Affairs Minister visit Japan
• A new loan was approved for the development of public finances ($50
million to be repaid in 2 years)
2010
• An agreement to cooperate in the rare-earths development sector of
Mongolia was signed between the two countries (96% of Japan’s rare-
earth metals are imported from China and the latter restricted their
export quotas by 72% and 35% in H2 2010 and Q1 2011 respectively.
China controls more than 95% of the world’s rare-earth output)
• Japanese geologists and scientists launched exploration of rare-earth
elements in Mongolia.
Economic cooperation
The economic relations of Mongolia and Japan have been significantly expanded
since the former’s transition to a market economy in 1991. Japan has historically
been the largest aid benefactor to Mongolia, until the US had approved a
“Millennium Challenge Compact” aid worth $285 million in October 2007.
At first, economic cooperation between the two nations was mainly in the form of
humanitarian aid to support the population of Mongolia, who were struggling to
bypass the transition period. The cooperation, however, later was extended to
focus on the development of infrastructure projects and to facilitate self-
sufficiency in certain sectors of the economy.
Economic ties strengthened after 1990 Japan – former largest aid donor to Mongolia From humanitarian aid to larger-scale projects
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6.2.4 North Korea
The People’s Republic of Mongolia established diplomatic relations with North
Korea in October 1948, when the former acknowledged the Soviet-backed
government of Kim II-Sung. Mongolia is one of the few countries in the world that
maintains warm relations with the Democratic People's Republic of Korea (DPRK).
History
During the 1950s’ civil war in Korea, Mongolia supported North Korea by
providing assistance. The first cooperation and friendship treaty between the two
countries was signed in 1986, after which Kim II-Sung paid an official visit to
Mongolia in 1988.
Abandonment of socialism and transition to democracy caused the two nations’
diplomatic relations to collapse, such that in 1995 the previously signed
cooperation treaty was cancelled and North Korea closed their embassy in
Ulaanbaatar in 1999.
The July 2007 visit by the Presidium of the Supreme People's Assembly of the
Democratic People's Republic of Korea, Kim Yong Nam, was the first high-status
visit to Mongolia by a North Korean delegate in 19 years.
North Koreans are deemed to see Mongolia as a “fellow non-Western” nation
which went through an experience similar to the DPRK’s during the Soviet era.
In 2006 rumours went that the Mongolian government allocated 1.3 square km of
land to North Korean refugees for the establishment of a camp in 40 km from
Ulaanbaatar, but the Mongolian Prime Minister of that time, M. Enkhbold,
officially rejected such a postulation.
6.3 Europe
Mongolia endeavours to maintain close relationships with European countries. In
1991, Mongolia signed an economic cooperation agreement with the UK, and
investment promotion and protection agreements with France and Germany.
6.3.1 United Kingdom
Recent Controversy
On September 17, 2010 the Mongolian Chief of Administration at the National
Security Council, Mr. B.Khurts, was arrested at Heathrow Airport while paying an
official visit to the United Kingdom. He was accused of kidnapping D.Enkhbat, a
Mongolian citizen who later died from health problems, from France as the
suspect in a high government official’s murder. Mr. Khurts and his three
associates’ action was deemed as alleged kidnapping, violating the Law of the
European Union.
1948: diplomatic relations with North Korea Mongolia backed North Korea during Korean civil war 1986: cooperation and friendship agreement 1995: cancellation 2007: first high-profile visit by North Korean delegate in 19 years
1991: cooperation agreements with UK, France and Germany
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After the incident, the Mongolian Prime Minister Sukhbaataryn Batbold cancelled
his official visit to London which was scheduled for 27 November 2010. Some see
this as an expression of Mongolia’s discontentment with the arrest of Mr. Khurts,
who was diplomatically immune, and the refusal of the British government to
release him upon Mongolia’s request.
6.4 North America
6.4.1 Canada
Canada and Mongolia established bilateral ties in November 1973. Mongolia
operates an Embassy in Ottawa and an Honorary Consulate in Toronto, while
Canada has an Honorary Consulate in Ulaanbaatar and an Embassy in nearby
Bejiing (China).
The two countries’ diplomatic relations were intensified when the Canada-
Mongolia Society was founded in 1980. After the collapse of the USSR, Canada
started supporting Mongolia by providing aid through its non-governmental
organizations and other specialised development agencies.
At the end of 2009, the Canadian FDI into Mongolia reached CAD 601 million
(around $594 million). According to the estimates, in 1999 – 2009 the bilateral
merchandise trade between the two nations rose over 60x from CAD2.6 million
($2.57 million) in 1999 to CAD163.8 million ($162 million) in 2009. Toronto-based
mining companies such as Ivanhoe Mines, SouthGobi Resources and Centerra
Gold are the major players in the Mongolian mining industry.
Recent News
Canadian FDI thus far has been mainly concentrated in the mineral resource
sector of Mongolia. Negotiations are ongoing on the signing of a foreign
investment promotion and protection agreement (FIPA) between the two nations.
In September 2010, the Mongolian Prime Minister (PM) Sukhbaataryn Batbold
attended the Canada-Mongolia Investors' Forum held in Toronto. Representatives
of the most influential mining companies with assets in Mongolia gathered at the
conference. The Prime Minister highlighted Mongolia’s intentions to create a
more favourable environment in the country for foreign businesses and investors
through legal and regulatory regime.
Mr. Batbold also paid a visit to the Toronto Stock Exchange (TSX). 19 companies
that are actively engaged in mining and exploration businesses in Mongolia are
listed on the TSX. The stock exchange officials expressed their willingness to help
develop the Mongolian Stock Exchange (MSE).
Subsequently the Prime Minister attended another investor meeting in Vancouver
where he stated that Mongolia should see Canada as a role model in terms of
Sep 2010: Mr. Khurts arrested at Heathrow Nov 2010: Mongolian PM cancelled his visit to UK
1973: bilateral relations with Canada Post-1990: strengthened relations 2000-2009: FDI x 60
Canadian FDI – mostly into mining
Sep 2010: Mongolian PM visits Canada PM calls for more FDI
PM visits TSX 19 companies with assets in Mongolia on TSX
Canada as Mongolia’s role model
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development, efficient utilisation of natural resources, cost-effective agriculture,
and high-quality public governance and education systems.
The PM pledged that Mongolia will continue supporting Canadian investors and
recommended that companies start building processing plants in Mongolia,
similar to those in Canada, so that the value of their extracted minerals could be
significantly enhanced.
A memorandum of understanding (MOU) was signed between the two countries
to promote cooperation on civil services in Mongolia.
6.4.2 USA
US Assistance
The United States agency for International Development (USAID) has continuously
been one of the key aid donors to Mongolia. The program primarily focuses on
“sustainable, private sector-led economic growth and more effective and
accountable governance”. As stated by the organization, in 1991-2008 USAID
granted Mongolia $174.5 million in total. The budget allocated in 2007 amounted
to $6.6 million and comprised projects in various fields.
In 2006, the United States Department of Agriculture granted Mongolia food aid
worth $4.2 million with the intention to improve the livelihood of herders and
encourage entrepreneurship in the agricultural sector of the economy.
The US also supports Mongolia’s reforms in defence. Since 2003 Mongolia has
been contributing small numbers of troops to support US operations in
Afghanistan and Iraq, and in 2005 it also deployed armed peacekeepers to UN and
NATO missions. The 100 troops sent to Iraq were withdrawn in 2008, as Russia
and China applied significant pressure.
The Peace Corps from the US, which is mainly focused on English teaching and
training work, operates with around 100 volunteers in Mongolia. The organisation
is also active in such fields as SME development, public health and youth
education. In 2011, the program will celebrate its 50th
anniversary and its 20th
anniversary in Mongolia.
In October 2007, the Mongolian government signed a Compact agreement with
the Millennium Challenge Corporation (MCC) for the receipt of a grant worth $285
million. The program comprises projects in railroad development, improvement of
vocational training, upgrade of health services and establishment of a property
registration system in Mongolia.
Recent News
In November 2010, two Mongolian Parliament Members and the Director of
MonAtom, a state organization accountable for all uranium licenses in Mongolia,
visited the USA for discussions on partnership in the mining sector. The visitors
learnt about the United States’ uranium exploration and enrichment experience,
Sep 2010: MOU on improvement of civil services
USAID – key aid donor to Mongolia 1991-2008: USAID = $174.5 mn Mongolia sent troops to Afghanistan and Iraq
2008: troops withdrawn from Iraq 1991: Peace Corps in Mongolia
MCC: grant = $285 mn
Agreement reached in uranium sector cooperation
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methods of efficient utilization of resources for fuel production and their
regulatory system in the uranium sector. High officials responsible for energy and
mining industries of the US exchanged views with their Mongolian counterparts in
order to find ways to strengthen bilateral cooperation of the two countries. A
consensus was reached on how the USA could contribute to the training and
development of the Mongolian workforce recruited in the uranium field.
Geography and Climate
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7 Geography and Climate A large, land-locked country with long, harsh winters but with highest number of blue-sky days… the “Nomad Empire of Eternal Blue Sky” Mongolia is ranked 19
th in the world by country size after Iran. It covers 1.56
million square km. Mongolia’s geography varies from a cold, mountainous region
in the north to the Gobi desert in the south.
It is the country of steppes. The highest altitude of Mongolia is the Khuiten Peak
(4,374m) situated in the far western massif, Tavan Bogd. The climate is generally
dry and the temperature varies significantly across the year, making the winters
extremely cold and summers very warm. In January, the temperature may fall as
low as −40 °C (−40 °F) and in summer it can rise to as high as +35 °C (+95 °F).
There are many occasions when Mongolia is hit hard by exceptionally cold winters
called “dzud”. Explanation of “dzud” is given in the Agriculture section of this
report. Ulaanbaatar has been named the coldest capital city in the world.
Mongolia receives little precipitation, as a result of short and dry summers, and is
especially windy due to its high altitude above sea level. On average, 257 out of
the 365 days of the year are cloudless and the heaviest atmospheric pressure falls
on the central region of Mongolia.
Precipitation is the highest in the Northern region, averaging 25-30 cm per year,
while it is the lowest in the Southern region, averaging 10-20 cm per year.
Sometimes there may be no rainfall in a year in parts of the Gobi desert. “Gobi”
means desert steppe in Mongolian, referring to the dry terrain that has deficient
foliage to be able to support livestock, except camels.
19th largest country (1.56 km2)
Khuiten Peak – the highest altitude (4,374m) Winter: −40 °C (−40 °F) Summer: +35 °C (+95 °F)
Ulaanbaatar – coldest capital city in the world 275 out of 365 days sunny
Little precipitation Gobi means desert steppe
Administrative Regions
January 24 2011
21 a
Mon
s
municipalities. An exception is the capital city
separate
Administrative Regions
Res
ResCap Mongolia 101
8 Administrative Regions21 aimags (provinces), 329 soums (sub-provinces)
Mongolia is divided into 21 aimags. Each aimag is subdivided into a number of
soums. Aimag means "tribe” in Mongolian. All aimags are governed as separate
municipalities. An exception is the capital city, Ulaanbaatar,
separately from Töv Aimag (Central Province), where it is located.
LIST OF AIMAGS
1. Arkhangai 2. Bayan-Ölgii 3. Bayankhongor
5. Darkhan-Uul 6. Dornod 7. Dornogovi
9. Govi-Altai 10. Govisümber 11. Khentii
13. Khövsgöl 14. Orkhon 15. Ömnögovi
17. Selenge 18. Sükhbaatar 19. Töv
21. Zavkhan
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Administrative Regions provinces)
aimag is subdivided into a number of
All aimags are governed as separate
Ulaanbaatar, which is administered
it is located.
3. Bayankhongor 4. Bulgan
7. Dornogovi 8. Dundgovi
12. Khovd
15. Ömnögovi 16. Övörkhangai
20. Uvs
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9 Economy The Largest contributors to the Economy are mining and agriculture. Expected GDP growth in 2013 in excess of 25% (IMF).
Economic activity in Mongolia has historically been focused on agriculture and
herding, but recent discoveries of mineral deposits have attracted large levels of
foreign direct investment (FDI) into the mining sector, which is also the largest
contributor to government receipts. Up until the dismantlement of the Soviet
Union in 1990-1991, soviet assistance used to account for up to a third of GDP,
before almost disappearing overnight. The decade that followed saw natural
disasters and political inaction cause deep recession, as well as free-market
economics, reform and privatization lead to economic growth. Mongolia joined
the WTO in 1997.
From 2000-02, the country again entered recession due to particularly harsh
winters and summer droughts which led to large-scale livestock fatalities, and was
compounded by falling prices for primary sector exports and opposition to
privatization.
In 2004-08, GDP grew at a compounded 9%, mainly because of increased gold
production and high copper prices. In 2008, inflation reached the highest levels in
over a decade, hitting 36% in August, but by the end of the year the price levels
dropped as commodity prices fell and the global financial crisis took hold.
Government revenues fell, forcing cuts in spending.
In early 2009, aided by the IMFs $242 million Stand-by Arrangement, Mongolia
began to recover from the crisis, although instability remained in the banking
sector. In October 2009, legislation was finally passed to develop the Oyu Tolgoi
gold/copper project, the world’s largest untapped copper deposit.
Mongolia’s economy continues to be significantly influenced by neighbouring
behemoths, Russia and China. Approximately 85% of all exports go to China, and
China accounts for over half of all Mongolian external trade. On the other hand,
95% of petroleum products and a large proportion of Mongolia’s electricity come
from Russia, leaving it vulnerable to Russian price hikes.
There are over 30,000 businesses operating in Mongolia, the majority of which
are operational in Ulaanbaatar. Outside of the capital city, subsistence herding
employs most of the workforce. Livestock typically consist of sheep, goats, cattle,
horses and camels.
Large reserves of copper, gold, coal, molybdenum, fluorspar, uranium, tin and tungsten
1990-2000: combination of deep recession due to political inaction/natural disasters as well as economic growth due to privatization and free-market economic reform
2004-2008: CAGR 9% due to high Cu prices and new Au projects. ‘08 inflation peaked at 36%
‘08 Financial crisis: lower inflation, reduced govt. revenues & spending
Oct 09: landmark agreement to develop OT, world’s largest untapped copper deposit
85% of Mongolian exports to China
Over 30,000 businesses in Mongolia
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9.1 The Global Financial Crisis of 2008/2009
The global economic downturn in late 2008/early 2009 resulted in reduced
demand for commodities and a resulting slump in their value. Mongolia saw its
demand for exports and export revenue decrease, and the GDP growth of 8.9%
seen in 2008 was following by a contraction in the economy by 1.6% in 2009.
Most crucial to Mongolia, being at the time the country’s largest export, were
copper prices, which fell from $8,700/tonne in April 2008, to $3000/tonne in
March 2009, a 65% reduction. Other commodities essential to Mongolia’s export
industry fell, including zinc, crude oil, coal and cashmere, and the only exception
was gold, which held its price on account of its status as a safe-haven investment.
The fall in price of commodities was combined with a fall in demand for
commodities by China, which accounts for 85% of Mongolian exports, and year-
on-year growth in industrial production shrunk from 16% in mid 2008 to 5% in the
first quarter of 2009. This resulted in a contraction in Chinese demand for
Mongolian copper imports by around 50% in the first half of 2009.
The sharp fall in exports, combined with moderate growth in imports, led to a
significant shift in the balance of payments in late 2008/early 2009. The current
account showed a surplus of 6.7% of GDP in 2007 compared to a deficit of 14% of
GDP in 2008, and the deficit further increased to 15% of GDP in the first half of
2009.
The Mongolian Tugrik depreciated by 38% between the end of October 2008 and
the middle of March 2009 due to a currency flight, which was further aggravated
by the attempts of the Bank of Mongolia to defend the currency and maintain the
de-facto peg against the dollar. This resulted in the bank losing $500 million in
foreign currency reserves between July 2008 and February 2009.
To prevent an overshooting of the exchange rate, measures were taken including
the introduction of a transparent, bi-weekly foreign exchange auctioning
mechanism and abandoning the de-facto peg to the dollar. The Central Bank rate
was hiked from 9.75% to 14% in March of 2009, and the combination of these
measures resulted in exchange rate stabilisation and the ability of the Bank to
replenish its foreign currency reserves. The spread between the ask and bid rates
in the commercial bank foreign exchange markets have remained low after the
sharp spike in late 2008/early 2009, a good sign of improved liquidity in the
market.
9.2 Current state of the economy
Mongolia continues on the road to a market economy, despite the significant
impact of the global financial crisis, and in 2010 saw significant growth in its
industrial and services sectors. Real GDP growth of 6.1% in 2010 was driven by
strong growth in PRC (whose reported GDP was up 10.3% in 2010). International
reserves has exceeded $2.0 billion as of the end of December 2010 (82.6% growth
yoy), a record high for Mongolia.
In 2009 economy contracted by 1.6%, primarily due to copper prices falling as much as 65%
China’s growth slowing from 16% to 5% led to decreased demand for Mongolian exports
MNT fell 38% from Oct08 – Mar09 $500m in foreign reserves were lost
2010 GDP growth = 6.1%
Current account moved from surplus of 6.7% of GDP in 2007 to deficit of 14% in 2008
De-facto peg abandoned BoM raised IRs from 9.75-14% in March 2009 to restore confidence in local currency
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The strong recovery may be attributable to a number of factors including the
strong policy response from the authorities, assistance from the international
community including the $242 million stand-by loan facility from the IMF (of
which only $194 million was actually drawn), the global economic recovery, high
copper prices and strong growth from the PRC.
The Government at the end of 2010 made plans to increase its spending given the
increased revenue and availability of budget financing, and has established a fiscal
framework with the focus on macroeconomic stability for 2011. It is pursuing
plans for structural reforms and has adopted a comprehensive fiscal responsibility
law.
A major milestone for developing Mongolia’s resource wealth was the eventual
signing of the investment agreement in October 2009 between the Government,
Ivanhoe Mines and Rio Tinto over the development of the vast Oyu Tolgoi
copper/gold prospect in the South Gobi desert.
Mongolia is about to experience a period of remarkable growth. The estimated
value of untapped mineral assets in the country is around $1.3 trillion. Industry
experts talk of the success and efficiency of recently implemented domestic
policies which took the country out of recession. The IMF forecasts the real GDP
growth to be over 25% in three years time, driven by advancements in the mining
sector. Inflation smoothed down to 13% in 2010 from the soaring 36% in August
2008, but the authorities’ plans to hold price increases at a single digit through
2011 seem far fetched. FDI into the country has been growing at 30% annually
and is expected to reach $11 billion in the next five years. In 2010, general
government budget showed a surplus of $611 million and the external trade
deficit reached $373.8 million (exports and imports were both up 53% yoy).
According to Montsame, in 2010, the total industrial output increased 169.7
billion MNT ($135.7 million) or 10% to 1,874.6 billion MNT ($1.5 billion) at 2005
constant prices compared to the previous year. This increase was mainly due to a
16.7% - 91.8% increase in main mining and quarrying products such as crude oil,
fluor spar concentrate and coal; a 11.2% - 69.0% increase in manufacturing
products such as copper, lime, alcohol, metal steel, flour, solid concrete, cement,
sawn wood, yoghurt, soft drinks, juice, metal foundries, fodder, milk; and a 2.1x -
2.3x increase in products such as steel casting, and iron ore.
In 2010, Industrial output (at 2005 constant prices) showed increases in mining of
coal and lignite extraction of peat (91.8%), other mining and quarrying (19.5%),
extraction of crude petroleum and natural gas (16.7%) for the mining and
quarrying sector; manufacture of office accounting and computing (5.5 times),
manufacture of rubber and plastics products (84.4%), production of non-metallic
mineral products (54.0%), manufacture of wood and wooden products (35.6%),
manufacture of basic metals (29.6%), manufacture of food products and
beverages (24.0%), manufacture of chemicals and chemical products (18.2%),
manufacture of wearing apparel, dressing and dyeing of fur (17.5%), publishing,
printing and reproduction of recorded media (7.6%), manufacture of tobacco
products (2.9%) for the manufacturing sector compared to the previous year.
Recovery attributable to policy response and IMF loan facility of $242m
Oct 2009: milestone agreement between government, Ivanhoe & Rio Tinto to develop OT
Fiscal framework approved for 2011 to encourage economic stability
Value of mineral assets in country estimated at $1.3 trillion
Inflation 13% FDI growing at 30% annually & expected to total $11bn in 4 years Budget surplus $611mn External trade deficit $373.8mn
Industrial output up 10% to $1.5bn (at 2005 constant prices)
Economy
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There was an increase in production of electricity, thermal energy, and steam
(6.4%) [Montsame].
9.3 Gross Domestic Product
Historically, the greatest contributors to GDP were livestock, agriculture and
animal husbandry, but recently focus has changed to mining. In 2009, 21.2% of
Mongolia’s GDP was attributable to agriculture whereas 22.5% of the economy
was attributable to the mining sector. The mining sector is by far the largest
source of foreign currency inflows, and contributed to 85% of exports in 2008 and
82% of exports in 2009.
On 13th
January 2011, the NSO officially announced that the 2010 real GDP growth
was 6.1%, and nominal growth was 25.3%. (The IMF prediction of real GDP growth
for 2010 was 8.5%). Trade in service, processing industry and mining had high
profits, but the agriculture sector experienced large losses when 11.3 million
livestock died during the winter dzud.
Mongolia is an emerging market whose GDP is comparatively small, at $6.6bn.
However, this figure grew at a CAGR of 8.7% from 2005 to 2008, primarily driven
by i) increased FDI cash in-flows, particularly in the mining industry ii) increased
commodity prices, chiefly copper, gold and iron
NOMINAL GDP COMPOSITION BY SECTOR
2007 2008 2009
Agriculture 20.5% 21.6% 21.2%
Mining 29.5% 22.5% 22.5%
Manufacturing 6.1% 6.2% 5.9%
Trading 7.0% 7.9% 6.0%
Services 19.0% 21.5% 23.2%
Other 10.40% 22.80% 23.30%
Source: National Statistics Office 2009
The IMF forecasts the real GDP growth to be over 25% by 2013 driven by
advancements in the mining sector, while income per capita is expected to reach
$3,500 in 2015 compared to the current level of $1,745.
2010 nominal GDP = $6.6bn 2005 – 2008 annual growth rate = 8.7%
Expected real GDP growth 8.9% in 2011, and in excess of 25% in 2013.
2010 real GDP growth = 6.1%
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Source: IMF
Source: World Bank estimate, IMF forecast
9.4 Money Supply
By the end of December 2010, money supply had reached 4.7 trillion tugrik ($3.8
billion), up 1.8 trillion tugrik ($1.45 billion) or 62% from the previous year. In 1990,
the M2 supply of money was $5.6 billion, this means in 1990-2010 the amount of
money in circulation increased 83,829%.
5.14.2
5.8
7.2 7.7
9.5
11.0
12.4
-5
0
5
10
15
20
25
30
0
2
4
6
8
10
12
14
2008 2009 2010 2011 2012 2013 2014 2015
Real G
DP growth, %
GDP, $ billions
16701343
17452051 2192
2693
3101
3504
0
500
1000
1500
2000
2500
3000
3500
4000
2008 2009 2010 2011 2012 2013 2014 2015
Income per capita, $
Economy
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Source: Bank of Mongolia (calculated at constant 2010 USD:MNT exchange rate)
In two and a half years from the beginning of 2008 to June of 2010, the M2 money
supply increased from $1.88bn to $2.86bn (52% rise)
Source: Bank of Mongolia (calculated at constant 2010 USD:MNT exchange rate)
9.5 Budget
According to the World Bank estimates, in August 2010 the fiscal deficit fell to
0.4% of GDP, compared to 10.6% a year ago. Total government revenues were up
56% YTD due to rebounding commodity prices and the infamous Windfall Tax,
while expenditures increased 23% owing to cash handouts delivered to 50’000
civilians. The figures indicate overall the improving economy and positive
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MONEY SUPPLY, $ MILLIONS
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MONEY SUPPLY, $ MILLIONS
M1 M2
In August 2010, gov revenues were up 56% YTD and expenditures up 23% YTD
Economy
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 41
prospects. Worth noting, the abolishment of the 68% Windfall Tax has been in full
effect since the 1st
of January 2011.
Source: World Bank
On the 1st of December 2010, Parliament approved a new budget for 2011.
According to the estimates, government revenues are to be 42% of GDP,
government expenditures 52% of GDP and the fiscal deficit 9.9% of GDP. There is
to be an increase in spending on wages of 22% and an increase in spending on
transfers of 50%. Expenditures are mainly about to hike due to project-financing
costs related to mining, infrastructure and agriculture. Financing of the Human
Development Fund, which is responsible for cash handouts and the provision of
student tuition fees, is to take up 11% of GDP. Income is mainly to be generated
by copper, gold and coal exports, exploitation of oil reserves and privatizations of
state properties.
Before the budget was officially approved, the World Bank had been continuously
warning about the possible inflationary pressure likely to be caused by the
adoption of such a fiscal policy. According to their view, excessive spending worth
52% of GDP would fuel the already existing inflation in the form of wage-price
spirals, pushing inflation towards 25%. The bank mentioned about the possibility
of the 2006-2008 mistakes being replayed, which were the years of boom and
excessive spending, during which no government funds were saved to cushion
against frictions in the economy and following which the 2008-2009 collapse
occurred in Mongolia.
In 2011, the Windfall Tax will no longer bring revenues to the government, but the
recently approved progressive royalties on minerals, i.e. 30% on copper ore and
15% on copper concentrate if their prices exceed 9000$/t, 5% on gold if the gold
price exceeds 1,300$/oz, will bring some income boost. The amended royalties on
copper will not be applied to Oyu Tolgoi production. Also the World Bank and the
IMF are not planning to secure any more lending to Mongolia, finding it
unnecessary as the country did not use the remaining two tranches of the IMF’s
Stand-by Agreement (SBA), worth $48 million. The IMF approved an 18-month
-100
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YTD % INCREASE IN GOVERNMENT REVENUE
Aug-09 Aug-10
Due to recovery in commodity prices and domestic demand, revenues grew sharply
In 2011 budget, govt revenue to be 42% of GDP, govt expenditure 52% of GDP
World Bank warns against such high government spending of 52% of GDP through fear of high inflation
Amended progressive royalties: 30% if Cu ore price exceeds 9000$/t 15% if Cu concentrate price exceeds 9000$/t 5% if gold price exceeds 1300$/oz ...etc.
Windfall tax abolished, effective from 01 Jan 2011
Economy
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 42
SBA in April 2009 for an amount equivalent to $242 million. Despite these issues
and the World Bank’s warnings, the spending plans in overall seem to be highly
unconstrained. The parliament members justified their move by asserting that no
matter what the government decides, there are always precautionary warnings
coming from the expert financial institutions, whereas the parliament makes their
resolutions based on their own estimates and specialist advisors.
9.6 Inflation
After falling to as low as 8.8% in July 2010, inflation resumed its upward trend yet
again by the end of 2010. The overall 2010 CPI, inflation as stated by the Bank of
Mongolia, was 13%. Main factors behind the price increases mostly belonged to
the supply side. Food and energy prices climbed up due to adverse weather
effects in Russia, which boosted grain prices, and a disastrously cold winter in
Mongolia, destroying ample of livestock and escalating meat prices.
Higher volatility of the CPI index points to greater instability of the overall
economy. However unfortunate it is, this usually is the case with transition
economies. The central bank justifies its incompetence in handling inflation on the
grounds that the price increases were mainly due to the supply side, while the
bank’s intervention could predominantly soothe the demand side inflation. Such
an excuse will no longer work in the future, as demand side inflation is also
creeping up, especially with the upcoming government expenditures leaving no
spare capacity (consequences of the 30% public sector wage increases effective
from October 2010 and a continuation of the promised cash handouts to the
public). Therefore, and not surprisingly, the World Bank predicts two-digit
inflation figures over the year 2011.
Source: Bank of Mongolia
Food prices are given the heaviest weighting in the consumer price index,
therefore supply-side shocks in food prices have the greatest effect on calculated
inflation levels in Mongolia.
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INFLATION, ANNUAL % CHANGE IN CPI
2010 inflation: 13% Supply side shocks in food prices main contributor to increased inflation towards end of 2010
Demand side inflation increasing, due to pressures from government’s 30% public sector wage hike & public handouts
Inflation reached 36% in Sep 08 Deflation occurred in Q4 2009
Economy
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 43
Source: Bank of Mongolia
9.7 Trade
In 2010, total external trade turnover reached $6.2 billion, an increase of $2.15
million or 53.5% over 2009. However, the external trade balance showed a deficit
of $378.7m in 2010, up $126.4 million or 50.1% compared to 2009.
Source: World Bank
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PROPORTIONAL CPI BASKET OF GOODS
Restaurants
Education
Recreation &
Transport
Medical care
Electricity,
Water
Housing
Clothing
Food
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No
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0
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TRADE, $ MILLION (12 MONTH ROLLING SUM)
Exports Imports Trade balance (right axis)
2010 trade turnover = $6.2bn, up 54% 2010 trade deficit = $379m, up 50%
Food makes up over 40% of the CPI basket of goods
Economy
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 44
9.7.1 Exports
The latest update informs that In 2010, Mongolian exports totalled $2.9 billion, up
53.8% from 2009. Mineral products, natural or cultured stones, precious metal,
jewellery, coins, textiles & textile articles live animals, animal origin products, raw
& processed hides, skins, fur & articles thereof accounted for 98% of the total
export value amount, and approximately 85% of all Mongolian exports go to
China.
The contribution of copper to export growth is levelling off, whereas has become
the leading contributor to growth in exports. In February, copper contributed 53%
to export growth, though by August this had reduced to only 9%, whereas coal
contributed 40 percentage points of the 59% that was the year on year August
growth. The dollar value of coal shipments in August had increased year-on-year
by 172%, for an increase in total shipment volume of 146%, and coal made up
27% of all goods exported from Mongolia, up from 16% the previous year.
On the other hand, gold exports were down, despite gold prices once again
reaching record heights. This was most likely a result of the abolishment of the
68% windfall profit tax coming into play on January 1st
2011, and hence gold
producers were withholding stocks until this time. Cashmere export remained
low, reflecting the effects of the devastating “dzud” last winter that destroyed
livestock.
2010 I-XII
EXPORTS Volume
Value, $
million
% of total
exports
Coal 16.6 million tonnes 877.6 30.3%
Copper
concentrate 568.7k tonnes 770.5 26.6%
Iron ore 3.5 million tonnes 250.9 8.7%
Gold
5.1 tonnes 178.3 6.1%
Crude oil
2.1 million barrels 154.9 5.3%
Zinc ore
concentrate 119k tonnes 134.1 4.6%
Greasy
cashmere 3k tonnes 104.9 3.6%
Fluorspar
ore/concentrate 376k tonnes 63.2 2.2%
Combed
cashmere 977 tonnes 68.8 2.4%
Molybdenium
ore/concentrate 4.8k tonnes 52.0 1.8%
Rest exports
244.0 8.4%
Source: National Statistics Office of Mongolia
Gold and cashmere exports down
2010 exports = $2.9bn, up 54%
Coal now Mongolia’s largest export commodity, accounting for 30% of all exports
Economy
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 45
China is Mongolia’s biggest trading partner. Currently around 85% of exports go to
the PRC.
Source: Bank of Mongolia
9.7.2 Imports
Imports have continued to grow as the economy recovers. In 2010, goods and
services of value $3.3 billion were imported, up 53.3% on 2009. The increase in
demand for imported goods was primarily driven by rising demand for machinery
and transport equipment, reflecting increased industrial activity involved in
mining, construction and agriculture. These activities also added to petroleum and
diesel imports, which are the country’s largest import products, and are supplied
by The Russian Federation. Mongolia imported $400 million worth of diesel, $230
million worth of petroleum in 2010.
2010 I-XII IMPORTS $ million % of total
EU countries 318.8 9.7%
Other countries of Europe 1,148.6 35.0%
of which Russia 1,090.2 33.3%
Northeast Asia 1,386.7 42.3%
of which Japan 197.6 6.0%
of which China 1000.2 30.5%
Southeast Asia 121.1 3.7%
Other countries of Asia 43.9 1.3%
Africa 9.5 0.3%
America 199.8 6.1%
Australia 49.5 1.5%
Total 3,277.9
Source: National Statistics Office
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EXPORTS, IN %
China Russia Other
85% of exports go to China
Imports rising as economy recovers, in particular machinery and equipment
Largest imports: diesel and petroleum from Russia
Economy
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 46
33.3% of all imports came from Russia in 2010, and 30.5% came from China,
maintaining the situation of Russia being the primary supplier and China being the
major buyer. The figure below displays historical proportions of imports that came
from the two neighbouring giants.
Source: Bank of Mongolia
9.8 Implemented Policies
As the IMF judges, Mongolia’s recovery after the crisis was largely due to strong
policy responses made by the authorities and substantial aid coming from
international communities, including a loan from the IMF itself. According to the
IMF, a number of successful policies have been implemented:
1) A flexible exchange rate regime adopted in early 2009, supported by a
forthright 400 bps increase in the policy rate. The new regime efficiently
stabilized the foreign exchange market and Mongolia’s foreign reserves
reached $1.7 billion (29% of GDP) in September 2010.
2) Fiscal adjustments were made in 2009 and continued in 2010 creating
financing constraints and bringing down fiscal deficit to 0.4% of GDP.
Parliament passed a comprehensive fiscal responsibility law in 2010.
3) Parliament approved a revised banking law that strengthened the
regulatory framework. Tougher supervision regulations were issued
bolstering the banking system and ensuring that banks could play their
crucial role in fostering development by providing credit to the private
sector.
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IMPORTS FROM RUSSIA AND CHINA, IN %
China Russia Other
34% of imports from Russia, 30% from PRC
Recovery after crisis due to strong policy response and IMF loans
Successful policies included adopting and stabilising a flexible exchange rate by increasing policy rate 400bps, fiscal responsibility laws and revised banking laws
Economy
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 47
9.9 Foreign Direct Investment
Inflow of FDI into Mongolia during 2005 – 2007 was equivalent to the total level of
direct investment received throughout 1990-2004. Net value in 2007 was 500
million USD, 67% of which was accounted for by mining alone and 22% by trade
and food.
Source: Trade and Development Bank
9.10 Currency
A flexible exchange rate regime was adopted in early 2009. Prior to 2005, when
exports were insignificant, the manufacturing industry was almost non-existent,
the overall supply of products came primarily from imports, and the supply of
international reserves were highly deficient, the de facto peg of the MNT against
USD in all probability was the most sensible way of protecting the currency from
continuous depreciation.
Recently, with the increasing amount of mining related foreign capital flowing into
the country, the Mongolian Tugrik started appreciating. In December 2010, the
MNT/USD rate gained in value 15% since January 2010, when it was 1,446, which
made it the second best-performing currency against the dollar in 2010.
Source: Bank of Mongolia
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EXCHANGE RATE, MNT/USD
FDI is expected to total around $11 billion over the next 4 years
MNT second best performing currency against the dollar in 2010
Banking Sector
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 48
10 Banking Sector 14 commercial banks active in Mongolia, of which the biggest are Golomt Bank, Xac bank, Khan Bank and TDB (Trade & Development Bank)
According to the Trade and Development Bank, the Mongolian financial sector
consists of 14 commercial banks, 188 NBFIs and 207 S&C (saving and credit)
Cooperatives. NBFIs provide similar products and services to banks such as loans
to small borrowers, money transfers and FX trading, although they do not take
deposits. S&C Cooperatives mostly provide micro-finance lending.
10.1 Background
Mongolia’s banking industry grew from a centrally planned, soviet-style single
bank system in which the State Bank of Mongolia performed all banking duties
within the country. As Mongolia transitioned into a free-market economy in 1991,
the first steps taken by the government to reform the financial sector were the
development of a two-tier banking system in which the Central Bank controls the
activities of state-owned and commercial banks, who in turn took over all lending
activities to the public. The commercial banks that emerged inherited non-
performing loans from the former state bank and also approved loans to poorly
performing enterprises. Several banking crises occurred during the transition
period in Mongolia in 1994, 1996 and 1998 as increasing NPLs damaged the
solvency of the banking system. Many banks faced severe liquidity issues and
public confidence in the banking system fell. In addition, institutional weaknesses
in the new banks, inadequate regulatory frameworks and general macroeconomic
problems resulted in eventual deposit runs.
To restore confidence in the banks, the Government initiated financial sector
reforms, promoting an efficient financial system. Previously insolvent banks were
rehabilitated, state ownership in banks gradually divested and foreign ownership
in the banking sector increased to help improve competition and efficiency.
The reckless lending practices resulted in collapse and closure of many S&C
Cooperatives in 2006 and ever since there has been a flight of funds from NBFIs
and S&C Cooperatives to commercial banks considered safe deposit holders. In
2006, the FRC was formed by the Government to regulate all financial institutions,
with the exception of commercial banks which remained under the Bank of
Mongolia’s supervision.
During the transition from Soviet style mono-banking to commercial banking, several banking crises occurred in 1994, 1996 and 1998 due to high levels of non-performing loans.
14 commercial banks, 188 NBFIs, 207 saving & credit (S&C) cooperatives
2006: reckless lending of S&Cs led to flight of funds to safe commercial banks
2009: Anod Bank closure and Zoos Bank into state-ownership due to liquidity issues
Banking Sector
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 49
10.2 Banking sector performance during 2008/2009 financial crisis
In 2009, the total assets of the banking sector grew by 21.1% $3.57bn from the
previous year, of which foreign currency appreciation was responsible for 13.3 out
of the 21 percent of this growth. The liquidity of banks became an issue due to the
economic downturn, the insolvency of Anod Bank, and tugrik depreciation which
lasted until Q2 2009.
BANKING SECTOR ASSETS AND FINANCIAL INTERMEDIATION
Note: 1. Exchange rate as of 31 Dec 2009
Source: Bank of Mongolia
The rate of decline in deposits, which had begun to decrease in October 2008,
began to slow as a result of the government’s blanket guarantee on deposits, and
they soon reached pre-crisis levels of $2bn. However, Zoos Bank’s loan portfolio
deteriorated significantly, being unable to fully commit to repayment of
customers' money because of violating the limit of a single borrower’s exposure,
and in November 2009 was taken into state ownership. However, the collapse did
not negatively affect the overall confidence of depositors, because in 2009 total
deposits totalled $1.46bn and grew by 34.5%. To provide liquidity support, the
Bank of Mongolia extended interbank loans of $77.6m to banks via new financial
instruments such as reverse repo, collateralized loan and foreign currency swaps,
and consequently the acid ratio of the banking sector grew by 16.6 percentage
points to 38.3% in 2009 compared to 2008.
The Mongolian government put a total of $53m on deposit into three banks, all of
which were repaid by the end of 2009. Total funding of $66.25m was given to 5
banks, who in turn lent $44.9m to 23 companies to support the gold mining
activities and improve their liquidity.
Until 25th
November 2012, the government’s blanket guarantee covers all money
on deposit. Although this has beneficial effects for the banking system, the
potential costs for the government (up to $2.5bn or 40% of GDP) could place
pressure on the state budget.
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The govt guarantee on deposits reduced outflow of deposits
Bank deposits grew by 34.5% in 2009
Banking Sector
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 50
10.3 Strengthening of the Financial System
Degree of prudence in the financial system in Mongolia has increased over the
last ten years, and particular focus has been placed on detecting potential
problems relating to loans. Some of the measures taken by the central bank
include: introducing prudential norms, better enforcement and supervision, loan
classification and loan loss provisioning systems. Bank’s undergo risk assessments,
loan loss reserve requirements have increased (1% reserve for performing loans,
5% for overdue loans – up from 1%). Loans are classified as overdue if the interest
payments are overdue, not just on whether the principal is up to date.
Capital adequacy principles for banks in Mongolia are very similar to international
standards, and prudential norms were introduced to the Mongolian banking
sector in 1996.
For the tier 1 ratio, the minimum capital adequacy for commercial banks is
currently 6% and the total capital ratio is 12%. These figures have increased from
2% and 4% respectively. The Central Bank also increased the minimum paid-in
capital required for commercial banks to the current level of $6.5m and failure to
comply results in revocation of the bank’s license.
To monitor the stability of the financial system, a financial stability committee was
established in 2005. The committee ensures public awareness of possible financial
crises, interacts directly with the management of financial institutions, and gives
financial support when needed.
Total deposits in the banking system from 2003-2009 increased 5x from $460
million to $2.42 billion and had further increased to $2.87 billion by mid 2010.
Similarly, loans which totalled $360 million in 2003, grew to $2.15 billion in 2009
at a CAGR of 35% for the six year period, and had further increased to $2.4 billion
by mid 2010. There is however still room for banks to lend more since the present
liquidity in the banking system remains above the minimum regulatory level of
12%.
Banking sector capital (prepaid tax deducted) reached $190 million at the end of
2009, and increased by 21% to $226 million by mid 2010. The risk weighted
capital adequacy ratio for the whole banking system (one of the main indicators
of sector’s ability to withstand risk) stood at 14% by mid 2010, exceeding the
minimum central bank requirement of 12%.
Regulations have been tightened on lending to related and other parties, and total
loans to a single related party must not exceed 5% of a bank’s total capital, while
total loans to a single borrower must not exceed 20% of the bank’s total capital.
Bank examinations more driven by risk assessments Loan reserve requirements increased
From 2003-2009, deposits grew 5 fold, loans grew 6 fold
Banks could further increase their loan portfolios
Max loan exposure to single borrower = 20% of bank’s total capital
2005: Financial stability committee
Capital adequacy ratio for banking system (mid 2010) = 14%
Banking Sector
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 51
10.4 Deposits and Loans
The following table sets forth the year-on-year credit and deposit growths of the
banking sector:
Assumed MNT/USD rate = 1250.
Deposits include current, savings and time deposits.
Source: Bank of Mongolia, mid 2010
There are 4 banks who dominate commercial and retail banking in Mongolia who
extend approximately 70% of all loans 73% of all deposits. These banks are TDB,
Golomt Bank, Khan Bank and Xac Bank, and their market shares are shown in the
following table:
TDB Golomt Bank Khan Bank Xac Bank
Assets 16.2% 23.8% 28.5% 6.6%
Loans 14.9% 22.9% 22.8% 9.2%
Deposits 16.7% 18.4% 33.9% 3.7%
Source: Public filings made by each bank, mid 2010
Source: Bank of Mongolia
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TOTAL LOANS OUTSTANDING ($m)
LOANS AND DEPOSITS AS OF 31 DECEMBER
$ millions, except percentages
2003 2004 2005 2006 2007 2008 2009 20101
Loans 353 485 688 977 1,644 2,108 2,124 2,350
% yoy 91.0 37.4 41.9 42.0 68.3 28.2 0.8 13.9
Deposits 457 563 814 1,081 1,781 1,782 2,385 2,825
% yoy 63.7 23.2 44.6 32.8 64.8 0.1 33.8 30.5
Loan/Deposit, % 77.2 86.1 84.5 90.4 92.3 118.3 89.1 83.2
TBD, Golomt Bank, Khan Bank & Xac Bank are the most significant commercial banks
Banking Sector
January 24 2011
Appreciation of the tugrik, commercial bank competition, rising incomes and
improved macroeconomic conditions have all helped increase bank deposits in
recent times. From 2003 to 2009, total deposits grew by a CAGR of 31.7% from
$464 million to $2.42 bill
account balances totalled $840 million while time deposits totalled $1.69 billion
by mid 2010.
DISTRIBUTION OF LOAN PORTFOLIO BY ECONOMIC SECTOR
Source: Bank of Mongolia
In 2001 the Government relaxed regulation on private real estate ownership,
which led to an expansion in credit for housing. In 2010, 63% of credit was lent to
the priv
the public sector. The rate of default was 8.4% in 2010 (in 1999 this peaked at
51%).
Note: 1.Assumed exchange rate: 1USD=1250MNT
Source: World Bank
To
tal l
oa
ns
ou
tsta
nd
ing
,
Largely increasing deposits into banks
63% of credit extended to private sector 36% to individuals 1.1.% to public sector Default rate = 8.4%
Banking Sector
Res
ResCap Mongolia 101
Appreciation of the tugrik, commercial bank competition, rising incomes and
improved macroeconomic conditions have all helped increase bank deposits in
recent times. From 2003 to 2009, total deposits grew by a CAGR of 31.7% from
$464 million to $2.42 billion and further increased to $2.86 billion in 2010. Current
account balances totalled $840 million while time deposits totalled $1.69 billion
by mid 2010.
DISTRIBUTION OF LOAN PORTFOLIO BY ECONOMIC SECTOR
Source: Bank of Mongolia
In 2001 the Government relaxed regulation on private real estate ownership,
which led to an expansion in credit for housing. In 2010, 63% of credit was lent to
the private sector, 36% to individuals and a mere 1.1% of loans were extended to
the public sector. The rate of default was 8.4% in 2010 (in 1999 this peaked at
51%).
Note: 1.Assumed exchange rate: 1USD=1250MNT
Source: World Bank
5.8%
13.2%
15.5%
14.4%18.0%
7.1%
26.0%
0.00
0.50
1.00
1.50
2.00
2.50
Au
g-0
7
De
c-0
7
Ap
r-0
8
Au
g-0
8
De
c-0
8
Ap
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9
Au
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9
De
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Ap
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0
To
tal l
oa
ns
ou
tsta
nd
ing
,
$ b
illio
n1
ResCap Resource Investment Capital
P a g e | 52
Appreciation of the tugrik, commercial bank competition, rising incomes and
improved macroeconomic conditions have all helped increase bank deposits in
recent times. From 2003 to 2009, total deposits grew by a CAGR of 31.7% from
ion and further increased to $2.86 billion in 2010. Current
account balances totalled $840 million while time deposits totalled $1.69 billion
DISTRIBUTION OF LOAN PORTFOLIO BY ECONOMIC SECTOR
In 2001 the Government relaxed regulation on private real estate ownership,
which led to an expansion in credit for housing. In 2010, 63% of credit was lent to
ate sector, 36% to individuals and a mere 1.1% of loans were extended to
the public sector. The rate of default was 8.4% in 2010 (in 1999 this peaked at
Agriculture
Mining
Manufacturing
Construction
Motor vehicles
Real estate
Other
-10
0
10
20
30
40
50
60
70
80
Au
g-1
0
An
nu
al g
row
th,
% y
oy
Banking Sector
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ResCap Mongolia 101 P a g e | 53
10.4.1 Non-Performing Loans (NPLs)
The 2008/2009 financial crises and economic slowdown led to a decline in
turnover and an increase in the rate of defaulting loans. As of 2009, NPLs
increased by $60 million in the construction sector, $48 million in the
manufacturing sector, $33 million in trading, and $28 million in the mining sector
and total number of NPLs went up almost three fold within 2009, reaching $435
million. The NPL ratio in the year went from 7.2% to 20%, eroding bank profits,
who in turn limited extension of new loans due to the increased levels of risk.
Source: World Bank
10.5 Banking Interest Rates
Source: Bank of Mongolia
0 5 10 15 20 25 30 35
Agriculture
Mining and quarrying
Manufacturing
Construction
Wholesale and retail
Other sectors
NPL ratio (% of total) Loans (% of total)
0.0
5.0
10.0
15.0
20.0
25.0
Jan
-08
Ma
r-0
8
Ma
y-0
8
Jul-
08
Sep
-08
No
v-0
8
Jan
-09
Ma
r-0
9
Ma
y-0
9
Jul-
09
Sep
-09
No
v-0
9
Jan
-10
Ma
r-1
0
Ma
y-1
0INTER-BANK INTEREST RATES, %
In 2009, number of default loans increased 2.8 fold
In 2009, NPL ratio grew by 12.8 percentage points to 20%
Banking Sector
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ResCap Mongolia 101 P a g e | 54
Commercial bank interest rates offered for MNT sight deposits are persistently
higher (approximately twice the rate) than those offered for USD sight deposits.
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.
Source: Bank of Mongolia
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
De
c-0
8
Feb
-09
Ap
r-0
9
Jun
-09
Au
g-0
9
Oct
-09
De
c-0
9
Feb
-10
Ap
r-1
0
Jun
-10
WEIGHTED AVERAGE OF CURRENT ACCOUNT INTEREST RATES, %
Current account IR, MNT Current account IR, USD
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
De
c-0
8
Feb
-09
Ap
r-0
9
Jun
-09
Au
g-0
9
Oct
-09
De
c-0
9
Feb
-10
Ap
r-1
0
Jun
-10
WEIGHTED AVERAGE OF TIME DEPOSIT INTEREST RATES (12 MONTHS), %
Time Deposit IR, MNT Time Deposit IR, USD
Banking Sector
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While back in February 1998 it cost 48% to borrow money from a bank in MNT
and around 40% in USD, in February 2010 the monthly loan interest rates fell to
around 20% in MNT and 14% in USD.
Source: Bank of Mongolia
10.6 Bank Asset Quality
Three banks dominate the Mongolian banking sector, constituting around 69% of
the country’s total banking assets.
According to Trade and Development Bank estimates, in August 2010 loans
totalled around $2.4 billion, performing loans and non-performing loans (NPLs)
grew by $268 million (16.1%) and $46 million (16.5%) respectively, while past-due
loans declined by $29 million (25.5%), all compared to the same period the
previous year. The top four commercial banks’ non-performing loan ratios fell to
3.7% on average in H2 2010 from 4.9% in H2 2009. Such good news implies
improvement of asset quality in Mongolia.
TDB Golomt Bank Khan Bank Xac Bank
Impairment Ratio 5.0% 2.5% 5.4% 1.7%
Source: Public filings made by each bank, mid 2010
In 2009 the sectors with greatest loans were retail, manufacturing, mining and
quarrying, jointly accounting for 61% of total credit. Agriculture sector loans have
increased at a 40% CAGR since 2004 and reached $124 million in Q1 2010. The
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Feb
-98
No
v-9
8
Au
g-9
9
Ma
y-0
0
Feb
-01
No
v-0
1
Au
g-0
2
Ma
y-0
3
Feb
-04
No
v-0
4
Au
g-0
5
Ma
y-0
6
Feb
-07
No
v-0
7
Au
g-0
8
Ma
y-0
9
Feb
-10
AVERAGE MONTHLY LOAN RATES, %
Loan rate, MNT Loan rate, USD Paid rate
H2 2010: Total loans: $2.4 bn Performing loans grew 16% yoy NPLs grew 16.5% yoy
Q1 2010: Agric. sector loans = $124m
Assumed exchange rate throughout this section: 1USD = 1250MNT
Banking Sector
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table below shows loans and deposits in the banking sector as percentage of GDP
for 2008 and 2009.
2008 2009
Loans (% of GDP) 40.1 37.0
Deposits (% of GDP) 36.3 52.6
Source: Bank of Mongolia, EIU Mongolia Country Report August 2010
ASSET QUALITY BY INDUSTRY, AS OF 31 DECEMBER
2008 2009
Performing Past due Non-
performing Performing Past due
Non-
performing
Agriculture, hunting, forestry and
fishing 84.7% 4.2% 11.1% 73.3% 2.1% 24.6%
Mining and quarrying 74.2% 9.6% 16.3% 78.0% 4.0% 18.0%
Manufacturing 90.9% 3.5% 5.6% 76.0% 4.2% 19.8%
Electricity, gas, steam and air
conditioning supply 88.4% 11.1% 0.5% 76.8% 3.5% 19.6%
Water supply, sewerage, waste
management and remediation
activities 96.9% 0.3% 2.8% 98.0% 0.3% 1.7%
Construction 83.4% 6.0% 10.5% 62.1% 7.7% 30.2%
Wholesale and retail trade, repair
of motor vehicles and motorcycles 92.1% 2.2% 5.8% 80.0% 4.1% 15.9%
Transportation and storage 81.7% 1.1% 17.2% 67.6% 7.7% 24.7%
Accommodation and food services
activities 95.2% 1.4% 3.3% 87.9% 3.4% 8.7%
Information and communication 82.9% 8.6% 8.5% 91.9% 0.4% 7.8%
Financial and insurance activities 94.5% 0.1% 5.4% 85.9% 0.4% 13.7%
Real estate activities 92.5% 1.6% 5.9% 81.9% 6.8% 11.3%
Professional, scientific and technical
activities 94.7% 0.0% 5.3% 85.9% 12.5% 1.5%
Administrative and support service
activities 92.6% 1.9% 5.5% 74.9% 15.2% 9.9%
Public administration and defence;
compulsory social security 99.5% 0.0% 0.5% 97.6% 0.6% 1.8%
Education 72.8% 1.7% 25.5% 73.7% 3.3% 23.1%
Human health and social work
activities 94.8% 1.7% 3.6% 90.6% 1.8% 7.5%
Other 93.3% 2.6% 4.1% 91.4% 2.2% 6.4%
Total 89.3% 3.6% 7.1% 78.0% 4.6% 17.4%
Source: Bank of Mongolia
Banking Sector
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10.7 Banking System Capitalisation
The minimum capital requirement for commercial banks ordered by the Bank of
Mongolia is MNT 8.0 billion ($6.4 million). Mongolian banks are in general very
well capitalised and according to the Trade and Development Bank indicators, the
banking system’s average capital adequacy ratio increased to 14% in 2010 (2.3%
above the minimum requirement) from 13.3% in 2008.
TDB Golomt Bank Khan Bank Xac Bank
Capital Adequacy
Ratio 13.9% 14.5% 17.2% 13.9%
Source: Public filings made by each bank, mid 2010
10.8 Banking Law of Mongolia (2010)
The following information has been provided by the Trade and Development Bank
of Mongolia. Commercial banks and their activities are governed by the Banking
Law of Mongolia. A new Banking Law was adopted in March 2010 for better
implementation of state policies and stability and efficiency of the banking sector.
10.8.1 Summary of the Ammended Banking Law
Transfer of a Bank’s Shares
• Banks must inform the Bank of Mongolia (BoM) in the following cases:
- if the size or structure of their share capital changes
- if a party attempts to become a “shareholder with significant influence”
in a bank, or an existing “shareholder with significant influence” changes
the size or structure of their ownership interest in the bank
• A “shareholder with significant influence” in one bank is not allowed to
become a “shareholder with significant influence” in another bank, along
with related parties.
Capital requirements
• Minimum amount of paid-in capital for banks as determined by the BoM
is MNT 8.0 billion ($6.4 million at 1USD = 1250 MNT exchange rate).
• A bank may distribute dividends only if, following the dividend payment,
it will continue to meet the mandatory prudential ratios set by the BoM
• A bank must quantify decreases/increases in its capital in accordance
with the profits earned or losses accrued from banking activities and
fluctuations in the size of its compulsory “reserve fund”
Minimum cap. requirement = $6.4mn 2010 general cap. adequacy ratio = 14% (2.3% above required)
Banking Sector
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• Allocation of funds from “the reserve fund” will be administered by the
BoM and the Ministry of Finance (MoF)
Law on Deposit Guarantee (2008)
• In line with the Deposit Guarantee Law effective until November 2012,
the Mongolian Government must insure all current accounts and deposit
accounts of citizens and legal entities at Mongolian commercial banks
• Fully covers the risk of non-repayment by banks
• Deposits of related persons, depositors or holders of subordinated or
convertible debts and deposits from the interbank market or from
foreign banks and financial institutions are excluded from this scheme
Law on Executing Domestic Settlement Transactions by National Currency
(2009)
• All payments and settlements within the territory of Mongolia must be
conducted in MNT (domestic transactions cannot be made in foreign
currency)
• MNT contracts can not be indexed to any foreign exchange index
• Savings deposits, loans from bank and non-bank entities, other
equivalent services, and derivative financial agreements and their
obligations can be expressed and executed in foreign currencies
Accounting Law (2001)
• All business entities must adopt and adhere to international accounting
standards, and submit audited quarterly financial statements and reports
to the MoF
• MoF and accounting associations are responsible for formulation of
generally accepted accounting principles and implementation of
international accounting standards
• The Accounting Council is responsible for developing accounting forms
and methodology, and for training of professional accountants
• MoF is responsible for implementation of reforms to accounting and
auditing systems
Mongolia has three accounting associations:
- The Accounting Council (26 members),
- The National Association of Certified Public Accountants (200 associate
unlicensed accountants)
- The Union of Finance Specialists Association (MoF accountants)
Banking Sector
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10.9 Banking Sector 2010 Summary
Trade and Development Bank inferences inform that:
• In Q3 2010 non-performing loans with arrears in principals as
percentage of total outstanding loans declined to 17% from 25% in
November 2009.
• General levels of NPLs were considerably high throughout 2010.
• Real interest rates plummeted, resulting in negative returns, especially
on depository accounts, due to inflationary pressure.
• Bank lending further concentrated with around 50 largest borrowers
accounting for approximately 30% of total loans or $690 million.
• MNT deposits continued to rise reaching $1.3 billion in mid 2010 (51%
increase yoy), despite falling real interest rates on deposits, owing to the
Deposit Guarantee Law and greater currency appreciation expectations
• Nominal interest rates on lending and borrowing remained high as
banks needed capital due to liquidity problems
10.10 Banking sector prospects
Business activities increased in 2010. Nevertheless, coping with the fundamental
weaknesses of the banking sector in Mongolia remains a top priority for the
officials in charge. Based on the experience gained from the recent turmoil, the
necessity to create a sound banking system to cushion against future frictions in
the economy is now deemed to be a matter of utmost importance.
On account of the ongoing mining boom and expected economic prosperity,
commercial banks in Mongolia at present have the possibility to develop a firm
basis for continued growth by improving their internal control, corporate
governance and risk management solutions.
Demand for credit will substantially increase in the coming five years as greater
necessity for capital will spread across all sectors in the economy. Commercial
banks must be prepared to meet the rising demand in order to ensure that the
flow of funds in and out of the country will not circumvent the local banks.
The collapse Anod and Zoos sent an essential signal that financial institutions in
Mongolia have to be restructured to a certain degree. The Bank of Mongolia is
working on implementing a better supervisory system, such that each bank’s
operations will be examined independently and in stages.
Protection provided by the Deposit Guarantee Law is not indefinite. The scope of
this move taken by the government to rescue the banking industry on the verge of
its collapse has now been confined. According to the July 2010 amendments to
the Deposit Guarantee Law, banks will have to pay a fee equivalent to 0.5% of
cashable deposits in order to be entitled for future government’s protection
against insolvency. The extent of the guarantee has also been limited, the
following items have been removed from the coverage:
NPLs as % of total loans fell to 17% Levels of NPLs were high Real i.r. plummeted Bank lending more concentrated MNT deposits rose 51% yoy Nominal i.r. remained high
Weaknesses of the banking sector remains a priority
Great possibilities in front of commercial banks
Credit demand will increase
Banks must be restructured Increasing supervision from BoM
Limited coverage of Deposit Guarantee
Banking Sector
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- current accounts and deposits assembled from the interbank market,
foreign banks and financial institutions
- current accounts and deposits of individuals and their related parties
who have loans and other assets
- guarantees and letters of credit and other contingent liabilities in a
specific bank
- cashable deposits with interest rate that exceeds the BoM’s refinancing
rate
These amendments were made in line with international principles, such that
excessive risk taking by commercial banks is restrained and fiscal burden to
taxpayers is reduced, preventing against ill-treatment of regulations in favour of
commercial banks’ self interest.
Amendments to Deposit Guarantee in line with international principles
The Central Bank
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11 The Central Bank The Bank of Mongolia (BoM) is the central bank of Mongolia. It reports to Parliament and is independent from the Government.
According to the Bank of Mongolia, their main objectives are to formulate and
implement monetary policy by regulating money, supervising banking activities,
organising inter-bank payments and settlements, holding and managing the
State’s foreign currency reserves and issuing currency into circulation. The Bank is
headed by a Governor, managed by a 12-man Board of Directors and has a
representative office in London.
11.1 Bank of Mongolia Monetary Policy
Final decision making at the BoM on monetary policy is done by the President of
the Bank, although his decision is supposed to be based on the advice of the 12
strong management board. Board meetings are regularly held and discuss the
following issues:
• Changing or keeping the policy rate
• Defining the principles of open market operations
• Defining the amount of long term central bank bills
• Changing or keeping the reserve ratio requirements
• Approving or introducing new policies or regulations on monetary policy,
and additions or amendments on existing regulations
• Discussing state monetary policy, monitoring and evaluating current
results, presenting the decisions to the parliament and getting approval
• Forecasting economic indicators
• Balancing foreign exchange rates according to monetary policy
Source: Bank of Mongolia
11.2 Bank of Mongolia Policy Rate
In the case of the Bank of Mongolia, monetary policy works by taking excess
money out of the economy and placing it in the Central Bank Bill. The interest rate
on the Central Bank’s 7 day bill has been named the official Bank of Mongolia
policy rate since July 2007. When this rate moves it affects the interest rates
offered by commercial banks, and it is not only the indicator of the monetary
direction of Mongolia but also the inter-bank rate. The Central Bank bill has a 7
day term at fixed interest and is traded every Wednesday on the inter-bank
market. All other rates are derived from the policy rate:
The Central Bank
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� Repo rate (15%) = policy rate +4%
� Collateralized loan rate (19%) = policy rate +8%
� Overnight rate (20%) = policy rate +9%
Source: Bank of Mongolia
In July 2007, the initial Bank of Mongolia policy rate was 6.4%. In October and
November of 2007 the Bank increased it by 1%, in March 2008 it increased 1.35%
and by a further 0.5% in September 2008, and thus it reached 10.25%. By
November 2008, it was 9.75%. By the end of 2008/start of 2009 the global
slowdown resulted in inflation reaching 34% in Mongolia, and so the BoM rate
was hiked to 14%.
The Bank rate was subsequently reduced in May, June and September of 2009 to
10%. Due to the particularly harsh winter of 2009/2010 (‘dzud”), from April 2010
the Human Development Fund started to allocate money to people, resulting in
rising inflation. The Bank of Mongolia increased the policy rate by 1%, and it is
now at 11%.
Source: Bank of Mongolia
11.3 Central Bank’s non-standing facilities
11.3.1 Collateralized loan
Banks that have good long-term liquidity but get into short term problems can be
lent money up to 90 days, but with collateral backing. The collateralised loan rate
was 8% higher than the policy rate at the start of 2010. In 2009, the Central Bank’s
collateralised loan balance was $84 million. $77 million was extended according to
“The Deposit Insurance Law” and $6.3 million of it extended according to
“Collateralised Loan Regulation”
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
De
c-0
7
Feb
-08
Ap
r-0
8
Jun
-08
Au
g-0
8
Oct
-08
De
c-0
8
Feb
-09
Ap
r-0
9
Jun
-09
Au
g-0
9
Oct
-09
De
c-0
9
Feb
-10
Ap
r-1
0
Jun
-10
Au
g-1
0
Oct
-10
De
c-1
0
BANK OF MONGOLIA POLICY RATE, %
Policy Rate Jul ‘07 6.40% Oct ‘07 7.40% Nov ’07 8.40% Mar ’08 9.75% Sep ’08 10.25%
(inflation = 34%) Mar ’09 14.00% Sep ’09 10.00% Apr ’10 11.00%
BoM can provide 90 day loans to banks in financial difficulty. 2009 collateralised loans = $84m
The Central Bank
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11.4 Objectives of monetary policy
A goal of the Bank of Mongolia is to insure the stability of the Tugrik. The capital
account is open in Mongolia, meaning there are no restrictions on inflow or
outflow of international currencies or international investment or trade. An open
capital account, low inflation control through interest rate mechanisms and
stability of the exchange rate cannot all be simultaneously controlled as they are
not all mutually exclusive, and only a combination of 2 can be controlled. Because
inflation and exchange rate stability usually takes five or more years to harmonise,
the BoM only focuses on keeping inflation in check and lets the exchange rate be
determined by market forces. CPI is not supposed to exceed 8% according to the
State Monetary Policy Guidelines (2010). If CPI remains lower than 8% and
exchange rate fluctuations are kept at a sensible level then Inflation and exchange
rate stability are assumed, respectively.
11.5 Bank of Mongolia Standing Facilities
11.5.1 Overnight loan
An overnight loan which starts before the closing of the clearing transaction and
ends at the beginning of the next clearing transaction is available at a rate of 9%
higher then the policy rate, at present.
11.5.2 Repo financing
Loans from the central bank with a Repo rate 4% higher than the policy rate and a
term of up to 90 days can be lent to commercial banks with collateral of central
bank bills, government bonds, or bonds of the Mortgage Corporation of Mongolia
(MIK). $367 million was given through repo financing in 2009 at an average rate of
16.84%.
No restrictions on inflows or outflows of foreign currency in Mongolia
$367m was given through repo financing in 2009
The Central Bank
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11.6 Central Bank Bond Rate
Source: Bank of Mongolia
The Mongolian economy is 95% reliant on the banking industry, and the bond
market is very primitive. As a result, government bonds, despite being the least
risky investment vehicle, are hardly ever used. The Central Bank Bond is
preferred.
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Jan
-98
Oct
-98
Jul-
99
Ap
r-0
0
Jan
-01
Oct
-01
Jul-
02
Ap
r-0
3
Jan
-04
Oct
-04
Jul-
05
Ap
r-0
6
Jan
-07
Oct
-07
Jul-
08
Ap
r-0
9
Jan
-10
CENTRAL BANK BOND RATE, % (1998-2010)
Mongolian bond market highly under-developed
Mongolian Taxation System
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12 Mongolian Taxation System
The general rate of tax in Mongolia is 10% income tax for individuals and corporation earnings under MNT 3bn ($2.4m) and 25% on corporation earnings over MNT 3bn. VAT is 10%
12.1 General Taxation
A taxpayer is the Mongolia tax system comprises of taxes, fees and payments. The
State Great Khural (Parliament) of Mongolia is authorized to introduce or amend
taxes by law.
12.1.1 Taxpayers
The following individual, business entity or organization, which have taxable
income, property in possession, and rights:
1) A citizen of Mongolia;
2) A foreign resident and a stateless person in the territory of Mongolia, a
non-resident person who gains income in Mongolia;
3) Foreign and domestic business entity, organization and fund in the
territory of Mongolia, legal person which is not located in the territory of
Mongolia, but gains income in this country;
4) A Representative Office of a foreign business entity or organization which
gains income in Mongolia.
12.2 Corporate Income tax
12.2.1 Taxpayers
• A corporate entity is a taxpayer, provided it produces revenue subject to
tax at the end of each accounting year or is bound to pay tax under this
law, notwithstanding the absence of taxable profits.
• A taxpayer defined above can be either a permanent resident or non-
resident taxpayer of Mongolia.
• Permanent resident taxpayer in Mongolia means the following corporate
entity:
- A corporate entity incorporated under the laws of Mongolia;
- A foreign corporate entity with its head office located in
Mongolia;
Mongolian Taxation System
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• Non-resident taxpayer in Mongolia is the following corporate entity:
- A foreign corporate entity that conducts its business in Mongolia
within the frame of its representative office;
- A foreign corporate entity that earns income in Mongolia in a
form other than that set forth in the previous bullet point
• A representative office means any of the following that partially or
wholly carries out business activity of a foreign corporate entity:
- Branch (unit, section);
- Plant;
- Trade and/or service unit;
- A mine that extracts oil, natural gas or other natural resources.
12.2.2 Tax Rate
• If annual taxable income is 0-3 billion MNT, it shall be taxed at the rate of
10 percent. If annual taxable income exceeds 3 billion MNT, it shall be
taxed at 300 million MNT plus 25% of income exceeding 3 billion MNT.
• Taxpayer's income is taxed at the following rates:
- Income from dividend at 10%;
- Income from royalty at 10%;
- Income from gaming and lottery at 40%;
- Income from sale or rental of erotic publication, book, and video
recording and erotic performance at 40%;
- Income from sale of immovable property at 2%;
- Income from interest at 10%;
- Income from sale of right at 30%;
- If a representative office of a foreign company transfers its
profits overseas, the transferred income at the rate of 20%
• The following income of a non-resident-taxpayer earned in Mongolia is
taxed at the rate of 20%:
- Dividend income received from a corporate entity registered
and operating in Mongolia;
- Loan interest and guarantee payments
- Income from royalty, leasing interest, payment for
administrative expenses, rent, management expenses, and
income from use of tangible and intangible asset;
- Income from goods sold, work performed and services provided
in the territory of Mongolia.
12.2.3 Tax exemption
The following income of a taxpayer is tax exempt:
• Interest of government notes payable (bond);
• Income stated in paragraph 1. of the previous section and income from
divided earned by a non-resident.
Mongolian Taxation System
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• Taxpayer operating in the territory of Mongolia under a product-sharing
contract in oil industry and derived from sale of its share of product;
• Income of a cooperative earned from sale of its member's products
through intermediary services.
12.3 Personal income tax law of Mongolia
12.3.1 Taxpayer
• A citizen of Mongolia, foreign national and stateless person who resides
in Mongolia and earns income subject to tax for the tax year or who is
liable to pay tax, even though the same income is not earned, must be a
taxpayer.
• The taxpayer is classified as a resident taxpayer of Mongolia and non-
resident taxpayer of Mongolia.
A resident taxpayer of Mongolia
• The following individuals are a resident taxpayer of Mongolia:
- An individual with a residence in Mongolia;
- An individual who resides in Mongolia for 183 or more days in a
tax year;
- A civil servant of Mongolia appointed to work overseas.
• A foreign national appointed at a foreign diplomatic mission, consulate,
the United Nations, and their branches and his/her family members who
reside in Mongolia are not considered residents of Mongolia.
A non-resident taxpayer of Mongolia
• A taxpayer who does not possess a place for residence and did not reside
in Mongolia for more than 183 days in a given year.
12.3.2 Tax rate and amount
• A tax rate of 10% is imposed on the annual amount of the income of
anyone who is specified.
• The following tax rates are imposed on the income specified in the
following provisions of this law:
- Tax rate on income from sale of immovable property is 2%;
- Tax rate on income earned by creating a scientific, literature,
and art work, innovating a new work, product prototype, and
advantageous design, organizing and participating in a sports
competition and cultural performance, and on income from
rewards from a sports competition and cultural performance,
and prizes is 5%;
Mongolian Taxation System
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- Tax rate on income from quiz, gambling, and lottery is 40%
12.4 Value Added Tax (VAT)
Value Added Tax at the rate of 10% is imposed on the supply of taxable goods and
services in Mongolia, and on imports into Mongolia.
12.4.1 Scope of VAT
VAT is levied on the following in Mongolia:
� Work performed and services rendered in Mongolia;
� All goods imported into Mongolia to be sold or used; and
� Goods exported from Mongolia for use or consumption outside
Mongolia.
Mongolian Stock Exchange
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13 Mongolian Stock Exchange
The second smallest bourse in the world by market cap, yet the second best performing market in the world in 2010
13.1 Overview
In 1991, the Mongolian Government established the Mongolian Stock Exchange
(MSE) with the intention to implement its Privatization Policy as a base of
transition from a central planned economy to a market economy. During the first
phase of privatization between 1991 and 1995, $17m of state assets were
privatized by distributing vouchers worth $8 to every citizen of Mongolia, and 475
companies were floated on the MSE.
As the Mongolian Parliament enacted the law of Securities and Exchange and The
Corporate Law in 1994 and 1995 respectively, the secondary market began by
establishing 28 brokerage firms. But during the start of the secondary market
between 1996 and 2004, shares worth over MNT38.8bn ($32.1m) had been
traded and a few people had bought a large proportion of the shares, taking single
control of the companies. As of the end of November 2010, there are 325
companies listed on the MSE and over 80% of stocks are held by a few people or
free float of the overall market is lower than 20%. There are around 30 stocks
actively traded on the MSE.
NUMBER OF LISTED COMPANIES
Source: Financial Regulatory Committee (FRC)
Since 1996, MNT275.7bn ($233.2m) has been raised by issuing a government
bond, a corporate bond and a public offering of shares through the MSE. The first
government bond trading was held in 1996 and corporate bond trading was
475458
436 430 418 410 401 403 402 395 392 387 383 376358
325
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
1991 MSE established 475 companies initially floated after privatization of state property
1994: Law of Securities and Exchange 1995: The Corporate Law 1996-2004: $32m shares traded in this period. A few had gained large stakes in the companies Nov 2010: 325 companies on MSE, only 30 stocks actively traded
Since 1996: $233m raised in govt bond, corporate bond and public offerings
Mongolian Stock Exchange
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introduced in 2001. To date, government bonds worth MNT200.2bn ($171m) and
corporate bonds worth of MNT12.9bn ($11m) have been issued.
GOVERNMENT BONDS, MNT BILLION
Source: MSE
CORPORATE BONDS, MNT BILLION
Source: MSE
Since the first IPO on the MSE completed in 2005 by Hotel Mongolia, there have
been 14 IPOs raising a total of $51m. Out of them, 1 IPO was unsuccessful, two
companies were bankrupted and one company changed operation.
0.1 11.130.841.7
21.712.5 6.8 4.5
39.6
1.530.0
200.2
0.0
50.0
100.0
150.0
200.0
250.0
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
19
96
-20
10
1.202.96 2.74
1.812.60
0.69 0.42 0.50
12.92
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
01
-20
10
14 IPOs raising $51m: 1 IPO was unsuccessful
Mongolian Stock Exchange
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FUND RAISING THROUGH IPO, MNT BILLION
Source: MSE
Although in recent years the MSE has had formal connections with over 10
Exchanges, signed an MOU with 7 stock exchanges, become a member of
Federation of Euro-Asian Stock Exchanges (FEAS) and the Asia Oceania Stock
Exchanges Federation (AOSEF), the Mongolian Stock Exchange is still the second
smallest bourse in the world after Laos. Penetration rate is very low compared
with other emerging and frontier markets, with a Market Cap/GDP ratio of only
15%, but the Mongolian stock exchange has already stepped towards the verge of
a new development era. Recently, the London Stock Exchange won the bid for
tender of the management of the MSE with its reforming vision that includes
normal custody, electronic trading and audited financials published in English.
13.2 The second best performing market in the world
The MSE’s benchmark index called ‘Top-20’ surged six-fold over the last 3 years
due to the following very positive factors:
1) Enormous, world-class mineral projects such as Oyu Tolgoi, the largest
copper deposit in Asia, and Tavan Tolgoi, the second largest,
undeveloped coal deposit in the world, are expected to bring in 2 to 3
times the current GDP in direct investment into this small, narrowly
based economy, causing a significant spill-over effect.
2) Investors’ optimism about the local listing of at least 10% of the
strategically important deposit’s stake in accordance with the new
mining law.
3) Inflow of foreign funds into capital market on the back of further
privatization of MSE listed coal mines which are undervalued (enterprise
value to reserve ratio of lower than 1x).
In the short term, the biggest risk of portfolio investment into the MSE is the
intention of major shareholders of some blue-chips to buy out shares cheaply.
0.04
8.42
16.95
34.01
2.70 0.40
62.52
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
20
05
20
06
20
07
20
08
20
09
20
10
20
05
-20
10
Market Cap/GDP = 15% LSE recently won bid for tender of management
‘Top-20’ index up 6 fold in 3yrs
Mongolian Stock Exchange
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The best contributors to the growth in 2010 were mostly coal miners such as
Tavan Tolgoi (known as “small TT”), the biggest company on the MSE and a coking
coal mine exporting coal to China, which surged $170m or 300% in the last year.
Shivee Ovoo, one of the strategically important deposits of Mongolia, rose $115m
or 325% in the last year. Baganuur, another strategically important deposit and
the second largest company at on the MSE, increased $110m or 185%. Sharyn Gol,
the first coal mine among the MSE listed mining companies which made an
internationally recognized JORC resource statement on their deposit, is up $52m
or 525% YTD.
On the MSE, there are just 15 mining companies, out of them 10 are coal miners
and the remaining 5 are geological exploration companies. But only 6 of them are
over $5m market cap companies.
In addition to the potential development of the domestic capital market, there are
18 mining companies operating in the Mongolian mining sector listed on the
international stock exchanges, worth over $29bn or 5 times the Mongolian GDP,
and all Mongolian leading business groups are still not listed on the domestic
market.
In last year: Tavan Tolgoi (biggest company on MSE, coking coal) up 300% ($170m) Shivee Ovoo up 325% ($115m) Baganuur up 185% ($110m) Sharyn Gol up 525% ($52m)
15 mining companies on MSE Additional 18 mining companies operating in Mongolia listed abroad
Mining
January 24 2011
Mongolia
14.1
Mongolia is now in the spotlight for something other than Chinggis Khan’s name.
Recently explored Mongolia’s vast mineral resources have caught the attention of
many investors. The history of resource identification goes back to when British
exploration te
when Mongolia has been a Republic and a satellite state of the Soviet Union,
Russian scientists discovered numerous mineral deposits with significant reserves.
Some of them were brought into
(EMC), a copper concentrate producing Mongolia
the city of Erdenet. Today the copper factory remains a key constituent of the
government revenue and is one of the biggest copp
Although the Russians did some work, much remains to be done. Only around
27% of Mongolian land has been mapped to a scale of 1:50000, therefore, the
resources remain mostly untapped. The Oyu Tolgoi deposit has been named the
bigg
there is a good number of other large
Tolgoi coal deposit, studied later in this section, which is about to be privatised in
2011.
Since
have been consistent, efficient and fast, especially throughout the past decade.
Source: Business Council of Mongolia
Mongolia’s resources remain mostly untapped Only 27% of the Mongolian land has been mapped to a scale of 1:50000 Possibilities to invest in many large-scale investments, including Tavan Tolgoi
Mining
Res
ResCap Mongolia 101
14 Mining Mongolia is considered one of the last mining frontiers.
14.1 Mining Sector
Mongolia is now in the spotlight for something other than Chinggis Khan’s name.
Recently explored Mongolia’s vast mineral resources have caught the attention of
many investors. The history of resource identification goes back to when British
exploration teams first came to the country over a century ago. During the era
when Mongolia has been a Republic and a satellite state of the Soviet Union,
Russian scientists discovered numerous mineral deposits with significant reserves.
Some of them were brought into function, including Erdenet Mining Corporation
(EMC), a copper concentrate producing Mongolia-Russian joint venture, located in
the city of Erdenet. Today the copper factory remains a key constituent of the
government revenue and is one of the biggest copper deposits in the world.
Although the Russians did some work, much remains to be done. Only around
27% of Mongolian land has been mapped to a scale of 1:50000, therefore, the
resources remain mostly untapped. The Oyu Tolgoi deposit has been named the
biggest undeveloped copper and gold deposit in the world. Apart from Oyu Tolgoi,
there is a good number of other large-scale investments, including the Tavan
Tolgoi coal deposit, studied later in this section, which is about to be privatised in
2011.
Since the shift towards a market economy, the developments in the mining sector
have been consistent, efficient and fast, especially throughout the past decade.
Source: Business Council of Mongolia
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
1994: QGX Gold
enters Mongolia
1990: Mongolia
opened: Foreign
Investment Law
passed
1998: Areva signs
uranium exploration
deal
1997: Minerals Law
passed
June 2002: Cameco
gol buys Boroo gold
May 2000: Ivanhoe
enters Mongolia
2004: Western
Prospector enters
Mongolia
2006: Windfall Profit
Tax set
2009: Chinese buy
Western Prospector
(uranium)
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one of the last mining frontiers.
Mongolia is now in the spotlight for something other than Chinggis Khan’s name.
Recently explored Mongolia’s vast mineral resources have caught the attention of
many investors. The history of resource identification goes back to when British
ams first came to the country over a century ago. During the era
when Mongolia has been a Republic and a satellite state of the Soviet Union,
Russian scientists discovered numerous mineral deposits with significant reserves.
function, including Erdenet Mining Corporation
Russian joint venture, located in
the city of Erdenet. Today the copper factory remains a key constituent of the
er deposits in the world.
Although the Russians did some work, much remains to be done. Only around
27% of Mongolian land has been mapped to a scale of 1:50000, therefore, the
resources remain mostly untapped. The Oyu Tolgoi deposit has been named the
est undeveloped copper and gold deposit in the world. Apart from Oyu Tolgoi,
scale investments, including the Tavan
Tolgoi coal deposit, studied later in this section, which is about to be privatised in
the shift towards a market economy, the developments in the mining sector
have been consistent, efficient and fast, especially throughout the past decade.
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
2006: Windfall Profit Jul 2008: Protests in
Ulaanbaatar
2009: Windfall Profit
Tax repealed
Oct 2009: Chinese
CIC invests $500
million in SGQ coal
and $700 million in
iron ore
Western Prospector
2009: Oyu Tolgoi
investment
agreement signed
Mining
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Mongolia is rich in natural resources, especially in gold, copper, coal, uranium,
molybdenum, tin, tungsten and oil deposits. The estimated value of total
resources is $1.3 trillion. Among the commodities, coal, copper and gold have
attracted the majority of investments thus far. While the agricultural sector was
the former largest contributor to government revenue, the role of the mining
sector in the economy continues to grow, making it the current major force
behind Mongolia’s economic growth and development. Now the mining sector
accounts for approximately 81% of Mongolia’s total exports, 32% of government
revenue and 30% of GDP. The latest updates inform that the industry employs 45
thousand people in total, which represents around 5% of the country’s total work
force. The government’s attempt to create a favourable investment environment
within the country through reformed tax regime and other legal frameworks is
paying off. Numerous small and large-scale investors are being attracted to
Mongolia these days, some are even willing to invest into very seed-stage
projects. Involvement of mining giants like Rio Tinto, and interests of Peabody,
Shenhua, Japanese and Korean consortiums to participate in the privatisation and
development of the country’s largest coal deposit, all indicate towards Mongolia
turning into one of the top performing mining investment destinations of today
and tomorrow.
Source: National Statistics Office
Annual Production Proven Probable
Commodity 2006 2007 2008 2009 Reserve Reserve
Coal 8mt 8.8mt 9.8mt 13.2mt 20bt 152bt
Copper 0.37mt 0.37mt 0.36mt 0.37mt 67.3 1.2bt
Gold 22t 17t 15t 10t 136t 125,000t
Iron ore 0.18mt 0.26mt 1.39mt 1.38mt 264mt 1.6bt
Uranium 0 0 0 0 - 62,000t
Source: National Statistics Office & Mineral Resources Authority of Mongolia
0
50
100
2002 2003 2004 2005 2006 2007 2008 2009
ROLE OF MINING SECTOR IN NATIONAL ECONOMY, IN %
In GDP In manufacturing industry In export
Estimated value of total reserves = $1.3trillion Mining sector: 81% of exports 32% of government revenue 30% of GDP
Mining
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MAJOR PLAYERS
Coal Copper Gold Iron ore Uranium
Erdenes-
Tavan Tolgoi Erdenet Centerra Gold Darkhan Steel
Khan
Resources
SouthGobi
Resources
Ivanhoe
Mines/Rio
Tinto
MAK Iron Mining
International
Western
Prospector
Energy
Resources
Western
Prospector
North Asia
Resources Cameco
QGX
Cameco Haranga
Resources Areva
Mongolia
Energy Corp. Areva Altain Khuder
Peabody Energy
Voyager
Resources
Aspire Mining
Gobi Coal and
Energy
Prophecy
Resource Corp.
Xanadu Mines
MAK
REVENUE FROM EXPORTS, (M1-M8 2009 vs. M1-M8 2010), $ MILLION
Source: Ministry of Mineral Resources and Energy of Mongolia
500 485
13385 98
137
35 41
0
100
200
300
400
500
600
Copper
Coal
Gold
Zinc
Crude oil
Iron ore
Molybdenum
Fluoride
2009 2010
Mining revenues climbed massively from 2009 - 2010
Mining
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14.2 Exploration and Geological Mapping
� The geological map for 99.1% of Mongolia has been produced at a scale
of 1:200,000
� The geological mapping of 27.1% of Mongolia based on the general
exploration work has been carried out at a scale of 1:50,000
� 1:500,000 scale map covers the basic geology for hydro-survey of 84% of
Mongolia
� 22.5% of Mongolia covered by gravimetric survey at scales of 1:200,000
and 1:100,000
� The aerial magnetic survey has been conducted for 60% of Mongolia at a
scale of 1:200,000
� Two maps of scales of 1:50,000 and 1:25,000 have been produced using
aerial multi-spectral survey for 32% of Mongolia.
Source: Mineral Resources Authority of Mongolia
� The geological mapping of 27.1% of Mongolia based on the general
exploration work has been carried out at a scale of 1:50,000
Average 0.4% of the territory is subject to new mapping projects every year
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Source: Mineral Resources Authority of Mongolia
14.3 Licenses
Exploration license Mining License Total
Quantity Area, Ha
million
Quantity Area, Ha
million
Quantity Area, Ha
million
Domestic
Companies
2,572 22.89 746 0.24 3,318 23.13
Foreign
Companies
1,087 16.08 339 0.22 1,426 16.30
Total 3,659 38.97 1,085 0.46 4,744 39.43
Source: Mineral Resources Authority of Mongolia (1st
Jan 2010)
Source: Mineral Resources Authority of Mongolia
� The aerial magnetic survey has been conducted for 60% of Mongolia at a
scale of 1:200,000
Mining
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14.4 Coal
Coal is now Mongolia’s number one export. Initially miners were attracted to the
country’s gold, copper and molybdenum reserves, however, the magnetism has
shifted towards coal riches now, giving Mongolia the new title of “The Saudi
Arabia of Coal”. The value of its immense coal reserves has increased threefold, as
the country is located right in between two of the world’s biggest resource
consumers, Russia and China.
Source: National Statistics Office and Trade and Development Bank
COAL RESOURCES
Source: Mineral Resources Authority of Mongolia
By the amount of reserves, Tavan Tolgoi (TT) is Mongolia’s biggest coal deposit,
with around 6.4 billion tonnes of coal, a quarter of which consists of high quality
coking coal. Except for TT, there are many other attractive coal deposits and the
total reserves of the country is estimated to be 152 billion tonnes. A majority of
reserves, although proven, have not been developed due to lack of investment
0
10
20
30
2007 2008 2009 2010 2011(f) 2012(f)
COKING COAL EXPORTS TO CHINA, MILLION TONNES
Coal Mongolia’s number one export
Tavan Tolgoi: 6.4bn t coal Total: 152bn t coal
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and infrastructure. Among the producing ones, the following are the most notable
coal mines:
1) The largest player in the economy and the main supplier to local consumers
is Baganuur coal mine, containing an estimated reserve of 1.3 billion tonnes
of brown coal. The government owns the majority of the company (The
ownership structure is better explained in the Equity Research part of this
report as the company is listed on the Mongolian Stock Exchange). Baganuur
was founded during Soviet times. Due to government control and necessity
to maintain the sale prices at artificially low levels for local consumers,
Baganuur is currently operating at a production scale significantly below its
potential and is incapable of spending capital on new equipments. The mine
is, in general, suffering from under-investment as no investor is interested in
a loss-generating, state controlled company. Baganuur is included in the list
of state properties to be privatised in 2011-2012.
2) Foreign investors are mostly attracted to coking coal reserves of Mongolia,
one of the main inputs to steel production, as there is growing demand
coming from China. The PRC has stopped exporting coal in 2007 and its
imports of coking coal grew from 8.5 million tonnes in 2008 to 50 million
tonnes in 2010, representing 8% of the country’s total consumption.
Mongolia Mining Corporation’s (formerly Energy Resources) advancements
in coking coal production have attracted immense attention from global
investors. The company, which is currently extracting coal from its 500
million tonnes Ukhaa Khudag deposit, located in the Tavan Tolgoi region, has
grown tremendously since its establishment in 2005. The mine is located
245 km from the Mongolian-Chinese border. They were the first Mongolian
company to be listed on the Hong Kong stock exchange, raising $748 million
(15% higher than the planned $650 million), in October 2010. Mongolia
Mining Corporation has obtained all necessary permission to put a railway
south to the Mongolian-Chinese border from their Ukhaa Khudag mine. The
construction of a paved road by the company is under way and is expected
to be completed in Q1 2011.
3) Another major private coal supplier is Mongolyn Alt Corp. (MAK). The
company began operations in the gold sector, then expanded into coal
extraction by obtaining the license for its Nariin Sukhait coal deposit situated
900 km south of Ulaanbaatar and 50 km from the Mongolian-Chinese border
pass Shiveekhuren. Nariin Sukhait is an open-pit mine, like the majority of
other coal mines in Mongolia, and contains 134 million tonnes of high-rank,
low-ash and low-sulphur coal reserves. The current production capacity
remains at 3 mtpa due to infrastructure constraints and is expected to
increase to 5-8 mtpa once railway is in place. MAK is constructing a coal
wash plant in order to increase the value of its product. The company is
faced with some logistics problems, as the Mongolian side of the border
mainly consists of earth road.
MAK has also created a joint venture with Qinhua Corporation of China and
obtained another license nearby its main project. The Chinese provided the
required capital enabling further growth of the company.
Baganuur = 1.3bn t brown coal, supplies domestic market
Mongolia Mining Corporation = 500mt coking coal, South Gobi province, 245km from Chinese border
1st
Mongolian company to be listed on HKEx ($748m)
Paved road to be completed Q1 2011
Mongolyn Alt Corp = 134mt coal, 900km south of UB, 50km from Chinese border Open-pit mine Production capacity=3mtpa due to infrastructure constraints No rail link, investing in new wash plant
MAK JV with Chinese Qinhua Corp
Obtained approval for railway construction
Mining
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4) SouthGobi Resources’ (SGQ) Ovoot Tolgoi project is certainly one of the
largest foreign investments in the coal field of Mongolia. The deposit is
situated 42 km from the Mongolian-Chinese border pass Shiveekhuren,
making it the closest coal supply to the PRC, with proven and probable
reserves of 114.1 million tonnes of thermal and coking coal. Ivanhoe Mines
and China Investment Corporation currently own around 54% and 13% of
SGQ respectively. The company is listed on Toronto and Hong Kong stock
exchanges. On top of their main project, SouthGobi owns 18 more
exploration licenses and intends to spend around $20 million annually on
continuous exploration. The reported production target for 2010 was 4
mtpa, with an expected increase to 8 mtpa in 2012. China is the main buyer
of SGQ’s coal. In Dec 2010, South Gobi signed an off-take agreement worth
3.2 mln tonnes of coal with Winsway Coking Coal. The two companies also
entered into a strategic alliance agreement whereby SGQ has committed to
sell a minimum of 2 mtpa of coal to Winsway. Also, in Dec 2010, SouthGobi
signed a coal supply agreement with North Asia Energy Group Limited
(NAEG) for the sale of 450k tonnes of coal in 2011 and another contract for
500k tonnes of coal in 2011 with a large international company. Recently, in
late December 2010, SGQ completed its private placement with Aspire
Mining and currently owns around 19.9% of the company. Aspire is an ASX
listed company focused on developing the Ovoot coking coal project, located
in Northern Mongolia, which contains 331 million tonnes of JORC resources.
As Mongolia has vast mineral reserves and large areas of unpopulated land, the
country is in need of foreign investments, which would be the driving force behind
this underdeveloped country’s future growth. In 2010, total coal exports reached
$877 in value, growing by 135% in volume and 187% in value from 2009.
Mongolia borders with the PRC, which purchases more than 70% of its coal
exports. According to forecasts, the coal sales to China could reach 30-50 mtpa by
2015. Historically, Australia has been the major coal supplier to the PRC. However,
it could soon be replaced by Mongolia as the latter is located closer and has
plenty to offer.
Source: Ministry of Mineral Resources and Energy of Mongolia
In 2010 Mongolian coal exports reached 16.6 million tonnes.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2001 2002 2003 2004 2005 2006 2007 2008 2009
COAL PRODUCTION, MILLION TONNES
2010: 4mtpa 2012: 8mtpa
Off-take agreement signed with Winsway for 3.2mt, at least 2mtpa to be sold to Winsway
2010 revenue from coal = $877m
2015 coal exports to China 30-50mtpa
SouthGobi Resources = 114.1mt thermal and coking coal
Coal supply agreement
- with NAEG for 450kt in 2011 - with a large international
company for 500kt in 2011
Owns 20% of Aspire Mining
Mongolia to replace Australia as main coal supplier to PRC
2010 coal exports: 16.6mt
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Although Tavan-Tolgoi is one of the world’s largest unexploited coal deposits,
Mongolia’s riches are not limited to TT. Apart from the mentioned mines, there
are dozens of other coal resources in the country.
MAJOR COAL DEPOSITS IN MONGOLIA
Note:
(8) – (14): numbers indicate resources as reported by the companies
(1) - (7): numbers indicate reserves as defined by China Reality Research
Source: World Bank, US Geological Survey, Ministry of Fuel and Energy of Mongolia
and China Reality Research
14.4.1 Tavan Tolgoi
Tavan Tolgoi (TT) is one of the largest unexploited coking and thermal coal
deposits in the world, with total estimated resources of 6.4 billion tonnes, a
quarter of which consists of high quality coking coal. It is located 550 km south of
Ulaanbaatar and 200 km from the Mongolian-Chinese border. The deposit was
discovered by Soviet exploration teams in 1950 and the initial drilling work
continued throughout the 1960s and 1970s. After the 1990 Democratic
Revolution and a transition to market economy, private sector explorers were
allowed to search for more mineralization in the area. BHP Billiton took the
initiative and started drilling. However, the company stopped exploration and
Energy Resources LLC (currently Mongolia Mining Corporation), a consortium of
major Mongolian companies, acquired the licenses, as it had the necessary capital
when many others did not. The Mongolian government approved amendments to
the Minerals Law in 2006 by identifying fifteen resource-rich areas as Strategic
Deposits, including Tavan Tolgoi.
Total Reserve: 6.4bn t 25% of reserves: coking coal Ownership: 100% Government (Erdenes MGL) A strategic deposit 550 km south of Ulaanbaatar, 200 km from Chinese border Discovered by Soviet exploration teams
Beyond Tavan Tolgoi...
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In 2007, Erdenes MGL LLC, a state-owned limited liability company was
established to represent the state interest in utilization of strategic deposits. The
government acquired back the majority of TT ownership from Energy Resources in
March 2008, leaving only the Ukhaa Khudag block in the company’s possession.
Various expansion options for Tavan Tolgoi have been evaluated since then, and
in 2009 it was announced that the state would delegate 49% of ownership rights
to private mining companies. In early 2010, however, the government reversed its
statement by declaring that a 100% government ownership would be retained.
By the end of 2010, the Mongolian government put forward a new arrangement
to both strategic investors and contract miners, which is still effective today. The
overall deposit has been divided into two blocks, Eastern and Western. In late
2010, a new company Erdenes-Tavan Tolgoi LLC was established under the
Erdenes MGL’s umbrella to hold the license and account for the management of
the deposit. In Q1 2011, through Erdenes-Tavan Tolgoi LLC, 10% of ownership
rights of the Eastern Block is to be distributed to the citizens of Mongolia for free,
another 10% is to be sold to private enterprises on the Mongolian Stock Exchange,
29% is to be released through both domestic and international stock exchanges to
investors and a 51% stake is to be retained by the government. Funds raised
through domestic and international IPO will be devoted to financing the
infrastructure and working capital of the Eastern Block. The Western Block,
however, will be handed over to strategic investors who will assume entire
responsibility for the block’s development, mine infrastructure and coal
marketing, independent from the government of Mongolia. Contract miners will
be able to participate in the development of the Eastern Block for a fixed service
fee, while strategic investors will be obliged to transfer a portion of their future
income to the government of Mongolia.
Challenges include the preparation of draft contracts, conduct of an adequate
bidding process and, above all, selection of the best suited contract miners,
strategic investors, and all other related parties including investment banks, legal
advisors, auditors and so forth. The Tavan Tolgoi coking coal deposit has attracted
interest from many of the international mining giants, including China’s Shenhua
Energy Co., Peabody Energy Corp from the US, a Russian consortium led by
Gazprom, Brazil’s Vale, India’s International Coal Ventures Pvt, a joint venture of
five state-run companies, Anglo-Australian Rio Tinto Plc and BHP Billiton. The
deadline for investors to submit their proposals was 17th
January 2011. The
deadline for contract miners to express their interest is the 27th
January 2011.
Sources inform that the government is planning to extract 15 mtpa through
contract mining from the Eastern Block in 2012.
Although construction of a paved road to the Chinese border is almost complete
by now, infrastructure challenges remain in the Tavan Tolgoi region, including
railway construction, electricity and water supply, and border crossing
arrangements.
Substantial challenges remain
International mining giants interested in TT
2012: 15mtpa through contract mining Paved road from TT to Chinese border is complete Railway construction required
Initial drilling: 1960-1970s Initial license owner: BHP Billiton Ukhaa Khudag block belongs to Mongolia Mining Corp Deposit is to be privatized in 2011 Eastern Block:
- 10% to citizens - 10% to Mongolian companies - (via MSE) - 29% to IPO (via MSE and e.g.
HKEx) - 51% to government
Western Block:
- To strategic investors who will assume full responsibility, including infrastructure development
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14.5 Copper/Gold
Copper has been the top Mongolian export commodity up until very recently. In
2010, Mongolia exported 568k tonnes of copper concentrate totalling $771
million in value. That represented 26.5% of total exports.
Currently the largest Mongolian copper mine in production is Erdenet Mining
Corporation (EMC), a Mongolian-Russian joint venture established in 1978, 51%
and 49% owned by the Mongolian and Russian governments, respectively. The
deposit is included in the top ten list of the world’s largest copper-molybdenum-
porphyry mineralisation areas, and is situated 400 km north-west of Ulaanbaatar.
In 2010 Erdenet copper mine alone accounted for about 12% of the Mongolian
GDP and was responsible for all of Mongolia’s copper ore and concentrate
production.
Mongolia is ranked 2nd
in the world by copper reserves, including its massive, soon
to be fully developed Oyu Tolgoi (OT) copper and gold deposit. OT is considered to
be three times larger than EMC. Ivanhoe Mines have announced that the
commercial production at Oyu Tolgoi mine will begin in 2013 following an initial
start-up in late 2012.
Source: European Bank of Reconstruction and Development
Thus far the dominant company in the gold sector has been Boroo Gold (BG), a
wholly owned subsidiary of Centerra Gold and one of the earliest foreign
investment agreement deals in Mongolia. Boroo Gold started production in 2003,
and in 2003-2009 the company extracted around 1.26 million oz of gold. Contrary
to BG, whose reserves are almost depleted by now, a magnificent upcoming event
is the full development of the Oyu Tolgoi project, which contains 46 million oz of
gold.
The exploration license for Gatsuurt deposit with proven reserves of 1 million oz
of gold also belongs to Centerra Gold. Whether or not the Mongolian government
will allow the company to proceed with the development of the deposit remains
unclear. In November 2010, the Ministry of Mineral Resources and Energy of
Mongolia announced that 1,782 mining licenses held by private companies and
High copper and coal exports, compared to modest exports of gold
2010: 568k t of Cu exported, worth $771m (26.4% of exports)
Centerra Gold - dominant producer of gold
EMC – current largest producer of Cu ore and concentrate
Mongolia – 2nd
largest in world by Cu reserves Oyu Tolgoi = Erdenet x3
BG reserves almost depleted OT development to change everything
Gatsuurt deposit: 100% owned by Centerra Gold Mining in Gatsuurt not allowed
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254 alluvial-gold licenses would be revoked. Four small licenses of Centerra Gold
were included in the revocation list.
14.5.1 Oyu Tolgoi (copper-gold, Mongolia)
Oyu Tolgoi is the world's largest undeveloped copper-gold deposit. It is situated
550 km south of Ulaanbaatar and in 80 km from the Mongolian-Chinese border.
Source: Ivanhoe Mines
A long-term Investment Agreement has been signed between the Mongolian
government, Ivanhoe Mines and Rio Tinto in October 2009 for the development
of Oyu Tolgoi copper and gold mine. According to the terms of the Agreement,
34% of Oyu Tolgoi ownership belongs to the state and the remaining 66% belongs
to Ivanhoe Mines. The international mining giant Rio Tinto became Ivanhoe
Mines’ strategic partner in 2007 and currently owns 42% of the company.
After the government’s assessment of progresses made after the initial signing of
the Investment Agreement, the contract came into full legal effect in March 2010.
Based on Ivanhoe Mines’ estimates, the Oyu Tolgoi deposit contains around 81
billion lbs (37 million tonnes) of copper and 46 million (1,431 tonnes) oz of gold in
measured, indicated and inferred resources.
Currently construction of the mining complex is progressing ahead of schedule
and Oyu Tolgoi’s first production of copper concentrate is expected in Q3 2012
from the Southern Oyu block. Ivanhoe Mines expects commercial production to
start in 2013.
The Southern Oyu part of the project is being developed as an open pit mine. A
copper concentrator plant and other facilities are being built around the area. At
OT = world’s largest undeveloped copper-gold deposit
Oct 09: Oyu Tolgoi Investment Agreement signed 34% - Mongolian government 66% - Ivanhoe Mines (42% owned by Rio Tinto) March 2010: Investment Agreement took full legal effect Resources: 81bn lbs Cu (37mt) 46m oz Au (1,431t) Initial production expected in Q3, 2012 Commercial production to commence in 2013 Southern Oyu open pit mine: 100k Cu t/day from Q3 2012
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full capacity, the Southern Oyu open-pit mine will provide 100k tonnes of ore per
day.
The Hugo North division of the project is being developed as a block-cave mine,
which will yield the first output in 2015. At full capacity, the Hugo North deposit
will produce 85k tonnes of ore per day. When the underground mine comes into
operation, the processing capacity of the copper concentrator will be expanded.
In accordance with the Minerals Law of Mongolia, Oyu Tolgoi is a strategic deposit
and qualifies for 30 years of stabilized taxes, including corporate income tax,
customs duty, value-added tax, excise tax, royalties, exploration and mining
license fees, immovable property and/or real estate taxes, and other regulatory
provisions. There is an option to extend the terms of the Investment Agreement
by an additional 20 years.
14.6 Iron ore
Iron ore mining in Mongolia commenced in 2007. Steel production is expanding at
an accelerated rate in China and the country is increasing its imports of iron ore
from Mongolia.
Source: Trade and Development Bank
Iron ore extraction is rapidly growing in Mongolia, and now accounts for 8.7% of
all Mongolian exports.
0
0.5
1
1.5
2
2.5
3
2007 2008 2009 2010 (I-X)
IRON ORE PRODUCTION, MILLION TONNES
30-50 years of stable tax and regulatory provisions
Iron ore exports = 8.7% of total exports
Hugo North underground mine: 85k Cu t/day from 2015
Iron ore production commenced in 2007
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Source: Trade and Development Bank
The Trade and Development Bank (TDB) of Mongolia made their forecasts in
October 2010, predicting the iron ore exports from Mongolia to rise to $250
million in value in 2011. However, the December figures from the National
Statistics Office suggest that in 2010 Mongolia exported 3.5 million tonnes of iron
ore, worth $251 million. The TDB’s 2011 forecast has already been realised in
2010. This means that iron ore exports could reach over $350 in value by the end
of 2011. MAJOR PLAYERS
2008-2010 was a period of substantial investments in the iron ore sector of
Mongolia.
In 2008, Singapore’s sovereign wealth fund, in partnership with Hopu Investment,
a private equity fund, endowed $300 million in Iron Mining International (formerly
Lung Ming) which owns the Eruu Gol iron ore asset in Mongolia. China Investment
Corporation (CIC) invested another $700 million in the same company in October
2009. All three funds are of substantial size, managing portfolios of $120 billion,
$2.5 billion and $300 billion respectively. Eruu Gol deposit contains 304 million
tonnes of iron ore in reserves. Iron Mining International was planning an IPO in
early 2011, however currently there is no news on their progress with the
intended listing.
North Asia Resources Holdings Limited (NAR) entered into a framework
agreement with Taishen Development LLC to acquire full equity interest in the
company in August 2010. Taishen has exploration and mining licenses for two
iron ore deposits situated in the Dundgobi and Dornogobi provinces of Mongolia
close to the Choir Govisumber province train station. The first deposit contains 79
million tonnes of proven iron ore reserves and its license had been issued for
thirty years in 2007.
Another notable player in the industry is Haranga Resources, a majority owner
and developer of five iron ore mining projects in Mongolia. The projects are
located close to the existing and planned infrastructure and the target market for
Haranga Resources’ iron ore production is mainland China. In mid December
0
100
200
300
400
2008 2009 2010 (I-X) 2011 (f) 2012 (f)
IRON ORE EXPORTS, $ MILLION
2010 iron ore exports = 3.5mt ($251m)
Large Iron ore investors in Mongolia: Singapore sovereign wealth fund + Hopu Investment = $300m in Iron Mining International China Investment Corp. (CIC) = $700m in Iron Mining International
Taishen Development = 79mt of iron ore reserves, bought by NAR
Haranga Resources with five iron ore projects raised $25m from ASX IPO
2012: iron ore exports to reach $375m in value
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2010, the company raised $25 million in an Australian Stock Exchange IPO. As
informed by the management, the initial offering was heavily oversubscribed.
IRON ORE DEPOSITS
Note: map also includes the planned East-West railway
Source: Ministry of Road, Transportation, Construction and Urban Development of
Mongolia
14.7 Oil
Although Mongolia started exporting crude oil in 1998, it was officially recognised
as an oil producing country in June 2008. The current oil exporting capacity is
insignificant because of infrastructure constraints. Mongolia’s total oil exploration
prospects, covering an area of 614 thousand square km, are divided into 25
blocks.
The existing capacity for further oil exploration is immense as Mongolia remains
significantly under-explored. The major players in the industry are PetroChina and
Petro Matad, an AIM-listed, Mongolian company. Both companies have heavily
invested in their respective oil projects. PetroChina’s investment started in 2005
when they purchased three exploration blocks (XIX, XXI, XXII) from Soco
International Plc, a London-based oil producing company, for $93 million. In
2010, Mongolia exported 2 million barrels of crude oil worth $155 million.
Compared to 2009, this was an increase of 7% in volume and 34% in value.
EBRD took an equity position of 17% in Petro Matad by investing $6 million in
December 2009. Petro Matad is the parent company of an oil exploration group
and its main shareholder is Petrovis LLC, which is the largest importer and
distributor of petroleum products in Mongolia with widespread retail and
wholesale network. In July 2010, the company discovered significant amounts of
oil from its first well Davsan Tolgoi-1 located in block XX, and the company’s share
prices soared 55% on the AIM market.
June ’08: Mongolia is an oil producer Oil sector under-explored Largest explorers:
• PetroChina
• Petro Matad (London AIM listed)
2010 crude exports = 2.0m barrels ($155m)
EBRD invested $6m in Petro Matad Oil discovered from the first well
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The Mongolian government’s main intention is to reach self-sufficiency in oil
products based on domestic resources and it is undertaking the possible means to
contribute to the exploration process and the further expansion of the petroleum
producing potential of Mongolia.
Mongolia’s southern neighbour, China, is the world’s second largest consumer of
oil after the US. Half satisfied by imports, the PRC’s consumption reached 8.3
million barrels per day in 2009. By 2011, Chinese oil demand is expected to grow
to 9.6 million barrels per day taking up 37% of the global increase in demand. This
justifies the presumption that oil blocks in Mongolia have the potential to be
highly profitable once they start producing.
In October 2010, it was announced that Japan’s Marubeni Corporation and Toyo
Engineering have agreed to construct an oil refinery in Mongolia, 200 km north of
Ulaanbaatar. The estimated project cost is $600 million and the two companies
are planning to assume full responsibility for maintenance and operation of the
refinery. The plant is to commence producing in autumn 2014 with a daily
capacity of 44k barrels.
Source: Trade and Development Bank
0
0.5
1
1.5
2
2.5
2008 2009 2010
CRUDE OIL EXPORTS TO CHINA, MILLION BARRELS
Goal: self-sufficiency in oil
Target market: China, the world’s second largest consumer
Marubeni Corp + Toyo Engineering = oil refinery in Mongolia ($600m)
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OIL AND GAS DEPOSITS
Note: map also includes the planned East-West railway
Source: Ministry of Road, Transportation, Construction and Urban Development of
Mongolia
14.8 Uranium
Russia estimated the Mongolian uranium reserves at 30 thousand tonnes while
the Mongolian government identifies the resources as 62,000 tonnes. The recent
controversy surrounding the uranium sector in Mongolia has caught the attention
of many. Khan Resources, a Toronto-based company, had two exploration licenses
for uranium mines in the Dornod province of Mongolia. The main deposit was
producing occasionally from 1988 to 1995 under Soviet administration. However,
since 1995, no further mining has occurred in the area.
The Dornod uranium deposits are included in the list of the fifteen strategic
deposits, like TavanTolgoi and Oyu Tolgoi. Therefore, the government of Mongolia
is entitled to a maximum of 50% ownership rights of the resources. Historical
Russian exploration work lay at the heart of the claim for ownership of the
licenses.
Controversy around Khan Resources’ licenses unresolved
Dornod is a strategic deposit
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URANIUM DEPOSITS
Note: map also includes the planned East-West railway
Source: Ministry of Road, Transportation, Construction and Urban Development of
Mongolia
14.9 Minerals Laws and Taxes
Recently, measures on environmental protection and rehabilitation issues have
been strengthened in Mongolia. Now the local administrative bodies are given
more regulatory power and private license holders have many more duties to
comply with.
14.9.1 Strategically Significant Deposits
Approximately 1,170 mineral deposits and 7,654 occurrences have been identified
in Mongolia to date. The occurrences include over 60 types of minerals, including
copper, gold, coal, molybdenum, iron ore, uranium, tin, tungsten, silver, zinc and
fluorspar. Fifteen deposits have been acknowledged by the government as
strategically important.
According to the Minerals Law (2006), a deposit is considered to be strategically
important, if it:
• has an influence on Mongolia’s national security, economic and social
development (such as all uranium deposits)
• contains minerals that have strong international demand
• yields annual revenues exceeding 5% of GDP
If a deposit is identified as strategically important to Mongolia, the government is
allowed to acquire up to 34% of ownership rights from the license holder, if the
exploration work has been financed purely with private funds, and up to 50% of
ownership rights, if the exploration work has been financed partially with state
funds, including capital invested during the Soviet times.
Stronger measures on environmental protection and rehabilitation
Identified: 1,170 deposits 7,654 occurrences 60 types of minerals 15 strategic deposits
If a deposit is strategic, government takes up to 34%-50% of ownership rights
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DEPOSITS OF STRATEGIC IMPORTANCE
Source: Mineral Resources Authority of Mongolia
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DEPOSITS OF STRATEGIC IMPORTANCE
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OVERVIEW OF STRATEGIC ASSETS
Deposit Minerals Reserves and quantity
State of development,
start date, output p.a. Ownership structure Estimated capex
1 Tavan
Tolgoi
Metallurgical
coal 6.4 bn t
Partial production, ramp-
up in 2011, 15-30 mtpa
100% Erdenes MGL
LLC1
US$ 2.4 bn (US$ 1.6
in the first 3 years)
2 Nariin
Sukhait
Metallurgical
coal 125.5. mn t Feasibility study
100% private (South
Gobi Resources, MAK-
Qinhua JV)
N/A
3 Baganuur Lignite coal 600.0 mn t2 Production, 2.8 mtpa
75% SPC3, 25% locally
listed -
4 Shivee
Ovoo Lignite coal 646.2 mn t Production, 2.0 mtpa
90% SPC, 10% locally
listed (operational
part); rest owned by
Erdenes MGL
-
5 Mardai Uranium 0.001 mn t at 0.119%
O3U8 Feasibility study
100% private (Khan
Resources)
Total US$ 200 mn 6 Dornod Uranium
0.029 mn t at 0.175%
O3U8 Feasibility study
21% SPC, 21% Russian
Gov, 58% Khan
Resources
7 Gurvan
Bulag Uranium
0.016 mn t at 0.152%
O3U8 Feasibility study
100% private
(Chinese company)
8 Tomortei Iron ore 229.3 mn t at 51.15% Fe Feasibility study
100% Darkhan
Metallurgical factory
(100% owned by SPC)
US$ 100 mn
9 Oyu Tolgoi Copper, gold 37 mn t of copper,
1,431 t of gold
Commercial production
in 2013
34% Erdenes MGL,
66% Ivanhoe Mines US$ 6 bn
10 Tsagaan
Suvarga
Copper,
molybdenum
10.6 mn t of oxides at
0.42% Cu/0.011% Mo;
240.1 mn t sulphides at
0.53% Cu/0.018% Mo
Feasibility study 100% private (MAK) US$ 200 mn
11 Erdenet Copper,
molybdenum
1.2 bn t at 0.51% Cu/
0.012% Mo
Production, 569k t of
concentrate
51% SPC, 49% Russian
Gov
US$ 150 mn for
downstream plant
12 Burenkhaan Phosphorite 300 mn t at 19.0% P2O5 Feasibility study 100% private (four
private companies) US$ 500 mn
13 Boroo Gold, ore 0.025 mn t at 1.6g/t Au Close to depletion 100% private (Boroo
Gold) -
14 Tomortein
Ovoo Zinc 7.7 mn t at 11.5% Zn
Production, 0.07 mn t of
zinc
100% private
(Tsairminerals JV) -
15 Asgat Silver 6.4 mn t at 351.08g/t Ag Feasibility study
100%
Mongolrostsvetmet
(50% SPC,
50% Russian Gov)
US$ 47 mn
Source: Worley Parsons, Ministry of Mineral Resources and Energy, State Property Committee of Mongolia
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Note: 1. Erdenes MGL – state owned limited liability company
2. Other sources estimate Baganuur reserves at 1.3 billion tonnes
3. SPC – State Property Committee of Mongolia
14.9.2 Overview of Foreign Investment
(The following information has been provided by legal firms active in Mongolia,
including Dewey & LeBoeuf)
The Mongolian Foreign Investment Law (FIL) was adopted in 1993 and
subsequently amended. According to the Law, the minimum amount accepted as
foreign investment is US$ 100k. The FIL gives similarly positive treatment to both
foreign and domestic investors with regard to control, use and removal of their
investments. Foreigners can repatriate income and profits earned. A Stability
Agreement (i.e. stabilization of taxes) is obtainable, the eligibility for and terms of
which depend on the degree of investment.
Foreign Ownership
• Foreign Investors can own 100% of any registered business and it is not
legally required to have a Mongolian partner
• Exceptions
- In line with the Minerals Law adopted in 2006, the Government
of Mongolia is entitled to obtain up to 34% or 50% share of any
deposit identified as strategically important
- In line with the Uranium Law adopted in 2009, the Government
of Mongolia is entitled to obtain at least 51% share of any
company engaged in uranium exploration and mining through
MonAtom LLC
Registration of Foreign Investment
• Any company with 25% or more foreign direct investment has to be
registered as a “foreign-invested firm” with the Foreign Investment and
Foreign Trade Agency (FIFTA)
• FIFTA is fully responsible for the registration process and currently
operates under the supervision of the Ministry of Foreign Affairs and
Trade (MFAT)
• FIFTA certifies the environmental practices and technologies of
registered foreign companies
Currency Issues
• Investment funds, profits, revenues, debt service and lease payments are
easily convertible and transferrable in various currencies.
• Mongolian companies are allowed to open offshore bank accounts
• Foreign-held interest bearing bank accounts are subject to a tax rate of
20%
• All domestic transactions must be conducted in local currency (MNT)
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Resolving Disputes
• Mongolia is a signatory to the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (CREFAA, New York Convention)
• Mongolia is a signatory to the Convention on the Settlement of
Investment Disputes (CSID, Washington Convention)
• Mongolia has signed Bilateral Investment Treaties (BITs) with numerous
countries
• Benefits of BITS and CSID Conventions
- Disputes can be resolved via international arbitration
� Domestic courts can be avoided
- Broad protection standards are provided under international
law
� Measures may have an effect equivalent to expropriation
� Provides investors with fair and equitable treatment
14.9.3 Foreign Investment in Mining
Exploration and Mining Licenses
• Mineral resources are the State’s property
• Only legal entities registered in Mongolia can hold exploration and
mining licenses
• Exploration Licenses
- Initially granted for 3 years
- The license can be extended twice, each extension comprising a
3-year period
- The license holders are required to spend the following
minimum amounts on exploration from the second year
onwards
� 2nd and 3rd year miners must spend at least US $0.5 per Ha
annually
� 4th to 6th year miners must spend at least US $1.0 per Ha
annually
� 7th to 9th year miners must spend at least US $1.5 per Ha
annually
• Mining Licenses
- Initially granted for 30 years
- The license can be extended twice, each extension comprising a
20-year period
- 5% royalties are applied on export sales
- Active mining companies must ensure that 90% of their
workforce consists of Mongolian nationals
- A license holder who invests $50 million or more can enter into
a special Investment Agreement with the Government
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Foreign Ownership
• The Minerals Law adopted in 2006 gives the Government of Mongolia
the right to obtain an equity stake in all strategically important deposits
- up to a 50% stake if the exploration of the deposit has been
partially financed with the State’s funds
- up to a 34% stake if the exploration of the deposit has been fully
financed with private funds
• The Government has to pay for the share it takes at a fair market value
• Holders of the mining licenses for strategic deposits must sell no less
than 10% of the shares on the Mongolian Stock Exchange
- Currently it is unclear how this provision of the Law will be
implemented
Investment Agreements
• Investors who undertake to invest more than $50 million within the first
five years of their mining operations are eligible to enter into a special
Investment Agreement with the Government of Mongolia
• The Investment Agreement can create fiscal and legal stability
• The Government acts through the Cabinet of Ministers represented by
cabinet members responsible for taxation, geology, mining and
environmental issues
• Maximum duration of the Investment Agreement:
- for investments worth US$ 50 - 100 million: 10 years
- for investments worth US$ 100 - 300 million: 15 years
- for investments in excess of US$300 million: 30 years
Environmental Issues
• The license holders must prepare the following documents:
- an environmental impact assessment
- an environmental action plan which addresses all adverse
impacts identified in the environmental impact assessment
• The license holders must deposit 50% of their environmental protection
budget for a particular year in a special bank account supervised by the
Government
• Current mining license holders are responsible for environmental
liabilities incurred by former license holders
Taking Security
• The license holder may pledge mineral licenses and immovable property
and register such pledge with FIFTA
• Only banks and other financial institutions can be registered as pledgees
of mineral licenses
- Key issue: only Mongolian legal entities (or nationals) can hold
mineral licenses
• There is no system to register pledges over movable property
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Recent Changes to the Mongolian Tax Code
• Effective from the 1st
of January 2007, the Tax Code creates a level
playing field between foreign and domestic investors
• In 2009, the allowance to carry forward losses has been extended from 2
to 8 years
- This was a condition for the development of the Oyu Tolgoi
project
• In 2009, Parliament revoked an exemption on VAT taxes of 10% on
equipments used to bring a mine into production Elimination of Excess Profits Tax on Gold and Copper
• Windfall Profits Tax law passed in 2006
- It imposed 68% tax on profits from gold and copper mining
� Gold: tax was applied when the gold price reached US$ 850/oz
� Copper: tax was applied when the copper price reached
$2,600/t
• The Parliament abolished the Windfall Profits Tax, effective from the 1st
of January 2011
Law on Prohibition of Mineral Exploration in Water Basins and Forest Areas (2009)
• The Law prohibits mining in water basins and in forested areas
• According to the Law, licenses to explore or mine mineral resources
within an area no less than 200 meters from a forest or water resource
must be revoked or modified
• The Law grants local officials the power to determine the actual areas to
be mined
- Local officials can extend the 200 meter threshold
• The Law requires the Government to give compensation to the license
holders for previously incurred exploration expenses or the revenues lost
due to standstill of operations
Uranium Law (2009)
• Created the Nuclear Energy Agency of Mongolia (Regulatory Authority)
• Created MonAtom, a new state-owned holding company, to maintain the
uranium assets that the government will demand back from the current
rights holders
• Revoked all uranium exploration and mining licenses, and required all
possessors to re-register those licenses (for a fee) with the Nuclear
Energy Agency
• Required investors to accept that MonAtom has the right to acquire 51%
share of the license holder’s company without compensation
• Created a uranium-specific licensing and regulatory regime
- Independent of the regulatory framework set out in the
Minerals Law (2006) for developing other mineral and metal
resources
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- The state can issue distinct licenses for uranium exploration on a
property otherwise dedicated to other mineral and metals
exploration
14.9.4 Progressive royalties on minerals
The State Information Digest was published on the 27th
December 2010.
According to the new release, the Law on Minerals has been amended and now
includes progressively increasing royalties on 23 types of minerals.
PROGRESSIVE ROYALTIES ON MINERALS
No Mineral Unit Threshold
market price, US$
Percent levy
ore concentrate product
1 Copper tonnes 0-5000 0.0 0.0 0.0
5000-6000 22.0 11.0 1.0
6000-7000 24.0 12.0 2.0
7000-8000 26.0 13.0 3.0
8000-9000 28.0 14.0 4.0
Above 9000 30.0 15.0 5.0
2 Gold ounce 0-900 0.0
900-1000 1.0
1000-1100 2.0
1100-1200 3.0
1200-1300 4.0
Above 1300 5.0
6 Iron tonnes 0-60 0.0 0.0 0.0
60-70 1.0 0.7 0.4
70-80 2.0 1.4 0.8
80-90 3.0 2.1 1.2
90-100 4.0 2.8 1.6
Above 100 5.0 3.5 2.0
7 Zinc tonnes 0-1500 0.0 0.0 0.0
1500-2000 1.0 0.8 0.4
2000-2500 2.0 1.6 0.8
2500-3000 3.0 2.4 1.2
3000-3500 4.0 3.2 1.6
Above 3500 5.0 4.0 2.0
11 Raw coal tonnes 0-25 0.0
25-50 1.0
50-75 2.0
Mining
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January 24 2011
ResCap Mongolia 101 P a g e | 98
75-100 3.0
100-125 4.0
Above 125 5.0
12 Processed coal tonnes 0-100 0.0
100-130 1.0
130-160 1.5
160-190 2.0
190-210 2.5
Above 210 3.0
13 Final product tonnes 0-160 0.0
(half-coke,
coke, gas,
liquid fuel,
coke chemical
product)
160-190 0.5
190-210 1.0
210-240 1.5
240-270 2.0
Above 270 2.5
Source: State Information Digest
Agriculture
ResCap Resource Investment Capital
January 24 2011
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15 Agriculture Currently replaced by mining, the agriculture sector formerly has been the backbone of Mongolia’s economy and the major driver for people’s living standards.
The agriculture sector formerly has been the largest contributor to Mongolia’s
economy, accounting for more than 20% of the country’s GDP and representing
around 14% of foreign currency revenue. The industry development has been and
still is largely constrained by harsh climatic conditions, long winters and
insufficient precipitation. To date, only 1% of Mongolia’s arable land is cultivated
with crops. The majority of vegetables and food products, except livestock, are
imported from China. The overall sector is mainly focused on animal husbandry,
therefore pastureland is the backbone of Mongolia’s agriculture. Previously
around 80% of the total territory used to be occupied with pastureland. However,
this proportion is decreasing due to the current advancements in the mining
sector. Mongolia has recently become self-sufficient in grains and potatoes.
The livestock sub-sector, which accounts for more than 80% of agriculture
production, is primarily focused on sheep, goat, cattle, horse, camel, yak and pig
husbandry. Livestock is extensively distributed throughout the entire territory,
with greatest concentration of horses and cattle in the north-central regions and
of goats and camels in the west-southern regions of Mongolia. The earliest
agricultural cooperatives were founded in the 1930s following the government’s
policy to systematize herders with their livestock. With assistance from the Soviet
Union, the number of cooperatives were increased and their sizes expanded in
the mid 1950s.
According to the National Statistics Office, by the end of 2010, there were 1.9
million horses, 2.2 million cattle, 270 thousand camels, 14.5 million sheep and
13.9 million goats in Mongolia, summing to 32.77 million heads of livestock. In
total 11.3 million heads of animals were lost due to “dzud” (explained later in this
section)
Crop cultivation areas are concentrated in the northern regions of Mongolia,
especially around the Orkhon and Selenge river basins, owing to moister land.
Around 80% of cropland is devoted to cultivation of grains such as wheat, barley
and oat. The remaining part is primarily devoted to fodder crops or hay. The sub-
sector generates rather low yields that vary heavily each year depending on the
weather conditions. A trivial fraction of the crop land is occupied by gardening of
potatoes, yet the output is enough to satisfy the demand coming from 2.7 million
people residing in the country. On average, the largest state-owned farms spread
over an area of 270 square kilometres and normally encompass some livestock
production.
In 2010, Mongolia produced 355 thousand tonnes of cereal (9.3% decrease yoy),
168 thousand tonnes of potatoes (11.1% increase yoy), 82 thousand tonnes of
Agriculture focused on animal husbandry Pastureland is the backbone of agriculture 1% of land cultivated with crops Self-sufficiency in grains and potatoes
Livestock accounts for over 80% of agriculture First cooperatives founded in 1930s
80% of cropland devoted to grain cultivation Crop cultivation yields are low and inconsistent Largest farms: 270 sq km
2010: total livestock 32.8m heads
2010: 1.7mt of harvest
Agriculture
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January 24 2011
ResCap Mongolia 101 P a g e | 100
vegetables (5.5% increase yoy), 1.1 million tonnes of hay (24.1% increase yoy) and
31 thousand tonnes of hand-made fodder (21.1% increase yoy), totalling 1.7
million of harvest.
Source: Ministry of Food Agriculture and Light Industry of Mongolia
15.1 Dzud
Dzud is a terminology explaining extremely cold and windy winters, throughout
which livestock perish from starvation as it becomes impossible to find fodder.
Herder households sometimes categorise the phenomenon as black, white and ice
dzuds. The first type is caused by low growth of fodder crop in summer followed
by a cold winter, the second type is caused by heavy snow falls, regardless of the
previous months’ harvest. The third type is a consequence of heavy rain falls
which create an ice coverage on top of the soil, freezing all the hay. As a result of
each type of dzud, livestock perish through malnourishment.
It is possible to prepare for dzud by drying and storing hay during the warm
seasons and by building winter shelters in advance for the livestock.
Dzud can easily slay over 1 million heads of animals. According to UN estimates,
the white dzud which occurred in late 2009 and early 2010 had a cruel impact and
by the end of April 2010, over 7.8 million heads of livestock (around 17% of total
livestock) were lost and 9,000 households (45,000) were left without animals. In
2009, livestock accounted for around 16% of GDP. According to the National
Statistics Office, by the end of 2010, the total loss increased to 11.3 million heads,
including 13.5 thousand horses (301% decrease yoy), 423 thousand cattle (16.3%
decrease yoy), 7.5 thousand camel (2.7% decrease yoy), 4.8 million sheep (24.9%
decrease yoy), 5.8 million goats (29.4% decrease yoy). Compared to 2009, the
total number of agricultural animals in Mongolia fell by 25.7%.
Abandoned, 4
79
Unused, 376
Fallow, 147
Sown, 195
CULTIVATED CROP LAND USE , THOUSAND HA
Dzud = cold and windy winters Animals perish from dzud
Q4 2009 – Q1 2010: 7.8m livestock lost; 45,000 people left without animals 2009: livestock = 16% of GDP
Real Estate
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January 24 2011
ResCap Mongolia 101 P a g e | 101
16 Real Estate The capacity to build residential properties in Ulaanbaatar is enormous, especially considering the increasing number of expats and foreign executives arriving in Mongolia.
Residential property prices rose four fold during the period 2002-2008, after
which they fell to 2007 levels as a result of the global recession. In the beginning
of 2010, the average price per square meter of an apartment in Ulaanbaatar was
$800 [Eurasia Capital].
Source: Global Property Guide, Eurasia Capital, Mongolian Properties
Source: Global Property Guide, Eurasia Capital, Mongolian Properties
250330
400450
590
800
1100
800
0
200
400
600
800
1000
1200
2002 2003 2004 2005 2006 2007 2008 2009
DYNAMICS OF RESIDENTIAL PRICES IN ULAANBAATAR ($/sqm)
4,500
1,9001,550
1,200800 650 475
0500
1,0001,5002,0002,5003,0003,5004,0004,5005,000
Mo
sco
w
Kie
v
Alm
aty
Ba
ku
Ula
an
ba
ata
r
Bis
hke
k
Ta
shke
nt
COMPARATIVE RESIDENTIAL PRICES ($/sqm)
2002-2008: residential property prices quadrupled
Real Estate
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ResCap Mongolia 101 P a g e | 102
Factors behind the real estate industry growth:
� Mining boom, economic development and higher foreign direct
investment; more foreign executives and diplomats coming to Mongolia;
increasing living standards and greater number of wealthy citizens
� Lack of contemporary apartments; over 1 million people residing in
Ulaanbaatar (40% of the population); lack of per person living space in
the capital city (7 square meter per person)
� Mongolian households are bigger in size compared to Russia and Eastern
Europe, having on average 4.1 persons
� Child benefits and population growth
� Migration of rural households to Ulaanbaatar
� Difficult living conditions in ger districts
Figures suggest that in 2008, over 15 thousand foreigners and 4 thousand expats
were residing in Ulaanbaatar. As a result, in 2008, the residential property yields
in Mongolia were among the highest in all of Asia, hovering around 15% to 18%,
with accommodation prices rising 30% yoy.
Because of the global recession and plunging copper prices, which was the main
export commodity of that time, residential property prices in Mongolia fell by
around 30% in 2009. The banking sector experienced a collapse of two banks and
commercial banks in general stopped providing loans to the citizens.
The signing of the Oyu Tolgoi Investment Agreement (Oct 2009) facilitated
substantial inflow of foreign capital into the mining sector, laying the foundation
for complete economic recovery and robust future growth. The top banks of
Mongolia started offering mortgage loans by the end of 2009. The recent success
in economic performance gives a solid reason to presume that the demand for
residential properties in the country is about to hike. Foreign residents are
allowed to own a property in Mongolia. The special license that qualifies their
ownership rights is the Immovable Property Ownership Certificate.
Statistics suggest that the population of Ulaanbaatar increased 30% to 1.1 million
in three years from 2007. More than half of the residents live in ger districts
surrounding the city. The government is working on a project to replace the ger
districts with proper residential complexes. An announcement has been made in
October 2010 that the authorities are willing to exchange two-room apartments
for 0.07 Ha of land in ger districts. The master plan is to construct residential
complexes in those areas comprising 75 thousand apartments for lower-income
people. The two-room replacements are meant to be a temporary provision of
accommodation for the land owners, who will be entitled to obtain housing from
the new complexes once they are fully constructed. Other projects designated for
25 thousand households are to be developed in provincial areas across Mongolia.
The estimated budget for the construction of all 100 thousand apartments is $6.2
billion.
The capacity to build residential properties in Ulaanbaatar is enormous, especially
considering the increasing number of expats and foreign executives arriving in
Mongolia. Being aware of such possibilities, several real estate suppliers have
started constructing new large-scale residential buildings, some of which are
2008: 15,000 foreign residents and 4,000 expats in Mongolia
2009: property prices fell 30%
Oyu Tolgoi agreement, economic recovery, provision of mortgage loans Demand expected to increase
2007-2010: Ulaanbaatar population increased 30% Offer to exchange 2-room apartments for 0.07 Ha land 100,000 apartments for low-income people to be constructed ($6.2bn)
Substantial existing capacity
Real Estate
January 24 2011
complete by now. Mongolian Propert
in Ulaanbaatar, which is owned by Asia Pacific Investment Partners, an investment
company focused on opportunities in Mongolia. Mongolian Properties has just
finished the construction of the Regency Residence (9
currently working on the Olympic Residence (135 apartments) project. Tenants
are now allowed to move into the former complex. The latter project is to be
finished by 2013. Bodi Group, one of the largest companies in Mongolia, which
ow
Ulaanbaatar.
Figures indicate that around 100 real estate developers are currently active in
Mongolia, out of which 10 can be considered as professional. With further
economic growth and development of the financial sector, provision of mortgage
loans by banks is expec
Source: Trade and Development Bank
Property market, recent research
Currently there is a significant lack of supply in the residential property market
throughout Mongolia. The demand for adequate accommodation and commercial
property is high and expected to hike further due to the mining boom, inflow of
capital, rising num
Numerous large-scale ongoing projects
100 real estate developers, only 10 are professional
Lack of residential property
Real Estate
Res
ResCap Mongolia 101
complete by now. Mongolian Properties is the largest real estate company based
in Ulaanbaatar, which is owned by Asia Pacific Investment Partners, an investment
company focused on opportunities in Mongolia. Mongolian Properties has just
finished the construction of the Regency Residence (9
currently working on the Olympic Residence (135 apartments) project. Tenants
are now allowed to move into the former complex. The latter project is to be
finished by 2013. Bodi Group, one of the largest companies in Mongolia, which
owns Golomt Bank, is also building a 84-villa complex in the Sanzai area outside of
Ulaanbaatar.
Figures indicate that around 100 real estate developers are currently active in
Mongolia, out of which 10 can be considered as professional. With further
economic growth and development of the financial sector, provision of mortgage
loans by banks is expected to increase substantially.
Source: Trade and Development Bank
Property market, recent research
Currently there is a significant lack of supply in the residential property market
throughout Mongolia. The demand for adequate accommodation and commercial
property is high and expected to hike further due to the mining boom, inflow of
capital, rising number of expats and improvement in living standards.
ResCap Resource Investment Capital
P a g e | 103
ies is the largest real estate company based
in Ulaanbaatar, which is owned by Asia Pacific Investment Partners, an investment
company focused on opportunities in Mongolia. Mongolian Properties has just
finished the construction of the Regency Residence (97 apartments) and is
currently working on the Olympic Residence (135 apartments) project. Tenants
are now allowed to move into the former complex. The latter project is to be
finished by 2013. Bodi Group, one of the largest companies in Mongolia, which
villa complex in the Sanzai area outside of
Figures indicate that around 100 real estate developers are currently active in
Mongolia, out of which 10 can be considered as professional. With further
economic growth and development of the financial sector, provision of mortgage
Currently there is a significant lack of supply in the residential property market
throughout Mongolia. The demand for adequate accommodation and commercial
property is high and expected to hike further due to the mining boom, inflow of
ber of expats and improvement in living standards.
Real Estate
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 104
Source: Broker research
Large-scale property projects are to be developed in the South Gobi province of
Mongolia, a home to grand deposits like Oyu Tolgoi and Tavan Tolgoi.
Source: CBRE, Savills, Global Property Guide, Eurasia Capital, Krisha Magazine
-50%
0%
50%
100%
150%
200%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2008 2009 2010 2011 2012 2013
Expat population growth
Number of expats
22,200
11,900
9,500
7,050 6,9005,200 5,000 4,500
3,150 3,1001,700
0
5,000
10,000
15,000
20,000
25,000
Ho
ng
Ko
ng
Sin
ga
po
re
Seo
ul
Be
ijin
g
Sha
ng
ha
i
Ba
ng
kok
Pe
rth
Ho
Ch
i M
inh
Alm
aty
Ku
ala
Lu
mp
ur
Ula
an
ba
ata
r
LUXURY RESIDENTIAL PROPERTY PRICES ($ per 1 sqm)
Real Estate
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January 24 2011
ResCap Mongolia 101 P a g e | 105
Source: CBRE, Savills, Global Property Guide, Krisha Magazine
In 2000, Ulaanbaatar was a soviet-style city with little construction activity taking
place, whereas in 2010 it has transformed into a contemporary city with an
extraordinary boom in real estate development. In 2000, the Mongolian GDP was
$1 billion, the GDP per capita was $456 and Ulaanbaatar’s population was 791
thousand. In 2010, however, the numbers have grown to over $6.6 billion, $1,745
and 1.1 million, respectively. Recently Mongolia has been named the “Saudi
Arabia of Coal” and many predict that Ulaanbaatar is about to follow the
footsteps of Astana and Doha in terms of their success and achievements in
transformation. According to the IMF estimates, Mongolia’s real GDP growth is to
exceed 25% by 2013-2014. The country’s GDP per capita is expected to rise faster
than the PRC’s, reaching $5,000 by 2012 and $12,000 by 2015, which is equivalent
to what an average resident of Shanghai earns today.
The capacity for new residential developments in the main cities, including
Ulaanbaatar, is immense. For instance, Dalanzadgad, the centre of the South Gobi
province, will be the next main destination for domestic and foreign workforce,
where construction of new housing, industrial complexes, offices and hospitals
will be required. There are approximately 18,000 people residing in the city and
most of them live in traditional gers. Another example is Sainshand city, where a
$10 billion industrial complex (park) is being developed which will increase the
value of Mongolian mineral resources. The park will contain a coal handling and
processing plant (CHPP), a copper smelter, an iron pellets plant, an oil refinery and
other facilities. Property developers and financiers should see the mine sites as
the main destination for real estate related investments.
The latest update informs that construction and installation works implemented
in Mongolia throughout 2010 grew 25.6% from 2009 and reached 351 billion MNT
(around $281 million) in total. Domestic construction companies executed 93% of
those (30% increase in activity yoy), while foreigners accounted for the remaining
7%.
63 6157
54
38
31 31 3024 24 23 22
0
10
20
30
40
50
60
70
Ho
ng
Ko
ng
Sin
ga
po
re
Seo
ul
Pe
rth
Ho
Ch
i M
inh
Sha
ng
ha
i
Be
ijin
g
Alm
aty
Ta
ipe
i
Ku
ala
Lu
mp
ur
Ba
ng
kok
Ula
an
ba
ata
r
GRADE A OFFICE RENTAL PRICES ($ per 1 sqm)
Ulaanbaatar – the capital city
of Mongolia (2000)
Ulaanbaatar – the capital city
of Mongolia (2010)
2010: construction/installation works nationwide $281m (up 25.6% yoy)
Infrastructure
January 24 2011
Mongolia’s infrastructure, or lack of, is the to developing its resource wealth. However, there are many ambitious projects and foreign investment commitments to improve the situation.
17.1
The Trans
country’s borders with Russia and China, stretches across 2,215 km. The line starts
at Ulan
Erenhot, where it j
branching out from the main line that link passengers to the main cities such as
Erdenet and Darkhan. Apart from the Trans
connects the eastern city Choibalsan,
Trans
government, is responsible for the operation of the main line.
In December 2010, the governments of Mongolia and Russia signed nine
cooperation agreements, including a contract on the enlargement of the
Ulaanbaatar Railway capital at equal contribution, which will help modernize the
company and facilitate the develop
Mongolia.
Trans-Mongolian railway (2,215 km) is Mongolia’s main rail line
Agreement signed on improvement of Ulaanbaatar Railway company
Infrastructure
Res
ResCap Mongolia 101
17 Infrastructure Mongolia’s infrastructure, or lack of, is the most serious inhibitor to developing its resource wealth. However, there are many ambitious projects and foreign investment commitments to improve the situation.
17.1 Railway
The Trans-Mongolian railway, which is Mongolia’s main rail link connecting the
country’s borders with Russia and China, stretches across 2,215 km. The line starts
at Ulan-Ude town, passes through Ulaanbaatar, then reaches Zamiin
Erenhot, where it joins the Chinese railway. There are a few diverted short routes
branching out from the main line that link passengers to the main cities such as
Erdenet and Darkhan. Apart from the Trans-Mongolian railway, a short link
connects the eastern city Choibalsan, the centre of the Dornod province, with the
Trans-Siberian railway of Russia. Ulaanbaatar Railway, 50% owned by the Russian
government, is responsible for the operation of the main line.
In December 2010, the governments of Mongolia and Russia signed nine
cooperation agreements, including a contract on the enlargement of the
Ulaanbaatar Railway capital at equal contribution, which will help modernize the
company and facilitate the development of the required infrastructure in
Mongolia.
ResCap Resource Investment Capital
P a g e | 106
most serious inhibitor to developing its resource wealth. However, there are many ambitious projects and foreign investment commitments to
Mongolian railway, which is Mongolia’s main rail link connecting the
country’s borders with Russia and China, stretches across 2,215 km. The line starts
Ude town, passes through Ulaanbaatar, then reaches Zamiin-Uud and
oins the Chinese railway. There are a few diverted short routes
branching out from the main line that link passengers to the main cities such as
Mongolian railway, a short link
the centre of the Dornod province, with the
Siberian railway of Russia. Ulaanbaatar Railway, 50% owned by the Russian
government, is responsible for the operation of the main line.
In December 2010, the governments of Mongolia and Russia signed nine
cooperation agreements, including a contract on the enlargement of the
Ulaanbaatar Railway capital at equal contribution, which will help modernize the
ment of the required infrastructure in
Infrastructure
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 107
17.2 Roads
Most roads in Mongolia are gravel road and 96.7% of the Mongolian road network
is unpaved. Investments into the sectors were boosted only after 2000, when the
US and major financial institutions like the World Bank and ADB contributed to
the development of road projects. As a result, 2,700 km of paved road were
added to the system, making the isolated regions of Mongolia more accessible.
As infrastructure constraints remain immense at this stage of the mining boom,
further investments are expected in rail and road networks. Mongolia Mining
Corporation’s new paved road from its Ukhaa Khudag deposit located in the
Tavan Tolgoi region to the Mongolian-Chinese border is soon to be fully
completed.
There is a paved road from Ulaanbaatar to the Mongolian-Russian border.
17.3 Airports
Chinggis Khaan Airport, located in 15 km from Ulaanbaatar, is the one and only
international airport of Mongolia. There are a number of domestic airports linking
the capital city to isolated provinces. MIAT or Mongolian Airlines, a state-owned
company, is the largest carrier in the country and currently offers international
flights only. Among major global destinations, Mongolia is directly linked to Seoul,
Beijing, Tokyo, Moscow and Berlin. The main two domestic carriers are
AeroMongolia and Eznis Airways, which also organise charter flights to the main
mine sites.
17.4 Water
Due to dry weather conditions, water is a scarce resource in Mongolia. Some
regions of the country do not receive precipitation at all throughout the year.
There is the threat that Ulaanbaatar’s water supply may be significantly depleted
in the medium to long term.
Not only is water required for people’s everyday life, but it also facilitates
industrial activities such as coal washing. In general, production levels of all sorts
of mines heavily depend on water supply. Desert areas contain aquifers, but it is
hard to quantify the size and distribution of those.
In late 2010, Oyu Tolgoi’s environmental team announced that they had found a
substantial amount of underground water deep beneath the Gobi desert. Experts
predict that the discovered aquifer will be capable of supplying the copper and
gold mine throughout the next 40 years. According to the announcement, even
after those years of utilization, water resources in the area will not be fully
depleted. The Oyu Tolgoi team is currently working to ensure that minimal
environmental impacts are caused by their activity in the region. Development of
96.7% of roads unpaved Major investments expected New paved road by Mongolia Mining Corporation
Only one international airport
Water is a scarce resource in Mongolia
Water is vital in mine development
Oyu Tolgoi team discovered an aquifer Water supply ensured for 40 years Environmental impacts will be minimal
Infrastructure
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 108
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
Infrastructure
January 24 2011
Most of the la
infrastructure.
Connection to the electrical grid in Mongolia takes twice as long to obtain in
comparison with Russia, China and Kazakhstan. Power outages and water supply
failures occur
Source: World Bank, “Mongolia Sources of Growth Country Economic
Memorandum”, July 26 2007
As informed by the Business Council of Mongolia, the 2010 Global
Competitiveness Report ranked M
infrastructure out of 134 countries. There are no paved roads from Ulaanbaatar to
the Mongolian
railway capacity is substantially restrained. In addit
of the current railway network is seen by many as an obstacle for development.
Currently in Mongolia, 88.4% of total roads are earth and only 3.3% are paved.
Source: Business Council of Mongolia
Largest deposits located in isolated areas Poor access to basic infrastructure
Ranked last for quality of infrastructure
88.4% - earth road 3.3% - paved road
Infrastructure
Res
ResCap Mongolia 101
Most of the large-scale deposits are located in isolated areas, with very limited
infrastructure.
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.
Source: World Bank, “Mongolia Sources of Growth Country Economic
Memorandum”, July 26 2007
As informed by the Business Council of Mongolia, the 2010 Global
Competitiveness Report ranked Mongolia last for the quality of overall
infrastructure out of 134 countries. There are no paved roads from Ulaanbaatar to
the Mongolian-Chinese border. Because of underinvestment, the country’s overall
railway capacity is substantially restrained. In addition, the half
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.
Source: Business Council of Mongolia
0
5
10
15
20
25
Mo
ng
olia
Ch
ina
Ru
ssia
Ka
zakh
sta
n
ACCESS TO BASIC INFRASTRUCTURE (DAYS SPENT)
Obtain electrical connection Water supply failures
88.4%
3.8%3.9%
3.1%
0.2%
0.5%
ResCap Resource Investment Capital
P a g e | 109
scale deposits are located in isolated areas, with very limited
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
Source: World Bank, “Mongolia Sources of Growth Country Economic
As informed by the Business Council of Mongolia, the 2010 Global
ongolia last for the quality of overall
infrastructure out of 134 countries. There are no paved roads from Ulaanbaatar to
Chinese border. Because of underinvestment, the country’s overall
ion, the half-Russian ownership
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.
Ka
zakh
sta
n
Ea
st P
aci
fic
Asi
a
ACCESS TO BASIC INFRASTRUCTURE (DAYS SPENT)
Water supply failures Power outages
Earth road
Improved road
Gravel
Asphalt road
Cement road
Others
Infrastructure
January 24 2011
Supply chain development potentials
Planned mining expenditures are to total $13 billion in the coming years, of which
$1.3 billion is to be
Source: Business Council of Mongolia
The government of Mongolia hopes to attract up to $25 billion in foreign
investment for mining projects in 2011
Note: Under 30 mtpa
Source: Business Council of Mongolia
Infrastructure development requires around $5.2 billion in investments from
2011
Planned mining expenditures: $13bn Mining service expenses: $1.3bn
2011-2015: expected FDI in mining $25bn
2011-2020: investment in infrastructure $5.2bn
Infrastructure
Res
ResCap Mongolia 101
Supply chain development potentials
Planned mining expenditures are to total $13 billion in the coming years, of which
$1.3 billion is to be spent on mining services.
Source: Business Council of Mongolia
The government of Mongolia hopes to attract up to $25 billion in foreign
investment for mining projects in 2011-2015.
Note: Under 30 mtpa production scenario
Source: Business Council of Mongolia
Infrastructure development requires around $5.2 billion in investments from
2011-2020.
26%
22%24%
16%
12%
COAL CASE, MINING INVESTMENT REQUIREMENTS, % OF TOTAL
ResCap Resource Investment Capital
P a g e | 110
Planned mining expenditures are to total $13 billion in the coming years, of which
The government of Mongolia hopes to attract up to $25 billion in foreign
Infrastructure development requires around $5.2 billion in investments from
COAL CASE, MINING INVESTMENT REQUIREMENTS, % OF TOTAL
600MW power plant
Open-cut coal mining
Railway
Coal beneficiation
Others
Infrastructure
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REQUIRED INVESTMENT IN MINING INFRASTRUCTURE (2011-2020)
Electricity $2.7 billion
Town development $1.5 billion
Land transport $800 million
Water resource $262 million
Total $5.2 billion
Source: World Bank
The government is planning to build 2,600 km of paved East-West road and 5,600
km of new railroads:
Railway construction strategy:
• Phase I (2010-2011), 1040 km: Tavan Tolgoi – Sainshand - Choibalsan
route providing access to Russian far eastern ports
• Phase II (2011-2012), 893 km: Nariin Sukhait - Shivee Khuren, Tavan
Tolgoi (Ukhaa Khudag) – Gashuun Sukhait
• Phase III (2012-2015), around 3,600km: the western railway lines from
Tavan Tolgoi (Ukhaa Khudag) through Nariin Sukhait
The railway infrastructure plan has considered all major mineral deposits. Around
$3.0 billion is to be spent on the first phase.
Source: Ministry of Road, Transportation, Construction and Urban Development of
Mongolia
Railway construction, 1st
phase $3.0bn
Infrastructure
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17.6 Industrial Park in Sainshand
An industrial complex is being built in Sainshand city, which is located at the
crossroads of the Trans-Mongolian and East-West rail lines. The latter is currently
under development and will link Tavan Tolgoi deposit with the Russian far-eastern
seaports, i.e. Vladivostok, through the Trans-Siberian rail route. Projected capex
of the entire complex is $10 billion.
Source: Ministry of Road, Transportation, Construction and Urban Development of
Mongolia
The Industrial Park is to include a CHPP (coal handling and processing plant), an
iron pellets plant, a copper smelter, an oil refinery and other facilities which will
increase the value of Mongolian mineral resources.
PLANNED PROJECT DEVELOPMENT PHASES
Source: State Property Committee
SAINSHAND IND. PARK
$10bn industrial complex in Sainshand
Infrastructure
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According to the estimates of the Ministry of Road, Transportation, Construction
and Urban Development of Mongolia, the construction of Sainshand Park and
associated industrialisation could increase the Mongolian GDP to $41 billion over
the next 11 years, compared to the current level of $6.6 billion.
Cumulative GDP growth over 2010-2021 is 45% higher under processing and export scenario
$ billion
Extraction and exports (unprocessed) 26
Losses due to higher transportation costs -4
Value added in transportation 3
Value added in processing and construction 11
Value added in power 3
Value added in other industries 1
Manufacturing and exports 40
Source: Boston Consulting Group, Oct 2010
17.7 Recent developments
The overall infrastructure investment needs are estimated to be around $5.2
billion throughout the next 10 years. Although the Mongolian government plans
to spend around $3.0 billion on the first phase of railway construction, it also
seeks to delegate some of the responsibility to individual companies.
Mongolia Mining Corporation (Energy Resources)
Mongolia Mining Corporation (MMC) has obtained rights to construct a railway
directly from its Ukhaa Khudag deposit to Gashuun Sukhait (the Mongolian-
Chinese border) in 2011-2012. The company is doing so in order to increase their
operational efficiency and reduce transportation costs. The new railway will be
roughly 240 km in length. Although the target market for Ukhaa Khudag’s coal is
mainland China, MMC is also seeking to export their product to other seaborne
markets via the Gashuun Sukhait border pass. The new rail link is expected to
convey 15 mtpa at full capacity, primarily satisfying the company’s own coal
transportation needs. Other mining companies, however, will be allowed to use
the railway in case of excess capacity.
Mongolia Mining Corporation has also started putting a 245 km paved road south
to the Gashuun Sukhait border pass from its Ukhaa Khudag mine. The road is to
be completed in Q1 2011 and will have a capacity of 18 mtpa. It will be used as a
principal coal haulage channel prior to the construction of their railway. The
project is intended to increase MMC’s transportation capacity and reduce the
related costs directly affecting the company’s profitability.
Sainshand Park can increase Mongolia’s GDP to $41bn
2011-2012: new railway, 240 km, 15mtpa
Q1 2011: new paved road, 18mtpa
Infrastructure
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Mongolia – Russia - China
Authorities of Mongolia have selected a more expensive infrastructure
development option with the purpose of strengthening Mongolia’s sovereignty.
Recently it has been announced that a new railroad will be constructed in 2011
linking Mongolia’s largest coal deposit, Tavan Tolgoi, with Mongolia’s domestic
rail network. The alternative option was a direct route south to China.
International advisors and a group of parliament members voted in favour of the
alternative option, which would have been much cheaper. The selected option, as
explained by political leaders, would protect Mongolia from the possible
economic and political pressure from China if it becomes the principal importer of
Tavan Tolgoi coal.
The approved rail route will stretch 1,040 km north to Russia, from Tavan Tolgoi
to Choibalsan city, which is linked to the Trans-Siberian railway through
Sainshand. Approximately $3.0 billion will be spent on the development. Russian
wide-gauges will be used in the construction, rather than narrower Chinese
gauges that are common in many countries.
A number of factors influenced the choice of such an expensive option. The
principal reason was the back-up of Sainshand Industrial Park’s development. Via
the new route, coal will be transported from Tavan Tolgoi to Sainshand.
Impediments to infrastructure development by individual companies
Mongolia Mining Corporation’s plan to put a railway south to China from its
Ukhaa Khudag mine has been impeded by resistance from some political leaders,
who were greatly concerned that this would cause heavier economic dependency
of Mongolia on China.
Numerous Mongolians do not trust China’s intentions towards their motherland,
especially after being controlled by the Manchu dynasty for 200 years.
In May 2010, SouthGobi Resources, engaged in coal exploration and mining
activity, terminated its plan to build a railway from its 114 million tonnes Ovoot
Tolgoi project to the Mongolian-Chinese border because of uncertainty over
government policy. The project is located only 42 km from the Chinese border,
hence a railway was deemed “not essential”.
Asian Development Bank
The Asian Development Bank (ADB) is funding a regional logistics development
project at Zamiin-Uud with $45 million in loans and grants, which will create a
new terminal with road and rail links. Zamiin-Uud is a remote south-eastern
Mongolia-Chinese border crossing, through which the majority of current export
and import products pass.
Once completed, the new terminal will offer contemporary customs and
quarantine facilities, which will make transit times shorter and increase capacity.
Management will be delegated to a contract operator. ADB will also participate in
2011: new railroad from Tavan Tolgoi to Choibalsan, 1,040 km, capex $3.0bn
Choibalsan is linked to Trans-Siberian railway
New route will help develop Sainshand Park
MMC’s plan to build a railway impeded
SouthGobi’s plan to build a railway terminated
ADB is funding a logistics project at Zamiin-Uud ($45m)
Infrastructure
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the training and support program of the government employees who will oversee
and implement the project.
ADB’s funding will take up 63% of the total costs of $71.6 million. $40 million of
the assigned $45 million will be a 32-year loan with a 1% interest rate rising to
1.5%. The rest $5 million be given as a grant.
CADEX KK
CADEX KK of Japan and Mongolian Railway, a state-owned company, formed a
strategic alliance to improve the railway infrastructure of Mongolia in September
2010.
According to the agreement, CADEX KK’s Mongolian subsidiary CADEX LLC
Mongolia will serve as a project manager and a business consultant to the
Mongolian Railway company in acquisition of new technologies and personnel.
The alliance is aimed at securing Mongolian Railway’s long-term growth.
By using its project management experience in Asia, large network, and human
resources base, CADEX will help Mongolia to catch new business opportunities,
develop a stable freight transportation system and achieve efficient exploitation
of mineral resources.
17.8 Mining boom and air industry
International air travel from Mongolia is limited to a number of destinations.
Domestic airport infrastructure is already in place to begin handling of
international routes from remote mine sites.
International air routes are split between numerous carriers
• MIAT (Beijing/Berlin/Irkutsk/Seoul/Osaka/Tokyo)
• Aeroflot (Moscow)
• Korean Air (Seoul)
• Air China (Beijing)
Domestic air routes are split between two carriers
• Aero Mongolia
• Eznis
Requirement for new international routes is split evenly between domestic and
international carriers. Assignment of new domestic and international routes into
Mongolia is regulated by the Mongolian government and MCAA (Mongolian Civil
Aviation Authority). A new airport with paved runway was built in 2007 in
Dalanzadgad (540km south of Ulaanbaatar). This means that there is an existing
paved runway at the Oyu Tolgoi mine site capable of handling Airbus A320 and
Boeing 737 aircraft. The government is planning to transform four domestic
airports into international airports by 2014.
$40m in loans $5m in grants
Sep 2010: CADEX KK and Mongolian Railway strategic alliance
Domestic airports are soon to start handling international routes
Dalanzadgad (South Gobi centre) airport can handle international routes
Infrastructure
January 24 2011
The Hong Kong market is expected to be opened up to Mongolia on a regular
basis starting in 2011.
global financial centres is unavailable.
Note: London and New York time differences vary based on daylight savings time
Trial charter flights from MIAT (Summer 2010)
Planned charter flights from MIAT (beginning April 2011)
International air travel to Mongolia is expected to arise from expat growth at mine
sites and business tourist demand linking Ulaanbaatar with Australasia through
Hong Kong.
Hong Kong market to open up to Mongolia
Infrastructure
Res
ResCap Mongolia 101
The Hong Kong market is expected to be opened up to Mongolia on a regular
basis starting in 2011. Currently, the direct access to Ulaanbaatar from major
global financial centres is unavailable.
Note: London and New York time differences vary based on daylight savings time
Trial charter flights from MIAT (Summer 2010)
• During summer 2010, MIAT planned 8 charter flights to Hong Kong but
only completed 7. Fragmented demand due to irregular flight times and
lower tourist season were seen as the cause for cancellation of the final
flight.
• Mongolian travel agent Juulchin World Tours Corporation and Miramar
Travel in Hong Kong acted as agents.
• The return fare was $550.
Planned charter flights from MIAT (beginning April 2011)
• Twice per week service from Ulaanbaatar to Hong Kong will be organised
beginning from April 2011
• The plan is to use existing Boeing 737-800 (with 162 seats) to fly to Hong
Kong
• The return fare will be approximately $600-650
International air travel to Mongolia is expected to arise from expat growth at mine
sites and business tourist demand linking Ulaanbaatar with Australasia through
ong Kong.
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The Hong Kong market is expected to be opened up to Mongolia on a regular
direct access to Ulaanbaatar from major
Note: London and New York time differences vary based on daylight savings time
charter flights to Hong Kong but
Fragmented demand due to irregular flight times and
lower tourist season were seen as the cause for cancellation of the final
Mongolian travel agent Juulchin World Tours Corporation and Miramar
Planned charter flights from MIAT (beginning April 2011)
Twice per week service from Ulaanbaatar to Hong Kong will be organised
800 (with 162 seats) to fly to Hong
International air travel to Mongolia is expected to arise from expat growth at mine
sites and business tourist demand linking Ulaanbaatar with Australasia through
Privatisation of State Properties
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18 Privatisation of State Properties
2011-2012 privatisation plans will allow international investors to gain access not only to some of the world's largest unexploited mineral resources, but also to the non-resource sector boom of the fastest growing economy in the world. In order to facilitate expansion of the economy based on private sector
development, the Mongolian government started privatising state owned
enterprises (SOE) through bidding, international tender, and management and
ownership contracts over the past twenty years. A number of state properties are
on the list to be privatised in the following 2 years, including Tavan Tolgoi, a 6.4
billion tonne coal mine, a quarter of which consists of high quality coking coal. The
2011-2012 privatisation plan for the SOEs has been presented by Mr. Sugar, the
Chairman of the State Property Committee (SPC), at the "Mongolia: raising
capital" conference in June 2010.
This upcoming share issuance of Tavan Tolgoi will not be the first experience in
Mongolia. The country went through the first round of privatizations in 1991 with
pink and blue vouchers. Due to lack of involvement and participation of citizens,
the exercise was seen as unsuccessful. Afterwards, people turned to high interest
rate savings at Credit and Savings Cooperatives, which also ended up going
bankrupt swallowing a good portion of the middle-income population’s savings.
Mongolia's plan to privatize its state-owned properties will allow international
investors to gain access to some of the world's largest unexploited mineral
resources.
18.1 2011-2012 privatisation strategy
18.1.1 Near term privatistaion targets
1. “Baganuur” JSC
53% of the Mongolian central electricity system depends on the Baganuur coal
supply. Containing estimated reserves of 1.3 billion tonnes of brown coal,
Baganuur is the biggest coal supplier to coal consumers in Mongolia.
The coal mine satisfies 100% of TPP-2 (Thermal Power Plant – 2), 100% of TPP-3
and 50% of TPP-4’s (the biggest power plant in Mongolia) coal needs. Between
1996-2004, the Mongolian Government implemented a project to modernize and
expand the production capacity of Baganuur, taking $31.1m and $50.9m in loans
from the World Bank and the Japanese government respectively. As a result, the
1990-2010: SOEs were privatised 2011-2012: several SOEs to be privatised, including Tavan Tolgoi
1990: first round of privatisations, unsuccessful exercise
International investors to benefit from privatisations
Baganuur, brown coal, 1.3bn tonnes Current production 3.0 mtpa Capacity 4.0+ mtpa 75% state owned 15% owned by Firebird
Privatisation of State Properties
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company’s exploitation capacity reached 4.0 mtpa. However, currently Baganuur
extracts only around 3.0 mtpa due to old equipment and financial constraints. The
state owns 75% of the company and the biggest private shareholder is a New York
based investment fund Firebird, which possesses over 15% of the shares, the rest
is free float.
SPC’s conditions of privatisation:
• Coal resources must be evaluated by JORC standards
• The mining license must be assessed in terms of a property
• Power plant and coal liquefaction projects must be studied by
professionals, then implemented
Method:
• Up to 51% of the current state-owned shares will be issued and offered
for sale
2. “Erdenet Power Plant” and TPP-3
The electricity system in Mongolia consists of three independent grids. The largest
one is the Central Energy System (CES), which covers the most populated area of
the country, including Ulaanbaatar. The installed capacity of the CES area is 786.3
MW, which is provided by five main power plants in Ulaanbaatar, Erdenet and
Darkhan. There are also two provincial centres with individual power plants that
are not connected to the main grids and meet the regional demand through local
networks.
Power Plant Installed
Capacity
(MWe)
Available
Capacity
(MWe)
Capacity
Boilers
(MWth)
District
Heating
(MWth)
Indus.
Stream
(MWth)
Commissioning
year
Ulaanbaatar
TTP-2,3,4 709.5 554.7 3,978.0 1,523.0 192.0 1961-1991
Darkhan 48.0 38.6 477.0 210.0 49.0 1966, 1986
Erdenet 28.8 21.0 318.0 140.0 24.0 1987-1989
Total CES 786.3 614.3 4,773.0 1,873.0 265.0 -
Source: Energy Efficiency Technical Report, Ulaanbaatar
All five plants are coal-fired and of Soviet design. They are used in the production
of electricity, hot water, heating and steam. 80% of domestic demand for coal is
consumed by the CES. Power outages and water supply failures are common in
Mongolia because the central grid is unable to meet the daily demand at its peak
due to poor peaking potential of the plants.
Mongolian electricity supply = 3 grids Largest grid – CES CES = 5 power plants CES capacity: 786.3 MW
CES consumes 80% of domestic coal supply Constant power outages and water supply failures
Privatisation of State Properties
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The Mongolian electricity system currently produces 650MW, leading to a deficit
of more than 120 MW. The deficit is covered by expensive imports from Russia
and has been forecasted to increase to 500 MW by 2013, as a result of Mongolia’s
economic growth and mining related industrialisation.
SPC’s conditions of privatisation:
• Investment must be made to improve technology:
- Heating capacity must be increased
- Costs must be reduced
Method:
• Privatization will be implemented via concession agreements
3. Mongolian Airlines MIAT
MIAT or Mongolian Airlines, a state-owned company, is the largest carrier in the
country and currently offers only international flights. MIAT flies to Beijing, Berlin,
Seoul and Tokyo. The company is planning to organise charter flights to Hong
Kong from Ulaanbaatar starting in summer 2011.
Method:
Privatization will be implemented via an international management and
ownership contract.
4. Mongolian Stock Exchange (MSE)
The description of the MSE has been provided earlier in this report. In October
2010, the London Stock Exchange was selected as the international partner to
assist in reforming the MSE.
Method:
Privatization will be implemented via a management contract. An experienced
team will assume administration of the stock exchange. The contract terms will be
announced in early 2011.
5. Mongolian Telecom
Mongolia Telecom Company (MTC) is the Mongolian national telecommunications
company that offers a variety of services to its customers. Currently Mongolia is
connected to 150 countries via MTC. The company also operates in mobile phone,
data network, cable TV, radio and TV broadcasting, and intranet network sectors.
It has 200k customers in the land line telephone segment and 20 thousand users
in the mobile phone segment. 23% of total internet users in Mongolia are MTC’s
customers.
MIAT – largest carrier, state-owned
LSE to manage MSE
MTC – national telecommunications company 200+20 thousand customers 23% of total internet users
Current supply: 650MW Current deficit: 120MW 2013 deficit: 500MW
Privatisation of State Properties
January 24 2011
The company was partially privatized
venture was formed. Korean Telecommunications Company acquired 40%
ownership.
Share ownership structure after the first privatisation:
Method:
The state will offer its portion of shares to be privatised to the Korean KT
Corporation first on a contractual basis. If an agreement can not be reached, the
state will open a tender.
6. The government will bundle in groups the state owned shares from the 15
strategic deposits by types of minerals and certain percentages of them will be
sold through domestic and international stock exchanges. New Joint Stock
companies will be established
The following are the detailed maps of the planned privatisation processes:
Source: State Property Committee
Privatisation of State Properties
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The company was partially privatized in 1995, when a Mongolian
venture was formed. Korean Telecommunications Company acquired 40%
ownership.
Share ownership structure after the first privatisation:
• 54% of shares owned by the Mongolian government
• 40% of shares owned by South Korean KT Corporation
• 6% of shares owned by the citizens of Mongolia
Method:
The state will offer its portion of shares to be privatised to the Korean KT
Corporation first on a contractual basis. If an agreement can not be reached, the
state will open a tender.
6. Mineral resources The government will bundle in groups the state owned shares from the 15
strategic deposits by types of minerals and certain percentages of them will be
sold through domestic and international stock exchanges. New Joint Stock
companies will be established in the process.
18.1.2 Detailed maps of planned privatisations
The following are the detailed maps of the planned privatisation processes:
Source: State Property Committee
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in 1995, when a Mongolian-Korean joint
venture was formed. Korean Telecommunications Company acquired 40%
54% of shares owned by the Mongolian government
rean KT Corporation
The state will offer its portion of shares to be privatised to the Korean KT
Corporation first on a contractual basis. If an agreement can not be reached, the
The government will bundle in groups the state owned shares from the 15
strategic deposits by types of minerals and certain percentages of them will be
sold through domestic and international stock exchanges. New Joint Stock
The following are the detailed maps of the planned privatisation processes:
Privatisation of State Properties
January 24 2011
Tavan Tolgoi coal mine (TT) is currently 100% owned by Erdenes MGL LLC which is
ful
The SPC is going to split the deposit into two blocks. In October 2010, Erdenes
Tavan Tolgoi Ltd, a subsidiary of Erdenes MGL, was set up for the development
and operation of the TT coal deposit. Erdenes MGL is intending to retain 51%
ownership of the Ea
Mongolian and international investors. That is, 10% will be distributed to the
citizens of Mongolia at no cost, 10% sold to Mongolian private enterprises at a
substantial price and 29% released
exchanges (IP0).
Funds raised through IPO will be devoted to financing the infrastructure and
working capital of the Eastern block. The
handed over to strategic investors who will assume entire responsibility for the
block’s development, mine infrastructure and coal marketing independently from
the government of Mongolia. Contract miners will be able
development of the Eastern block for a fixed service fee, while strategic investors
will be obliged to transfer a portion of their future income to the government of
Mongolia.
Source: State Property Committee
The State Proper
strategic deposits, except Tavan Tolgoi, to create a Coal Asset Joint Stock
Company, and partially privatise that, retaining 70% of the shares and releasing
the remaining 30% on the domestic and in
IPO. The Coal Asset Company will in turn own 90% of Shivee Ovoo, 75% of
Baganuur, 34% of Nariin Sukhait, and 34% or higher stake of other coal deposits.
Tavan Tolgoi privatisation: 10% to citizens 10% to Mongolian companies 29% to IPO
Eastern block to contract miners Western block to strategic investors
Privatisation of State Properties
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ResCap Mongolia 101
Tavan Tolgoi coal mine (TT) is currently 100% owned by Erdenes MGL LLC which is
fully controlled by the State Property Committee.
The SPC is going to split the deposit into two blocks. In October 2010, Erdenes
Tavan Tolgoi Ltd, a subsidiary of Erdenes MGL, was set up for the development
and operation of the TT coal deposit. Erdenes MGL is intending to retain 51%
ownership of the Eastern Block and privatise the rest by splitting
Mongolian and international investors. That is, 10% will be distributed to the
citizens of Mongolia at no cost, 10% sold to Mongolian private enterprises at a
substantial price and 29% released through domestic and international stock
exchanges (IP0).
Funds raised through IPO will be devoted to financing the infrastructure and
working capital of the Eastern block. The Western block, however, is going to be
handed over to strategic investors who will assume entire responsibility for the
block’s development, mine infrastructure and coal marketing independently from
the government of Mongolia. Contract miners will be able
development of the Eastern block for a fixed service fee, while strategic investors
will be obliged to transfer a portion of their future income to the government of
Mongolia.
Source: State Property Committee
The State Property Committee will bundle the coal assets it holds from the
strategic deposits, except Tavan Tolgoi, to create a Coal Asset Joint Stock
Company, and partially privatise that, retaining 70% of the shares and releasing
the remaining 30% on the domestic and international stock exchanges through an
IPO. The Coal Asset Company will in turn own 90% of Shivee Ovoo, 75% of
Baganuur, 34% of Nariin Sukhait, and 34% or higher stake of other coal deposits.
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Tavan Tolgoi coal mine (TT) is currently 100% owned by Erdenes MGL LLC which is
The SPC is going to split the deposit into two blocks. In October 2010, Erdenes-
Tavan Tolgoi Ltd, a subsidiary of Erdenes MGL, was set up for the development
and operation of the TT coal deposit. Erdenes MGL is intending to retain 51%
stern Block and privatise the rest by splitting 20:29 between
Mongolian and international investors. That is, 10% will be distributed to the
citizens of Mongolia at no cost, 10% sold to Mongolian private enterprises at a
through domestic and international stock
Funds raised through IPO will be devoted to financing the infrastructure and
estern block, however, is going to be
handed over to strategic investors who will assume entire responsibility for the
block’s development, mine infrastructure and coal marketing independently from
the government of Mongolia. Contract miners will be able to participate in the
development of the Eastern block for a fixed service fee, while strategic investors
will be obliged to transfer a portion of their future income to the government of
ty Committee will bundle the coal assets it holds from the
strategic deposits, except Tavan Tolgoi, to create a Coal Asset Joint Stock
Company, and partially privatise that, retaining 70% of the shares and releasing
ternational stock exchanges through an
IPO. The Coal Asset Company will in turn own 90% of Shivee Ovoo, 75% of
Baganuur, 34% of Nariin Sukhait, and 34% or higher stake of other coal deposits.
Privatisation of State Properties
January 24 2011
Source: State Property Committee
The State Property Committee
from the strategic deposits to create a Copper and Silver Joint Stock Company,
and partially privatise that, retaining 70% of the shares and releasing the
remaining 30% on the domestic and international st
IPO. The Copper and Silver Company will in turn own 51% of Erdenet copper
factory, 100% of Asgat silver deposit, 50% of Tsagaan Suvarga
copper/molybdenum deposit and 34% of the Oyu Tolgoi deposit.
The plan is to construct a copper smelting factory in Sainshand to increase the
value of copper mines.
development of the project. If the government of Mongolia arranges for
construction of a copper
between the government of Mongolia and Ivanhoe Mines:
Copper smelter in Sainshand to increase valu of Cu resources
Privatisation of State Properties
Res
ResCap Mongolia 101
Source: State Property Committee
The State Property Committee will bundle the copper and silver assets it holds
from the strategic deposits to create a Copper and Silver Joint Stock Company,
and partially privatise that, retaining 70% of the shares and releasing the
remaining 30% on the domestic and international stock exchanges through an
IPO. The Copper and Silver Company will in turn own 51% of Erdenet copper
factory, 100% of Asgat silver deposit, 50% of Tsagaan Suvarga
copper/molybdenum deposit and 34% of the Oyu Tolgoi deposit.
The plan is to construct a copper smelting factory in Sainshand to increase the
value of copper mines. The private sector will be the driving force for the
development of the project. If the government of Mongolia arranges for
construction of a copper smelter, then according to the Investment Agreement
between the government of Mongolia and Ivanhoe Mines:
- Ivanhoe Mines must provide Rio Tinto's (or its affiliates) p
technologies held in joint venture with Outokumpu
the smelter.
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will bundle the copper and silver assets it holds
from the strategic deposits to create a Copper and Silver Joint Stock Company,
and partially privatise that, retaining 70% of the shares and releasing the
ock exchanges through an
IPO. The Copper and Silver Company will in turn own 51% of Erdenet copper
factory, 100% of Asgat silver deposit, 50% of Tsagaan Suvarga
copper/molybdenum deposit and 34% of the Oyu Tolgoi deposit.
The plan is to construct a copper smelting factory in Sainshand to increase the
The private sector will be the driving force for the
development of the project. If the government of Mongolia arranges for
smelter, then according to the Investment Agreement
between the government of Mongolia and Ivanhoe Mines:
Ivanhoe Mines must provide Rio Tinto's (or its affiliates) proprietary
with Outokumpu, for the operation of
Privatisation of State Properties
January 24 2011
Source: State Property Committee
The State Property Committee will bundle the iron ore assets it
strategic deposits to create an Iron Assets Joint Stock Company, and partially
privatise that, retaining 70% of the shares and releasing the remaining 30% on the
domestic and international stock exchanges through an IPO. The Iron Assets
Com
Ovoo zinc deposit, 100% of Temur Tolgoi iron ore deposit, and 100% of Darkhan
Metallurgical plant.
Source: State Property Committee
Privatisation of State Properties
Res
ResCap Mongolia 101
Source: State Property Committee
The State Property Committee will bundle the iron ore assets it
strategic deposits to create an Iron Assets Joint Stock Company, and partially
privatise that, retaining 70% of the shares and releasing the remaining 30% on the
domestic and international stock exchanges through an IPO. The Iron Assets
Company will in turn own 100% of Temurtei iron ore deposit, 34% of Temurtein
Ovoo zinc deposit, 100% of Temur Tolgoi iron ore deposit, and 100% of Darkhan
Metallurgical plant.
Source: State Property Committee
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The State Property Committee will bundle the iron ore assets it holds from the
strategic deposits to create an Iron Assets Joint Stock Company, and partially
privatise that, retaining 70% of the shares and releasing the remaining 30% on the
domestic and international stock exchanges through an IPO. The Iron Assets
pany will in turn own 100% of Temurtei iron ore deposit, 34% of Temurtein
Ovoo zinc deposit, 100% of Temur Tolgoi iron ore deposit, and 100% of Darkhan
Privatisation of State Properties
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January 24 2011
ResCap Mongolia 101 P a g e | 124
The State Property Committee has already bundled the uranium assets it holds
from the strategic deposits and created a Uranium Assets company – MonAtom
LLC. The privatisation plan is similar to the previous cases, to retain 70% of the
business and release the remaining 30% on domestic and international stock
exchanges through an IPO. Mon Atom will in turn own 51% of Central Asia
Uranium Company (58% owned by Khan Resources), 51% of Gurvan Bulag
uranium deposit, 51% of Mardai uranium deposit (also owned by Khan
Resources), 34% of Coge Gobi LLC (a joint Mongolia-French company, a subsidiary
of Areva), and 51% of Gurvan Saikhan uranium deposit. According to the Uranium
Law (2009), the State is entitled to control 51% of all uranium assets in Mongolia.
18.1.3 State Property Committe
(The following bullet points have been highlighted by the SPC)
Structure, duties and team
• The State Property Committee is a Government agency with the
functions to own, use and protect state owned properties;
• The State Property Committee operates with a total of 65 employees
including a Chairman, 8 part time members, 3 departments and 4
divisions. The Government designates a Committee member based on
the proposal of the Chairman.
Full powers of the State Property Committee
• Administer the activities on improvement of ownership, storage and
protection of the state property and monitor its implementation;
• Manage and oversee the recording of primary accounting documents,
census and balance sheets of the state property, monitor and control its
use and take measures to improve its efficiency;
• Negotiate with relevant organization and determine planning, profit and
revenue distribution, remuneration norms and normative of a state
owned legal body;
• Manage privatization of State Owned Enterprises based on a list
approved by the Government and report performance;
• Provide professional and methodological assistances to manage local
properties;
• Assign a state property representative in a state owned legal body and
monitor its activities;
• Review and approve proposal and order of excluding immovable
property or movable property belonging to the fixed asset from account
and make a decision on new purchase;
• Other powers specified in the law.
Privatisation of State Properties
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18.1.4 Recent developments
Mongolian Stock Exchange
In December 2010, the London Stock Exchange (LSE) signed a contract agreement
with the Mongolian Stock Exchange (MSE). It was informed that LSE officials will
arrive in Mongolia in the third week of January, when the terms of the contract
agreement will be announced to the public.
Tavan Tolgoi Erdenes –Tavan Tolgoi (TT) LLC, a subsidiary of the State Property Committee
owned Erdenes MGL, is the current fully authorised owner of TT licenses and
holds 15 billion shares. The delegation of 10% of the Eastern Block’s ownership
rights to the citizens of Mongolia and the sale of another 10% at a market price to
Mongolian private enterprises will be organized in Q1 of 2011. The planned IPO of
selling 29% of the same block on domestic and foreign stock exchanges will be
organized in stages and start being implemented as early as possible in 2011.
Tender for the contract miner of the Eastern Block is ongoing.
2011 plans:
- To raise funds for project financing
- To cooperate with international and domestic investment banks and
advisors in order to prepare for the IPO
- To start work on infrastructure development, including water supply,
mine camps, power plant and roads.
The tender for strategic investors for the Western Block has been officially
announced and closed on 17th
January at 16:00. According to the latest update,
China’s Shenhua Energy Co, Peabody Energy Corp from the US, a Russian
consortium led by Gazprom, a consortium of four Japanese trading houses,
including, Itochu Corp., Sumitomo Corp., Sojitz Corp. and Marubeni Corp., a
consortium of 10 South Korean companies, including Posco and Korea Electric
Power Corp., Anglo-Australian mining companies Rio Tinto and BHP Billiton,
Brazil’s Vale, and India’s International Coal Ventures Pvt, a joint venture of five
state-run companies, have expressed their interest to participate in the bid. The
tender for contract miners for the Eastern Block has been officially announced
and is about to close on the 27th
January 2011.
Erdenet Factory, MongolRosTsvetMet and Dornod Uranium In December 2010, on his last visit to Moscow, the Mongolian Prime Minister
Sukhbaataryn Batbold has signed nine cooperation agreements with his Russian
counterpart, Vladimir Putin. The negotiations included settlements on the
Mongolian debts to Russia and the national level joint venture, Dornod Uranium.
An agreement was signed specifying the business plan for the uranium deposit,
according to which the joint venture would start functioning in 160 days. It also
informed that the two existing Mongolian-Russian joint ventures, Erdenet and
MongolRosTsvetMet, may merge and market their stock. Together the two
Contract agreement signed between MSE and LSE
Erdenes – Tavan Tolgoi, sole owner of the deposit, holds 15bn shares. Eastern block privatisation to domestic investors in Q1 2011, afterwards IPO
Eastern block privatisation to domestic investors in Q1 2011, afterwards IPO Deadline for strategic investors: 17 Jan 2011 Deadline for contract miners: 27
Jan 2011
14 December 2010, 9 cooperation agreements signed between Mongolia and Russia:
- Debt settlement - Dornod Uranium JV - Erdenet + MonRosTsvetMet =
merger & IPO
Privatisation of State Properties
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January 24 2011
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companies account for about 20% of the Mongolian GDP with Erdenet Copper
Mine taking up 26.5% of total exports. Extensive modernization of Erdenet Copper
Mine and MongolRosTsvetMet is currently in progress, and the privatisation
process is intended to considerably enhance the two companies’ competitiveness
and have a constructive effect on the Mongolian economy.
Demographics
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January 24 2011
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19 Demographics A country the size of Western Europe with only 2.8 million people...
In 2009, the National Statistics Office estimated that the population of Mongolia
was 2.8 million people. The population growth rate is approximately 1.2%. Around
59% of the citizens are below the age of 30 and 27% are below the age of 14.
Compared to EU countries and Japan that are going through a period of
“demographic winter”, Mongolia’s population is significantly younger. In
November 2010, the government conducted the 10 - yearly population Census,
the results of which are yet to be released in 2011.
Source: National Statistics Office
Source: IMF
2000
2100
2200
2300
2400
2500
2600
2700
2800
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
POPULATION, IN THOUSANDS
0
2
4
6
8
10
12
14
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
UNEMPLOYMENT RATE, % OF TOTAL LABOUR FORCE
2009: 2.8m people (NSO estimate)
- 59% below 30 - 27% below 14
Population growth rate 1.2%
Demographics
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January 24 2011
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The unemployment rate in Mongolia has been lower than 4% since 2002.
However, during the peak of the economic crisis (2009) it reached 13% and now is
returning to its regular levels.
Since the transition into a market economy, the overall fertility rate (children per
woman) in Mongolia has been declining at a steep rate compared to other
countries in the world. According to UN estimations, the fertility rate in 1970-
1975 was 7.3 children per woman, while in 2005-2010 the number has decreased
to 1.9.
Mongolia is becoming more urbanized with more rural population migrating to
the capital city in search of better living conditions. Currently about 40% of the
population live in Ulaanbaatar, around 20% live in Darkhan, Erdenet, provincial
centres and soum settlements and the remaining 40% live in rural areas. Semi-
nomadic and nomadic herders make up around 30% of the entire population.
85% of Mongolia’s population consist of ethnic Mongolians, out of which 90%
consists of Khalkha Mongols. Buryats, Durbet and other ethnic groups make up
the remaining 10%. People of Turkic origin, including Kazakhs, Tuvans and Uzbeks
represent 7% of the population. The remaining 8% consist of Tungusic, Russian
and Chinese people, although most Russians have left the country after the
collapse of the Soviet Union.
13% unemployment rate in 2009 Since 1990: steadily declining fertility rate
40% of population live in UB, 20% in other urban areas 40% in rural areas 30% are herders
90% of population: Khalkha Mongols
Languages
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20 Languages Many Mongolians have a good grasp of Russian and English
The official language in the country is Khalkha Mongolian. One can encounter
other dialects such as Oiratian (spoken by Durbet) and Buryatian across the
country. Speakers of Khamnigan Mongolian also exist. The western region of
Mongolia is occupied by Kazakhs and Tuvans who speak languages of Turkic
origin.
Mongolians adopted the Cyrillic alphabet from Russia in 1937, before which they
used to write in their traditional vertical script.
The majority people, especially the older population, speak fluent Russian, making
it the most popular foreign language in the country. Currently English is gradually
replacing Russian, being preferred among the younger generation. A substantial
number of Mongolians work and live in South Korea, prompting the Korean
language to also gain popularity in Mongolia. Plenty of youth are learning Chinese
with growing importance of China as the other neighbouring power. Japanese is
also widely spoken, especially due to the possibility to get access to Japanese
government funded scholarship programs. Older Mongolian academics, who
studied in Germany during the Soviet times, can speak fluent German. Because
households endeavour to send their children abroad for higher education (as long
as there are possibilities to support them throughout their stay) many younger
Mongolians today fluently speak Western European languages such as French,
German and Italian.
Official language – Khalkha Mongolian
Cyrillic script adopted in 1937
Traditional Mongolian script
Widely spoken languages:
- Russian - English - Chinese - Korean - Japanese - Western European
Religion
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January 24 2011
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21 Religion Religious practices were largely impeded by the Communist regime.
According to the CIA World Factbook and the U.S. Department of State, 50% of
Mongolia's population follow the Tibetan Buddhism, 40% are listed as having no
religion, 6% are Shamanist, Baha'i and Christian, and 4% are Muslims.
Historically, various forms of Shamanism have been practiced and widely
accepted as the main religion by the Mongolian nomads. Tibetan Buddhism was
first introduced to Mongolia during the ruling of Yuan Dynasty and currently is the
most commonly practiced religion, although Shamanism is still popular. During
the Mongol Empire Islam was also favoured and the three khanates (independent
states of that time) adopted Islam.
Following the Communist influence, throughout the XX century, religious practices
were largely restrained by the government. The Buddhist Temples were a
replication of the pre-socialist feudal system and the Khaan of Mongolia was the
head of the Temple (The 8th
Jebtsundamba Khutuktu Bogd Khaan). In 1930, most
of Mongolia’s 700 Buddhist temples were destroyed and around 18,000 monks
(lamas) were killed under the regime led by “Marshal” Choibalsan, who held a
position equivalent to today’s Prime Minister. While in 1924 there were around
100,000 Buddhist monks, by 1990 the number decreased to only 110.
Collapse of the Soviet Union and the Democratic Revolution of 1990 restored the
legitimacy of religious practices. The Tibetan Buddhism again became the most
practiced religion in Mongolia. Other religious streams were also resumed,
including Islam and Christianity. Statistics suggest that the number of Christians
rose from just 4 in 1989 to 40,000 in 2008.
50% - Buddhists 40% - not religious 6% - follow Shamanism, Baha’i & Christianity 4% - Muslims
First Shamanism, then Buddhism, then Socialism (destruction of monasteries), then Democracy (resumption of religious practices)
Equity Research
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 131
1 Equity Research
1.1 Tavan Tolgoi
Company brief: There are two companies named Tavan Tolgoi (TT). One is the 6.4
billion tonne deposit Tavan Tolgoi which is 100% owned by the state-owned
Erdenes MGL and the other one is Tavan Tolgoi JSC listed on the MSE. The main
Tavan Tolgoi deposit complex is partially owned by Erdenes MGL (6 mining
licenses), Mongolia Mining (1 mining license), Moril Luu (1 mining license), Broad
(1 mining license), Daitsuki (1 mining license) and Tavan Tolgoi JSC with 2 mining
licenses. The South Gobi provincial government owns 51% of TT JSC and the rest is
privately held. TT JSC is the biggest company on the MSE by market capitalization
and the third largest coal miner in Mongolia by production volume. In 2004, the
Company signed a coal export contract with a Chinese client and since then its
coal export to China has substantially increased. The company cooperates with
Tavan Tolgoi Trans private company in transporting coal to China. Although in
Gansu and Inner Mongolia semi-soft coal and hard coking coal prices are around
$85/t and $155/t respectively, the company is still selling their coking coal at
$7.5/t to the local market due to the state-regulated sale prices and is exporting
at around $25-35/t. Since 2007 the company almost tripled the extracting
capacity to 2mtpa. In 2009, they extracted over 2m tonnes with 170 employees.
Deposit: Tavan Tolgoi JSC’s license area is 169ha located in the South Gobi region
of Mongolia, 250km from the Mongolian border with China and 550km from
Ulaanbaatar. The total proven reserve is 20.5m tonnes and the resource is 60m
tonnes of coking coal with a calorific value of 6,500-7,500kcal/kg, 20% ash and
8.5% moisture.
Financial highlights: In the last few years, total revenue increased due to the
company’s investment of $1.0m into new technology and equipments. In 2009,
the company sold over 2.5mt of coal to both foreign markets and local clients, and
worked with $65.8m revenue and $29.5m of net profit. Revenue has surged 12
times since 2006 and 65 times since 2003. Cash cost per tonne of Tavan Tolgoi JSC
coal mine is approx $11-12, which is very low compared to international peers. As
a result of the low cost, Tavan Tolgoi JSC mine’s profitability is great (ROA at
103%, ROE at 116%, gross margin at 58% and net margin at 44.8%, as of FY2009).
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales 32,564 47,797 95,436
Net profit 12,863 16,134 42,753
EPS, MNT 24,425 30,636 81,178
Total Asset 15,519 23,984 58,835
Current Asset/Non-Current Asset, % 638% 808% 1091%
Net debt/Equity, % -37% -8% -62%
Gross margin, % 52% 45% 58%
Net margin, % 40% 34% 45%
EV/EBITDA, (x) 0.8 2.2 1.0
Sales growth, % 301% 47% 100%
Stock data
Price, MNT 530,000
Price, US$ 436.86
The peak, MNT 670,000
52Wk Range, MNT 120,000 - 670,000
Mkt cap, MNTbn 279
Mkt cap, US$mn 230
Avg daily turnover, US$ 8,467
Free float, % 11.90%
YTD performance, % 293%
Key indicators
P/BV 5.27
P/E 6.53
ROE 116%
Gross margin 58%
Net debt/Equity -62%
EBITDA margin 59%
EV/EBITDA 1
EV/Resource 3.55
Dividend yield 61%
100
200
300
400
500
600
700
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
/10
6/4
/10
7/4
/10
8/4
/10
9/4
/10
10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
Share price performance, MNT
Shareholders
51%34%
7%8%
Provincial
governor
Ajnai
Corporation
Board members
Retail
shareholders
Source: Company data and SCH&CD
As of 16 Dec 2010
Equity Research
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January 24 2011
ResCap Mongolia 101 P a g e | 132
1.2 Baganuur
Company brief: 53% of the Mongolian central electricity system depends on
Baganuur coal supply. Containing an estimated reserves of 1.3 billion tonnes of
brown coal, Baganuur is the biggest coal supplier to coal consumers in Mongolia.
The coal mine satisfies 100% of TPP-2 (Thermal Power Plant – 2), 100% of TPP-3
and 50% of TPP-4’s (the biggest power plant in Mongolia) coal needs. From 1996-
2004, the Mongolian Government modernized and expanded production at
Baganuur by acquiring $31.1m and $50.9m in loans from the World Bank and the
Japanese government respectively. As a result, the company’s exploitation
capacity reached 4mtpa. Currently the mine extracts 3mtpa due to central-region
demand, old equipments and financial constraints. The State owns 75% of the
company and the biggest private shareholder is Firebird investment fund, holding
over 14%, the rest is free float. Baganuur JSC is included in the 2011-2012
privatization plan, approved by the parliament of Mongolia.
Deposit: Baganuur coal deposit is one of the strategically important deposits of
Mongolia (area: 0.6ha, waste:10-60m on average, general coal seam: 10.3-17.2m,
coal seam in the central part: 25-96m). The mine is located 139km east of
Ulaanbaatar and has access to railway. Baganuur’s strip ratio is around 1:1 to 6:1.
The total proven reserve is 600mt of coal with a calorific value of 3,200-
3,500kcal/kg, 12.9% ash and 32.9% moisture.
Financial highlights: Despite the mine making losses due to the regulated coal
prices, the reserve based valuation of Baganuur is significantly low compared to
international peers. Baganuur’s EV/Reserve multiple is 0.39$/t. In 2009, the
company produced 3mt of coal at COGS of $30.5m or $10.15/t mining cost. SG&A
and other costs were $0.97/t. In 2009, the company operated with a gross margin
of 11%, an operating margin of 1% (due to the slight relaxation the sale price to
$12.54), net losses of $6.3m (due to exchange rate adjustments of debt and
interest rate payments). In December 2010, the Parliament made a decision to
cover all losses acquired from the exchange rate risk, inducing Baganuur’s
shareholder equity to increase by around $13.8m. Currently the company has
$54.3m of long term debt on the balance sheet. In 2010, as part of the State’s
investment plan of $8.5m, Baganuur JSC purchased two additional 100t capacity
trucks for $2.9m.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales 34,308 43,174 49,483
Net profit -7,184 -11,077 -9,121
EPS, MNT -342 -528 -435
Total Asset 61,466 64,776 75,472
Current Asset/Non-Current Asset, % 105% 109% 71%
Gross margin, % -1% 6% 11%
Net margin, % -21% -26% -18%
EV/EBITDA, (x) na na na
ROE, % na na na
Dividend yield, % 0% 0% 0%
Sales growth, % 7% 26% 15%
Stock data
Price, MNT 10,600
Price, US$ 8.74
The peak, MNT 11,000
52Wk Range, MNT 2,800 - 11,000
Mkt cap, MNTbn 222
Mkt cap, US$mn 183
Avg daily turnover, US$ 71,023
Free float, % 11.37%
YTD performance, % 203%
Key indicators
P/BV -
P/E -
ROE 51%
Gross margin 11%
Net debt/Equity -541%
EBITDA margin -15%
EV/EBITDA -
EV/Resource 0.39
Dividend yield -
Share price performance, MNT
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
/10
6/4
/10
7/4
/10
8/4
/10
9/4
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10
/4/1
0
11
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0
12
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0
MN
T'0
00
Shareholders
75%
14% 11% State
Master
Fund/Firebird
Free Float
Source: Company data, SCH&CD and ResCap
As of 16 Dec 2010
Equity Research
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January 24 2011
ResCap Mongolia 101 P a g e | 133
1.3 Shivee Ovoo
Company Brief: Shivee Ovoo, an open pit mine, satisfies 25% of coal consumption
in Mongolia. 80% of Shivee Ovoo coal production is supplied to TPP-4, the biggest
power plant in Mongolia, and the remainder goes to Ulaanbaatar Railway,
MongolRosTsevetment, Bor Undur, Sainshand, Zuun Mod and others. The
Mongolian Government owns 90% of the company through Erdenes MGL and
9.0% is held by Firebird Fund. Production capacity of the company increased to
2mtpa owing to the $67.6m loan from the Japanese government obtained in
1998-2004. The company produces 1.4mtpa of coal. In 2010, the Parliament of
Mongolia established a cooperation contract to build a thermal power plant
relying on Shivee Ovoo coal deposit. The Mongolian and Chinese governments
signed an agreement to erect a 4800MW thermal power plant, from which
4500MW would be exported to China and the rest supplied to local consumers.
The Mongolian government plans to build TPP-5 in UB, which will utilise 4mtpa of
Shivee Ovoo’s coal. The Mongolian electricity consumption is 1,261kWh per capita
(3 times, 6 times and 13 times lower than Kazakhstan, Russia and Canada
respectively), however, the demand is inevitably increasing.
Deposit: Shivee Ovoo coal deposit, one of the strategically important deposits of
Mongolia, covers 4,293ha with a width of 35km and a length of 15km, located
260km southeast of Ulaanbaatar and in 20km from the Choir railway station, one
of the stops of the Trans-Mongolian rail line. Total proven reserve is 600mt of
brown coal and 2.7bn tonnes of resources. Out of the proven reserve, 564mt is
economically viable. Coal contents are 2,963-4,407kcal/kg calorific value, 40% ash
content, 8.5% of moisture, 0.5% sulphur and 43% volatile material.
Financial highlights: At present, resources of the deposit is significantly
undervalued considering the uncertainty over future dealing pipeline of Shivee
Ovoo and regulated tariffs on electricity and coal prices. The coal mine had
operational margins of 1%, 5% and 7% in 2007, 2008 and 2009 respectively, even
though the company incurred net losses due to the exchange rate adjustments of
long term debt. The company has accumulated $63.7m of debt on the balance
sheet as a result of the long term loan, which was obtained in 1998-2004 to
increase the company’s mining capacity. In December 2010, the Parliament made
a decision to cover all losses acquired from the exchange rate risk, inducing Shivee
Ovoo’s shareholder equity to increase by around $13.1m.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales 10,813 14,731 16,202
Net profit -566 -6,318 -11,048
EPS, MNT -42 -471 -823
Total Asset 68,325 70,242 92,244
Current Asset/Non-Current Asset, % 49% 55% 45%
Gross margin, % 3% 8% 10%
Net margin, % -5% -43% -68%
EV/EBITDA, (x) na na na
ROE, % na na na
Dividend yield, % 0% 0% 0%
Sales growth, % 10% 36% 10%
Stock data
Price, MNT 12,800
Price, US$ 10.55
The peak, MNT 14,900
52Wk Range, MNT 2,400 - 14,900
Mkt cap, MNTbn 172
Mkt cap, US$mn 142
Avg daily turnover, US$ 3,063
Free float, % 1%
YTD performance, % 288%
Key indicators
P/BV -
P/E -
ROE 37%
Gross margin 8%
Net debt/Equity -1268%
EBITDA margin -68%
EV/EBITDA -
EV/Resource 0.08
Dividend yield -
Share price performance, MNT
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
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6/4
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7/4
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8/4
/10
9/4
/10
10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
Shareholders
90%
9%
1%
State
Master
Fund/Firebird
Free Float
Source: Company data, SCH&CD and ResCap
As of 16 Dec 2010
Equity Research
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 134
1.4 APU
Company brief: APU is the fourth largest company on the MSE by market cap. It is
the leading brewery and alcohol producer in Mongolia, taking up over 50% of beer
and over 40% of vodka markets. The company distributes their products through
over 6000 trade and shopping centres nationwide, the largest distribution
network in Mongolia. APU has registered the vodka trademark "Chinggis Khan" in
over 20 countries worldwide. On June 11, 2010, APU opened a new brewery
factory with a capacity of 58.4m litres/year of beer, after receiving a $25m loan
from the EBRD in May 2010. In 2009, APU produced 230,000 hectolitres of beer
with about 700 employees. The company has an intensive plan to double its
brewery capacity by 2014.
Market presence: APU is the biggest player in the beer market. The other major
players in Mongolia are MCS and GEM. APU’s market share in the beer market has
increased dramatically in recent years.
Financial highlights: In the last 2 years, the company’s revenue increased 9 times
to $59.9m and total assets increased 1.8 times to $49.4m. Gross margin is robust
at 22%. In FY2009, ROE reached 31%, the highest in the company’s history, on the
back of net sales increasing 61% and high leverage of 1.24 x of D/E ratio. In 2009,
the company expanded sales into urban markets.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales 10,114 53,799 86,867
Net profit 367 3,856 8,070
EPS, MNT 5 52 109
Total Asset 39,751 47,918 71,858
Current Asset/Non-Current Asset, % 0.84 0.63 1.01
Net debt/Equity, % 517% 127% 119%
Gross margin, % 20% 21% 23%
Net margin, % 4% 7% 9%
EV/EBITDA, (x) na na 7.6x
ROE, % 6% 29% 31%
Dividend yield, % nmf 5% 5%
Sales growth, % na 432% 61%
Stock data
Price, MNT 1,855
Price, US$ 1.53
The peak, MNT 2,000
52Wk Range, MNT 630 - 2,000
Mkt cap, MNTbn 138
Mkt cap, US$mn 114
Avg daily turnover, US$ 18,612
Free float, % 8.10%
YTD performance, % 194%
Key indicators
P/BV 4.35
P/E 17.31
ROE 31%
Gross margin 23%
Net debt/Equity 119%
EBITDA margin 13%
EV/EBITDA 7.58
Dividend yield 5%
Share price performance, MNT
Source: Company data, SCH&CD and ResCap
Shareholders
0.0
0.5
1.0
1.5
2.0
2.5
1/4
/10
2/4
/10
3/4
/10
4/4
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5/4
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6/4
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7/4
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8/4
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9/4
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10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
52%40%
8% Shunkhlai
Two key
shareholders
Free float
As of 16 Dec 2010
Equity Research
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 135
1.5 Mongolia Telecom
Company brief: Mongolian Telecom was established the under name of
Mongolian Telecommunication Company (MTC) in 1992. Then MTC was divided
into two separate companies, Information Communication Network Company
(ICNC) and Telecom Mongolia JSC. ICNC is currently a 100% state owned company
and Mongolian Telecom was partially privatized. Mongolia Telecom’s
shareholders are the Mongolian Government - 55%, Korean Telecom - 40% and
the rest is free float. Mongolia Telecom is a quasi-monopoly in the land line
telecommunications sector. The company has branches in all aimag and soum
centres in Mongolia. The company also offers Wireless Local Loop (WLL), internet
and internet based services. Mongolia Telecom is the leasing backbone from
(ICNC) and has its own fiber optic network along the railway. The WLL network of
Mongolia Telecom Company was introduced with South Korean LG Electronics
Company’s help. A network, with a capacity of over 10,000 users, 7 base stations
and a CDMA-based wireless network called “MY Phone”, was introduced on July
8th, 2002. Within its expansion of services, the company introduced CDMA
450MHz, NGN+CDMA+IN, payment systems at such banks as TDB, Khan and
Savings and extended its prepaid card distributor’s network with ATMs.
Market presence: The number of fixed telephone subscribers per 100 people is
5.3, which is far below the world average of 17.8. The number of mobile phone
subscribers per 100 people is 82.2, well above the world average of 67. The
overall Mongolian telecommunication basic network leased by the ICNC consists
of 3,100km of analogue, and approximately 900km of digital lines connecting
Ulaanbaatar and provincial centres. Mongolia Telecom has access to the INTELSAT
satellites in the Indian Ocean region and to the Express-6 satellite of the
INTERSPUTNIK system. The Wireless Local Loop (WLL) services were newly
introduced in May 1999. The Mobile phone market has undergone a remarkable
boom, with mobile phone users increasing 26% yoy to 2.38m as of June 2010.
However, in current years, customers of fixed telephones have been decreasing at
about 10% per annum.
Financial highlights: In current years, the company’s revenue has been decreasing
due to the shrinking fixed telephone market in Mongolia. The company’s
introduction of new services could not offset the decrease in revenue land line
services.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales 31,471 26,655 24,657
Net profit 5,321 2,776 2,893
EPS, MNT 206 107 112
Total Asset 41,487 39,736 38,147
Current Asset/Non-Current Asset, % 0.83 1.09 1.26
Net debt/Equity, % -3% -11% -11%
Gross margin, % 22% 16% 16%
Net margin, % 17% 10% 12%
EV/EBITDA, (x) 19.6 9.3 16.6
ROE, % 16% 8% 9%
Sales growth, % na -15% -7%
Stock data
Price, MNT 3,626
Price, US$ 2.99
The peak, MNT 9,000
52Wk Range, MNT 2,100 - 4,000
Mkt cap, MNTbn 94
Mkt cap, US$mn 77
Avg daily turnover, US$ 800
Free float, % 5.30%
YTD performance, % 58%
Key indicators
P/BV 2.82
P/E 17.75
ROE 9%
Gross margin 16%
Net debt/Equity 12%
EBITDA margin 14%
EV/EBITDA 16.6
Dividend yield -
Share price performance, MNT
Shareholders
Source: Company data, SCH&CD and ResCap
2.0
2.5
3.0
3.5
4.0
4.5
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
/10
6/4
/10
7/4
/10
8/4
/10
9/4
/10
10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
55%
40%
5% State
Korean
Telecom
Free Float
As of 16 Dec 2010
Equity Research
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 136
1.6 Sharyn Gol
Company Brief: Sharyn Gol is the only MSE listed coal mine with an approved
JORC resource. In 1995, the company was partially privatized and floated on the
MSE and in 2005 it became a 100% private company. The company has a capacity
to extract 2mtpa of coal. It produces around 0.5mtpa and 80% of its coal is
supplied to Darkhan and Erdenet Thermal Power Plants (TPP). Currently, the
company is owned by a New York based Fund Firebird (54.4%), local management
team (38.8%) and the rest is free float. As the Major shareholders want to convert
the company into a western style coal company, the business is undergoing full-
scale restructuring. The board has been changed with 2 Australians and 2
Americans and a new British CFO was appointed. They are proposing to expand its
drilling program to 30k meters.
Deposit: Sharyn Gol deposit is located 50km south of Darkhan city and 240km
north of Ulaanbaatar, and connected through railroad to the cities. The deposit’s
total license area is 1,8ha. According to the company management, the total
reserve is over 100-150mt of coal as a result of additional drilling of 16K meters.
Sharyn Gol recently found new coal seams, as well as highly mineralised
continuation of the current coal seams they are mining at the moment on the
license area. The coal quality is high grade thermal coal and in some places semi-
soft coking coal. According to the company’s announcement made on 10 October
2010, a new coal seam was discovered and most coal samples have a calorific
value of over 7,000kcal/kg on an air-dried, ash-free basis as of early laboratory
results.
Financial highlights: The company’s EV/Reserve multiple of 0.53$/t is relatively
cheap compared to international peers. Regulated low coal prices and delays with
payments for delivered coal by the TPPs cause financial problems to the company.
In FY2009, despite the fact that company’s production decreased by 22% to 426kt,
net profit increased to the highest point of $180m since 1998 as a result of
reduced non-operational costs. As for exports, historically the company sold coal
to Russia and China (2006, 2007). For the company to be able to export coal to
China $70 million must be spent on infrastructure, in which case production
capacity could be increased to 2.5 mtpa.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales 8,198 10,526 8,812
Net profit 173 61 219
EPS, MNT 24 8.5 30
Total Asset 12,590 10,790 9,535
Current Asset/Non-Current Asset, % 2.84 2.10 2.22
Net debt/Equity, % 1005% 737% 545%
Gross margin, % 9% 10% 11%
Net margin, % 2% 1% 2%
EV/EBITDA, (x) nmf nmf nmf
ROE, % 17% 5% 17%
Sales growth, % 17% 28% -16%
Stock data
Price, MNT 10,300
Price, US$ 8.49
The peak, MNT 13,500
52Wk Range, MNT 1,696 - 13,500
Mkt cap, MNTbn 74
Mkt cap, US$mn 61
Avg daily turnover, US$ 31,282
Free float, % 8.14%
YTD performance, % 507%
Key indicators
P/BV 51.66
P/E 337.04
ROE 17%
Gross margin 11%
Net debt/Equity 545%
EBITDA margin 4%
EV/EBITDA 63.16
EV/Resource 0.5
Dividend yield -
Share price performance, MNT
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
/10
6/4
/10
7/4
/10
8/4
/10
9/4
/10
10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
Shareholders
54%
22%
14%
3%3%
1%
0%
3%
Master Fund/Firebird
Batmunkh Batkhuu
Sharyn Gol Energo
Batbold
MDR
Balihuu Dambachultem
Anod Bank
Free Float
As of 16 Dec 2010
Equity Research
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 137
1.7 Gobi
Company brief: Gobi JSC is the leading producer of cashmere and camel wool
products in Mongolia and the 5th
largest manufacturer in the cashmere market
worldwide, with an annual capacity to process 1,000 tonnes of raw cashmere, 200
tonnes of raw camel wool and 40 tonnes of sheep and yak wool. The company’s
products are sold through its own stores and vendor companies in the domestic
market, and mostly through vendor companies in the international market. Even
though historically 80% of its products are exported to international markets,
essentially Europe (60% of its export), in current years exports have been
tightening. In 2009, 71.5% of total sales were derived from the domestic market
and 28.5% from export. The company has over 130 partners in over 30 countries.
According to management estimates, in 2009 Gobi held 42% of market share in
the domestic finished products market.
Market presence: China and Mongolia are the two biggest pure cashmere
producers with 60% and 30% of the world’s pure cashmere market share
respectively. Chinese cashmere traders and companies buy as much as 75% of
Mongolian raw cashmere and the rest is bought by domestic cashmere
manufacturers. China is key to the Mongolian cashmere sector in terms of
cashmere products and raw cashmere purchases.
Financial highlights: Over the last 3 years, the company’s sales outside of
Mongolia decreased and domestic sales rose sharply. In 2009, domestic sales
increased 44% and foreign sales decreased 39%. However, the company has
activated marketing efforts internationally, opening their own shops in North
America and Europe. But in 2010, their product competitiveness in foreign
markets weakened on the appreciating national currency versus the greenback.
As a result, management’s ambitious goal to increase sales up to $100m by 2012,
recovering Gobi brand’s reputation and former market internationally, appears
challenging. Gobi’s vertically integrated business model allows it to control
production costs, with the exception of raw material costs.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales 20,282 19,585 20,247
Net profit -732 689 1,501
EPS, MNT -93.92 88.35 192.51
Total Asset 27,069 30,778 34,018
Current Asset/Non-Current Asset, % 2.22 1.92 1.48
Net debt/Equity, % 24% 34% 38%
Gross margin, % 8% 18% 27%
Net margin, % -4% 4% 7%
EV/EBITDA, (x) na 15.4 13.2
ROE, % -3% 3% 6%
Sales growth, % 16% -3% 3%
Key indicators
P/BV 1.8
P/E 29.09
ROE 6%
Gross margin 27%
Net debt/Equity 38%
EBITDA margin 15%
EV/EBITDA 13.22
Dividend yield -
Share price performance, MNT
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
/10
6/4
/10
7/4
/10
8/4
/10
9/4
/10
10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
74%
11%
16%
Tavan Bogd
Foreign 2
stakeholders
Free float
Source: Company data, SCH&CD and ResCap
Shareholders
Stock data
Price, MNT 5,749
Price, US$ 4.74
The peak, MNT 9,002.00
52Wk Range, MNT 3,850 - 7,700
Mkt cap, MNTbn 45
Mkt cap, US$mn 37
Avg daily turnover, US$ 13,764
Free float, % 16%
YTD performance, % 42%
As of 16 Dec 2010
Equity Research
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 138
1.8 BDSec
Company brief: BDSec is a local brokerage firm in Mongolia. The company was
established in 1991 under the name of Bayandukhum in the Tuv aimag (Central
province) as a part of the privatization program in Mongolia. BDSec was the first
underwriter in Mongolia licensed by the Financial Regulatory Commission in 2004.
The company is now licensed with brokerage, dealer, underwriting and
investment advisory services. Major shareholders are Mr. Dayanbilguun,
Alexander Zwahr, Master fund-1 LLC and Master fund-2 LLC (together Firebird
Fund)
Market presence: BDSec is the largest brokerage firm by transactions made on
the MSE with a market share of 50% in total trading turnover. They serve 17% of
domestic account holders and 47% of foreign account holders at the Securities
Clearing House and the Central Depository of Mongolia.
Financial highlights: In 2009, due to the crisis, the company’s total assets declined
17% to $3.96m. As the company revenue decreased 13% to $1.45m in 2009, gross
profit sharply fell and the company had net losses of $380k. As a result,
shareholder’s equity decreased 5% to $3.88m.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales 2,020 2,023 1,765
Net profit 991 363 -455
EPS, MNT 121 33 -41
Total Asset 2,111 5,899 4,853
Current Asset/Non-Current Asset, % 2.36 0.91 0.95
Net debt/Equity, % 3% 16% 1%
Gross margin, % 100% 64% 5%
Net margin, % 49% 18% -26%
EV/EBITDA, (x) na na na
ROE, % 99% 10% -9%
Sales growth, % na 0% -13%
Stock data
Price, MNT 2,500
Price, US$ 2.06
The peak, MNT 4,000
52Wk Range, MNT 1,600 - 2,700
Mkt cap, MNTbn 28
Mkt cap, US$mn 23
Avg daily turnover, US$ 7,267
Free float, % 19%
YTD performance, % 56%
Key indicators
P/BV 5.69
P/E -
ROE -9%
Gross margin 5%
Net debt/Equity 1%
EBITDA margin -
EV/EBITDA -
Dividend yield -
Share price performance, MNT
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
/10
6/4
/10
7/4
/10
8/4
/10
9/4
/10
10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
Shareholders
56%
25%
19%
Management
team
Master
Fund/Firebird
Free Float
Source: Company data, SCH&CD and ResCap
As of 16 Dec 2010
Equity Research
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 139
1.9 Aduunchuluun
Company brief: “Aduunchuluun” joint stock Company was established with
underground mining operations in 1954 to supply the Eastern Mongolian region
with coal and meet Choibalsan city’s electricity demand. Later in 1969, the current
open-pit mining was given a start with a capacity of producing 200ktpa of coal. In
1979, with research from Russian economists and technical analysis teams, the
scope of operations was expended and capacity increased to 600ktpa. The current
capacity, with innovative technology and equipment, allows a production of 1.5-
2mtpa. Today Aduunchuluun LLC, which functions with well trained workers and
skilled managers, is fully capable of satisfying Dornod Power Plant’s long term coal
needs. The deposit is included in the list of Mongolia’s tier-2 deposits of strategic
importance. Choibalsan city is connected to Russia by railway. Aduunchuuun coal
products can also be delivered to China via Russian and Eastern Inner Mongolian
railways.
Deposit: Aduunchuluun deposit is located in 5km from Choibalsan city, a centre of
the Dornod province, 650 km east of Ulaanbaatar and 100 km from the
Mongolian-Chinese border. The total proven reserves and resources of brown coal
are 241.3mt and 423.8mt respectively with gross calorific value of 3,203Kcal/kg,
9.9% ash content, 38.7% moisture, 1% sulphur and 45.8% volatile matter. The coal
seam is 25.65m in thickness, consisting of two layers, and is positioned 40-42m
below the surface.
Financial highlights: The company’s gross margin is very high at 33% and
profitability is at 19%, even though the company sells their coal to local clients at
$6.6 per tonne.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales
n/a 9.8 2,881
Net profit
n/a 1.5 409
EPS, MNT
n/a 0.47 130.00
Total Asset
n/a 2,495 3,150
Current Asset/Non-Current Asset, %
n/a 1.73 1.94
Net debt/Equity, %
n/a 16% 32%
Gross margin, %
n/a 22% 33%
Net margin, %
n/a 15% 14%
EV/EBITDA, (x)
n/a nmf 4.5
ROE, %
n/a 0% 19%
Dividend yield, %
n/a 10% -
Sales growth, %
n/a n/a nmf
Stock data
Price, MNT 7,000
Price, US$ 5.77
The peak, MNT 8,331
52Wk Range, MNT 450 - 8,331
Mkt cap, MNTbn 22
Mkt cap, US$mn 18
Avg daily turnover, US$ 127
Free float, % 8%
YTD performance, % 1334%
Key indicators
P/BV 10.34
P/E 53.84
ROE 19%
Gross margin 33%
Net debt/Equity 14%
EBITDA margin -
EV/EBITDA 4.5
EV/Resource 0.82
Dividend yield -
Share price performance, MNT
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
/10
6/4
/10
7/4
/10
8/4
/10
9/4
/10
10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
Shareholders
Source: Company data, SCH&CD and ResCap
54%38%
8% Management
team
Two
shareholders
Free float
As of 16 Dec 2010
Equity Research
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 140
1.10 Mongolia Development Resources
Company brief: Mongolian Development Resources (MDR) was the first property
and non-resource sector investment and project development company listed on
the MSE, with a focus on high-growth investment opportunities in Mongolia. In
December 2006, the company was initially established under the name Tuul
Songino Usnii Nuuts (Tuul Songino Water Resources) dedicated to infrastructure
development with a number of projects such as a Technical Water Facility,
Drinking Water Facility and a Pumped Storage Power Station. In December 2007,
Tuul Songino Water Resources conducted an IPO. Over 70% of the company stake
is owned by international investors mainly from the USA, Europe and Asia.
According to an extraordinary shareholders meeting held in December 2009, the
company decided to transform into a diversified investment company, stopping
three prior infrastructure projects due to the unviable nature of the three projects
caused by the state-regulated electricity tariff and the fact that the TPPs use fresh
water from aquifers at no cost.
Market presence: MDR pursues attractive investment opportunities across
various sectors (mainly finance, property, tourism, construction service and
materials, consumer goods, agriculture, media, professional service, mining and
metal and health care) in Mongolia and provides diversified exposure to the
Mongolian economy for local and international investors. The company is to
launch a non capital raising Global Depositary Receipt program, an advanced
capital market instrument, with the Bank of New York Mellon, in order to attract
new international investors.
Financial highlights: Since IPO in December 2007, the main source of the
company’s revenues were from non-operational income of interest accruals on
the company’s cash placed in term deposits with local banks. Since a new
management team was appointed, the company’s main operation is transferred
to investment operation. Therefore, from 2010, the main revenue is to be derived
from investment yields they receive.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales 26 - -
Net profit -90 487 -145
EPS, MNT -6.57 35.47 -10.58
Total Asset 27,798.06 28,341.76 13,324.43
Current Asset/Non-Current Asset, % 0.79 0.60 5.16
Net debt/Equity, % -43% -33% -43%
Gross margin, % 90% na na
Net margin, % -338% na na
EV/EBITDA, (x) nmf 7.12 nmf
ROE, % 0% 2% -1%
Sales growth, % na na na
Stock data
Price, MNT 1,250
Price, US$ 1.03
The peak, MNT 1,410
52Wk Range, MNT 750 - 1,410
Mkt cap, MNTbn 17
Mkt cap, US$mn 14
Avg daily turnover, US$ 10,678
Free float, %
YTD performance, % 26%
Key indicators
P/BV 0.61
P/E 35.24
ROE -
Gross margin -
Net debt/Equity -
EBITDA margin -
EV/EBITDA 60.25
Dividend yield -
Share price performance, MNT
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
/10
6/4
/10
7/4
/10
8/4
/10
9/4
/10
10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
Shareholders
Source: Company data, SCH&CD and ResCap
As of 16 Dec 2010
27%
25%15%
12%
7%
7%7%
Mongolia Capital
Firebird Global
Mongol Discov. Fund
Opportunity Fund
East Investor
Urban resources
Other
Equity Research
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 141
1.11 Mogoin Gol
Company brief: Mogoin Gol mine was established in 1970, and now supplies coal
mainly to the centres of Khuvsgul and Zavkhan provinces and eastern soums of
the Zavkhan province. In 1983, 1989 and 1995 production capacity was expanded
with investments in new mining equipment and machines, increasing to 200ktpa
of coal production. In 1995, the company was partially privatized, floating 49% of
the company on the MSE. Then the state owned 51% was transferred to the
provincial government’s ownership. Currently, the company has 74 employees. In
FY2009, Mogoin Gol JSC supplied 18K tonnes of coal to western provinces’ clients,
Zavkhan (71.4%) and Khuvsgul aimags (28.6%), providing them with energy and
heating.
Deposit: Located in the Tsetserleg soum of Khuvsgul aimag, 880km northwest
from Ulaanbaatar city and 209km west from the Khuvsgul province centre,
Mogoin Gol coal deposit is strategically important for the northern region of
Mongolia. The deposit covers an area of 89ha. Total reserve is a 13.6m tonnes of
coal with a calorific value of 5,200-7,100kcal/kg, 7.3% ash and 0.9% moisture, out
of which 3.6m is viable by open pit mining. Mogoin Gol’s average strip ratio is
about 5-7. According to the management of the company, the remaining total
reserve is 11.2m, out of which 3.1m was viable by open pit mining as of 2009.
Financial highlights: In 2009, the company sold 18k tonnes of coal and worked
with $280k of revenue, gross margin of 24% and net margin of 1%. However, the
company is on track to surge production volume over 10 times through 2 separate
coal selling pipelines: 1) future dealing pipeline relating to electricity consumption
of Mongolian western regions, and 2) delivery of coal to the nearby Russia to
cover for lost production caused by Raspadskaya accident. The opening ceremony
of a 60MW thermal power plant (TPP), the first ever TPP in Mongolia with private
investment, to be built on the basis of Mogoin Gol coal mine, was held on June 20,
2010. On Dec 29, 2009, Yuanda Group Ltd, a Mongolia-China joint venture, and
New Asia Mining LLC signed an Engineering, Procurement, Construction and
Management contract (EPCM) with the Mongolian Ministry of Mineral Resources
and Energy to construct the 60MW TPP. It is expected that the commercial
operation of the TPP will start in early 2012, providing energy to two western
provinces of Mongolia including Zavkhan and Gobi-Altai with an average power
consumption of 15MW per year. According to the provincial government, once
the TPP operation starts, Mogoin Gol JSC will supply 200k tonnes of coal annually
to its prospective TPP, increasing current production volume 12 times.
Key financials, MNT million unless otherwise stated
2007 2008 2009
Sales
na 300 351
Net profit
na 4 4
EPS, MNT
na 4.8 4.8
Total Asset
na 1,053 3,172
Current Asset/Non-Current Asset, %
na 0.79 0.67
Net debt/Equity, %
na 69% 36%
Gross margin, %
na 24% 24%
Net margin, %
na 1% 1%
EV/EBITDA, (x)
na nmf nmf
ROE, %
na 1% 0%
Sales growth, %
na na 17%
Key indicators
P/BV 3.78
P/E nmf
ROE 0%
Gross margin 24%
Net debt/Equity 36%
EBITDA margin 3%
EV/EBITDA nmf
EV/Resource 0.59
Dividend yield -
Share price performance, MNT
Shareholders
Source: Company data, SCH&CD and ResCap
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1/4
/10
2/4
/10
3/4
/10
4/4
/10
5/4
/10
6/4
/10
7/4
/10
8/4
/10
9/4
/10
10
/4/1
0
11
/4/1
0
12
/4/1
0
MN
T'0
00
Stock data
Price, MNT 10,349
Price, US$ 8.53
The peak, MNT 11,376
52Wk Range, MNT 1,970 - 11,367
Mkt cap, MNTbn 9
Mkt cap, US$mn 7
Avg daily turnover, US$ 1,021
Free float, % 9%
YTD performance, % 425%
51% 40%
9%
Provincial
government
Mogoin Gol
Energy/Transneft
Free Float
As of 16 Dec 2010
Disclaimers
ResCap Resource Investment Capital
January 24 2011
ResCap Mongolia 101 P a g e | 142
2 Disclaimers
Analyst Certification We hereby certify that all of the views expressed in this research report accurately reflect
our personal views about the subject company or companies and its or their securities. We
also certify that no part of our respective compensation was, is or will be, directly or
indirectly, related to the specific recommendations or views expressed in this research
report.
Important Disclosures Resource Investment Capital ("ResCap") is a boutique corporate finance advisor working
with clients in connection with mergers and acquisitions, project development, public and
private capital raisings and other strategic matters. ResCap is based in Ulaanbaatar,
Mongolia with a dedicated focus advising on Mongolian-related transactions.
Disclaimer The information provided in this report has been gathered from various sources
deemed to be reliable and accurate by ResCap. However, ResCap does not
guarantee the accuracy of the data and accepts no responsibility under any
circumstance for any financial losses or other that may be incurred through the
use of this information. Investment decisions should always be made based upon
individual personal circumstances and requirements, and preferably with the
advice of a qualified professional advisor.
© 2011 Resource Investment Capital. All rights reserved.
References
ResCap Resource Investment Capital
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3 References
� IMF (Oct 2010); Joint Statement by Mongolia’s Minister of Finance, Governor of the
Bank of Mongolia and IMF staff Mission, Press Release No. 10/387
� IMF (Jun 2010); Mongolia: Joint IMF/World Bank Debt Sustainability Analysis Under
the Debt Sustainability Framework for Low-Income Countries, IMF Country Report
No. 10/166
� World Bank (Oct 2010); Mongolia Quarterly Economic Update
� CIA – The World Factbook
� Bank of Mongolia, Monetary Policy Guide for 2011
� Bank of Mongolia (Nov 2010); Monthly Statistical Bulletin
� Bank of Mongolia (Nov 2010); Managing Mongolia’s Growth: The Role of The
Central Bank
� National Statistics Office, Monthly Bulletin (Dec2010)
� Trade and Development Bank of Mongolia (Dec 2010); Mongolia’s Investment
Needs and Opportunities, Presentation
� Trade and Development Bank Information Memorandum (October 2010)
� Ministry of Road, Transportation, Construction and Urban Development of
Mongolia (Oct 2010); Mongolia: Building a Sustainable Economic Growth through
Downstream Industries and Rail Infrastructure, Presentation
� Ministry of Food, Agriculture and Light Industry of Mongolia; Agricultural Policy
(2008-2010)
� Business Council of Mongolia (Nov 2010); Mongolia Mining Supply Chain,
Presentation
� Energy Efficiency Study of Thermal Power Plant #4 (2006); Technical Report
� EBRD (Nov 2010); Mongolia Investment Summit in London, Presentation
� Engineering and Mining Journal (Aug 2010); Mongolian Mining, Global Business
Reports
� Eurasia Capital Management (Oct 2010); Mongolia Development Resources:
Property and Infrastructure Developer in Mongolia, Presentation
� Eurasia Mongolia Guide 2009
� State Property Committee of Mongolia (Oct 2010); Privatizing Mongolia’s State
Owned Assets and What This Means for Investors, Presentation
� Dewey & Le Boeuf (Nov 2010); Overview of the Legal Framework for Foreign
Investment in Mining and Infrastructure in Mongolia, Presentation
� PricewaterhouseCoopers (2010); Mongolia Doing Business Guide 2010-2011
� General taxation Law of Mongolia
� Corporate Income Tax Law of Mongolia
� Personal Income Tax Law of Mongolia
� Wikipedia (Mongolia History and Public Relations)
� Value Added Tax Law of Mongolia
� Business Council fo Mongolia (BCM Newswire)
Some information in this report may have been derived from the following sources:
Business Council of Mongolia
World Bank
Bank of Mongolia
Eurasia Capital
Trade and Development Bank (esp. Information Memorandum Oct. 2010)
International Monetary Fund
Price Waterhouse Cooper (esp. Tax Law)
Contacts
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4 Contacts
ResCap
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15 Chinggis Avenue
1st Khoroo Sukhbaatar District
210648, Ulaanbaatar, Mongolia
Tel/Fax: +976 70100095
www.resource-cap.com
David Hanbury
+976 99998853
Enkhbayar Davaatseren
+976 99007069
Uyanga Orgodol
+976 99094282