BUSINESS COUNCIL of MONGOLIA NewsWire

www.bcmmongolia.org

Email: info@bcmmongolia.org Issue 34, August 15, 2008

NEWS HIGHLIGHTS:

Business: EBRD syndicated loan to MCS, first in Mongolia; Baganuur Mines to expand development

operations; USD 100 million Kazakh-Mongolian investment fund being set up; Take-over bid circular and QGX directors' circular mailed; Ivanhoe explains delay on Oyu Tolgoi; French expertise for coal liquefaction; Inspection agency halts mining at Tavan Tolgoi; Leighton looks to expand into Mongolia, Siberia.

Economy: Monetary policy implementation by Central Bank; Budget surplus comes down from last

year; GDP rises 13.3 per cent; Unemployment up as new jobs are created; More freight makes up for fewer passengers; Costs rise along with petrol, diesel prices; More money for Mongolia Development Fund.

Politics: Parliament tries twice to meet, and fails; Leaders mix business with pleasure in Beijing;

MPRP shows up inconsistency in DP stand; Polar Star for Japanese Ambassador; Embassy in Canberra soon; Ruling party continues to be homeless; People prefer stocks to cash in “wealth share”.

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NOTICE TO BCM MEMBERS

There will be no BCM NewsWire issued next Friday. The next BCM monthly meeting for Members will be Monday, August 25, at 5 PM at the Open Society Forum. Featured will be World Bank presentations on general economic conditions in Mongolia and a current view on the Mongolian mining sector led by Arshad Sayed, Country Representative-Mongolia, World Bank. Members who plan to attend the meeting with questions for Mr. Sayed should Email them in advance to info@bcmmongolia.org. Embassy updates will be presented by Asun Arar, Ambassador of the Republic of Turkey to Mongolia, and Mark Minton, Ambassador of the USA to Mongolia. A delegation of some 25 German businessmen from OAV’s German-Asia Business Association has accepted BCM’s invitation to be guests at the meeting. Introductory remarks will be made by their host, Pius Fisher, Ambassador of Germany to Mongolia, and by the head of the German delegation, Mr. Hartmut Schneider, Deputy Director General Energy Policy, Federal Ministry of Economics and Technology.

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BUSINESS

EBRD SYNDICATED LOAN TO MCS, FIRST IN MONGOLIA

As its first syndicated loan in Mongolia the EBRD is providing a US $13 million credit to MCS Coca-Cola LLC, a privately-owned local soft-drinks producer, to help it raise production, expand its product range, and most importantly, improve its wastewater treatment and recycling processes. MCS will use the funds to construct a greenfield bottling plant to increase its production capacity. The new wastewater treatment and recycling plant, to be used by a neighboring MCS-APB brewery, will allow the company to recycle water up to five times more than now to discharge to the municipal sewage system (once treated). MCS, which holds the franchise for Coca-Cola products in Mongolia, is one of the largest private companies in the country. According to the President of MCS Holding LLC, this expansion project

partially funded with EBRD support will help take the company’s business to a different level and promote local manufacturing, employment, and environment-friendly production.

Source: www.maximnews.com

BAGANUUR MINES TO EXPAND DEVELOPMENT OPERATIONS

The Baganuur Mines Company has decided to enlarge its development area to twice its present extent. The 30-year-old company currently spends Tg 40 billion annually on development operations, and in recent years it has been facing financial challenges in conducting exploration and development work.

Coal from Baganuur’s mines meets 40% of the entire demand of Mongolia. More important, the mines supply 60% of the demand in Ulaanbaatar and thus their coal is indispensable for generating electricity and heating in the capital city.

Source: www.miningmongolia.mn

USD 100 MILLION KAZAKH-MONGIOLIAN INVESTMENT FUND BEING SET UP

Work is going ahead on setting up a joint Kazakh-Mongolian Direct Investments Fund, with an initial corpus of USD 100 million, to facilitate business between the two countries. Seen as “a financial bridge” by spokesmen for both countries, the Fund is expected to help finance large economic projects.

The areas in Mongolia likely to benefit most from the Fund include energy, transport, the financial sector, telecommunications, tourism, and mining.

Source: www.mongolia-web.com

TAKE-OVER BID CIRCULAR AND QGX DIRECTORS’ CIRCULAR MAILED

QGX Ltd. and Mongolia Holdings Corp., an indirect subsidiary of Kerry Holdings Limited, announced on August 11 that Mongolia Holdings’ formal bid circular in respect of the offer to acquire the outstanding common shares of QGX at a price of Cdn$5.00 in cash per share had been mailed to QGX's registered shareholders. QGX has also mailed its directors' circular recommending its shareholders accept the offer and tender their shares to the offer.

On July 22, QGX announced Mongolia Holdings’ intention to make a supported take-over bid for QGX, valuing its total common share capital at approximately Cdn$259 million. The offer is open for acceptance until midnight (Vancouver time) on September 15, unless extended or withdrawn.

Certain shareholders of QGX, including the directors and officers of QGX, representing approximately 43% of the issued and outstanding common shares of QGX on a fully diluted basis, have agreed to tender their shares to the offer, subject to certain exceptions and have entered into lock-up agreements evidencing such commitment.

These documents are available on the Canadian Securities Administrators website at www.sedar.com and on the QGX website at www.qgxgold.com.

Source: www.marketwire.com

IVANHOE EXPLAINS DELAY ON OYU TOLGOI

In Australia to attend a Diggers and Dealers conference, Robert Friedland of Ivanhoe Mines was asked about the Oyu Tolgoi copper-gold project in Mongolia, which it aims to develop in partnership with Rio Tinto, and which has more than USD 400 billion worth of metal in the deposit. Explaining that the development of Oyu Tolgoi is stalled because the Mongolian Government and Ivanhoe have yet to agree on the fiscal terms, Mr. Friedland said, “Mongolia has a very small population base and Oyu Tolgoi [will be] a huge amount of wealth. They are just taking the requisite amount of time in a democratic way to see how they will handle it.”

Source: Sydney Morning Herald

FRENCH EXPERTISE FOR COAL LIQUEFACTION

A total of USD 300,000 has been allocated in the state budget on developing a national program to liquefy coal. Technical and economic details are being worked out with the French AXENC group to

identify the most appropriate technology in this regard. The head of the fuel policy coordination department at the Ministry of Fuel and Energy, B. Ganbaatar, has said samples from five coal deposits, both large and small, have been sent for analysis. The composition of the coal determines the technology to be used.

Courses are being offered at universities here to make sure there is no dearth of properly trained Mongolians for the work. There are plans to send some of them to Germany and Australia also for further training. A clearly formulated state policy on fuel and energy will be important in attracting foreign investments in this sector.

In a related development, reports Zuunii medee, ICM made a presentation at the Ministry of Trade and Industry on August 13 on its project to produce liquid benzene from coal. Commercial production is scheduled to start in 2014. The total investment will be between USD 400-600,000. The company’s managing director, D. Nemehbayar, asked for government support for the strategically important sector. Sources: Montsame; Zuunii medee

INSPECTION AGENCY HALTS MINING AT TAVAN TOLGOI Following an investigation into complaints that Tavantolgoi Trans and Tavantolgoishin, two companies that transport coal to the border with China, are damaging the environment, particularly plant life, the State Professional Inspection Agency has halted coal mining work in the Tavan Tolgoi deposits area. The Environment, Mining, and Radioactive Unit of the agency decided that the present operations violated several regulations. It wants paved roads for the coal transportation so that the wide dispersal of polluting dust is controlled. The results of the inspection will be open to public study.

Source: Onoodor

LEIGHTON LOOKS TO EXPAND INTO MONGOLIA, SIBERIA

Leighton Holdings Ltd., Australia's largest engineering contractor, said it is looking to expand into mining contract work in Mongolia and Siberia. "We're seriously looking at Mongolia as an area of opportunity," Leighton Chief Executive Wal King told reporters. "We've also been engaged in discussions with the Basic Elements group in Russia, Oleg Deripaska, to look at mining opportunities in Siberia." Source: Reuters - Melbourne, Australia

ECONOMY

MONETARY POLICY IMPLEMENTATION BY CENTRAL BANK

A report from the Bank of Mongolia, reviewing monetary policy implementation in the first half of 2008, says it has succeeded in lowering the level of banks' excess reserves and also growth of monetary aggregates. Prices of imports have gone up. Quasi money has risen by 7.1 per cent since the beginning of the year, largely because of an increase in foreign currency saving deposits and current accounts. Tugrug-denominated deposits have dropped. The favorable appreciation of the exchange rate against the USD may be one reason for this, while the continuing high inflation rate might be another. Net foreign assets have fallen 5.4 per cent since March 2008, whereas net domestic assets have gone up 17.2 percent. In other words money supply to the economy is now coming mainly from domestic sources.

The growth in net domestic assets is largely a result of increased loans for the private sector. The expanding economy in recent years, increasing demands, and high housing prices contributed to this. However, the growth rate in loans is slightly tapering off. Considering the behavior of money aggregates, it seems demand-side inflation can be curbed. The decrease of 6.7 percent in net foreign assets as of June 2008, when compared with the same period last year, can be attributed to a fall in the net official international reserves at the Central Bank and also in the net international reserves of the banking sector.

Source: www.mongolbank.mn

BUDGET SURPLUS COMES DOWN FROM LAST YEAR

In the first seven months of 2008, the total revenue and grants of the General Government Budget (GGB) amounted to Tg 1,251.7 billion while the total expenditure and net lending totaled Tg 1,227.5 billion. The overall surplus of Tg 24.3 billion is Tg 95.9 billion less than what it was in the same period last year. Solely in terms of income and expenditure, however, the surplus of Tg 279.4 billion shows an increase of Tg 8.6 billion over last year’s corresponding figures.

Total tax revenue is 59.8 per cent more. A break-up shows income tax collection has risen by 76.3 per cent, taxes from foreign trade by 56.4 per cent, excise tax by 45.3 per cent, and VAT by 58.6 per cent. The shares of current expenditure and net lending in the total expenditure and net lending amounted to 78.9 per cent and 5.0 per cent respectively, a decrease of 0.5 points and 0.1 points from 2007, respectively. The share of capital expenditure in the total expenditure amounted to 16.1 per cent, an increase of 0.6 points over the same period last year.

In the first seven months of 2008, capital expenditure reached Tg 197.6 billion, an increase of 70.7 per cent or Tg 81.8 billion compared with the same period the previous year. However, it was 59.7 per cent or Tg 292.8 billion less than planned.

Source: Montsame

GDP RISES 13.3 PER CENT

The total Gross Domestic Product (GDP) in the first half year was Tg 1,624.5 billion at 2005 constant prices, an increase of 13.3 per cent over the corresponding period last year. Tg 631.1 billion of the total came from the first quarter, and Tg 993.4 billion from the second.

Agriculture accounted for 32.9 per cent of this year’s total growth. The share of the industry and construction sectors was 7.7 per cent, of the service sector 39.4 per cent, and 20.0 per cent came from net taxes on products. Compared with the first six months of 2007, this year GDP increased by 18.9 per cent in the agriculture sector, by 3.6 per cent in the industry and construction sectors, by 14.6 per cent in services, and by 22.2 per cent in net taxes on products.

Source: Montsame

UNEMPLOYMENT UP AS NEW JOBS ARE CREATED

Statistics released by the Bank of Mongolia show that even as 22,000 new jobs were created in Mongolia in the first half of 2008, the period also saw a 7.8 percent increase in unemployment. Altogether 32,200 people are registered for benefits and as actively seeking employment. Of them 2,300 got a job in the period under review. The National Statistics Committee reports that monthly wages rose by 61.6 percent from the beginning of the year.

People seeking work in the capital city and around it, particularly those coming from the provinces, often do not know where to go to get information. The Metropolitan Employment Exchange has recently started offering more and detailed information about such job possibilities. Since the beginning of 2008 more than 2,600 people submitted their application for a job to the exchange and about 65 percent of them received employment. There are currently 5,800 vacancies waiting to be filled, most of them in the construction and mining sectors which need people with professional qualifications.

Source: www.mongolbank.mn; en.News.mn

MORE FREIGHT MAKES UP FOR FEWER PASSENGERS

The 8.3 million tons of freight carried by the railway in the first seven months of 2008 showed a 3 per cent increase over the same period last year. The number of passengers, however, fell by 2.7 per cent. Freight carried within the country rose 9.5 per cent but the international volume was lower by 3.7 per cent. Transit freight also went down 34.2 per cent.

A similar trend was seen in domestic air transportation. Freight rose 13.4 per cent in the first seven months over the corresponding period in 2007, but passenger traffic was 3.2 per cent less. One reason could be that Aero Mongolia was stopped from flying for a considerable part of the period under review. The total revenue of railway and air transportation reached Tg167.3 billion, an increase of 8.7 per cent seen against the same period last year.

Source: Montsame

COSTS RISE ALONG WITH PETROL, DIESEL PRICES

All petroleum prices were raised on August 7. The Mineral and Petroleum Agency has announced that a liter of ordinary petroleum now costs Tg 150-175 more, A-92 Tg 175, and A-80 Tg 150. Diesel price goes up by Tg 160 from the raised price just a few weeks ago. There could be marginal variations between prices charged by the different companies, but in general a liter of АI-80 in Ulaanbaatar is now Tg1,260 (USD1.09), АI-92 Tg1,400 (USD1.21) and diesel Tg1,630 (USD1.41). The dollar rates are approximate.

The Agency has calculated that a rise of Tg 100 per liter in petroleum prices works out to a kilogram of meat costing Tg 23 more, flour Tg 27, a loaf of bread Tg 6, and taxi rides Tg 11 more for a kilometer.

Transportation costs have gone up following the latest gasoline price rise. A one-way trip to Zavkhan province will now cost Tg 32,000, up by Tg 4,000. Private cars will charge each passenger more than Tg 45,000. Privately owned vehicles are charging Tg 55-60,000 per passenger to Khovd. This rise comes just before the beginning of the new school year when the number of people coming to Ulaanbaatar increases sharply.

With the rise in Ulaanbaatar Railway freight rates, the price of construction materials has begun to show a sharp increase. The traditional unit of timber cost Tg 12,000 last winter, rising to Tg 18,000 in the spring and last week it was Tg 25,000. There are fears in the trade that prices will go up further.

Source: www.en.News.mn

MORE MONEY FOR MONGOLIA DEVELOPMENT FUND The first six months of 2008 put Tg 514.4 billion into the Mongolia Development Fund, Tg 129.3 billion more than the same period last year. According to the central tax administration office, the contribution of Erdenet Mining Corporation to the Fund increased by 26.9 percent.

Source: Zuunii medee

POLITICS

PARLIAMENT TRIES TWICE TO MEET, AND FAILS

There were two attempts to hold a session of the new Parliament on August 14 and both failed. The first meeting was called at 11.30 am. All MPRP members were present, and so were S.Oyun from the Civil Will party, and the lone Independent, Z.Altai. The two DP leaders who are now supporting an early swearing in, E.Bat-Uul and B.Batbayar, were also seen. With the rest of the DP members staying away, however, there was no quorum and it was decided to meet again at 3 pm. This also did not have enough members and so could not be held.

A resolution seems likely in the next few days. Hectic consultations are pointing to some sort of a coalition being worked out. The MPRP has two factions, one led by the present Prime Minister, S.Bayar, and the other by his predecessor in office, M.Enkhbold. A rough count gives both leaders the support of an equal number of 23 MPs. Both factions would like to dominate the next government, formed either by the MPRP or by the party with others’ support. The winner at the stakes might well be the one who succeeds in getting the DP’s support.

There is division within that party also on which faction to support and on what terms. One group is led by E.Bat-Uul and B.Batbayar, who have come out in open favor of new MPs taking the oath without any further delay. Meanwhile the DP Executive Board has decided to discuss the issue of expelling E.Bat-Uul and B.Batbayar from the party.

Source: en.News.mn

LEADERS MIX BUSINESS WITH PLEASURE IN BEIJING

State leaders of Mongolia, invited to watch the opening ceremonies of the Olympic Games, took advantage of their visit to hold important talks. President N.Enkhbayar has met with Chinese President Hu Jintao to suggest several new areas of cooperation. These include projects like building a second railway line connecting the two capitals, building a new railway in north Mongolia as part of the North East Asia Project, developing the capacity of Zamyn Uud to handle

trade, increasing oil exploration efforts, building a refinery, particularly for the petroleum that Mongolia will be importing from China, and building a power station in south Mongolia near the Shivee Ovoo coalmines.

President Hu promised careful consideration of all the proposals, and suggested setting up a mechanism to work on food safety and security as soon as possible, renewing the present general agreement on cooperation in several sectors, and working on a new agreement on labor.

Ulaanbaatar Mayor T.Bilegt, also in Beijing, met with officials of the Chinese Road and Bridge Construction Corporation, which is listed among the world’s 500 biggest corporations. The company has expressed interest in road building jobs in Mongolia and has conducted related surveys. It also presented proposals to the Mayor about solving the problems of Ulaanbaatar road networks.

Source: www.news.mn

MPRP SHOWS UP INCONSISTENCY IN DP STAND

In separate meetings on August 12, MPRP members of the old and the new parliaments decided to reject the conditions issued by the DP on August 6. Among other things, the DP had said it wanted the old Parliament to continue until its demands were met. Briefing media on August 12 after the two meetings Ts.Nyamdorj, MPRP leader and former Speaker, said his party did not find any merit in the DP stand, and hoped the DP’s new members would realize the gravity of the situation and agree to take the oath soon.

Nyamdorj recalled the situation in 2004 when President N.Bagabandi had called the newly elected Parliament to session but the old Parliament also met and took some decisions. The President vetoed all these decisions and the Constitutional Court upheld the vetoes. The DP supported the vetoes on the ground that any meeting of the old Parliament was illegal. The MPRP finds it strange that this time around, the DP sees legitimacy in an old Parliament retaining power because one party would not allow MPs to take their oath. Saying that the impasse had lasted long enough, he hoped it would be resolved this week.

Source: en.News.mn

POLAR STAR FOR JAPANESE AMBASSADOR

President N.Enkhbayar issued a decree on August 12 conferring the Order of the Polar Star upon Yasuyoshi Ichihashi, Ambassador of Japan to Mongolia, for his significant contribution to strengthening bilateral relations and collaboration.

Source: Montsame

EMBASSY IN CANBERRA SOON

Mongolia will open an Embassy in the Australian capital, Canberra, soon. Four Mongolians will be employed there, three of them with diplomatic status.

Source: en.News.mn

RULING PARTY CONTINUES TO BE HOMELESS

With its headquarters set on fire during the July 1 protests, the MPRP is without its own place. Its different sections have moved to different places like the University of Humanities building, metropolitan party bureaus, and to some Government buildings.

The busy main office now functions from the University of Humanities but it may be asked to leave once classes are resumed on September 1. Even if construction of a new building begins soon, the country’s oldest party will remain homeless this year.

Source: Ardiin Erkh

PEOPLE PREFER STOCKS TO CASH FROM “WEALTH SHARE”

In a survey to discover how people wanted the proposed “Wealth Share” scheme to be implemented, 91% of the respondents favored receiving their share in the form the stocks, and not cash. Answering another question, 81% of those surveyed said they wanted a national corporation to be established to utiliize the monetary gains from the nation’s mineral resources. This information

was given by R. Sodkhuu, CEO of the Mongolian Stock Exchange that commissioned the survey. Source: Onoodor

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SPONSORS

ECONOMIC INDICATORS

MSE WEEKLY REVIEW

For the week ended August 8, 2008, trading activity on the Mongolian Stock Exchange (MSE) totaled

4.6 million shares with 41 companies traded. Total market value of transactions was MNT 824.1

million. Total market capitalization of the 358 stock companies listed on the MSE was MNT 797.0

billion, and increased by MNT 14.3 million or 1.8% from the previous week.

The Top-20 Index increased by 95.62 points or 1.0% compared to the previous week closing at

9,501.56 points. The MSE Composite Index increased by 88.36 points or 2.1% compared to the

previous week, closing at 4,385.10 points.

Most active stocks traded were: Khukh gan (4.1 million shares), Hermes Center (232,000 shares),

Genco tour buro (88,400 shares), Anod Bank (85,800 shares). and APU Company (43,900 shares).

Major share price percentage gainers were: Tavan tolgoi (28.4%), Bayan itgelt (15.3%), Khar

tarvagatai (15.2%), Savshim (14.9%), and Tsagaan Tolgoi (14.8%). Major share price percentage

losers were: Nekheesgui edlel (-15.0%), Mon.Tsakh.Kholboo (-10.0%), Moninjbar (-6.1%), Erdenet

Khivs (-5.7%), and Olloo (-5.4%).

INFLATION

Year 2006 6.0% [source: National Statistical Office of Mongolia (NSOM)] Year 2007 Avg. 9.0% [source: NSOM] Year 2007 *15.1% [source: NSOM] July 31, 2008 *32.0% [source: NSOM] * year over year (yoy)

CURRENCY RATES – August 14, 2008

Currency name Currency Rate

US dollars US 1152.95

Euro EUR 1721.07

Japanese yen JPY 10.6

British pound GBP 2190.09

Hong Kong dollar HKD 147.66

Chinese yuan CNY 168.08

Russian ruble RUB 47.71

South Korean won KRW 1.11

MONGOLIA’S GOLDEN

Mongolia claimed its first ever Olympic gold medal after judoka Tuvshinbayar Naidan beat Kazakhstan's Askhat Zhitkeyev in the men's -100kg class.