MGL Challenges and Opportunities

8/8/2019 MGL Challenges and Opportunities

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MONGOLIA:

CHALLENGESANDOPPORTUNITIES

September2009

Ulaanbaatar,Mongolia


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2009EurasiaCapital.Allrightsreserved.

DISCLAIMER

Thisreport ismadeforinformationpurposesonly,anddoesnotconstituteanoffer,solicitationofanoffertopurchase,hold,

sell, invest or make any other financial decision. In making decisions, investors may rely on their own examinations of the

parties and risks involved. Information contained in this reportis obtained from the sources believed to be accurate and

reliable. Because of the possibility of human or mechanical error as well as other factors such information provided 'as is"

withoutwarranty

of

any

kind

and

Eurasia

Capital,

in

particular,

make

no

representation

or

warranty,

express

or

implied,

as

to

accuracy, timeliness, completeness, merchantability or fitness forany particular purpose of any such information. Underno

circumstances, Eurasia Capital has any liability to any person or entity (ies) for (a) any loss or damage in whole or in part

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Capital is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such

information.


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Shockwaves the recent commodities slump sent through the Mongolian economy are yet another

exampleofboomandbustcycledangers.Thisreporttakesaquickglanceonforeign investmentsand

recenteconomicdevelopmentsinMongolia.Thepapernotesthatdespitecurrenteconomicdifficulties,

Mongolia has immense economic potential and offers unique opportunities to investors. Unlocking

theseopportunitiesisachallengefacedbytheGovernmentaswellasbusinessinMongolia.


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Contents

1. ECONOMICDEVELOPMENTANDROLEOFFOREIGNINVESTMENTSINMONGOLIA......................................6

2. PROCYCLICALECONOMY...........................................................................................................................9

2.1. WHATWENTWRONG?...................................................................................................................................9

2.2.

RESPONDINGTOCRISIS.................................................................................................................................

11

2.3. BEYONDBOOMANDBUST:MANAGINGCOMMODITYPRICEVOLATILITY...................................................................12

3. MININGANDINFRASTRUCTURE: VIRTUOUSORVICIOUSCIRCLE...............................................................12

3.1. OVERVIEW.................................................................................................................................................12

3.2. INFRASTRUCTURE BOTTLENECK........................................................................................................................ 13

3.3. SHORTAGEINFINANCING...............................................................................................................................13

3.4. GROWINGTOGETHERORFAILINGAPART...........................................................................................................14

4. SMALLCAPSLARGESTRIDES:TINYMARKETWITHSTRONGUPSIDEPOTENTIAL.....................................15

4.1. CAPITALMARKETSOVERVIEW......................................................................................................................... 15

4.2. EQUITIESMARKETPERFORMANCE...................................................................................................................16

5. OPPORTUNITIESINMONGOLIANECONOMY............................................................................................18

5.1. PATIENCEPAYSOFF?....................................................................................................................................18

5.2. OPPORTUNITIESINMONGOLIA.......................................................................................................................19

5.3. GAININGACCESS..........................................................................................................................................20

6. CONCLUSION...........................................................................................................................................21

CONTACTS......................................................................................................ERROR!BOOKMARKNOTDEFINED.


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7/22

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8/22

Mongoliasminingsector increasing itsshareofeconomyevenfurther.The investments inminingwill

acceleratewiththedevelopmentofmajorminingdeposits.Thus,Mongoliaisfacingissuesofmanaging

pricevolatilityrisksanddiversifyingeconomy.Theissues,recentcrisisprovedtobeofvitalimportance

forthedevelopmentofMongolia.

For developing countries the significance of foreign investment, especially FDI, goes beyond capital

formation.Foreigninvestmentmaypromoteeconomicdevelopmentbyhelpingtoimproveproductivity

growth, expand trade and open new markets. FDI boosts government tax and royalties revenues.

Expandingforeign

trade

brings

in

export

revenues.

Investments

going

into

production

facilities

transfer

production technology and knowhow. Foreign investment transfers and encourages development of

skills,innovativecapacity,organizationalandmanagerialprocesses.Inotherwords,foreigninvestments

notonlybringinhardwareintheformofequipmentandmachinery,butalsoslowlybuildupskillsand

humancapacityofahostcountry.Additionally,FDIsasarulecreateanewchainofsupplies,increasing

localsuppliersstandardsandgoodsquality.Penetrationof foreigncompanies into localmarkets,also

generatescompetition. Localcompaniesmusteitherimproveor looseout.Alltheabove,inthesound

macroeconomic and political environment can become a foundation for a longterm sustainable

development.

Assessment of foreign investment influence on

the development of Mongolia, requires

considerationofthreebasiccommonlyaccepted

benefits

productivity

change,

trade

pattern

and

technologicalimprovement.

Mongolianlabourproductivityhasgrown35%in

20002008.Labourproductivityinmanufacturing

sectorgrewstaggering153%inthesameperiod.

Thegrowth wasparticularlyimpressivein2005

2008 registering a 65.4% increase. These

astonishingratesofgrowthwerepossibledueto

aninitiallowstartingpoint.Butonlyinvestments

to manufacturing, technological and process

improvement can explain such a growth. Trade

data

reveals

that

between

2005

and

2008imports of machinery and transport equipment

increased185%,whilsttheshareintotalimportsremainedsteadyat30%.Increasingproductivitydueto

technological,skillsandorganizational improvementarethecommonbenefitsassociatedwithforeign

investments.

Miningsector,asaprimaryrecipientofforeignFDI,providesanexampleofforeigninvestmenteffect.In

openpit mining a stripping ratio refers to the amount of waste rock removed to recover ore. The

average strip ratio for open pit coal

mining is4:1,thatmeanstorecoverone

tonne of coal, a miner removes four

tonnesofwasterock.Inotherwords,the

higher the ratio is, the more expensive

the

mine

operations

are.

The

largest

MongolianminingcompanyBaganuurJSC

has a high stripping ratio of about 8:1,

the second largest mining company

Shivee Ovoo JSC mines at 4:1 ratio and

Shariin Gol JSC has an economically

prohibitive strip ratio of 10:1. That

compares unfavourably with

internationally listedSouthGobiEnergyResourcesstrippingratioof2:1.Thoughthedifference inthe

age of their mines is important, but of more importance is investment. The mining sector price

regulation has lead the Mongolian mining companies to be chronically underinvested and

Changeinlabourproductivity(manufacturing sector)

Sources:NationalStatisticalOfficeofMongoliaAisanProductivityOrganisation,EurasiaCapitalestimates

EstimatedincomemultipliereffectsinSouthAmericanMines

Mines Investment

US$mn

Metalproduced Multiplier

IntiRaymi,Bolivia 200 Gold&Silver 2.79

Yanacocha,Peru 492 Gold 2.53

Antamina,Peru 2,296 Copper&Zinc 1.42

Escondida,Chile 2,300 Copper 5.7

Candelaria,Chile 902 Copper 1.76

Source:WorldBank Mongolia.Miningsectorsourcesofgrowthstudy,2007

0

100

200

300

400

500

600700

800

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

US$mn

Productivity(Y2000=1) FDI(rightaxis)


9/22

technologically obsolete. In a competitive environment, the Mongolian companies would have taken

measurestoimproveitstechnologytoremainand/orexpandonthemarketplace.

Foreigninvestmentsanddevelopmentofminingdepositswillhaveconsiderablespillovereffecttothe

wider economy. Increased mining output and exports raise government fiscal revenues, providehard

foreigncurrencytoimproveitsbalanceofpayments.Increasedminingsectorincometricklesdownvia

suppliers,subcontractors,serviceproviders,employeesandotherstakeholdersmultiplyingtheincome

generatedintheexpansionoftheminingproduction.

2. PROCYCLICALECONOMY2.1. WHATWENTWRONG?In recent years Mongolia has experienced a sustained period of robust economic growth, fueled by

strongglobaldemand forcommoditiesandhighprices for itsmajorexportproducts.MongoliasGDP

growthrateaveraged9.1%during20042008.Expandingagricultureandservicessectorswerethemain

driversofgrowth.Agriculture,albeitrelativedecline,remainedan importantsectorsupporting40%of

populationandaccountingfor20%ofGDP.Thesectorgrewunderpinedbyfiscal incentivesforwheat

production and livestock increase.Services sector, roughly accounting for 40%ofGDP,wasdriven by

transport

and

trade.

Industry

and

services

developed

around

mining,

manufacturing,

transport

and

agriculturerelatedactivities.

GDPgrowth Contributiontogrowth(percentagepoints)

Source:IMF,NationalStatisticalOfficeofMongolia Source:IMF,NationalStatisticalOfficeofMongolia

During20042008,GDPpercapitagrewfromUS$639toUS$1,861 incurrentprices.High international

prices for Mongolian main exports contributed to a budget surplus in 20052007. Increasing

Government revenues created a strong wealth effect for the population. The Government doubled

publicsector

wages

over

aperiod

of

two

years.

Social

transfer

payments

were

extended

to

about

half

thepopulation.Inflationremained lowuntilpickingupto15.1% in2007andfurther increasing28% in

2008. Expansion in public investment and spending fuelled consumption and surge in construction.

Banking sector assets averaged44%YoY from January2006 to June2008. Growth in bankingservices

was supported by expansion in real estate services, wholesale and retail trade, and communication.

Externaltradewasexperiencingdramaticgrowth.

0

2

4

6

8

10

12

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008

%US$b

GDP,US$bn(atcurrentprices) RealGDPgrowth,%

0

2

4

6

8

10

12

2004 2005 2006 2007 2008

Agriculture Industry Services


10/22

Total foreign trade turnover grew from

US$1,890mn in 2004 to US$5,779mn in 2008. In

2000,exportofmineralscomprised35.2%oftotal

exports.In2004,theshareofmineralsinthetotal

exports increased to 40.7%. In 2008, mineral

exports amounted to 60.3% of total exports,

other main export items being prescious metals

and

jewelry

23.7%

of

total

exports

and

textiles

8.9%. Overall,mineralsandmetalsaccountedfor

84% of total exports in 2008. Copper alone

generated 40% of export revenue. Mineral

revenues accounted for more than onethird of

the government revenue, a 68% windfall tax on

saleofcopperandgoldbeingthemainsource.

AmidstallthesuccessoftheMongolianeconomy,

thereweremanysignsoffuturedifficulties.Governmentexpenditureswereuncontrollably increasing.

Most of the additional revenues were used to make previously targeted social transfers universal, to

increasesalariesandwages.In2007,universalsocialtransferswereintroducedatacostof3.5%ofGDP.

Publicsectorwageincreaseadded2.5%ofGDPtothewagebillin2008.Between2004and2008social

transfersgrew

from

7.8%

to

11.5%

of

GDP,

salaries

and

wages

from

6.7%

to

9.3%,

new

infrastructure

investmentgrewfrom3.6to9.1%ofGDP.Capitalexpendituresmorethantripledsince2005.In2005

2007budgetsurpluswasinmere23%despiteboomincommoditiesandfiscalsituationbecamehighly

sensitive to any reversal in commodity prices. Export structure revealed lack of diversification in

Mongolian economy and its apparent tilt to commodities exports, specifically, copper exports. Non

mining fiscalbalancedeterioratedstrongly, rising from1%ofGDP in2005 to13%ofGDP in 2007. In

2008,publicspendingtotaledto40.2%ofGDP,whereasrevenuewereat35.2%ofGDP.Drivenbylarge

socialtransferandconsumption,domesticdemandballooned.Since2000tradebalancewasindeficitin

allbutyear2006.Since2005,exportsasashareofGDPhavebeenflat,resultinginaworseningcurrent

accountdeficitevenbeforecommoditypricesstartedtofall.Bytheendof2008,thestatebudgetdeficit

widenedto5%ofGDP.

The sudden and catastrophic drop in the price of commodities brought economic downturn to

Mongolia.From

its

peak

in

mid

2008,

the

copper

price

shrank

60%

creating

severe

imbalances

in

both

the fiscal and external accounts. Current account quickly deteriorated to a deficit of 12.9% of GDP.

Mineral revenues fell by 10% of GDP. Mineral revenues share in the total government revenues fell

from 39% at the peak in 2007 to about 12.5% in 1H2009. In 1H2009, total foreign trade plunged

44.3%YoY, includingexports40.2%YoYand imports47.3%YoY.TheGovernmentrevenuesfell20%YoY,

as collection from the windfall profit tax declined 86%YoY, corporate income tax 51%YoY and VAT

19%YoY.AsashareofGDP,revenuesfellto2005levels,butspendingwasbyonethirdhigher.

InflationacceleratedinAugust2008hitting34%YoY.Privatecapitaloutflows,highinflationandshiftof

togrogdeposits into foreignexchangeaccountsstrainedthebankingsector,sendingbanks intostress

after a period of rapid credit expansion. The crisis sapped liquidity from the economy. The banks,

concerned about the health of other financial institutitons as well as borrowers, restricted lending.

Nonperforming

loans

more

than

doubled

from

3.4%

of

toal

loans

in

2007

to

7.2%

in

2008.

Theweakeningcurrentaccountputdownwardpressureon thetogrog.TheCentralBankofMongolia

attempts to support thenationalcurrency led to loss of almost US$500mn in hard currency reserves

betweenJuly2008andJanuary2009.Thepolicywaseventuallyineffective,asthetogrogdepreciatedby

37% against the US dollar. On the back of deteriorating fundamentals, falling revenues and declining

trade,theIMFestimateseconomicgrowthrateslowingsignificantlyto2.7%YoYin2009fromaprevious

rate of 8.9%YoY. In 1H2009, the economy contracted 1.3%YoY, whilst in the same period in previous

yearitgrew13.3%.

Essentially,theMongoliangovernmentpolicywasextremelyprocyclicalandbasedontheassumptions

ofhighandrelentlessly increasingmineralrevenues.Thegovernmentbudgetfor2009,adopted inthe

ExportsandImports

Source:NationalStatisticalOfficeofMongolia,IMF

0

500

1000

1500

2000

2500

3000

2003 2004 2005 2006 2007 2008 2009e

U

S$mn

TotalExports,US$mn TotalImports,US$mn


11/22

fall of 2008, envisaged 6.1% deficit, despite optimistically assuming an average copper price of

US6.700/tonne fortheyear.Thus, inevitablehard landing fortheMongolianeconomycamewith the

dropincommodityprices.

2.2. RESPONDINGTOCRISISDuringthecommodityboomyears, thegovernmentofMongoliadidnotdevelopanycomprehensive

andclearly

set

policy

to

manage

commodity

price

volatility.

Policy

makers

led

to

ever

growing

social

transfers, increasingconsumptionand lowsavings.Thus,Mongolia facedthemostseverecrisisofthe

last75yearsunpreparedwithhighspendings, lowsavings,deteriorating incomesandhigh inflation.

Yet again the crisis has demonstrated the risks that procyclical fiscal policies pose to a commodity

basedeconomy.

Underseverefiscaldifficulties,thegovernmentofMongoliarequestedassistancefromtheinternational

financialinstitutions(IFIs),China,Russia,Japanandothercountries.TheIMFapprovedaUS$229.2loan

tostabilizetheMongolianeconomy.ADB,WBandJapanpledgedatotalofUS$160mntofinancefiscal

gap. China and Russia pledged to provide multimillion softloans to Mongolia in support of financial

system,infrastructureandagriculture.

Currently,Mongoliaisundergoingtheprocessofrestoringhealthofgovernmentfinanceswiththehelp

ofIFIs

and

main

trading

partners.

Fiscal

stabilization

is

the

governments

primary

short

term

concern.

In

March2009,theparliamentofMongoliarevisedthe2009budget.Assumptionsforcopperpricewere

loweredtoUS$3,400/tonnefortheyear.FiscaldeficitprojectedtobeUS$204mnoverthetwoyearsis

managedwiththefinancialsupportofIFIsandforeigncountries.Recentrecoveryofcommoditypricesis

alsohelpingtostabilizetheMongolianeconomy.InJune,abudgetaryassumptionforcopperpricewas

increasedtoUS$3,995/tonne.Budgetdeficitisprojectedtobeunder6%in2009.Theprocessofmacro

economic stabilization and fiscal adjustment will continue in 2010 and beyond, requiring a further

reductionofthefiscaldeficitto4%ofGDP in2010.Thetermsof IMFsupportenvisagesthefollowing

keyelements(IMFPressReleaseNo.09/110,April01,2009):

Fiscal policy: restrain on expenditures and constrain the deficit to 6% of GDP in 2009. Thesavingswillcomefrompostponementofdomesticallyfinancedcapitalexpenditureplans,wage

andhiringfreeze,cutsinuntargetedsocialallowance

Monetary and foreign exchange policy: build up foreign currency reserves to prevent anysuddenswingsinexchangerates

Financial sector: strengthen banking system by improving the current framework for depositguaranteesandenhancingbanksupervision

Socialprotection:overhaulofuntargetedsystemofsocialtransferprogrammes.In response tocrisis, the governmentof Mongolia has developedamedium term economicpolicy to

boost economic growth and sustainabilty, control inflation, facilitate public and private investment.

Thus,thegovernmentplanstomaintainthemacroeconomicstability,keepfiscaldeficitunder6%,keep

currentaccountsustainableandwithsurplusinordertoincreaseforeignreservesandensureeconomic

growth of 810% in medium term. The government plans to use revenues from the mining sector to

diversify economy and encourage growth in other sectors and to facilitate future growth to develop

infrastructure

with

the

help

of

concessional

loans

and

private

sector.

To

avoid

previous

mistakes

ofoverspending,increasesinwages,pensionsandallowancesaretobeonlyinlinewiheconomicgrowth

and economic rate. Additionally with the help of donor organizations, legal framework restricting

budgetdeficitwillbedeveloped.

Thegovernmentpolicyoftaxingandspending,whichprevailedduringcommodityboomyearsisgivinga

way to progrowth policies of encouraging private sector and investments. Recent commitment to

abolish windfall profit tax from January 1, 2011 is a sign of changing policy. Instead of redistributing

wealth to population via social transfers, policies generating growth and creating incomegenerating

opportunitiesforthepopulationprovideslongtermstabilityforthegovernmentfinances.


12/22

2.3. BEYONDBOOMANDBUST:MANAGINGCOMMODITYPRICEVOLATILITYCommodity exports dependent countries are highly vulnerable to price fluctuations. The recent

experience shows that commodity price volatiliy hurt growth rate of countries like Mongolia. These

countriesare highly affectedby external price shocks. Common recommended approach for them to

avoid endless boom and bust cycles is to save up in good years to weather lean years. Overall, the

government needs to have enough political will and ability to thread along three fundamental

challenges related to bumper commodity revenues: fiscal sustainability, longterm investment and

capital

neutralisation.

Addressing

these

challenges

may

not

solve

deficiencies

of

inherently

cyclical

economicstructure,butsetsaframework,whichhelpstoweatheranysuddenvolatilityinprices.

Fiscal sustainability needs to be of utmost concern for the Mongolian government. That is to avoid

implementation of policies that lead to fiscalunsustainable commitments. At thepeak of commodity

boom, increasing social transfers and wages meant that these expenditures in Mongolia was

approaching40%of totalgovernmentexpenditures.With thedownturn inrevenues, thegovernment

facedtheneedtodrasticcutsinexpenditures.BeitnotforIFIsandsomeforeigncountriestoclosethe

fiscal gap, the economic situation would have deteriorated immensely. Prudent monetary and fiscal

policieswillhelp toavoid inefficientuseof funds.Thegovernmentneedstokeepnonmineral deficit

undercontrol.Otherwise,commodityrevenuesmayhurtlongtermsustainableeconomicgrowthofthe

country.

Commodity

boom

periods

are

ideal

for

planning

long

term

development

of

the

country.

Additional

revenuesavailableneedtobedirectedtolongterminfrastructuredevelopmentinvestments.Improving

infrastructure can bring immense long term benefits in terms of growth, competitiveness, poverty

reductionandattractingFDI.Developedinfrastructuregenerallycontributestovalueaddition,improves

productivity,createsnewjobsandfinallyenhancesqualityoflifeforentirepopulation.Socialtransfers

mayhaveimmediateeffectonconsumptionlevelandbemorepoliticallypopular.Investmentsinroads,

urbanandruralinfrastructure,education,health,socialdevelopment,whileavoidinginefficiency,bring

realfuturefruits.

However,thecountrymaynotbeabletoabsorballtherevenuegeneratedbythecommoditiesexports

withouthavingcertainnegativeconsequnces.Injectionoftheselargeexportrevenuesintotheeconomy

may leadtoappreciationofthenationalcurrencythatwillhurtcompetitivenessofothersectors.This

mayinhibitgrowthofothersectorsandmakethecountryevenmorevulnerableforfuturepriceshocks.

Therefore,someoftherevenuesmayberequiredtoneutralizeinanationalwealthfund.Thefundmay

accumulate revenues for lean times, while providing some specified amount for government

expendituresannually. Itmay invest in foreignassetstosterilize foreigncurrency inflowsandcounter

nationalcurrencyappreciation.Oritcouldmakeinvestmentsintodomesticeconomynurturingsectors

beyond commodities. The fund could be aimed to repay foreign debt. There are many successful

examplesofwealthfundsworldwide.Theyhavedifferentobjectives,sourcesofrevenueandcycles,but

allofthemhaveincommonstrictproceduresonusingfunds.

3. MININGANDINFRASTRUCTURE:VIRTUOUSORVICIOUSCIRCLE3.1. OVERVIEWImproving infrastructure is crucial for the development of the mining sector in Mongolia. Existing

capacityisoutdatedandinsufficienttofacilitatefurtherdynamicexpansionofthethissector.Growing

urbanization around the capital city Ulaanbaatar and major mining areas, increase in industrial

production,realestateconstruction and foreigntradehavecausedasignificantpressureonsupplyof

infrastructureservices. Infrastructure investmentsremainsmall.Subsequently, infrastructure isunable

tomeetincreasingdemand.Powersupplyexperiencesshortagesduetoincreaseddemandfromurban

areas and industrial facilities. Questions about supplying power to mining developments have no


13/22

definitive answer. Water supply for mining activities is yet another issue faced by th emining sector.

Underdevelopedroadandrailroadsystemisyetanotherinhibitingfactorinthedevelopmentofmining

sector.

3.2. INFRASTRUCTUREBOTTLENECKTodaysinfrastructurecapacitiesdonotallowMongoliatoprovidesufficientandqualityservicesneither

topublic

nor

to

business.

Only

67%

of

population

has

access

to

power

(electricity)

and

35%

to

water.

Roads are in poor condition, only 3.5% of road are paved and existing ones need capital repair. The

railway network capacity does not

matchtogrowingexportimportcargo

flows.Suchinfrastructurebottleneckis

expected to get further narrowed

starting from 2012 when the major

mines start production of minerals.

About 8,000jobs are estimated to be

createdinthemineareas,withmostoftheemployeescomingfromotherregions,thatwillleadtomore

burden on water, sanitation, electricity and heating supply in the southern regions. More road

construction is needed amid increasing number of motor cars and trucks. Transporting multimillion

tonnesof

the

minerals

to

be

mined

both

for

internal

use

and

exports

to

Russia

and

China,

will

further

increasepressureonlandtransportinfrastructure,inparticularrailwaytransport.

3.3. SHORTAGEINFINANCINGMongolianinfrastructuresectorrequiressubstantialinvestmentstorenewexistingcapacitiesandbuild

newones.MongoliasinfrastructureneedsUS$8bnoverthenextdecade,TradeandDevelopmentBank

CEO said at MongoliaAsia Investment Forum on March 31, 2009. According to the World Bank

estimates, the infrastructure for theOyuTolgoiandTavan Tolgoiprojectsalonewill requirean initial

investmentofmorethanUS$5bnoverthenextfiveyears.

According to the Ministry of Roads, Transportation, Urban

Developmentand

Construction

Mongolia

needs

US$10bn

for

railway network and industrial zone to centrally process

mineralsofstrategicdeposits.

The Prime Minister declared that Mongolia is seeking

US$25bn of overseas investments in mining in the next five

years to develop its resources. That is US$5 billion annually

forone largescaleminingprojecteveryyear.The signingof

OTdealvitalfortheabovedeclaredplans.Governmentsees

the projectasanamecardor template forotherprojects to

be developed by foreign investors. Regarding sources and

how investment will be raised in infrastructure, Mongolia is

considering the following: a) through product supply arrangement loans in exchange for supply of

mining products; b) through longterm supply contracts using the contract as collateral and raise

investmentfromfinancialmarkets.

The government alone does not have sufficient resources for infrastructure development. Although

international financial institutions such as the World Bank and the Asian Development Bank have

provided multimillion US$ investment loans in the sector, Mongolia will still need more investments

fromprivatesources,particularlyfromminingcompaniescomingtothesouthernmineareas.

Thegovernment,realizingtheimportanceofinfrastructuredevelopment,hasincreasedcapitalspending

in power, transport and communication over the last recent years. Investments in infrastructure

reachedarecordlevelin2007at19%oftotalexpenditures(10%ofGDP)from13%(4%ofGDP)in2001

Potentialmajorminerals inSouthernMongolia

Mineral Life

(years)

Production

(000tons/year)

Employment

Estimate

Startdate

Estimate

Coal 20200+ 69,000 4700 20032015

Copper* 2050 2,250 5000 2012

*Productionfigureisforcopperconcentrate(30%copper)

Source:TheWorldBank

Investment needsfor

Southern

Mongolia

US$mn

Electricity 2,711

Towndevelopment 1,454

Landtransport 800

Waterresources 262

TOTAL 5,177

Source:TheWorldBank


14/22

2006.Between20062008thecapitalspendingtripled.Thepublicinvestmentsamountedto10%ofGDP

in2008,includingthestatebudgetfinancesUS$290mn.

Over19952005,loans,grants,privateinvestmentandthegovernments investments in infrastructure

have averaged US$128mn per year, including grants 20.3% and loans 68.7%, with government and

private resources providing the rest. Assuming that infrastructure investment needs are estimated at

US$427mnperyear,existingfinancingsourcesleaveagapofUS$300mnperyear.

Compared with previous levels, annual road infrastructure

investmentalonewillequaleightfold inabsolutetermsover

the next decade. Total investments needed equal to an

annual investment of about 15% of GDP over the coming

years, still an unsustainable level without international

precedent. The mismatch between available financial

resourcesandproposed investmentssuggeststhatplanswill

havetobecombinedwithregulatoryandinstitutionalreform

and a greater role for private investments as well as with

effectiveuseofbudgetspending.

Mongolia is concerned that underdeveloped infrastructure

may hinder development of the mining sector and the economy as a whole locking the country into

vicious

cicrcle

of

crumbling

infrastructure

dragging

down

mining

sector,

which

in

its

turn

failing

togenerate enough revenues to finance infrastructure improvements. It is increasingly demanding

commitmentstodevelop infrastructurefromforeign investors.Launchingmajormines inthesouthern

regionwill leadtoincreaseddemandfor infrastructureservices.Besides,governmentplanstodevelop

valueaddedproductprocessing industriesfrom itsreserves, includingbuildingcoppersmelters,which

will require unprecendent investments into infrastructure as well as human capital. Given financing

constrains of Mongolia, situation offers strong investment opportunities. The nations authorities are

likely to partner international infrastructure companies in power, water and transport industries.

Mongoliaisconsideringusingpublicprivatepartnership(PPP)schemeininfrastructuredevelopment.

3.4. GROWINGTOGETHERORFAILINGAPARTUnder

developed

infrastructure

may

put

unnecessary

costs

on

mining

companies.

South

Gobi

Energy

Resources coal exports exemplifies viciouscircle ofundeveloped infrastructure putting extra costs on

miningsector.Thecompanysdepositislocated45kmtothenorthfromChina.Coalfromthecompany

depositsissuppliedtoChinabymiddlemenwithtruckfleet.Inthe1Q2009thecompanyhaddifficulties

in transporting thecoal as theborder crossing toChinawasonlyopen for limitedhours, limiting the

amountofcoalthatcouldbesuppliedtotheChinesemarket. InMarch,thebordercrossingresumed

normal operations allowing South Gobi to ship more than 115,00 tonnes of coal in the month. The

exportsgrewto231,000tonnesinJune.Thecompanyhaveplanstoincreaseitsexportsto3mntonnes

per year. Construction of railroad, though expensive, will allow to increase annual exports to 15mn

tonnes,whilstcuttingmiddlementrucktransportationcompanies.

Coalindustry

potential

But developing infrastructure could offer great investment opportunities. Coal industry has immense

potential in infrastructure and exporting something other than coal. Coal production could reach 55

milliontonnesperannum.

Given its limiteddomesticrequirements,Mongoliahasthepotentialtobecomeoneofthemajorcoal

exportersintheworld.ThereiseveryindicationthatdemandforMongoliascoalwillincrease.In2008,

Chinas massive demand for energy changed it from being net coal exporter to a net coal importer.

Indonesia, the worlds second largest coal exporter, is suggesting that it will not be able to meet

expecteddemandgrowthintheAsiaPacificregionasthedomesticconsumptionisincreasing.

Annualinvestment

gap

Source:TheWorldBank


15/22

Electricitygenerationaccountedfor25%ofall

Asian energy use in 1990, but, in 2006, the

International Energy Agency forecast that by

2030 it would rise to 44%. By 2030, Asia is

expected to reach 45% of global electricity

demand, compared with 20% in 1990. Coals

share in Asian electricity production has been

projected

by

the

IEA

to

rise

from

56%

in

2004

to 63% in 2030. In China, the countrys long

dependence on coal has grown as coalfired

plants have been commissioned on a weekly

basis. By end2007, Chinas 712,290 MW total

capacity included 556,400 MW of coalfired

plant which, during 2007, produced 85% of

nationalelectricityproduction.Moreover,muchofthatcapacitywasadded inrecentyears,with2007

alonewitnessingcoalfiredgenerationofadditional65,000MW.

It is clear that Mongolia going forward may play significant role in energy market of Asia. Ironically,

despite such huge energy potential, in recent years Mongolia is hard pressed to meet the increasing

energy demand domestically. Soon the lack of additional electricity capacity may hamper the

developmentof

many

new

mining

deposits

which

are

vital

for

the

economy

of

the

country.

According

to

the World Bank estimates, Southern Mongolia may generate about US$2bn from coking coal export,

aboutUS$1bnfromthermalcoalexportandaroundUS$2.3bnfromcopperexportsfromtheOyuTolgoy

andTsagaanSuvragadeposits.Therefore,thebottleneckinenergysectormaycosttheeconomyabout

US$5.3bnperannum.

Obviously, Mongolia needs huge investments in power generation to meet its growing domestic

demand. The country can not afford such huge investments without private sector participation. But

whethertheeconomicdevelopmentinfrastructureminingcircleisvirtuousorviciousisuptothepolicy

makerstodetermine.

4. SMALLCAPSLARGESTRIDES:TINYMARKETWITHSTRONGUPSIDEPOTENTIAL4.1. CAPITALMARKETSOVERVIEWMongolian Stock Exchange (MSE) was established to

implement the Initial Privatization Policy on January 18,

1991bytheGovernmentofMongolia.

During 19921995, 475 state owned entities were

successfully privatized offering 96.1 million shares worth

MNT8.2bn (US$7mn) through Mongolian Stock Exchange.

The Securities and Exchange Law and Corporate Law

adopted in mid90s paved theway for the developmentof

thesecondary

market.

Twenty

nine

brokerage

firms

initially

workedonMSE.

PotentialmajorcoalminesinShoughternMongolia

Name Life

(years)

Production

(000tons/year)

Estimated

startdate

TavanTolgoi 200+ 15000 2012

Uhaahudag 100 10000 2009

BaruunNaran 20 6000 2012

TsagaanTolgoi 20 2

000 2015

NariinSukhait 40 2000 2003

OvootTolgoi 50 5000 2008

Sumber 50 5000 2015

ShiveeOvoo 200+ 14000 2015

NumberofCompanieslistedatMSE

Source:MSE

475449

435430

418411

401403402

395392387384

374364

0 100 200 300 400 500

1995

1997

1999

2001

2003

2005

2007

2009


16/22

Withthestartofsecondarymarketactivity,sharesofover

MNT38.8bn (US$32.1mn) have been traded in 19962004.

The government bond and corporate bond trading was

introduced in 2000 and 2001 respectively. To date

government bonds worth of MNT117.9bn (US$97.5mn),

andcorporatebondsworthofMNT9.9bn(US$8.2mn)have

beentraded.

In2005

2008,

13

IPOs

were

made,

raising

US$47.7mn.

TOP

5 IPOs raised US$36.6mn (77% of the total). Currently, 44

FRC licensed brokerage houses are trading on MSE. The

leadingfivebrokeragehouseshaveaccountedfor98.5%ofYTDMSEtransaction.

NumberofBrokeragehousesatMSE

Source:MSE

TransactionatMSEbybrokerages(asof31.07.09)

Source:MSE

4.2. EQUITIESMARKETPERFORMANCEDespite recent recovery in

commoditiesprices,MSETop20Index

is still down 1.5% YtD. The index is

57.8% below from its peak in March

April 2008. Currently, the total

marketcap

of

MSE

Top

20

companies

amount to mere US$233.5mn. Total

marketcapofallMongolianequities is

down over 53% to US$355.8mn from

its peak of US$760mn in April 2008.

Whilstequitieselsewhere ralliedsince

March 09, 2009 and copper hit

US$6,500/tonne, Mongolian equities

remained anemic and continued their

slowslide.Lowmarket liquidityregisteredYtDtradingamounts lessthanUS$8mn invalue.Itcouldbe

explained by insufficient sentiment and appetite among investor for frontier market risks and

confidencesappingprolongednegotiationsonOyuTolgoiagreement.

Thatcontrastsstrikinglywiththeprecrisisyearsof investorhungerforrisk,whenMSETop20Index

grewonaverage34%perannumfrom1999to2006.BetweenJanuaryandSeptember2007,theindex

increasedalmostsevenfoldfrom2,030to13,676.Theindexretreatedto9,441byDecember2007and

climbedbackto13,074inlateMarch2008.Richmineralreservesandgrowingoutputsinminingsector

broughtforeigninvestmentsinMongoliaonthebackofglobalcommoditiesboom.Thatboostedtrading

activityonMSEandfueledsharpincreaseofitsindex.

Currently,Mongolianstocksarecheapcomparedtoothermarkets intermsofP/E.Mostofthe locally

listedcompaniesaresubstantiallyundervalued.TotalmarketcapofMSEamountstoamere7%ofGDP.

TheMongoliancapitalmarketpenetrationrateistoolowcomparedwithothercountries.

28 29 29

41 41 42 4234

25 25 24 24 26

41 44

0

10

20

30

40

50

IPOsinUS$mn

Source:MSE

Top20Index

Source:MSE

0.03

7.23

14.49

25.97

0

10

20

30

2005 2006 2007 2008

1.5%

2.5%

5.7%

12.3%

27.3%

41.5%

5% 5% 15% 25% 35% 45%

Others

WorldKey

Zerged

Gauli

ECMGL

BDSec

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09

Top20 Index

50

DMA


17/22

IndexPerformance(asof14.08.09)

Source:MSE,KASE,RTS,MSCIP/Eratio(asof31.07.09)

Source:EurasiaCapitalMongolia

MarketCapitalizationtoGDPratio

GDPforY2008Source:EurasiaCapitalMongolia

AlthoughtheMongolianequitiesmarketissmallandhaslimitedliquidity,ithasstronggrowthpotential.

RecentpositivenewsthattheParliamentisedgingtowardsapprovingOyuTolgoiinvestmentagreement

withIvanhoeMinesandRioTintohassentMSETop20indexup15%inAugust2009.Localcompanies

equitiesincreased

with

NIC

petroleum

company

up

47%,

Tavan

Tolgoi

coal

company

up

46%,

Spirt

Bal

Buramup41%inAugustalone.TherearealsotentativesignsofincreasingtradevolumesonMSE.

ThedevelopmentofmassiveOyuTolgoicopper

and Tavan Tolgoi coal projects are expected to

bring inoverUS$12bn indirect investment into

US$5.2bn Mongolian economy with vast spill

over effects. Signing the Oyu Tolgoi and Tavan

Tolgoi deals and adopting probusiness

regulatory changes will lead to unprecedented

growth in Mongolias stock market. This will

happenthroughprivatizationofthestateowned

companies by selling shares in the local stock

marketand

IPOs

in

the

local

stock

exchange

by

largeprivatebusinessgroupsandinternationally

listed companies with major operations in

Mongolia. Investors would be interested in

purchasing stakes in the companies being

privatized, especially in the resources sector.

Now the government has a plan to privatise

several stateowned companies in the coming years, including in the resources sector such as coal

minersBaganuurandShiveeOvoo.SeveralmajorbusinessgroupssuchasMCSGroup,NewcomGroup,

Bodi Group, Tavan Bogd Group and Monnis Group, which have attracted multimillion dollar

MarketcapbreakdownofTop20companiesbyindustry

(asof31.08.09)

Sources:MSE,EurasiaCapitalMongolia

50%70%

90%

110%

130%

150%

170%

190%

MSCIEMAsia KZKAKIndex

RTSI$Index MSETOPIndex

93.1

33.0 28.622.1 20.5 18.6 17.9 17.8 16.7 14.7

0

2040

60

80

100

707%

643%

400%

295%

132% 126%103%

42% 25% 7%

0%

100%

200%

300%

400%

500%

600%

700%

800%

39%

15%15%

11%

9%

5%3%3%

0%

BasicMaterials Consumergoods

Financials Telecommunications

Oil&Gas ConsumerServices

Utilities HealthCare


18/22

investmentsfromtheEBRDandIFC,andprivateequityfirms,arealsonextmajorcontendersforgoing

public.

5. OPPORTUNITIESINMONGOLIANECONOMY5.1. PATIENCEPAYSOFF?Duringlate90sMongoliasobjectivewastoattractforeigninvestmentintotheminingsectorasoneof

theenginesofbadlyneededeconomicdevelopment.A1997MineralsLawwasregardedasbeingoneof

themostinvestorfriendlyintheworldandmadeinfantMongolianminingsectorhighlycompetitiveat

aninternationallevel.In2002,royaltypaymentsforalltypesofmineralswerereducedto2.5%ofgross

sales and gold mining royalties were reduced from 12.5% to 7.5% for both hard rock and placer

deposits.Onthebackofattractivelegalenvironment,theMongolianeconomyhasattractedUS$2.7bn

since 2000 in FDI, majority going into the mining sector. Many international mining companies have

enteredMongolia,manyofthem internationally listed.Mongoliabecametopexplorationdestinations

intheworld.Thishashadpositiveeffectonothersectorsintheeconomy.

Ivanhoemines

has

discovered

arguably

the

worlds

largest

undeveloped

Oyu

Tolgoi

(OT)

copper

gold

deposit.Withmorethan36mntonnesofcopperand45mnozofgold,ithasattractedattentionofthe

whole Mongolia and international investors. Estimated capital cost of the project is US$5bn and

estimated export revenue is over US$2bn annually. But the company could not proceed with the

development of the mine due to failing to agree with the government terms of the concession and

changesinthelegalframeworkrelatedtoproject.OnMay15,2006theMongolianparliamentadopted

awindfallprofitstax(WPT)thatimposedtaxesofupto68%onminingprofitsinthecaseofgold,when

pricesexceedUS$500anounceand,inthecaseofcopper,whenpricesexceedUS$2,600atonne.

OnJuly8,2006,arevisedversionofthe1997lawwasadoptedbytheMongolianparliamentthatwas

much less encouraging to foreign investors. The revised law has modified the licensing requirements

and licensetransferprocedures. ItgivestheMongoliangovernmenttherighttoholdastakeofupto

34%instrategicmineraldepositsfoundbyprivatelyfundedexplorations(i.e.,depositsthatmayhavean

effecton

national

security,

the

economic

and

social

development

of

the

country,

or

that

produce

or

havethepotentialtoproducemorethan5%ofthecountrysGDPinanygivenyear).Therevisedlawalso

increased royalty rates from 2.5% to 5.0%. These actions caused high uncertainty with regards to

development of mining sector and much disappointment among foreign investors. The parliament

furthermore initiated debate on whether or not to change the 2006 Minerals Law, to allow the

governmenttoincreaseitsstakeinstrategicdepositsto51%.

ForsixyearsIvanhoeMinesnegotiatedwiththegovernmentan investmentagreementtodevelopthe

OTdeposit.ThecompanyattractedRioTintoasastrategicpartner.Thesesixyearsincludedatopofthe

miningcycle,whencommoditypricesreachedalltimehigh,withcopperreaching8900/tonne in2008.

Thiswasthetimewheninternationalinvestorswerewillingandfinanciallycapabletofinancesuchlarge

projectsasOyuTolgoi.

Andyet

it

took

commodity

cycle

downside

to

be

optimistic

about

the

project.

Mongolia

is

on

the

verge

ofsigningOyuTolgoi investmentagreementwith IvanhoeMinesandRioTinto.Thenewtermsofthe

agreement envisage abolition of 68% windfall profits tax from January 1, 2011. The Government

receives34%stake intheproject.Thecapitalthegovernmenthastocontributewillbenomorethan

US$817mn,downfromtheUS$1.7bnearlierproposedbytheinvestors.Investorswillnotbeexempted

frompayinganytax.TheinitialamountoftheinvestmentintheprojectshallnotexceedUS$4bn.

Theparliamenthasalready adoptednumerouschanges to existing laws inorder topave theway for

finalapprovaloftheagreement.Mongolianequitymarketsreactedtorecentdevelopmentsbyrallying

over15%inAugust2009.TheOyuTolgoiagreementisconsideredtobecomeablueprintforanyother

futurelargeminingagreements,setaframeworkforfuturenegotiations,thuseliminatingchallengesof


19/22

developinglargedepositsinMongolia.TavanTolgoi,amassivecockingcoaldepositandsomeothersare

expectedtofollow.

5.2. OPPORTUNITIESINMONGOLIAMongolia offers immense

opportunitiesbeyond OyuTolgoi. It

is

a

resource

rich

country

next

to

China, generating strong demand

for commodities. Beyond Oyu

Tolgoi, Mongolia is blessed with

numerous other large and medium

deposits.

Other deposits and already

operating mines also provide great

opportunities for investors. For

exampleHongKong listedMongolia

Energy Corporation is in the

development

stage

of

the

Hushuut

coal mine in Western Mongolia.

Sough Gobi Energy Resources

already started production from its

Ovoot tolgoi coal mine in Southern

Mongolia. Mongolian Stock

Exchange listed Baganuur, Shivee

OvooandAduunchuluuncoalmines,

which supply coal to existing

Thermal Power Plants, also provide

opportunities for the investors

eyeing for Mongolias mineral

resources as the state is preparing to

privatizenumberofsuchminesincoming

years. Mongolian Stock Exchange (MSE)

Top20 Index has fallen more than 60%

fromitspeaklastyear.Asglobalequities

markets already bounced back

substantially from their bottoms

Mongolian market lags behind, thus

providing opportunity for investors to

invest in undervalued companies listed

onMSE.

Apart from mining sector, foreign and

domestic

investments

increased

inconstruction, transport and food and

beveragesectors.

As economic growth picked up in

Mongoliasodid theconstruction sector.

Almosthalfoftheentirepopulation lives

in Ulaanbaatar city and the need for housing is huge. The residential market of Mongolia (mainly

Ulaanbaatar) has consistently grown over the last few years, with supply struggling tomeet the high

levelsofdemand.ResidentialpricesofUlaanbaatarhaverisenatanaverage30% ineachof lastthree

years. Over the period of 20022008 residential property prices have risen 4 times, although global

Largestrategicdeposits

Depositname Mineraltype Reserves

TavanTolgoi Coal 6.4bn/t

NariinSukhait Coal 125.5mn/t

Baganuur Browncoal 600mn/t

ShiveeOvoo Browncoal 646.2mn/t

Mardai Uranium 924.6thousand/t0.119%U3O8

Dornot Uranium 16467thousand/t0.175% U3O8

Gurvanbulag Uranium 10560thousand/t

Tumurtoi Ironore 229.3mn/t51.15%Fe

OyuTolgoi

Copper,

molybdenum

2300mn/t1.16%Cu0.35gram/tonneAu

TsagaanSuvargaCopper,

molybdenum

10.64mn/toxide0.42%Cu,0.011%Mo

240.1mn/tsulphat0.53%Cu,0.018%Mo

ErdenetCopper,

molybdenum1200mn/t0.51% Cu,0.012%Mo

Burenkhan Phosphoryte 192.24mn/t

Boroo Gold 24.523thousand/t1.6gram/tonneAu

Tumurtei Zinc,lead 7689.4thousand/t11.5%Zn

Asgat Silver 6402.6thousand/t 351.08gram/tonneAg

Source:LawsofMongolia

Sectors

growth

(at

current

prices)

Source:NationalStatisticalOfficeofMongolia

60%

25% 25% 22% 21% 20% 20%13% 12%

5%

0%

10%

20%

30%

40%

50%

60%

70%

CAGR,

%

(2000

2008)


20/22

financialcrisishassincedraggedpricesbackdown to January2007 levels.To take advantageofsuch

opportunitiesforeigninvestors,namelyKoreanandJapanese,investedintheconstructionsector.

Recent global economic downturn resulted in sharp drop in commodity prices such as copper, as a

resource based economy Mongolia was hit hard by decline incommodity prices. Consequently,

residentialpropertypriceshavecomedown30%onaverage.However,recentParliamentapprovalof

theamendmentlawtoabolish68%WindfallTaxLawanddevelopmentsaroundOyuTolgoiinvestment

agreementsignalturningpointand likelytofueleconomicgrowthastheprojectwillbringUS$4bn in

investments.

Therefore,

residential

property

prices

are

likely

to

bounce

back

and

further

increase

in

comingyears.

DynamicsofresidentialpricesinUlaanbaatar

(US$per1sqm)

Comparativeresidentialprices

(US$per1sqm)

Source:GlobalPropertyGuide,MongoliaProperties Source:GlobalPropertyGuide,Krishamagazine,Deltamax PropertyFrontiers,EurasiaCapitalMongoliaestimates

5.3. GAININGACCESSInvestorsmaygainaccesstoinvestmentopportunitiesinMongoliathrough

Foreign public equity hedge funds to local stocks and internationally traded companies withoperations

in

Mongolia

Foreignprivateequityfunds Mongoliabasedinvestmentbanksandbrokeragehousestolocalstocks Mongoliabased Investment banks advising on acquisition of Mongolian companies/assets by

foreigncompanies

Foreign hedge funds and investment banks with westernstyle operations have strong localknowledgethroughtheirlocalphysicalpresence.

Currentlythereareanumberofinternationalpublicandprivateequityfundmanagementfirms(suchas

EurasiaCapitalManagement,Firebird,OstInvest)havinginvestmentsinMongolia.Thesefundsthrough

theirhedgefundshaveinvestedmultimilliondollarsacrossmanysectors,includinginmining,property,

telecomandlocallylistedstocks.

Even

global

large

hedge

funds

are

now

keen

to

explore

investment

opportunities

in

Mongolia

on

optimismthatmajorminingprojectswillgoaheadandthespureconomy.(Forexample:MarkMobius

of Templeton Asset Management Ltd., which oversees about US$20bn of emerging market assets,

visitedMongoliainAprilthisyearandexpressedinterestinpossibleinvestinginMongolialistedstocks.

According to Mobius,Templetonhasboughtsharesofcompanieswith interests inMongolia,suchas

Chinesegoldandcoalminers.)

AnotherbetterwayofgainingaccesstotheMongolian localstocks isthrough local investmentbanks.

On the back of previous mining boom followed by stock market rocketing in Mongolia some new

westernstyle investment banks, advisors, research and brokerage houses emerged who are able to

provide quality services to local and foreign investors eyeing investment opportunities in Mongolia.

250

330400

450

590

800

1000

750

0

200

400

600

800

1000

1200

2002 2003 2004 2005 2006 2007 2008 2009

Mar

5000

2000 18001250

750 700 570

0

1000

2000

3000

4000

5000

6000


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These investment banks may also advise on mergers and acquisitions of local and international

companieswithassetsinMongoliabyinternationalstrategiccompanies/investors.

Mongolias stock market, although small now, has strong upside potential. Multibillion dollar

investments in major mining deals and infrastructure around them will surely boost the economy,

increaseprofitabilityof localcompaniesandstockmarketsaswell.Othertriggersforthestockmarket

areprivatizationofthestateownedcompaniesbysellingshares inthe localstockmarketand IPOs in

the local stock exchange by large private business groups and internationally listed companies with

majoroperations

in

Mongolia.

Another way of getting access to Mongolian economy is through participation in the privatization of

stateownedenterprises.Mongoliahighlyencouragesprivatesectorparticipationandinvestment,both

domesticandforeign.Forthisreason,theGovernmentofMongoliasoverallpolicygoalistoaccelerate

theprivatizationprocessandincreaseprivatesectorparticipationintheeconomy.

Sincethestartoftheeconomicreforms,theGovernmentofMongoliahasimplementedafarreaching

privatizationprogram.Startingfromalmostnothingin1990,theGDPcontributionoftheprivatesector

isnowmorethan80%.Since1996almost1,000enterpriseshavebeenprivatized,andtoday90%ofall

enterprisesareprivatelyowned.

Recently privatized enterprises include financialcompanies such as the Trade andDevelopment Bank

(US$ 12.2mn); the Agricultural Bank (US$ 6.8mn); and Mongol Daatgal, national insurance company

(US$5.8mn).

The

agri

food

sector

has

also

seen

many

formerly

state

owned

companies

go

private:

Max

Impex,largestmeatprocessingandtradingcompanywasprivatizedforUS$1.9mn,andAPUJSC the

largestspiritandbeveragemanufacturingcompany wasprivatizedforUS$4.5mn.

The enterprises soon to be privatized include largecompanies like Mongolia Telecom Company (55%

stateowned),DarkhanMakhExpo(21%stateowned),Mongolrostsvetmet(51%stateowned),MIAT

Company, Baganuur coal mine, Shivee Ovoo coal mine, Tavan Tolgoi coal mine, Mongolian Stock

Exchange and Mongol Kino Unit. Petroleum stations, airports, and service department of MIAT will

alsobeprivatized.

6. CONCLUSIONRecentrecoveryincommoditypricesmeansthatMongoliaisreturningoninternationalinvestorsfocus.

NearingapprovaloftheOyuTolgoidealhasalreadysentlocalequitymarketsupwards.Mongoliaoffers

opportunities for both FDI and portfolio investments. Policy shift in the government from tax and

spend approach to create opportunities is an encouraging sign for investors. The government

commitmenttoabolishwindfallprofitstaxbyJanuary1,2009reinforcestheoptimismaboutupturnin

Mongolia.Overall,Mongoliasregulatorystructureisconducivetoforeigninvestments.Althoughsocial

and physical infrastructure deficiencies impose added costs, but they are not prohibitive to foreign

investments,especiallyconsideringupturnpotentialMongoliasmineralwealthoffers.


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7. CONTACTS

AlisherAliDjumanov CEO [email protected]

OyunboldGombo ExecutiveDirector,EurasiaCapitalMongolia

[email protected]

InvestmentBanking

MaratUtegenov Director [email protected]

BekzodKasimov Associate [email protected]

TurbatMunkhsure Analyst [email protected]

Research

SardorKoshnazarov HeadofResearch,Oil&Gas [email protected]

DosbergenMusaev Analyst,Strategy [email protected]

UlugbekAzamov Infrastructure,Property [email protected]

AkmalAminov Analyst,Metals&Mining [email protected]

BatbayarBatErdene Analyst,Metals&Mining [email protected]

RentsendorjYondon Analyst,MongoliaEquities [email protected]

Zultsetseg

Chuluunbat

Analyst,

Mongolia

[email protected] Analyst,Kazakhstan [email protected]

SalesandTrading

ZhyldyzSadiralieva Associate [email protected]

BolorUlziisaikhan Broker [email protected]

EnkhbayarDavaatseren Trader [email protected]

Addresses:HONGKONG

33/FOneInternationalFinanceCentre

1HarbourViewStreet,Central,

HongKong

Tel.:+85228248716

Fax:+852

2166

8999

CHINA

11th

Floor,NorthTower,BeijingKerryCentre

No.1 Guang Hua Road, Chao Yang District,

Beijing100020,

Tel.:+86(0)1065997912

Fax:+86

(0)

10

6599

9100

MONGOLIA

Suite71,7th

Floor,GrandOfficeCenter

JamiyangunStreet12,1stKhoroo,

Ulaanbaatar

Tel:+97670130078

Fax:+976

7013

0078

UZBEKISTAN

11A,AlmazarStreer

Tashkent100003

Tel:+998711403538

Fax:+998711403533

RUSSIA

MoscowEnbankmentTower

BlockC,18Krasnopresnenskaya

Naberezhnaya

Moscow123317

Tel:+74959677676

Fax:+74959677600

KAZAKHSTAN

NurlyTauBusinessCenter

Building2B,office505,5th

Floor

13AlFarabiAvenue

Almaty,050059

Tel:+7273111080

COMPANYDESCRIPTION

EURASIA

CAPITAL

GROUP

EurasiaCapitalGroup(ECG)isaSingaporebasedinvestmentgroupwithprimarilyfocusonCentralAsiaandEurasiaregion.ECGhastwomain

businesses:EurasiaCapital,aninvestmentbankandEurasiaCapitalManagement, afundmanagementfirm.EurasiaCapitalManagement(ECM)

isfocusedoninvestinginemergingmarketsinEurasiaincludingRussia,China,CentralAsiaandMongolia.WithoverUS$100mninassetsunder

management and advisory mandates, ECM invests across various industries (oil and gas, mining, banking, telecom, energy/infrastructure,

consumergoods,agribusiness)andassetclasses(publicsecurities,privateequityandproperty)throughafamilyoffundsaswellasmanaged

accounts.

MGL Challenges and Opportunities

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