Investment Sentiments and Long-Term Opportunities in Mongolia

Alisher Ali Chairman Mongolia Investment Summit 2014 30 April 2014, London

Costs of Poorly Conceived Policies

Power of Sentiments: FDI Slumped, Currency Depreciation, Rating Downgrades

China Factor: Slow Growth and Easing Demand

Mining Stocks: Huge Losses

Interest to Investors:

• Mining: Still Underexplored and Attractive Valuations

• Private Equity: Non-Resource Play

• Real Estate

• Equities: Time to Buy?

• Bonds:

About Eurasia Capital

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Summary

Costs of Poorly Conceived Policies

Adoption of controversial law on the regulation of foreign investment in entities operating in strategic sectors in May 2012

The law brought negative impacts on overall Mongolian economy and uncertainty for foreign investors as governmental and parliamentary authorization were required to invest in sectors of strategic importance (mining, banking and finance, media and communication)

Amendments were made to above mentioned law on April 2013 to improve foreign investor’s sentiment. (The law no longer applies to foreign private entities)

Adoption of Investment Law in October 2013 and abrogation of law on the regulation of foreign investment in entities operating in strategic sectors to boost economic slowdown and restore foreign investor’s confidence

Dispute between Rio Tinto (majority owner of Oyu Tolgoi mine) and the Government of Mongolia over investment agreement including cost overruns, management fees, dividend, and the second phase project finance of OT

Investor confidence suffered significantly as valuation of Mongolia asset classes (especially resource stocks) plunged over the last two years

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Government Supported Growth

4

Mongolian GDP Growth Mongolian GDP Growth

Mongolian economy has been slowing down since 2012 primarily due to decline in FDI and falling minerals exports.

However, the economy which grew 17.5% in 2011, maintained its double digit growth rate at 11.7% in 2013, mostly thanks to government spending.

In response to the slumped FDI, exports revenue, surging inflation and domestic currency depreciation, Mongolian government and central bank injected total MNT4 trillions to the economy.

Therefore, GDP growth at 11.7% in 2013 was the result of strong intervention by the authorities - it was not organic growth indeed.

Despite current challenges, Mongolia still has strong fundamentals and is expected to experience high growth rates in coming years as projected by IMF.

Source: NSO Mongolia, IMF

Foreign Direct investment Foreign Direct investment

0

1,000

2,000

3,000

4,000

5,000

2006 2007 2008 2009 2010 2011 2012 2013

FDI in US$ mn

Mineral export Mineral export

0

1,000

2,000

3,000

4,000

5,000

6,000

2004 2006 2009 2010 2011 2012 2013

in US$ mn including coal, gold, copper and etc

Loan growth Loan growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

5,000

10,000

15,000

20,000

25,000

2008 2009 2010 2011 2012 2013

in MNT bn  0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016 2017 2018

In US$ bn 

Weaker investor sentiments towards Mongolia as growth in China slows: GDP growth in China declined from 10.45% in 2010 to 7.67% in 2013 and the growth rate in 2013 moderate around 7% in 2014-16.

China’s growth moderation directly reflected in commodity demand. Morgan Stanley cut its forecasts (2013) for the S&P

GSCI, which include iron ore, coal, copper, from 6% to 2.5%

Macquarie Research also cut (2013) its forecasts for commodities including copper, aluminum

Consolidation of mining companies over the last five years is maturing. The government encourages Chinese companies to

invest directly in resource projects

Acceleration of Chinese companies’ participation in resource M&A

Global coal price has declined 30% from US$144 to US$101 per ton over the last 2 years

5

90

100

110

120

130

140

150

US$

per

ton

10.45%

9.30%

7.65%

7.67% 7.54% 7.28%

6.97%

4%

5%

6%

7%

8%

9%

10%

11%

2010 2011 2012 2013 2014 2015 2016

GDP growth, %

Source: IMF (from 2013 - expected)

China Factor

Source: Bloomberg

Coal Price, US$/ton

6

China is the largest consumer of Mongolian resources (86% of Mongolia’s total exports in 2013), largest trading partner and investor in Mongolia.

75% of China’s imports are resources: nearly 100% of Mongolia’s copper concentrate, 42% of molybdenium and all Mongolia’s coal exports go to China.

In 2013, export of commodities such as coal, molybdenum and zinc dropped -40%, -42% and -9% y-o-y respectively. However, copper export increased 13%, iron ore 23% and fuorspar 11% which have been for Mongolia considering challenging macro conditions

Exports by Market (% of total, 2013)* Total Mongolian Exports (US$mn)*

Source: NSOM (2013) Source: NSOM

0

1,000

2,000

3,000

4,000

5,000

6,000

2004 2006 2009 2010 2011 2012 2013

Coal Copper Iron Ore Crude oil

Cashmere Zinc Gold Fluorspar

Molybdenium Other

China 86.83%

China Canada Russia Others

China: Key Export Market

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Ratings 2012 2013

Standard & Poor’s

BB BB-

Moody’s B1 B1

Fitch BB- B+

Ratings 2013

Mongolian Mining Corporation

Caa2 (Moody’s), CCC+ (S&P)

Development Bank of Mongolia Bond B1 (Moody’s)

Trade & Development Bank of Mongolia B2 (Moody’s)

Mongolian Sovereign Rating

Corporate Bond Rating

Fitch downgraded its rating on Mongolia to B+ in December 2013. The agency pointed out following factors as its basis on the evaluation:

Fiscal deficit climbed to MNT1.5 tn in 2013, accounting 12% of the GDP, fueled by off-budget channels such as Chinggis Bond commitments and the Central Bank injection to construction and infrastructure sectors.

According to the Fitch projections, Mongolian foreign debt would reach US$13.5 bn or 120% of the GDP in 2013. Khan bank and XacBank, two big retail banks

in Mongolia also downgraded by Fitch.

Due to decrease in commodity exports, MMC, only private sector corporate bond issuer, is experiencing drop in bond prices and increase in yield on its US$600m 2017 notes.

Mongolia Mining Corp Bond yield, %

Source:Bloomberg

Ratings Downgraded

China Prime Coking Coal Yinchuan Price

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Seaborne Hard Coking Coal Price

Source: Bloomberg

Mining Stocks: Overreaction?

Mongolian Mining Corporation SouthGobi Resources

-33% in 2 years -43% in 2 years

-90% in 2 years -91% in 2 years

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Mongolia Energy Corporation Aspire Mining

Source: Bloomberg

Mining Stocks: Oversold?

Draig Resources Tavan Tolgoi

-74% in 2 years -86% in 2 years

-94% in 2 years -50% in 2 years

Massive resources, high quality minerals and proximity to main consumer market such as China and Russia.

The development of the Oyu Tolgoi and Tavan Tolgoi mines are expected to further transform Mongolia

Only 9.1% of Mongolia’s huge landmass is covered under existing exploration licenses*

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Unexplored Mining Sector

Boroo (gold)

Dornod Mardai Gurvan Bulag

Tavan Tolgoi (coking coal)

Oyu Tolgoi (copper, gold)

Nariin Sukhait                      (coal)

Shivee Ovoo (brown coal)

Baganuur (brown coal)

Tumurtein Ovoo (iron ore)

Erdenet  (copper, molybdenium)

Tumurtei (zinc, lead)

Burenkhaan (phosphorite)

Asgat (silver)

Tsagaan Suvarga (copper, molybdenium)

Russia

China

(uranium deposits) 

*Source: The Ministry of Mining of Mongolia, 2014

Private Equity: Much-Needed Financing

Most of the Mongolian companies are private, not listed

Many dynamically growing Mongolian business groups with interests across various industries (mining, property, construction, trade, consumer goods, retail)

Substantial pre-IPOs opportunities emerging with Mongolian companies, especially in non-resource sectors

Relatively small, under-capitalized banking sector unable to meet the rapidly growing demand for services (13 banks with only $853mn in equity)

Non-resource private equity opportunities for early investors:

• financial services (banking, insurance, leasing),

• agriculture, manufacturing, media, IT

• property, tourism and hospitality sectors

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Property Slow economic growth, lower FDI inflows, currency

depreciation are negatively impacting property market

Mongolian banking sector has expanded but mortgage loan penetration remains to be insignificant at below 10%, suggesting upside potential

Support for the first-time homebuyers (mortgages at 6%) boosted the residential market and resulted in increased supply.

Office and commercial property market growth has cooled due to increase in supply as well as exit of some foreign companies

Number of tourist arrivals dropped 12.2% to 417,815 tourists, from 475,892 a year earlier

Mongolian property market possesses significant growth potential, however risk factors, supply and demand trends should be watched

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Source: Bank of Mongolia

Construction by property type, MNT bn

0

100

200

300

400

500

600

700

800

2008 2009 2010 2011 2012 2013

Residential IndustrialTrade & service Hospitals, schools & culturalOther

Source: National Statistical Office of Mongolia

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MSE market capitalization dropped to US$1,007mn in 2013 from US$1,553mn (-35%)

In our estimates, Mongolia MCap/GDP ratio will reach 18% by 2017 from 12% in 2014.

MCap/GDP ratio will increase along with strong expected GDP growth in 2014-2017

Based on our assumptions, MSE market capitalization may reach US$1,447mn by the end of 2014 and increase up to US$2,803mn by 2017, representing strong upside

Source: MSE, Eurasia Capital Holding estimation Source: Bloomberg, IMF, Eurasia Capital Holding estimation, NSO

Local Equities: Rebound Expected

Mongolian GDP (US$ mn ) and MCap/GDP ratio, (%)

1,104

1,553

1,293

1,007

1,447

1,839

2,240

2,803

0

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012 2013 2014 2015 2016 2017

Market Capitalization, US$ mn

6,244

8,709 10,258

10,600 12,057

13,135 13,998

15,570

18% 18%

13%

10%

12% 14%

16% 18%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

0%2%4%6%8%

10%12%14%16%18%20%

2010 2011 2012 2013 2014 2015 2016 2017

GDP, US$ mn (right)

MarCap/GDP ratio, % (left)

MarCap/GDP ratio, %, Eurasia Capital Estimation

GDP Projection by IMF, US$mn

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Emerging and Frontier Markets: Comparables

172%

90%

240%

66%

10% 0%

50%

100%

150%

200%

250%

300%

Malaysia Thailand SouthAfrica

Chile Mongolia

59%

40%

23% 28%

10%

0%

10%

20%

30%

40%

50%

60%

70%

Kuwait Kenya Vietnam Argentina Mongolia

Source: Bloomberg,

Mongolia compared to emerging markets, MCap/GDP ratio (%,) 2013)

Mongolia compared to frontier markets MCap/GDP ratio (%), 2013

Mongolian MCap/GDP ratio (10%), one of the lowest in the world, is low even by frontier markets standards

This reflect both 1) low percentage of public companies among Mongolian banks and corporates and 2) Mongolian equities being undervalued

Very strong growth potential in Mongolian equities in 2014-2020

Source: MSE (2014), Bloomberg (2014) 15

MSE Top 20 Index

Name    Symbol    Market Cap, US$mn  

 Performance since January 

2012, %  Sector  

APU   APU    158.4  ‐25%  Food & Beverage s Tavan Tolgoi   TTL   153.7  ‐61%  Coal  Mining Sharyn Gol   SHG   47.1  ‐43%  Coal  Mining Shivee Ovoo   SHV   45.6  ‐69%  Coal Mining Baganuur   BAN   43.7  ‐77%  Coal Mining Gobi  GOV   28.9  2%  Textile   Mongolian Telecom  MCH   22.5  ‐55%  Telecom  Suu  SUU   20.3  27%  Food & Beverage  UB Hotel  ULN   19.3  79%  Hospitality  BDSec  BDS   16.6  ‐40%  Financials  State Department Store  UID   12.2  ‐23%  Retail   Bayangol Hotel  BNG   12.1  12%  Hospitality Talkh Chikher  TCK   9  10%  Food & Beverage  Mogoin Gol  BDL    8  ‐58%  Coal Mining Khukh Gan  HGN   6.7  ‐54%  Metals Remicon  RMC   6.6  ‐33%  Construction materials  Silikat  SIL   5.5  ‐26%  Construction materials  Genco Tour Bureau  JTB   5.3  ‐25%  Hospitality  Hotel Mongolia  MSH   5.3  ‐18%  Hospitality 

SILK ROAD MONGOLIA INDEX: A Country Proxy

Source: MSE , Bloomberg as of March 31, 2014

№  Company Name  Ticker  Exchange % since 

01.01.2012 MktCap, US$mn Sector1  TURQUOISE HILL RESOURCES   TRQ:US  New York   ‐48% 6881.9 Metals  & Mining 2  CENTERRA GOLD   CG:CN  Canada  ‐73% 1137.3 Mining 3  MONGOLIAN MINING CORP  975:HK  Hong Kong   ‐88% 343.9 Mining 4  CENTRAL ASIA METALS   CAML:LN  London  214% 238.8 Mining 5  MONGOLIA ENERGY CORP   276:HK  Hong Kong   ‐67% 187.3 Mining 6  WINSWAY COKING COAL HOLDINGS  1733:HK  Hong Kong   ‐84% 180.0 Mining 7  APU JSC  APU:MO  Mongolia   ‐19% 171.6 Beverages8  TAVANTOLGOI JSC  TTL:MO  Mongolia   ‐61% 154.2 Mining 9  SOUTHGOBI RESOURCES   1878:HK  Hong Kong   ‐89% 116.9 Mining 10  MONGOLIA GROWTH GROUP   YAK:CN  Canada  n/a 80.6 Property 11  GUILDFORD COAL   GUF:AU  Australia   ‐78% 57.8 Mining 12  NORTH ASIA RESOURCES HOLDING  61:HK  Hong Kong   68% 54.7 Mining 13  ENTREE GOLD   ETG:CN  Canada  ‐66% 52.4 Mining 14  SHIVEE OVOO JSC  SHV:MO  Mongolia   ‐66% 50.2 Mining 15  SHARYN GOL JSC  SHG:MO  Mongolia   ‐44% 46.6 Mining 16  BAGANUUR JSC  BAN:MO  Mongolia   ‐65% 46.0 Mining 17  ORIGO PARTNERS PLC  OPP:LN  London  ‐76% 46.0 Investments 18  BERKH UUL JSC  BEU:MO  Mongolia   ‐24% 39.7 Mining 19  PETRO MATAD   MATD:LN  London  ‐66% 23.8 Oil & Gas 20  Mongolian Telecom  MCH:MO  Mongolia   ‐56% 22.0 Telecom21  FEORE   FEO:AU  Australia   ‐77% 21.5 Metals  & Mining 22  ASPIRE MINING   AKM:AU  Australia   ‐80% 19.5 Mining 23  PROPHECY COAL CORP  PCY:CN  Canada  ‐82% 14.7 Mining 24  HARANGA RESOURCES   HAR:AU  Australia   ‐75% 14.5 Metals  & Mining 25  KINCORA COPPER   KCC:CN  Canada  ‐69% 13.1 Mining 26  ERDENE RESOURCE DEVELOPMENT  ERD:CN  Canada  ‐82% 10.2 Mining 27  XANADU MINES   XAM:AU  Australia   ‐75% 9.5 Mining 28  EAST ASIA MINERALS CORP  EAS:CN  Canada  ‐94% 5.5 Mining 29  VOYAGER RESOURCES   VOR:AU  Australia   ‐84% 4.3 Mining 30  MODUN RESOURCES  MOU:AU  Australia   ‐81% 2.0 Mining    Total        10,046.5  

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MSETOP Index MSCI Frontier Index SILKMN Index

-25%

-78%

160

140

120

100

80

60

40

20

0

Source: MSE (2014), Bloomberg (2014)

+34%

Mongolian Int’l Equities: Time to Buy?

Mongolia-focused Stocks vs Frontier Peers

MSCI Frontier

MSE Top-20

SILKMN

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Highly correlated to resources exports (copper, gold, and coal) In last two years, MNT depreciated 35% due to increase in current account deficits,

declining commodity prices, and lower foreign investment inflows While MNT may depreciate even further, there is a contrarian case for the

Mongolian currency appreciation in the next 3-4 years

Source: Bank of Mongolia

1,200

1,300

1,400

1,500

1,600

1,700

1,800 US$-MNT rate (March 2012 – March 2014)

MN

T/U

S$

MNT: Contrarian View

Eurasia Capital is a leading Mongolia-focused investment banking and brokerage firm • Launched its operations in September 2008

• Raised over $200m in equity financing for international and local clients

Strong local presence with experienced team of professionals based in Ulaanbaatar Provides full-fledged advisory, brokerage and research services to local and international

companies, private equity groups and hedge funds Advises on strategic and portfolio investments, cross-border M&As and capital raising Advised on deals in Myanmar, Mozambique and other frontier markets Eurasia Capital is the multi-award winning firm, recognized by leading finance publications:

Best Investment Bank Awards by Euromoney, EMEA Finance, Global Finance, FinanceAsia, World Finance and Business New Europe

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Eurasia Capital

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EURASIA CAPITAL Ulaanbaatar Suite 301, Regency Olympic-16 Ulaanbaatar Tel: +976 77119799 www.eurasiac.com

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