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ResCap
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Mongolia 101
Initiating country coverage on one of the
last remaining mining frontiers

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ResCap Mongolia 101 One of the Last

Remaining Mining Frontiers
Mongolia - One of the Key Global Economic and Mining Stories of 2011
Nestled between two political giants - China and Russia, Mongolia is a vastly
undeveloped resource rich country on the brink of an economic transformation.
Thanks to positive recent political and economic developments, Mongolia is set
for spectacular growth which is becoming noticed globally. And backed by its
resource rich landscape of world class deposits, Mongolia has been coined the
Saudi Arabia of Coal with strong parallels to previous natural resource booms
around the world.
The Mongol Rally Has Literally Just Begun
A rally to attract foreign investment, re-develop the stock exchange, re-urbanize
much of the population into sustainable housing and reignite a process to unlock
much of the countrys wealth in state owned mineral assets, has brought many
foreigners rallying into Ulaanbaatar. The potential for discovery of more world
class assets such as Oyu Tolgoi has unlocked a wave of financiers and geologists
flooding into Mongolia. But quite simply the fascination of the unknown in a
country not very well understood but linked with enormous potential has
naturally played into human nature and curiosity root to many visitors arriving
in Ulaanbaatar, financiers and tourists alike.
Patriotism and History Underpinning Development
Modern humans first arrived in Mongolia over 40,000 years ago and battled
through waves of liberation, bloodless democratic revolution and one of the
harshest climates on earth, now prospering through a young but developing freemarket economy. Mongolia is a nation proud to have partners but also very
proud to remain unique and independent and central to success in Mongolia is
prospering through strong, local partnerships.
ResCap Mongolia 101 Country Guide
2011 will be a fascinating year and a potential turning point for Mongolia. As
investors continue to ask the questions of how, what, where and when in
Mongolia, ResCap has developed a user guide to the country. This ResCap
Mongolia 101 is an account of Mongolia in a detailed handbook as part of our
initiation of coverage on one of the last remaining mining frontiers.

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Abstract

Abstract
Mongolia's national identity has been dominated by the talismanic figure of
Chinggis Khan. This legendary warrior-nomad conquered vast tracts of Central
Asia in the 13th century to found the Mongol Empire, which remains the largest
contiguous empire to have existed in the history of the world. He remains the
subject of great national pride, and understanding the history, the culture, the
laws, politics and the economy can not only help investors understand the nature
of these proud, nomadic people and Mongolian society, but also help them better
judge where to put capital to work in this large, resource-rich country.

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Executive Summary

1
1.1

Executive Summary
History

Chinggis Khan founded the Mongol Empire in 1206.

By the end of the XVII century, most of Mongolia had fallen under the rule of
the Qing Dynasty.

With the demise of the Qing Dynasty in 1911, Mongolia declared
independence, but had to struggle until 1921 to firmly establish de facto
independence from China.

Mongolia came under strong Soviet influence in 1921. The Mongolian
People's Republic was declared in 1924.

After the collapse of the Soviet Union, Mongolia saw its own peaceful
Democratic Revolution in early 1990.

1.2

Government

Mongolia follows a parliamentary type of governance.

The highest executive power is the Prime Minister.

The President of Mongolia has limited powers but acts as the Head of State
and Commander-in-Chief of Mongolias army.

The biggest political parties are the Mongolian People's Party (MPP), formerly
the Mongolian People's Revolutionary Party (MPRP), and the Democratic
Party (DP).

Since the Democratic Revolution, there has been continuous replacement of
governments.

The current Prime Minister is Sukhbaataryn Batbold and the current President
is Tsakhiagyn Elbegdorj.

In 2008 a coalition government was formed between the MPP and DP, which
facilitated the greatest advancements in the economy.

The State Great Khural or the Parliament is the legislative authority of
Mongolia and consists of a single chamber with 76 seats, led by the house
Speaker.

1.3

Foreign Relations

In developing its relations with other countries, Mongolia is guided by

universally recognized principles and norms of international law as defined in
the UN charter.

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Executive Summary

Mongolia has bilateral relations with 140 and diplomatic relations with 149
countries.

Mongolia almost certainly has the strongest relationship with Russia. Russia
helped Mongolia to ward off the Chinese invasion. In December 2010,
Mongolia and Russia signed an agreement to develop the Dornod uranium
deposit. Russia holds 190 reports on Mongolias 6 uranium fields, while
Mongolia only has access to 34.

As the Soviet Union had been Mongolias main ally and the most influential
neighbouring power up until 1990, foreign relations between the PRC and
Mongolia used to be predominantly determined by the PRC and USSR
relations.

With adoption of democracy and transition to a market economy, Mongolias
relationships with China began to improve. Currently the PRC is the largest
trading partner of Mongolia. Mongolia will soon have the capacity to supply
25-40 mtpa of coal to the PRC.

The Peoples Republic of Mongolia established diplomatic relations with Japan
in February 1972. The ties were strengthened after the Democratic
Revolution in Mongolia.

Japan has historically been the largest aid benefactor to Mongolia, until the
US had approved a Millennium Challenge Compact aid worth $285 million
in October 2007.

96% of Japans rare-earth metals are imported from China and the latter
restricted their export quotas by 72% and 35% in H2 2010 and Q1 2011
respectively. Japanese geologists and scientists launched exploration of rareearth elements in Mongolia.

The Peoples Republic of Mongolia established diplomatic relations with
North Korea in October 1948. Mongolia is one of the few countries in the
world that maintain warm relations with the Democratic People's Republic of
Korea (DPRK).

Mongolia endeavours to maintain close relationships with European
countries. In 1991, Mongolia signed an economic cooperation agreement
with the UK, and investment promotion and protection agreements with
France and Germany.

Canada and Mongolia established bilateral ties in November 1973. Canadian
FDI thus far has been mainly flowing to the mineral resource sector of
Mongolia. Negotiations are ongoing on the signing of a foreign investment
promotion and protection agreement (FIPA).

The United States agency for International Development (USAID) has
continuously been one of the key aid donors to Mongolia. In October 2007,
the Mongolian government signed a Compact agreement with the Millennium
Challenge Corporation (MCC) for the receipt of a grant worth $285 million.

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Executive Summary
1.4

Geography and Climate

th

Mongolia is ranked 19 in the world by country size after Iran. It covers 1.56
million square km.

The climate is generally dry and the temperature varies significantly across
the year, making the winters extremely cold and summers very warm.

1.5

Administrative Regions

Mongolia is divided into 21 aimags. Each aimag is subdivided into a number of

soums.

1.6

Economy

Economic activity in Mongolia has historically been focused on agriculture and

herding, but recent discoveries of mineral deposits have attracted large levels
of foreign direct investment (FDI) into the mining sector.

The global economic downturn in late 2008/early 2009 had a harsh impact on
Mongolia.

Mongolia is about to experience a period of remarkable growth. The IMF
forecasts the real GDP growth to be over 25% in three years time driven by
advancements in the mining sector. In 2010, the real GDP growth was 6.1%,
nominal growth was 25.3% (GDP reaching $6.6 billion), general government
budget showed a surplus of $611 million and the external trade deficit
amounted to $378.7 million (both exports and imports were up around 53%)

Inflation smoothed down to 13% in 2010 from the soaring 36% in August
2008.

FDI into the country has been growing 30% annually and is expected to reach
$11 billion in the next four years.

In 2010, the total industrial output increased 10% to approximately $1.5
billion 9at 2005 constant prices) compared to the previous year

In December 2010, the MNT/USD rate gained in value 15% since January
2010, when it was 1,446, which made it the second best-performing currency
against the dollar in 2010.

By the end of December 2010 Mongolias official international reserves has
exceeded $2.0 billion, growing 82.6% yoy.

1.7

Banking Sector

The Mongolian financial sector consists of 14 commercial banks, 188 NBFIs

and 207 S&C (saving and credit) Cooperatives.

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The minimum capital requirement for commercial banks ordered by the Bank
of Mongolia is MNT 8.0 billion ($6.4 million)

In Q3 2010 non-performing loans with arrears in principals as percentage of
total outstanding loans declined to 17% from 25% in November 2009.

General levels of NPLs were considerably high throughout 2010.

Real interest rates plummeted, resulting in negative returns, especially on
depository accounts, due to inflationary pressure.

Bank lending more concentrated, with around 50 largest borrowers
accounting for approximately 30% of total loans or $690 million.

MNT deposits continued to rise reaching $1.3 billion in mid 2010 (51%
increase yoy), despite falling real interest rates on deposits, owing to the
Deposit Guarantee Law and greater currency appreciation expectations.

Nominal interest rates on lending and borrowing remained high as banks
needed capital due to liquidity problems.

Business activities increased in 2010, nevertheless, coping with the
fundamental weaknesses of the banking sector in Mongolia remains a top
priority for the officials in charge.

Demand for credit will substantially increase in the coming five years as
greater necessity for capital will spread across all sectors in the economy.

Deposit Guarantee Law has been amended, the pledge is no longer unlimited

1.8

The Central Bank

The Bank of Mongolia (BoM) is the central bank of Mongolia. It reports to

Parliament and is independent from the Government. The BoMs aim is to
insure the Tugriks stability in terms of external stability of the exchange rate
and internal stability of the consumer price index.

1.9

Mongolian Taxation System

The general rate of tax in Mongolia is 10% income tax for individuals and
corporation earnings under MNT 3bn ($2.4m) and 25% on corporation
earnings over MNT 3bn. VAT is 10%.

1.10 Mongolian Stock Exchange

Established in 1991 as a result of the first round of privatisations of state
properties, the MSE is the second smallest bourse in the world by market cap,
yet the second best performing market in the world in 2010. In December
2010 the London Stock Exchange (LSE) has signed a contract agreement with

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Executive Summary
the Mongolian Stock Exchange (MSE). The LSE has been selected as the
international partner to assist in reforming the MSE.

1.11 Mining

The estimated value of total reserves in Mongolia is US$1.3 trillion.

Approximately 1,170 mineral deposits and 7,654 occurrences have been
identified to date.

Occurrences include over 60 types of minerals, including copper, gold, coal,
molybdenum, iron ore, uranium, tin, tungsten, silver, zinc and fluorspar.

15 deposits have been acknowledged by the government as strategically
important.

The mining sector accounts for 81% of exports, 32% of government revenue
and 30% of GDP.

Only around 27% of Mongolian land has been mapped to a scale of 1:50,000,
therefore, the countrys resources remain largely untapped.

There are numerous opportunities to invest in many large-scale investments,
e.g. Tavan Tolgoi (TT) coal deposit.

The government of Mongolia plans to attract up to US$25 billion in foreign
investment for the mining projects in 2011-2015.

Coal is now Mongolias number one export commodity.

Total coal resources of Mongolia have been estimated at 152 billion tonnes.

2010 coal exports reached $877 million in value (16.6 million tonnes).

By 2015 coal export to China is predicted to increase to 25-40 mtpa.

Tavan Tolgoi coal deposit, which contains 6.4 billion tonnes of coking (25%)
and thermal (75%) coal, is about to be privatised in Q1 2011.

Copper was the former major export commodity of Mongolia.

2010 copper exports reached $771 million in value (586k tonnes),
representing 26.4% of total exports.

Oyu Tolgoi deposit contains 81 billion pounds of copper (37 million tonnes)
and 46 million ounces of gold (1,431 tonnes).

Initial production at Oyu Tolgoi mine is expected in Q3 2012 and commercial
production in 2013.

Mongolia started producing iron ore in 2007.

2010 iron ore exports reached $251 million in value (3.5 million tonnes).

Iron ore exports now account for 8.7% of total exports.

Mongolia was officially recognised as an oil producing country in 2008.

Oil sector remains significantly under-explored.

2010 crude exports reached $155 million in value (2.0 million barrels).

Marubeni Corporation in partnership with Toyo Engineering Corporation are
about to construct a $600 million oil refinery in Mongolia.

Russia estimated the Mongolian uranium reserves at 30 thousand tonnes
while the Mongolian government identifies the resources at 62,000 tonnes.

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Mongolia has not started exporting uranium yet.

Measures on environmental protection and rehabilitation issues have been
strengthened in Mongolia recently.

The Law on Minerals has been amended and now includes progressively
increasing royalties on 23 types of minerals.

If a deposit is of strategic importance, the government in entitled to take up
34%-50% of the ownership rights.

The Foreign Investment Law of Mongolia gives similarly positive treatment to
both foreign and domestic investors with regard to control, use and removal
of their investments.

1.12 Agriculture

Agriculture in Mongolia is focused on animal husbandry, only 1% of
Mongolias arable land is cultivated with crops.

Livestock accounts for over 80% of agricultural production.

In 2010 the number of total livestock reached 33 million (human population
of Mongolia = 2.8 million). 11 million heads were lost due to 2010 dzud.

In 2010 harvest production reached 1.7 million tonnes.

Mongolia has recently become self-sufficient in grain and potatoes.

1.13 Real Estate

The capacity to build residential properties in Ulaanbaatar is enormous,
especially considering the increasing number of expats and foreign executives
arriving in Mongolia.

The population of Ulaanbaatar increased 30% to 1.1 million in the three years
from 2007.

More than half of Ulaanbaatar residents live in ger districts surrounding the
city.

The government is working on a project to replace the ger districts with
proper residential complexes.

In October 2010, the authorities announced that 0.07 Ha of land in ger
districts can be exchanged for two-room apartments.

The government plans to construct 100,000 apartments for lower-income
people in Ulaanbaatar and provincial centres for an estimated budget of $6.2
billion.

Construction and installation works implemented in Mongolia throughout
2010 grew 25.6% from 2009 and reached around $281 million in total.

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1.14 Infrastructure

Mongolias infrastructure, or lack of it, is the most serious inhibitor to
developing its resource wealth. However, there are many ambitious projects
and foreign investment commitments to improve the situation.

Mongolias main rail line is the Trans-Mongolian railway (2,215 km in length).

96.7% of roads in Mongolia are unpaved.

Chinggis Khaan Airport, located 15 km from Ulaanbaatar, is the one and only
international airport of Mongolia.

Due to dry weather conditions, water is a scarce resource in Mongolia.

Production levels of all sorts of mines heavily depend on water supply.

In late 2010, the Oyu Tolgoi team discovered an aquifer, capable of ensuring
40 years of water supply to the mine.

Most large-scale deposits in Mongolia are located in isolated areas, with very
limited infrastructure.

The 2010 Global Competitiveness Report ranked Mongolia last for the quality
of overall infrastructure out of 134 countries.

Mining investments are to total $13 billion in the coming years, of which $1.3
billion is to be spent on mining services.

Infrastructure development requires around $5.2 billion in investments
through 2011-2020.

The government is planning to build 2,600 km of paved East-West road and
5,600 km of new railroads.

The railway infrastructure plan has considered all major mineral deposits and
around $3.0 billion is to be spent on the first phase.

A $10 billion industrial complex in Sainshand is being built to increase the
value of mineral reserves of Mongolia.

The construction of Sainshand Park and the associated industrialisation could
increase Mongolian GDP to $41 billion over the next 11 years.

Mongolia Mining Corporation (MMC) has obtained all necessary permissions
to build a 240 km railway with 15mtpa capacity from its Ukhaa Khudag
deposit located in the Tavan Tolgoi region south to the Mongolian-Chinese
border.

MMC is also constructing a 245 km paved road with 18mtpa capacity from its
Ukhaa Khudag deposit south to the Mongolian-Chinese border, which will
come into operation in Q1 2011.

Mongolian authorities chose to build a new railroad in 2011 linking
Mongolias largest coal deposit Tavan Tolgoi with Mongolias domestic rail
network, rather than establishing a direct route straight to China from TT.

The Asian Development Bank (ADB) is funding a regional logistics
development project at Zamiin-Uud with $45 million in loans and grants,
which will create a new terminal with road and rail links.

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The Hong Kong market is expected to be opened up to Mongolia on a regular
basis via direct flights starting in April 2011. Currently, the direct access to
Ulaanbaatar from major global financial centres is unavailable.

Mongolias electricity deficit is expected to reach 500 MW by 2013.

1.15 Privatisation of State Properties

2011-2012 privatisation plans will allow international investors to gain access
not only to some of the world's largest unexploited mineral resources, but
also to the non-resource sector boom of the fastest growing economy in the
world.

State properties to be privatised in 2011-2012:
Baganuur coal deposit (1.3billion tonnes of lignite coal)
Erdenet Power Plant and TPP-3 (two out of the 5 power plants making up
the Central Electricity System, which covers the most populated area of
the country, including Ulaanbaatar)
MIAT or Mongolian Airlines (the largest carrier in the country which
operates flights to Beijing, Berlin, Moscow, Seoul, Tokyo and Irkutsk)
Mongolian Stock Exchange
Mongolian Telecom Company (a national telecommunications company
offering variety of services)
Strategic deposits (the government will bundle in groups the state owned
shares from the 15 strategic deposits by types of minerals and certain
percentages of those will be sold through domestic and international
stock exchanges)
... and more

In December 2010, the London Stock Exchange (LSE) signed a contract
agreement with the Mongolian Stock Exchange (MSE) for the latters
restructuring.

Tavan Tolgois Eastern Block is to be privatised to domestic investors in Q1
2011.

The tender for strategic investors for Tavan Tolgois Western Block has been
th
officially announced and closed on 17 January at 16:00.

The tender for contract miners for Tavan Tolgois Eastern Block has been
th
officially announced and closes on the 27 January 2011.

Chinas Shenhua Energy Co, Peabody Energy Corp from the US, a Russian
consortium led by Gazprom, a consortium of four Japanese trading houses,
including, Itochu Corp, Sumitomo Corp, Sojitz Corp and Marubeni Corp, a
consortium of 10 South Korean companies, including Poco and Korea Electric
Power Corp, Anglo-Australian mining companies Rio Tinto and BHP Billiton,
Brazils Vale, Indias International Coal Ventures Pvt, a joint venture of five
state-run companies and others have expressed their interest to participate in
Tavan Tolgoi bid.

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Executive Summary

In December 2010 an agreement was signed between the Mongolian and
Russian Prime Minsters specifying the business plan for the Dornod Uranium
JV.

Two existing Mongolian-Russian joint ventures, Erdenet and
MongolRosTsvetMet, may soon merge and market their stock.

1.16 Demographics

Mongolias population is 2.8 million people (59% below the age of 30, 27%
below the age of 14).

The unemployment rate in Mongolia has been lower than 4% since 2002.
During the peak of the economic crisis (2009) it reached 13% and now is
returning to its regular levels.

40% of Mongolias population live in Ulaanbaatar, 20% in other urban areas,
the remaining 40% in rural areas. 30% are herders.

85% of Mongolias population consist of ethnic Mongolians, out of which 90%
consist of Khalkha Mongols.

1.17 Languages

The official language in the country is Khalkha Mongolian. Many Mongolians
have a good grasp of Russian and English.

Other widely spoken languages are Chinese, Korean, Japanese, French,
Spanish and Italian.

1.18 Religion

50% of Mongolia's population follow the Tibetan Buddhism, 40% are listed as
having no religion, 6% are Shamanist, Baha'i and Christian, and 4% are
Muslims.

1.19 Equity Research

Stock information of top 10 performers on the MSE (+1 mining company) is
provided at the end of this report.

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Mongolia Key Statistics

Mongolia: Key Indicators
2003

2004

2005

2006

2007

2008

2009

2010
(f)

7.0

10.6

7.3

8.6

10.2

8.9

-1.6

8.5

Industrial production index

100.0

110.4

113.4

109.6

(% yoy change)

10.4

2.8

-3.3

Unemployment (%)

3.4

3.6

3.3

3.2

2.8

2.8

3.3

Consumer price index (% yoy change)

4.6

10.9

9.6

5.6

14.1

23.2

11.2

12.0

Government balance (% of GDP)

-3.7

-1.8

2.6

3.3

2.8

-5.0

-5.4

-2.2

-5.9

-5.8

-1.3

-7.3

-13.4

-15.1

-12.9

-11.2

3.1

1.4

0.1

1.0

0.5

0.0

3.7

19.3

-199.6

-99.2

-99.5

136.2

-52.4

-613.0

-195.0

-639.0

627.0

872.0

1066.0

1542.0

1889.0

2534.0

1875.0

2446.0

19.7

39.0

22.2

44.8

22.4

34.0

-26.0

30.4

14.7

94.8

27.7

12.1

39.9

40.4

826.9

971.3

1021.1

1485.6

2117.3

3147.0

2070.0

3085.0

21.6

17.5

16.0

25.4

42.5

70.8

-41.1

30.5

-102.4

24.1

29.7

221.6

264.8

-722.0

-411.0

-805.0

-7.1

1.3

1.3

7.0

6.7

-14.0

-9.8

-14.0

131.5

128.9

257.6

289.6

360.0

836.0

496.0

422.0

92.6

76.0

61.2

45.1

40.1

33.7

47.1

39.0

204.0

208.0

333.0

718.0

1001.0

658.0

1328.0

1599.0

2.4

2.0

2.6

4.3

3.8

3.0

4.3

3.0

157.3

25.8

18.8

-3.1

78.4

52.5

-7.6

47.1

Output, Employment and Prices

Real GDP (%yoy change)

Public Sector

Non-mining balance (% of GDP)

Public Sector Debt

Foreign Trade, BOP and External

Trade balance ($mn)
Export of goods ($mn)
(% yoy change)
Copper exports (% yoy change)
Imports of goods ($mn)
(% yoy change)
Current account balance ($mn)
(% of GDP)
Foreign direct investment ($mn)
External debt (% of GDP)

Foreign exchange reserves, gross ($mn)

In month of imports of g&s
Financial markets
Domestic credit (% yoy change)
Short-term interest rate (% per annum)

15.8

3.7

5.1

8.4

9.8

1168.0

1209.0

1221.0

1165.0

1170.0

1267.5

1442.8

94.2

93.9

99.6

102.8

104.8

124.4

102.4

-4.8

-0.4

6.1

3.2

1.9

18.7

-17.7

151.5

120.8

203.6

382.0

2048.0

1181.6

Nominal GDP (MNT bn)

1660.0

2152.0

2780.0

3715.0

4600.0

6020.0

6055.0

7911.0

Nominal GDP ($ mn)

1448.0

1814.0

2307.0

3156.0

3930.0

5258.0

4203.0

722.0

900.0

1214.0

1491.0

1921.0

1551.0

Exchange rate (MNT/USD)

Real effective exchange rate (2006=100)

(% yoy change)
Stock market index (2000=100)

Memo:

GDP per capita ($)

583.0
2

Mongolia Key Statistics

Notes: 1. Non-mining balance excludes revenues from corporate income tax and dividends from mining
companies, the Windfall Profit Tax and royalties. 2. On public and publicly guaranteed debt. 3. Yield of
14-day bills until 2006 and of 7-day bills for 2007. 4. Increase is appreciation. 5. Top-20 index, end of
year, index=100 in Dec 2000. Source: IMF and World Bank

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Contents
3

Contents

ABSTRACT 3
1
EXECUTIVE SUMMARY .......................................................... 4
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
1.12
1.13
1.14
1.15
1.16
1.17
1.18
1.19

2
3
4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8

5
5.1
5.2
5.3
5.4
5.5

6
6.1
6.1.1
6.2

HISTORY................................................................................................ 4
GOVERNMENT........................................................................................ 4
FOREIGN RELATIONS................................................................................ 4
GEOGRAPHY AND CLIMATE ....................................................................... 6
ADMINISTRATIVE REGIONS........................................................................ 6
ECONOMY ............................................................................................. 6
BANKING SECTOR.................................................................................... 6
THE CENTRAL BANK ................................................................................ 7
MONGOLIAN TAXATION SYSTEM ................................................................ 7
MONGOLIAN STOCK EXCHANGE................................................................. 7
MINING ................................................................................................ 8
AGRICULTURE ........................................................................................ 9
REAL ESTATE .......................................................................................... 9
INFRASTRUCTURE .................................................................................. 10
PRIVATISATION OF STATE PROPERTIES ....................................................... 11
DEMOGRAPHICS ................................................................................... 12
LANGUAGES ......................................................................................... 12
RELIGION ............................................................................................ 12
EQUITY RESEARCH................................................................................. 12

MONGOLIA KEY STATISTICS ................................................. 13

CONTENTS ...................................................................... 14
HISTORY OF MONGOLIA ..................................................... 18
PRE-HISTORY ....................................................................................... 18
EARLY HISTORY .................................................................................... 19
MONGOL EMPIRE ................................................................................. 19
POST-IMPERIAL PERIOD ......................................................................... 19
UNDER THE QING ................................................................................. 20
INDEPENDENCE..................................................................................... 20
MONGOLIAN PEOPLE'S REPUBLIC............................................................. 21
DEMOCRATIC REVOLUTION ..................................................................... 21

GOVERNMENT ................................................................. 22
POLITICAL SYSTEM AND RECENT HISTORY .................................................. 22
PRESIDENT........................................................................................... 23
THE STATE GREAT KHURAL ..................................................................... 23
MONGOLIA PEOPLES PARTY AND DEMOCRATIC PARTY ................................ 23
PRIME MINISTER AND THE CABINET .......................................................... 23

FOREIGN RELATIONS .......................................................... 24

AFRICA ............................................................................................... 24
EGYPT................................................................................................. 24
ASIA ................................................................................................... 25

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Contents
6.2.1
6.2.2
6.2.3
6.2.4
6.3
6.3.1
6.4
6.4.1
6.4.2

7
8
9
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.7.1
9.7.2
9.8
9.9
9.10

10
10.1
10.2
10.3
10.4
10.4.1
10.5
10.6
10.7
10.8
10.8.1
10.9
10.10

11
11.1
11.2
11.3
11.3.1
11.4

RUSSIA ............................................................................................... 25
PEOPLES REPUBLIC OF CHINA (PRC) ........................................................ 26
JAPAN................................................................................................. 27
NORTH KOREA ..................................................................................... 29
EUROPE .............................................................................................. 29
UNITED KINGDOM ................................................................................ 29
NORTH AMERICA .................................................................................. 30
CANADA.............................................................................................. 30
USA................................................................................................... 31

GEOGRAPHY AND CLIMATE .................................................. 33

ADMINISTRATIVE REGIONS .................................................. 34
ECONOMY....................................................................... 35
THE GLOBAL FINANCIAL CRISIS OF 2008/2009.......................................... 36
CURRENT STATE OF THE ECONOMY ........................................................... 36
GROSS DOMESTIC PRODUCT ................................................................... 38
MONEY SUPPLY .................................................................................... 39
BUDGET .............................................................................................. 40
INFLATION ........................................................................................... 42
TRADE ................................................................................................ 43
EXPORTS ............................................................................................. 44
IMPORTS ............................................................................................. 45
IMPLEMENTED POLICIES ......................................................................... 46
FOREIGN DIRECT INVESTMENT ................................................................. 47
CURRENCY ........................................................................................... 47

BANKING SECTOR ............................................................. 48

BACKGROUND ...................................................................................... 48
BANKING SECTOR PERFORMANCE DURING 2008/2009 FINANCIAL CRISIS ........ 49
STRENGTHENING OF THE FINANCIAL SYSTEM .............................................. 50
DEPOSITS AND LOANS ............................................................................ 51
NON-PERFORMING LOANS (NPLS) .......................................................... 53
BANKING INTEREST RATES ...................................................................... 53
BANK ASSET QUALITY ............................................................................ 55
BANKING SYSTEM CAPITALISATION ........................................................... 57
BANKING LAW OF MONGOLIA (2010) ...................................................... 57
SUMMARY OF THE AMMENDED BANKING LAW ........................................... 57
BANKING SECTOR 2010 SUMMARY .......................................................... 59
BANKING SECTOR PROSPECTS .................................................................. 59

THE CENTRAL BANK........................................................... 61

BANK OF MONGOLIA MONETARY POLICY .................................................. 61
BANK OF MONGOLIA POLICY RATE ........................................................... 61
CENTRAL BANKS NON-STANDING FACILITIES .............................................. 62
COLLATERALIZED LOAN ........................................................................... 62
OBJECTIVES OF MONETARY POLICY............................................................ 63

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Contents
11.5
11.5.1
11.5.2
11.6

12
12.1
12.1.1
12.2
12.2.1
12.2.2
12.2.3
12.3
12.3.1
12.3.2
12.4
12.4.1

13
13.1
13.2

14
14.1
14.2
14.3
14.4
14.4.1
14.5
14.5.1
14.6
14.7
14.8
14.9
14.9.1
14.9.2
14.9.3
14.9.4

15
15.1

16
17
17.1
17.2
17.3
17.4

BANK OF MONGOLIA STANDING FACILITIES ................................................ 63

OVERNIGHT LOAN ................................................................................. 63
REPO FINANCING .................................................................................. 63
CENTRAL BANK BOND RATE .................................................................... 64

MONGOLIAN TAXATION SYSTEM........................................... 65

GENERAL TAXATION .............................................................................. 65
TAXPAYERS .......................................................................................... 65
CORPORATE INCOME TAX ....................................................................... 65
TAXPAYERS .......................................................................................... 65
TAX RATE ............................................................................................ 66
TAX EXEMPTION.................................................................................... 66
PERSONAL INCOME TAX LAW OF MONGOLIA .............................................. 67
TAXPAYER............................................................................................ 67
TAX RATE AND AMOUNT ......................................................................... 67
VALUE ADDED TAX (VAT) ...................................................................... 68
SCOPE OF VAT ..................................................................................... 68

MONGOLIAN STOCK EXCHANGE ............................................ 69

OVERVIEW........................................................................................... 69
THE SECOND BEST PERFORMING MARKET IN THE WORLD ............................... 71

MINING ......................................................................... 73
MINING SECTOR ................................................................................... 73
EXPLORATION AND GEOLOGICAL MAPPING ................................................ 76
LICENSES ............................................................................................. 77
COAL .................................................................................................. 78
TAVAN TOLGOI ..................................................................................... 81
COPPER/GOLD ..................................................................................... 83
OYU TOLGOI (COPPER-GOLD, MONGOLIA)................................................. 84
IRON ORE ............................................................................................ 85
OIL .................................................................................................... 87
URANIUM............................................................................................ 89
MINERALS LAWS AND TAXES ................................................................... 90
STRATEGICALLY SIGNIFICANT DEPOSITS ..................................................... 90
OVERVIEW OF FOREIGN INVESTMENT........................................................ 93
FOREIGN INVESTMENT IN MINING ............................................................ 94
PROGRESSIVE ROYALTIES ON MINERALS ..................................................... 97

AGRICULTURE .................................................................. 99
DZUD ............................................................................................... 100

REAL ESTATE ................................................................. 101

INFRASTRUCTURE ............................................................ 106
RAILWAY ........................................................................................... 106
ROADS .............................................................................................. 107
AIRPORTS .......................................................................................... 107
WATER ............................................................................................. 107

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Contents
17.5
17.6
17.7
17.8

18
18.1
18.1.1
18.1.2
18.1.3
18.1.4

19
20
21
21.1

1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10

2
3

MINING BOOM AND INFRASTRUCTURE DEVELOPMENT ................................ 108

INDUSTRIAL PARK IN SAINSHAND ........................................................... 112
RECENT DEVELOPMENTS ....................................................................... 113
MINING BOOM AND AIR INDUSTRY ......................................................... 115

PRIVATISATION OF STATE PROPERTIES .................................. 117

2011-2012 PRIVATISATION STRATEGY ................................................... 117
NEAR TERM PRIVATISTAION TARGETS ...................................................... 117
DETAILED MAPS OF PLANNED PRIVATISATIONS .......................................... 120
STATE PROPERTY COMMITTE................................................................. 124
RECENT DEVELOPMENTS ....................................................................... 125

DEMOGRAPHICS ............................................................. 127

LANGUAGES .................................................................. 129
RELIGION ...................................................................... 130
TAVAN TOLGOI ................................................................................... 131

EQUITY RESEARCH........................................................... 131

BAGANUUR........................................................................................ 132
SHIVEE OVOO .................................................................................... 133
APU ................................................................................................ 134
MONGOLIA TELECOM .......................................................................... 135
SHARYN GOL...................................................................................... 136
GOBI ................................................................................................ 137
BDSEC.............................................................................................. 138
ADUUNCHULUUN ................................................................................ 139
MONGOLIA DEVELOPMENT RESOURCES .................................................. 140
MOGOIN GOL .................................................................................... 141

REFERENCES .................................................................. 143

CONTACTS .................................................................... 144

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History of Mongolia

CHINGGIS KHAN

History of Mongolia

Horse nomadism, Chinggis Kahn, Qing dynasty, Russian

liberation, communism, bloodless democratic revolution, free
market economy

1206: The Mongol Empire

1921: Independence
1945: International recognition
1924: Soviet influence, socialism
1990: Democratic revolution

The Mongol Empire was founded by Chinggis Khan in 1206. Following the collapse
of the Yuan Dynasty, the Mongols returned to previous behaviour of constant
internal conflict and raids on the Chinese borderlands. Mongolia came under the
influence of Tibetan Buddhism in the 16th and 17th centuries, but by the end of
the 17th century, most of Mongolia had fallen under the rule of the Qing Dynasty.
With the demise of the Qing Dynasty in 1911, Mongolia declared independence,
but had to struggle until 1921 to firmly establish de facto independence from
China, and only gained international recognition of it in 1945.
Afterwards, Mongolia came under strong Soviet influence; in 1924, the Mongolian
People's Republic was declared, and Mongolian politics began to follow the same
patterns as that of the Soviet Union at the time. After the breakdown of
communist regimes in Eastern Europe in late 1989, Mongolia saw its own peaceful
Democratic Revolution in early 1990, which led to a multi-party system, a new
constitution in 1992, and the on-going transition to a market economy.

4.1
Modern humans reached Mongolia
40,000 years ago

5500-3500 BC: horse-riding nomadism

became dominant lifestyle

Pre-History

Homo erectus inhabited Mongolia 800,000 years ago, whereas modern humans
reached Mongolia approximately 40,000 years ago during the Upper Paleolithic
period.
Neolithic agricultural settlements (c. 5500-3500 BC) preceded the introduction of
horse-riding nomadism, and became the dominant lifestyle during the Copper and
Bronze Age (3500-2500 BC). The wheeled vehicles found in burials have been
dated to before 2200 BC. Pastoral nomadism and metalworking became more and
more developed with the Okunev Culture (2nd millenium BC), Andronovo culture
(2300-1000 BC) and Karasuk culture (1500-300 BC), culminating with the Iron Age
Xiongnu Empire in 209 BC.
Tocharians (Yuezhi) and Scythians inhabited western Mongolia during the Bronze
Age. The mummy of a 30-40 year old, male Scythian warrior with blond hair is
believed to be 2,500 years old, and was found in the Altai, Mongolia. As horse
nomadism was introduced into Mongolia the political center of the Eurasian
Steppe shifted with it to Mongolia, where it remained until the 18th century CE.

2300-1000 BC: development of pastoral

nomadism and metalworking

Cultivation of crops continued since the Neolithic period, but has always remained
small-scale compared to pastoral nomadism, which was first introduced from the
West.

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History of Mongolia
4.2
The Modu Shanyu confederation forced
the Qin Dynasty to construct the Great
Wall of China

Previous monarchs:
209 BC-93 AD: Xiongnu
93-234: Mongolic Xianbei
330-555: Mongolic Rouran Khaganate
555-745: Gokturks
745-840: Uyghur Khaganate
907-1125: Mongolic Khitans
1125-1206: Khamag Mongol

Since pre-historic times, Mongolia has been inhabited by nomads who

occasionally formed great confederations that rose to prominence. The first of
these, the Xiongnu, were brought together to form a confederation by Modu
Shanyu in 209 BC. They soon emerged as the greatest threat to the Qin Dynasty,
forcing the latter to construct the Great Wall of China. During Marshal Meng
Tian's tenure it was guarded by up to 300,000 soldiers in order to defend against
the destructive Xiongnu raids.
The Xiongnu empire (209 BC-93 AD) was superseded by the Mongolic Xianbei
empire (93-234) which ruled over a larger area than present-day Mongolia. The
Mongolic Rouran Khaganate (330-555) ruled a massive empire before being
defeated by the Gokturks (555-745) whose empire was even larger. They were
followed by the Uyghur Khaganate (745-840) who were in turn defeated by the
Kyrgyz. During the Liao Dynasty (907-1125) the Mongolic Khitans ruled Mongolia
after which the Khamag Mongol (1125-1206) rose to prominence.

4.3
1206: Chinggis Khan assembled the
Mongol Empire
The Mongol Empire - the largest
contiguous land empire in the history of
the world:
- 33 million sq. km
- 100 million people
1368: Collapse of the Mongol Empire

Mongol Empire

During the chaos of the late 12th century, a chieftain named Temjin united the
Mongol tribes between the Altai Mountains and Manchuria. He took the title
Chinggis Khan In 1206, and waged a series of brutal and ferocious military
campaigns, sweeping through much of Asia, and forming the largest contiguous
land empire in the history of the world. Under his successors it stretched from
present-day Poland in the west to Korea in the east, and from Siberia in the north
to the Gulf of Oman and Vietnam in the south, covering 13 million square miles
(or 22% of the Earth's total land area) and included a population of over 100
million people.
Following the death of Chinggis Kahn, the empire was subdivided into four
kingdoms (Khanates), which eventually became semi-independent after
Mngke's death in 1259. One of the khanates, the "Great Khaanate", included the
Mongol homeland and China, and became the Yuan Dynasty under Chinggis
Khans Grandson, Kublai Khan. His capital was in present day Beijing, but after a
century the Yuan was superseded by the Ming Dynasty in 1368, with the Mongol
court fleeing north. As the Ming armies pursued the Mongols into their homeland,
they sacked the Mongol capital of Karakorum, among other cities, throwing
Mongolia back into anarchy and wiping out cultural progress made by the
Mongolians during their imperial period.

4.4
Following centuries: violent power
struggles between various fractions

Early History

Post-Imperial Period

The centuries that followed were marked by violent power struggles between
various factions and there were numerous Chinese invasions. The Oirads, under
Esen Tayisi, gained the upper hand in the early 15th century and raided China in
1449 in a conflict over Esen's right to pay tribute, and in the process captured the

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History of Mongolia
16 century: Mongolia reunited

Chinese Emperor. However, the Borjigids were recovered when Esen was
murdered in 1454.

1578: Second introduction of Tibetan

Buddhism

Batumongke Dayan Khan reunited the entire Mongols under the Chinggisids in the
early 16th century and in 1557, Altan Khan of the Tmed, Grandson of
Batumngke, founded Hohhot. His meeting with the Dalai Lama in 1578 sparked
the second introduction of Tibetan Buddhism to Mongolia. Abtai Khan converted
to buddhism in 1585 and founded the Erdene Zuu monastery.

th

4.5
Ligden Khan: the last Mongol Khan

1636: most Inner Mongolian tribes

submitted to Manchu

1691: Khalkha Mongol submitted to Qing

Empire

Until 1911: the Manchu maintained the

control of Mongolia

Ligden Khan was the last Mongol Khan (early 17th century). He alienated most of
the Mongol tribes and got into conflicts with the Manchu over the looting of
Chinese cities. He died on his way to Tibet in 1634, whilst attempting to destroy
the Yellow Hat sect of Buddhism and evading the Manchu. By 1636, most Inner
Mongolian tribes had submitted to the Manchu and the Khalkha eventually
submitted to the Qing in 1691, thus bringing all but the west of today's Mongolia
under Beijing's rule. The Dzungars were virtually wiped out in 175758 by several
wars. Mongolian culture remained in tact because The Manchus forbade mass
Chinese immigration.
The Manchu maintained control of Mongolia until 1911 with a combination of
military and economic measures, intermarriages and alliances. Manchu high
officials, Ambans, were installed around territories and the country was
subdivided into ever more feudal and ecclesiastical fiefdoms. During the 19th
century, feudal lords cared more about representation than the responsibilities of
their subjects. This behaviour of Mongolia's nobility resulted in poverty becoming
ever more widespread, and was worsened by the usurious practices of Chinese
traders and the collection of imperial taxes in silver instead of livestock.

4.6
1911: independence from Qing Dynasty

The eighth Jebtsundamba

Khutuktu (Bogd Khaan)

Under the Qing

Independence

Following the collapse of the Qing Dynasty, Mongolia declared independence in

1911 under Bogd Khaan. However, the newly established Republic of China
claimed the territory of Mongolia as part of its own. The area controlled by the
Bogd Khaan was approximately that of the former Outer Mongolia, and the 49
hoshuns of Inner Mongolia expressed their willingness to join the new country,
but to no avail. In 1919, after the October Revolution in Russia, Chinese troops
occupied Mongolia, led by Xu Shuzheng.
However, in October 1920 as a result of the Russian Civil War, the White Russian
adventurer Baron Ungern led his troops into Mongolia, where in February 1921 he
defeated the Chinese at Niislel Khree (Ulaanbaatar). Bolshevik Russia supported
the establishment of a communist Mongolian government and army to reduce the
threat posed by Ungern. This Mongolian army took the Mongolian part of Kyakhta
from the Chinese on March 18, 1921, and Russian and Mongolian troops arrived
in Khree on July 6. Mongolia's independence was once again declared on July 11,

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History of Mongolia
1921: full independence from China

1921. Mongolia remained closely aligned with the Soviet Union over the next
seven decades.

4.7
1924: Mongolian Peoples Republic
established

1924 onwards: centrally planned

economy, destruction of monasteries,
murder of monks, Stalinism

Mongolian People's Republic

Following the death in 1924 of the king and religious leader, Bogd Khan, a
Mongolian People's Republic was proclaimed with support from the Russians.
By the beginning of the 20th century, 750 monasteries were functioning in
Mongolia, and during the 1920s approximately one third of the male population
were monks. In 1928, Khorloogiin Choibalsan rose to power. He instituted
collectivisation of livestock, the destruction of Buddhist monasteries and the
murder of monks and other enemies of the people. The Stalinist purges in
Mongolia beginning in 1937 left more than 30,000 people dead. Japanese
imperialism became even more alarming following the invasion of neighbouring
Manchuria in 1931. However, during the Soviet-Japanese Border War of 1939, the
Soviet Union successfully defended Mongolia against Japanese expansionism.

1945: China recognised Outer Mongolias

independence

Mongolian forces also took part in the Soviet Manchurian Strategic Offensive
Operation of August 1945 in Inner Mongolia. China agreed to recognize Outer
Mongolia's independence, provided a referendum was held, because of the Soviet
threat of seizing parts of Inner Mongolia. The referendum took place in October
1945 and 100% of the electorate voted for independence, according to official
numbers. Both countries confirmed mutual recognition on October 6, 1949
following the establishment of the PRC.

1945 onwards: Mongolia aligned closely

with USSR

Mongolia continued to align itself closely with the Soviet Union, especially as
relations worsened between the PRC and the USSR in the late 1950s. In the 1980s,
55,000 Soviet troops were based in Mongolia.

4.8
1990: peaceful Democratic Revolution,
introduction of multi-party system &
market economy
1992: new constitution

1993: the first election wins for

non-communist parties

Democratic revolution

Mongolian politics was strongly influenced by the introduction of perestroika

(restructuring) and glasnost (openness and freedom of speech) by Mikhail
Gorbachev in the early 90s, leading to the peaceful Democratic Revolution, the
introduction of a multi-party system and a market economy. In 1992, a new
constitution was introduced and the "People's Republic" was dropped from the
country's name. The first election wins for non-communist parties came in the
1993 Presidential elections and the 1996 parliamentary elections.The transition to
a market economy was often rocky, with the early 1990s seeing food shortages
and high inflation. The signing of the Oyu Tolgoi copper/gold mine contract is
considered a major cornerstone in recent Mongolian history. The Mongolian
People's Revolutionary Party dropped the Revolutionary from its name in 2010.

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Government

Government

Democracy, coalition government between the MPP & the DP,

State Great Khural, elections in 2012

The biggest political parties:

The Mongolian People's Party (MPP)
The Democratic Party (DP)

Mongolia exists as a parliamentary republic, whose government is elected by

parliament, which is in turn elected by the people. Mongolia's constitution
guarantees full freedom of expression and religion and Mongolia has a number of
competing political parties, the most significant two being the Mongolian People's
Party (MPP, formerly the MPRP) and the Democratic Party (DP).

5.1

Sukhbaatar Square in front of the Saaral

Ordon that houses the offices of the
Prime Minister and President
Since Democratic Revolution, there has
been continuous replacement of
governments

Political System and Recent History

Mongolian politics is established under the framework of a parliamentary

democracy, in which the State Great Khural (Parliament) holds legislative powers
and the executive branch is headed by the Prime Minister who appoints a
Cabinet. The President of Mongolia has limited executive powers but acts as the
Head of State and Commander-in-Chief of Mongolias army. Elections are held
every four years, and so there have been six parliamentary and Presidential
elections since 1991. The MPRP won the parliamentary and Presidential elections
in 1992, but was defeated by the Democratic Party in 1996. The 2000
parliamentary election returned the MPRP to dominant power, who remained in
office after the 2004 elections, but with reduced representation.
From 2004 there were numerous changes of Prime Minister. A coalition
government headed by the leader of the Democratic Party, Elbegdorj Tsakhia, was
formed in 2004. In January 2006, he was replaced by MPRP leader Enkhbold
Miyeegombo as Prime Minister, who in turn resigned his position following his
failure to be re-elected as MPRP Chairman, and was superseded by Bayar Sanjaa.

Current President:
Tsakhiagyn Elbegdorj

In November of 2007, a new cabinet was formed with members of several

different parties. Again the MPRP won a majority in the 2008 parliamentary
elections, but allegations of electoral fraud by the opposition led to the first ever
riots and several damages to property and deaths arose. Consequently, the MPRP
invited opposition members into the Cabinet forming the coalition government
that exists today.

2008: coalition government formed

between the MPP and DP

In May 2009, the long tenure of MPRP politicians in the Presidential seat was
ended when the Democratic Party figure Elbegdorj Tsakhia was elected President.

Current Prime Minister:

Sukhbaataryn Batbold

Mr Bayar resigned his position in October of 2009 due to ill-health, and was
replaced by the current Prime Minister, Sukhbaataryn Batbold, who was
previously Minister of Foreign Affairs.

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Government
5.2

President

Mongolia's President, as Head of State, has a largely symbolic role, but with the
power to block Parliament's decisions. Parliament can then over-rule the veto
with a two-thirds majority vote. The President is required to formally resign his or
her party membership when he takes office. The current President, Tsakhiagiin
Elbegdorj, was twice formerly the Prime Minister and member of the Democratic
Party. He was elected as President on May 24, 2009. Mongolia's constitution
provides three requirements for taking office as President; the candidate must be
at least 45 years old, be a native-born Mongolian and have resided in Mongolia
for five years prior to taking office.
President of Mongolia, Tsakhiagyn
Elbegdorj
5.3

The State Great Khural

The State Great Khural is the name of the parliament, and consists of a single
chamber with 76 seats with a house speaker who acts as Chairman. The members
of parliament are elected every four years.

5.4

The Mongolia Peoples Republic Party, or MPRP, governed the country in a oneparty system from 1921 to 1990. Then, with the peaceful democratic revolution,
came a multi-party system. The party continued governing until 1996, and from
2000 to 2004, after which it formed a coalition with the Democratic Party and two
others, and since then has formed two other coalitions, initiating the change both
times and remaining the dominant party. The MPRP won the last round of
parliamentary elections in June 2008, and in November 2010, the party reverted
to its initial name of 1921 by removing the revolutionary title, now known
simply as the Mongolia Peoples Party, or MPP.

PARLIAMENTARY SEATS
3

27

46

MPP

Democratic Party

Mongolia Peoples Party and Democratic Party

The Democratic Party, or DP, was the dominant governing party in the coalition
formed from 1996-2000 and approximately an equal partner in the coalition
formed from 2004-2006.

Others
5.5

Prime Minister and the cabinet

The current Prime Minister, Sukhbaataryn Batbold, assumed office on 29 October

2009, and his deputy Prime Minister is Norovyn Altankhuyag. There are ministers
of each department (finance, defense, labour, agriculture, etc.) and those offices
constitute the Prime Minister's cabinet, as nominated by the Prime Minister in
consultation with the President and confirmed by the State Great Khural. A key
position of present, given the importance of mining to the economy, is the
Minister of Minerals and Energy, currently held by Minister D.Zorigt.

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Foreign Relations

Foreign Relations

Key relations with Russia (largest importer into Mongolia,

uranium & rail JVs), China (85% of Mongolian exports), North
Korea (amicable relationship) & Japan (interests in rare earth
expansion)

Mongolia maintains bilateral relations

with 140 and diplomatic relations with
149 countries.

In developing its relations with other countries, Mongolia is guided by universally

recognized principles and norms of international law as defined in the UN charter.
Mongolia has bilateral relations with 140 countries and diplomatic relations with
149 countries. Recently, the government has put much emphasis on encouraging
foreign investment into Mongolia.

6.1

Africa

6.1.1

Egypt

Relations between Egypt and Mongolia officially began in 1964, since then the
countries have signed various bilateral corporation agreements. The only
Mongolian embassy on the African continent is in Cairo.
Recent Official Visits
A Mongolian parliamentary delegation visited Egypt in June 2001 in order to sign
an agreement to try to boost Mongolian students attending Egyptian courses.
June 2001: cooperation agreement was
signed

2007: enhanced cooperation between

the two countries discussed

In April 2004, the Mongolian President Natsagiin Bagabandi met with the Egyptian
President, Hosni Mubarak, in Egypt and discussed ways to improve bilateral
relations, as well as problems in Iraq and Palestine. They signed an executive
protocol for agreements on economic cooperation, air services and investment
protection.
In March 2007, the Egyptian Minister of International Cooperation visited
Ulaanbaatar where he met Mongolian Prime Minister Miyeegombyn Enkhbold.
In October 2008, the Secretary General of the Egyptian Fund for Technical
Cooperation with the Commonwealth visited Ulaanbaatar where he met with
ministers and discussed enhanced cooperation between Egypt and Mongolia. The
Mongolian officials said they welcomed the technical support provided by the
fund in training and other economic benefits.

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Foreign Relations
Security cooperation
2001 and 2008: enhancement of security
cooperation

Mongolia and Egypt have cooperated on security exercises and operations, such
as Mongolian policeman visiting Egypt in 2001 to train for techniques in
prevention of drug-trafficking and anti-terrorism, and in 2008 Mongolian officials
visiting Egypt to learn of the role of anti-corruption officers.

6.2

Asia

6.2.1

Russia

Mongolia almost certainly has the strongest relationship with Russia, who it has
been close with ever since the Russians helped liberate Mongolia from the
Chinese in 1921, and over the next 70 years the Soviet Union was the countrys
greatest ally. Both are members of the Organization for Security and Co-operation
in Europe, Mongolia has an embassy in Moscow and Russia has one in
Ulaanbaatar.
Background
Russia and Mongolia share a 3,500km
border
Russia helped Mongolia to ward off the
Chinese invasion

Mongolia shares its borders with only two countries, Russia and China, and as a
result its economics and politics are directly influenced by the two. The majority
of imports come from Russia, in particular petroleum and diesel, and they two
countries share a 3,500km border.
th

The Mongolian People's Republic was

established under the Soviet influence in
1921

In the past, Mongolian invasions in the 13 century bought much of Russia into
the Mongol Empire, and a significant portion of the Russian population were
killed. Most of Russia remained under Mongol rule for the following 300 years. In
1921, the Soviets helped establish the Mongolian Peoples Republic after helping
to ward off the Chinese invasion.
Communist era

Close bilateral relations due to both

communist regimes
1986: treaty of peace, friendship and
cooperation signed

Both nations forged close relations during soviet times with strong industrial trade
links, and a large number of soviet troops were permanently deployed in
Mongolia through fear of Chinese expansionism. Mongolia supported Russia
during the Sino-Soviet split of the 1950s, and a treaty of peace, friendship and
cooperation was signed between the two nations in 1986. Plans for the
withdrawal of Russian troops from Mongolia were finalised in 1989.
Modern era

Collapse of Soviet Union, Mongolia's

trade with Russia declined by 80%

Following the end of the cold war and dissolution of the Soviet Union, Russias
trade with Mongolia decreased by 80% almost overnight and Chinas influence
over Mongolia increased. However, today the majority of imports come from
Russia, in particular petroleum and diesel imports.

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2000: Vladimir Putin renewed a major
bilateral treaty

Russian government writes off 98% of

Mongolia's state debt

In 2000, Vladimir Putin (then President of Russia) made a visit to Mongolia to restrengthen a bilateral treaty, which was the first visit by a Russian head of state
since Leonid Brezhnev in 1974.
Recently, a meeting between Ruissian PM Vladimir Putin and his Mongolian
counter-part S. Batbold led to Russia writing off 97.8% of Mongolian debts which
had accumulated during soviet times - $172m, of which Mongolia would only be
asked to pay back $3.8m in a single transfer.
Uranium exploration and recent Joint Venture

Russia holds 190 reports on Mongolias 6

uranium fields, Mongolia only has access
to 34

Through the decades of former Soviet exploration in Mongolia in the second half
of the last century, Russia has become an adept student of Mongolian geology
and mining potential. From 1970-1990, the Soviet Union discovered 6 uranium
deposits in which it estimated 1.5mt of reserves in Mongolia. All 190 reports on
the discoveries are currently held in Russia, whereas the Mongolians have only
been given copies to 34 of these reports. Russia now finds itself positioned again
as a very important player participating in Mongolian uranium exploration.
In December 2010, Mongolia and Russia signed an agreement to develop the
Dornod uranium resource, Mongolias biggest untapped uranium field. Rosatom
Corp., Russias nuclear power company, Russias government-run ARMZ Uranium
Holding, Mongolias state-owned KOO MonAtom and the countrys Nuclear
Energy Agency (NEA) signed the agreement in Moscow. Mongolians will remain in
control, with 51% of the share to Monatom and 49% going to ARMZ.
The Russians will invest $300 million in the first stage, and first production is
expected in 2011, with the action plan stating that the JV would begin to function
around June. The expected Mongolian reserves are 30,000 tons, and the new
company will survey, mine and process the uranium.

6.2.2

Peoples Republic of China (PRC)

As the Soviet Union had been Mongolias main ally and the most influential
neighbouring power up until 1990, foreign relations between the PRC and
Mongolia used to be predominantly determined by the PRC and USSR relations.
With adoption of democracy and transition to a market economy, Mongolias
relationships with China also began to improve. Currently the PRC is the largest
trading partner of Mongolia.
Background

Mongolia and China wars

Mongolia and China instigated many wars throughout history, provoking the
Chinese to build their Great Wall to defend against the Mongols. Although
Khubilai Khaan conquered the majority of China and established the Mongolian
capital at the location of modern Beijing, the Qing dynasty of Manchu invaded
th
Mongolia in the 18 century. The ruling of the Qing dynasty came to an end in
1911, when Mongolia declared its independence. Although in 1919 China
regained control over the region, in 1921 the USSR forces helped Mongolia to

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reclaim its independence, prompting the later formation of the Mongolian
Peoples Republic.
Communist era
1949: diplomatic relations with PRC
1962: border treaty signed
1984: demarcation of border
1986: further agreements
1988: border treaty verified

In October 1949, Mongolia established diplomatic relations with the PRC.

Although a border treaty was signed in 1962, Mongolia requested for further
support from the USSR due to security concerns. Only in 1984, when a highpower delegation from China visited Mongolia, was tension over bilateral
relations relaxed, and the two nations started to set apart their borders. Various
agreements to improve trade and create air and transport links were signed in
1986. A treaty on border control was verified in 1988.
Modern period

1994: treaty of friendship and

cooperation
Mongolia given access to Tianjin port

Since the end of the Cold War, China has been continuously making effort to
strengthen its bilateral ties with Mongolia with all due respect to the latters
autonomy. In 1994, the two countries signed a treaty of friendship and
cooperation. Today, the PRC has become the major trading partner of Mongolia
and the greatest contributor in mining related foreign investments. Chinas
decision to allow Mongolia to use its Tianjin port was a significant move bolstering
the landlocked countrys trade with the Asia Pacific region.
Recent News

25-40 mtpa of coal from Mongolia to

China
Dairy and flour factories to be developed
in rural Mongolia

The latest news informs that around 15 million tonnes of coking coal has been lost
in Queensland floods in Australia, the largest exporter of coal to China. Mongolia
will soon have the capacity to supply 25-40 mtpa of coal to the PRC. It has been
continuously noted that there are great opportunities for mutually beneficial
cooperation between the two countries, especially since Mongolia has abundant
natural resources and China has the market. Currently, negotiations are taking
place on the establishment of dairy and flour factories in rural Mongolia.

6.2.3

Japan

The Peoples Republic of Mongolia established diplomatic relations with Japan in

February 1972. The ties were strengthened after the Democratic Revolution in
Mongolia.
Japan-Mongolia relations over 2006 - 2010
2006
1972: diplomatic relations with Japan
Capitalism in Mongolia strengthened
further ties

First ever visits by Mongolian and Japanese Prime Ministers

Contracts for SME development and environmental protection project

were signed, an official development assistance loan to Mongolia was
approved (JPY 3 billion/$36 million)
Over 80 members of the Japanese Diet visited Mongolia

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2007
Mongolian President visits Japan



Basic action plan for Mongolia-Japan cooperation over the following ten
years was signed
An agreement was signed to hold a two-stage Public-Private Joint
Consultative Meeting for promotion of trade, investment and joint
utilisation of mineral resources.

2008
Speaker of the Mongolian Great Khural visits Japan


A project for a new international airport near to Ulaanbaatar was

approved. A contract for an official development assistance loan to
Mongolia for the airport project was signed (JPY 29 billion/$349 million)

2009
Mongolian Prime Minister and Foreign Affairs Minister visit Japan

A new loan was approved for the development of public finances ($50
million to be repaid in 2 years)

2010

An agreement to cooperate in the rare-earths development sector of

Mongolia was signed between the two countries (96% of Japans rareearth metals are imported from China and the latter restricted their
export quotas by 72% and 35% in H2 2010 and Q1 2011 respectively.
China controls more than 95% of the worlds rare-earth output)
Japanese geologists and scientists launched exploration of rare-earth
elements in Mongolia.

Economic cooperation
Economic ties strengthened after 1990
Japan former largest aid donor to
Mongolia
From humanitarian aid to larger-scale
projects

The economic relations of Mongolia and Japan have been significantly expanded
since the formers transition to a market economy in 1991. Japan has historically
been the largest aid benefactor to Mongolia, until the US had approved a
Millennium Challenge Compact aid worth $285 million in October 2007.
At first, economic cooperation between the two nations was mainly in the form of
humanitarian aid to support the population of Mongolia, who were struggling to
bypass the transition period. The cooperation, however, later was extended to
focus on the development of infrastructure projects and to facilitate selfsufficiency in certain sectors of the economy.

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6.2.4

North Korea

The Peoples Republic of Mongolia established diplomatic relations with North

Korea in October 1948, when the former acknowledged the Soviet-backed
government of Kim II-Sung. Mongolia is one of the few countries in the world that
maintains warm relations with the Democratic People's Republic of Korea (DPRK).
History

1948: diplomatic relations with North

Korea
Mongolia backed North Korea during
Korean civil war
1986: cooperation and friendship
agreement
1995: cancellation
2007: first high-profile visit by North
Korean delegate in 19 years

During the 1950s civil war in Korea, Mongolia supported North Korea by
providing assistance. The first cooperation and friendship treaty between the two
countries was signed in 1986, after which Kim II-Sung paid an official visit to
Mongolia in 1988.
Abandonment of socialism and transition to democracy caused the two nations
diplomatic relations to collapse, such that in 1995 the previously signed
cooperation treaty was cancelled and North Korea closed their embassy in
Ulaanbaatar in 1999.
The July 2007 visit by the Presidium of the Supreme People's Assembly of the
Democratic People's Republic of Korea, Kim Yong Nam, was the first high-status
visit to Mongolia by a North Korean delegate in 19 years.
North Koreans are deemed to see Mongolia as a fellow non-Western nation
which went through an experience similar to the DPRKs during the Soviet era.
In 2006 rumours went that the Mongolian government allocated 1.3 square km of
land to North Korean refugees for the establishment of a camp in 40 km from
Ulaanbaatar, but the Mongolian Prime Minister of that time, M. Enkhbold,
officially rejected such a postulation.

6.3

Europe

Mongolia endeavours to maintain close relationships with European countries. In

1991, Mongolia signed an economic cooperation agreement with the UK, and
investment promotion and protection agreements with France and Germany.

6.3.1

United Kingdom

Recent Controversy

1991: cooperation agreements with UK,

France and Germany

On September 17, 2010 the Mongolian Chief of Administration at the National

Security Council, Mr. B.Khurts, was arrested at Heathrow Airport while paying an
official visit to the United Kingdom. He was accused of kidnapping D.Enkhbat, a
Mongolian citizen who later died from health problems, from France as the
suspect in a high government officials murder. Mr. Khurts and his three
associates action was deemed as alleged kidnapping, violating the Law of the
European Union.

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Sep 2010: Mr. Khurts arrested at
Heathrow
Nov 2010: Mongolian PM cancelled his
visit to UK

After the incident, the Mongolian Prime Minister Sukhbaataryn Batbold cancelled
his official visit to London which was scheduled for 27 November 2010. Some see
this as an expression of Mongolias discontentment with the arrest of Mr. Khurts,
who was diplomatically immune, and the refusal of the British government to
release him upon Mongolias request.

6.4

North America

6.4.1

Canada

Canada and Mongolia established bilateral ties in November 1973. Mongolia

operates an Embassy in Ottawa and an Honorary Consulate in Toronto, while
Canada has an Honorary Consulate in Ulaanbaatar and an Embassy in nearby
Bejiing (China).
1973: bilateral relations with Canada
Post-1990: strengthened relations
2000-2009: FDI x 60

The two countries diplomatic relations were intensified when the CanadaMongolia Society was founded in 1980. After the collapse of the USSR, Canada
started supporting Mongolia by providing aid through its non-governmental
organizations and other specialised development agencies.
At the end of 2009, the Canadian FDI into Mongolia reached CAD 601 million
(around $594 million). According to the estimates, in 1999 2009 the bilateral
merchandise trade between the two nations rose over 60x from CAD2.6 million
($2.57 million) in 1999 to CAD163.8 million ($162 million) in 2009. Toronto-based
mining companies such as Ivanhoe Mines, SouthGobi Resources and Centerra
Gold are the major players in the Mongolian mining industry.
Recent News

Canadian FDI mostly into mining

Canadian FDI thus far has been mainly concentrated in the mineral resource
sector of Mongolia. Negotiations are ongoing on the signing of a foreign
investment promotion and protection agreement (FIPA) between the two nations.

Sep 2010: Mongolian PM visits Canada

In September 2010, the Mongolian Prime Minister (PM) Sukhbaataryn Batbold

attended the Canada-Mongolia Investors' Forum held in Toronto. Representatives
of the most influential mining companies with assets in Mongolia gathered at the
conference. The Prime Minister highlighted Mongolias intentions to create a
more favourable environment in the country for foreign businesses and investors
through legal and regulatory regime.

PM calls for more FDI

PM visits TSX
19 companies with assets in Mongolia on
TSX
Canada as Mongolias role model

Mr. Batbold also paid a visit to the Toronto Stock Exchange (TSX). 19 companies
that are actively engaged in mining and exploration businesses in Mongolia are
listed on the TSX. The stock exchange officials expressed their willingness to help
develop the Mongolian Stock Exchange (MSE).
Subsequently the Prime Minister attended another investor meeting in Vancouver
where he stated that Mongolia should see Canada as a role model in terms of

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development, efficient utilisation of natural resources, cost-effective agriculture,
and high-quality public governance and education systems.
The PM pledged that Mongolia will continue supporting Canadian investors and
recommended that companies start building processing plants in Mongolia,
similar to those in Canada, so that the value of their extracted minerals could be
significantly enhanced.
Sep 2010: MOU on improvement of civil
services

A memorandum of understanding (MOU) was signed between the two countries

to promote cooperation on civil services in Mongolia.

6.4.2

USA

US Assistance
The United States agency for International Development (USAID) has continuously
been one of the key aid donors to Mongolia. The program primarily focuses on
sustainable, private sector-led economic growth and more effective and
accountable governance. As stated by the organization, in 1991-2008 USAID
granted Mongolia $174.5 million in total. The budget allocated in 2007 amounted
to $6.6 million and comprised projects in various fields.
USAID key aid donor to Mongolia
1991-2008: USAID = $174.5 mn

In 2006, the United States Department of Agriculture granted Mongolia food aid
worth $4.2 million with the intention to improve the livelihood of herders and
encourage entrepreneurship in the agricultural sector of the economy.

Mongolia sent troops to Afghanistan and

Iraq

The US also supports Mongolias reforms in defence. Since 2003 Mongolia has
been contributing small numbers of troops to support US operations in
Afghanistan and Iraq, and in 2005 it also deployed armed peacekeepers to UN and
NATO missions. The 100 troops sent to Iraq were withdrawn in 2008, as Russia
and China applied significant pressure.

2008: troops withdrawn from Iraq

1991: Peace Corps in Mongolia

The Peace Corps from the US, which is mainly focused on English teaching and
training work, operates with around 100 volunteers in Mongolia. The organisation
is also active in such fields as SME development, public health and youth
th
th
education. In 2011, the program will celebrate its 50 anniversary and its 20
anniversary in Mongolia.

MCC: grant = $285 mn

In October 2007, the Mongolian government signed a Compact agreement with

the Millennium Challenge Corporation (MCC) for the receipt of a grant worth $285
million. The program comprises projects in railroad development, improvement of
vocational training, upgrade of health services and establishment of a property
registration system in Mongolia.
Recent News

Agreement reached in uranium sector

cooperation

In November 2010, two Mongolian Parliament Members and the Director of

MonAtom, a state organization accountable for all uranium licenses in Mongolia,
visited the USA for discussions on partnership in the mining sector. The visitors
learnt about the United States uranium exploration and enrichment experience,

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methods of efficient utilization of resources for fuel production and their
regulatory system in the uranium sector. High officials responsible for energy and
mining industries of the US exchanged views with their Mongolian counterparts in
order to find ways to strengthen bilateral cooperation of the two countries. A
consensus was reached on how the USA could contribute to the training and
development of the Mongolian workforce recruited in the uranium field.

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Geography and Climate

Geography and Climate

A large, land-locked country with long, harsh winters but with

highest number of blue-sky days the Nomad Empire of Eternal
Blue Sky
2

19th largest country (1.56 km )

Khuiten Peak the highest altitude
(4,374m)
Winter: 40 C (40 F)
Summer: +35 C (+95 F)

Ulaanbaatar coldest capital city in the

world
275 out of 365 days sunny

Little precipitation
Gobi means desert steppe

th

Mongolia is ranked 19 in the world by country size after Iran. It covers 1.56
million square km. Mongolias geography varies from a cold, mountainous region
in the north to the Gobi desert in the south.
It is the country of steppes. The highest altitude of Mongolia is the Khuiten Peak
(4,374m) situated in the far western massif, Tavan Bogd. The climate is generally
dry and the temperature varies significantly across the year, making the winters
extremely cold and summers very warm. In January, the temperature may fall as
low as 40 C (40 F) and in summer it can rise to as high as +35 C (+95 F).
There are many occasions when Mongolia is hit hard by exceptionally cold winters
called dzud. Explanation of dzud is given in the Agriculture section of this
report. Ulaanbaatar has been named the coldest capital city in the world.
Mongolia receives little precipitation, as a result of short and dry summers, and is
especially windy due to its high altitude above sea level. On average, 257 out of
the 365 days of the year are cloudless and the heaviest atmospheric pressure falls
on the central region of Mongolia.
Precipitation is the highest in the Northern region, averaging 25-30 cm per year,
while it is the lowest in the Southern region, averaging 10-20 cm per year.
Sometimes there may be no rainfall in a year in parts of the Gobi desert. Gobi
means desert steppe in Mongolian, referring to the dry terrain that has deficient
foliage to be able to support livestock, except camels.

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Administrative Regions

Administrative Regions

21 aaimags (provinces), 329 soums (sub-provinces)

provinces)

Mon
Mongolia is divided into 21 aimags. Each aimag is subdivided into a number of
ssoums. Aimag means "tribe in Mongolian. All aimags are governed as separate
municipalities. An exception is the capital city
city, Ulaanbaatar, which is administered
separate
separately from Tv Aimag (Central Province), where it is located.

LIST OF AIMAGS
1. Arkhangai

2. Bayan-lgii

3. Bayankhongor

4. Bulgan

5. Darkhan-Uul

6. Dornod

7. Dornogovi

8. Dundgovi

9. Govi-Altai

10. Govismber

11. Khentii

12. Khovd

13. Khvsgl

14. Orkhon

15. mngovi

16. vrkhangai

17. Selenge

18. Skhbaatar

19. Tv

20. Uvs

21. Zavkhan

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Economy

Economy

The Largest contributors to the Economy are mining and

agriculture. Expected GDP growth in 2013 in excess of 25%
(IMF).

Large reserves of copper, gold, coal,

molybdenum, fluorspar, uranium, tin
and tungsten
1990-2000: combination of deep
recession due to political
inaction/natural disasters as well as
economic growth due to privatization
and free-market economic reform

Economic activity in Mongolia has historically been focused on agriculture and

herding, but recent discoveries of mineral deposits have attracted large levels of
foreign direct investment (FDI) into the mining sector, which is also the largest
contributor to government receipts. Up until the dismantlement of the Soviet
Union in 1990-1991, soviet assistance used to account for up to a third of GDP,
before almost disappearing overnight. The decade that followed saw natural
disasters and political inaction cause deep recession, as well as free-market
economics, reform and privatization lead to economic growth. Mongolia joined
the WTO in 1997.
From 2000-02, the country again entered recession due to particularly harsh
winters and summer droughts which led to large-scale livestock fatalities, and was
compounded by falling prices for primary sector exports and opposition to
privatization.

2004-2008: CAGR 9% due to high Cu

prices and new Au projects. 08 inflation
peaked at 36%
08 Financial crisis: lower inflation,
reduced govt. revenues & spending

In 2004-08, GDP grew at a compounded 9%, mainly because of increased gold

production and high copper prices. In 2008, inflation reached the highest levels in
over a decade, hitting 36% in August, but by the end of the year the price levels
dropped as commodity prices fell and the global financial crisis took hold.
Government revenues fell, forcing cuts in spending.

Oct 09: landmark agreement to develop

OT, worlds largest untapped copper
deposit

In early 2009, aided by the IMFs $242 million Stand-by Arrangement, Mongolia
began to recover from the crisis, although instability remained in the banking
sector. In October 2009, legislation was finally passed to develop the Oyu Tolgoi
gold/copper project, the worlds largest untapped copper deposit.

85% of Mongolian exports to China

Mongolias economy continues to be significantly influenced by neighbouring

behemoths, Russia and China. Approximately 85% of all exports go to China, and
China accounts for over half of all Mongolian external trade. On the other hand,
95% of petroleum products and a large proportion of Mongolias electricity come
from Russia, leaving it vulnerable to Russian price hikes.

Over 30,000 businesses in Mongolia

There are over 30,000 businesses operating in Mongolia, the majority of which
are operational in Ulaanbaatar. Outside of the capital city, subsistence herding
employs most of the workforce. Livestock typically consist of sheep, goats, cattle,
horses and camels.

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9.1

The Global Financial Crisis of 2008/2009

In 2009 economy contracted by 1.6%,

primarily due to copper prices falling as
much as 65%

The global economic downturn in late 2008/early 2009 resulted in reduced

demand for commodities and a resulting slump in their value. Mongolia saw its
demand for exports and export revenue decrease, and the GDP growth of 8.9%
seen in 2008 was following by a contraction in the economy by 1.6% in 2009.
Most crucial to Mongolia, being at the time the countrys largest export, were
copper prices, which fell from $8,700/tonne in April 2008, to $3000/tonne in
March 2009, a 65% reduction. Other commodities essential to Mongolias export
industry fell, including zinc, crude oil, coal and cashmere, and the only exception
was gold, which held its price on account of its status as a safe-haven investment.

Chinas growth slowing from 16% to 5%

led to decreased demand for Mongolian
exports

The fall in price of commodities was combined with a fall in demand for
commodities by China, which accounts for 85% of Mongolian exports, and yearon-year growth in industrial production shrunk from 16% in mid 2008 to 5% in the
first quarter of 2009. This resulted in a contraction in Chinese demand for
Mongolian copper imports by around 50% in the first half of 2009.

Current account moved from surplus of

6.7% of GDP in 2007 to deficit of 14% in
2008

The sharp fall in exports, combined with moderate growth in imports, led to a
significant shift in the balance of payments in late 2008/early 2009. The current
account showed a surplus of 6.7% of GDP in 2007 compared to a deficit of 14% of
GDP in 2008, and the deficit further increased to 15% of GDP in the first half of
2009.

MNT fell 38% from Oct08 Mar09

$500m in foreign reserves were lost

De-facto peg abandoned

BoM raised IRs from 9.75-14% in March

2009 to restore confidence in local
currency

The Mongolian Tugrik depreciated by 38% between the end of October 2008 and
the middle of March 2009 due to a currency flight, which was further aggravated
by the attempts of the Bank of Mongolia to defend the currency and maintain the
de-facto peg against the dollar. This resulted in the bank losing $500 million in
foreign currency reserves between July 2008 and February 2009.
To prevent an overshooting of the exchange rate, measures were taken including
the introduction of a transparent, bi-weekly foreign exchange auctioning
mechanism and abandoning the de-facto peg to the dollar. The Central Bank rate
was hiked from 9.75% to 14% in March of 2009, and the combination of these
measures resulted in exchange rate stabilisation and the ability of the Bank to
replenish its foreign currency reserves. The spread between the ask and bid rates
in the commercial bank foreign exchange markets have remained low after the
sharp spike in late 2008/early 2009, a good sign of improved liquidity in the
market.

9.2

2010 GDP growth = 6.1%

Current state of the economy

Mongolia continues on the road to a market economy, despite the significant

impact of the global financial crisis, and in 2010 saw significant growth in its
industrial and services sectors. Real GDP growth of 6.1% in 2010 was driven by
strong growth in PRC (whose reported GDP was up 10.3% in 2010). International
reserves has exceeded $2.0 billion as of the end of December 2010 (82.6% growth
yoy), a record high for Mongolia.

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Recovery attributable to policy response
and IMF loan facility of $242m

The strong recovery may be attributable to a number of factors including the

strong policy response from the authorities, assistance from the international
community including the $242 million stand-by loan facility from the IMF (of
which only $194 million was actually drawn), the global economic recovery, high
copper prices and strong growth from the PRC.

Fiscal framework approved for 2011 to

encourage economic stability

The Government at the end of 2010 made plans to increase its spending given the
increased revenue and availability of budget financing, and has established a fiscal
framework with the focus on macroeconomic stability for 2011. It is pursuing
plans for structural reforms and has adopted a comprehensive fiscal responsibility
law.

Oct 2009: milestone agreement between

government, Ivanhoe & Rio Tinto to
develop OT

A major milestone for developing Mongolias resource wealth was the eventual
signing of the investment agreement in October 2009 between the Government,
Ivanhoe Mines and Rio Tinto over the development of the vast Oyu Tolgoi
copper/gold prospect in the South Gobi desert.

Value of mineral assets in country

estimated at $1.3 trillion

Mongolia is about to experience a period of remarkable growth. The estimated

value of untapped mineral assets in the country is around $1.3 trillion. Industry
experts talk of the success and efficiency of recently implemented domestic
policies which took the country out of recession. The IMF forecasts the real GDP
growth to be over 25% in three years time, driven by advancements in the mining
sector. Inflation smoothed down to 13% in 2010 from the soaring 36% in August
2008, but the authorities plans to hold price increases at a single digit through
2011 seem far fetched. FDI into the country has been growing at 30% annually
and is expected to reach $11 billion in the next five years. In 2010, general
government budget showed a surplus of $611 million and the external trade
deficit reached $373.8 million (exports and imports were both up 53% yoy).

Inflation 13%
FDI growing at 30% annually & expected
to total $11bn in 4 years
Budget surplus $611mn
External trade deficit $373.8mn

Industrial output up 10% to $1.5bn (at

2005 constant prices)

According to Montsame, in 2010, the total industrial output increased 169.7

billion MNT ($135.7 million) or 10% to 1,874.6 billion MNT ($1.5 billion) at 2005
constant prices compared to the previous year. This increase was mainly due to a
16.7% - 91.8% increase in main mining and quarrying products such as crude oil,
fluor spar concentrate and coal; a 11.2% - 69.0% increase in manufacturing
products such as copper, lime, alcohol, metal steel, flour, solid concrete, cement,
sawn wood, yoghurt, soft drinks, juice, metal foundries, fodder, milk; and a 2.1x 2.3x increase in products such as steel casting, and iron ore.
In 2010, Industrial output (at 2005 constant prices) showed increases in mining of
coal and lignite extraction of peat (91.8%), other mining and quarrying (19.5%),
extraction of crude petroleum and natural gas (16.7%) for the mining and
quarrying sector; manufacture of office accounting and computing (5.5 times),
manufacture of rubber and plastics products (84.4%), production of non-metallic
mineral products (54.0%), manufacture of wood and wooden products (35.6%),
manufacture of basic metals (29.6%), manufacture of food products and
beverages (24.0%), manufacture of chemicals and chemical products (18.2%),
manufacture of wearing apparel, dressing and dyeing of fur (17.5%), publishing,
printing and reproduction of recorded media (7.6%), manufacture of tobacco
products (2.9%) for the manufacturing sector compared to the previous year.

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Economy
There was an increase in production of electricity, thermal energy, and steam
(6.4%) [Montsame].

9.3

Gross Domestic Product

Historically, the greatest contributors to GDP were livestock, agriculture and

animal husbandry, but recently focus has changed to mining. In 2009, 21.2% of
Mongolias GDP was attributable to agriculture whereas 22.5% of the economy
was attributable to the mining sector. The mining sector is by far the largest
source of foreign currency inflows, and contributed to 85% of exports in 2008 and
82% of exports in 2009.
th

2010 real GDP growth = 6.1%

On 13 January 2011, the NSO officially announced that the 2010 real GDP growth
was 6.1%, and nominal growth was 25.3%. (The IMF prediction of real GDP growth
for 2010 was 8.5%). Trade in service, processing industry and mining had high
profits, but the agriculture sector experienced large losses when 11.3 million
livestock died during the winter dzud.

2010 nominal GDP = $6.6bn

2005 2008 annual growth rate = 8.7%

Mongolia is an emerging market whose GDP is comparatively small, at $6.6bn.

However, this figure grew at a CAGR of 8.7% from 2005 to 2008, primarily driven
by i) increased FDI cash in-flows, particularly in the mining industry ii) increased
commodity prices, chiefly copper, gold and iron

NOMINAL GDP COMPOSITION BY SECTOR

2007

2008

2009

Agriculture

20.5%

21.6%

21.2%

Mining

29.5%

22.5%

22.5%

Manufacturing

6.1%

6.2%

5.9%

Trading

7.0%

7.9%

6.0%

Services
Other

19.0%

21.5%

23.2%

10.40%

22.80%

23.30%

Source: National Statistics Office 2009

Expected real GDP growth 8.9% in 2011,
and in excess of 25% in 2013.

The IMF forecasts the real GDP growth to be over 25% by 2013 driven by
advancements in the mining sector, while income per capita is expected to reach
$3,500 in 2015 compared to the current level of $1,745.

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12.4
11.0

GDP, $ billions

12

25

9.5

10
7.2

8
5.1

30

20

7.7

15

5.8

10

4.2

Real GDP growth, %

14

-5
2008 2009 2010 2011 2012 2013 2014 2015

Source: IMF

Income per capita, $

4000

3504

3500

3101

3000

2693

2500
2000

2051

2192

1745

1670
1343

1500
1000
500
0
2008

2009

2010

2011

2012

2013

2014

2015

Source: World Bank estimate, IMF forecast

9.4

Money Supply

By the end of December 2010, money supply had reached 4.7 trillion tugrik ($3.8
billion), up 1.8 trillion tugrik ($1.45 billion) or 62% from the previous year. In 1990,
the M2 supply of money was $5.6 billion, this means in 1990-2010 the amount of
money in circulation increased 83,829%.

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MONEY SUPPLY, $ MILLIONS

Nov-09

Jan-08

Dec-08

Feb-07

Mar-06

May-04

M2

Jun-03

Jul-02

Aug-01

Sep-00

Oct-99

Nov-98

Dec-97

Jan-97

M1

Apr-05

3500
3000
2500
2000
1500
1000
500
0

Source: Bank of Mongolia (calculated at constant 2010 USD:MNT exchange rate)

In two and a half years from the beginning of 2008 to June of 2010, the M2 money
supply increased from $1.88bn to $2.86bn (52% rise)
MONEY SUPPLY, $ MILLIONS
3500
M1

3000

M2

2500
2000
1500
1000
500
May-10

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

Jan-08

Source: Bank of Mongolia (calculated at constant 2010 USD:MNT exchange rate)

9.5
In August 2010, gov revenues were up
56% YTD and expenditures up 23% YTD

Budget

According to the World Bank estimates, in August 2010 the fiscal deficit fell to
0.4% of GDP, compared to 10.6% a year ago. Total government revenues were up
56% YTD due to rebounding commodity prices and the infamous Windfall Tax,
while expenditures increased 23% owing to cash handouts delivered to 50000
civilians. The figures indicate overall the improving economy and positive

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Windfall tax abolished, effective from 01
Jan 2011

prospects. Worth noting, the abolishment of the 68% Windfall Tax has been in full
st
effect since the 1 of January 2011.
300

YTD % INCREASE IN GOVERNMENT REVENUE

250

Aug-09

Aug-10

200

Due to recovery in commodity prices and

domestic demand, revenues grew
sharply

150
100
50

Non-tax revenues

Royalty

Import duties

Excise taxes

VAT

Social sec cont'ns

WPT

Wages and salaries

-100

Corporate income tax

-50

Tax revenue

Source: World Bank

In 2011 budget, govt revenue to be 42%
of GDP, govt expenditure 52% of GDP

World Bank warns against such high

government spending of 52% of GDP
through fear of high inflation

Amended progressive royalties:

30% if Cu ore price exceeds 9000$/t
15% if Cu concentrate price exceeds
9000$/t
5% if gold price exceeds 1300$/oz
...etc.

On the 1st of December 2010, Parliament approved a new budget for 2011.
According to the estimates, government revenues are to be 42% of GDP,
government expenditures 52% of GDP and the fiscal deficit 9.9% of GDP. There is
to be an increase in spending on wages of 22% and an increase in spending on
transfers of 50%. Expenditures are mainly about to hike due to project-financing
costs related to mining, infrastructure and agriculture. Financing of the Human
Development Fund, which is responsible for cash handouts and the provision of
student tuition fees, is to take up 11% of GDP. Income is mainly to be generated
by copper, gold and coal exports, exploitation of oil reserves and privatizations of
state properties.
Before the budget was officially approved, the World Bank had been continuously
warning about the possible inflationary pressure likely to be caused by the
adoption of such a fiscal policy. According to their view, excessive spending worth
52% of GDP would fuel the already existing inflation in the form of wage-price
spirals, pushing inflation towards 25%. The bank mentioned about the possibility
of the 2006-2008 mistakes being replayed, which were the years of boom and
excessive spending, during which no government funds were saved to cushion
against frictions in the economy and following which the 2008-2009 collapse
occurred in Mongolia.
In 2011, the Windfall Tax will no longer bring revenues to the government, but the
recently approved progressive royalties on minerals, i.e. 30% on copper ore and
15% on copper concentrate if their prices exceed 9000$/t, 5% on gold if the gold
price exceeds 1,300$/oz, will bring some income boost. The amended royalties on
copper will not be applied to Oyu Tolgoi production. Also the World Bank and the
IMF are not planning to secure any more lending to Mongolia, finding it
unnecessary as the country did not use the remaining two tranches of the IMFs
Stand-by Agreement (SBA), worth $48 million. The IMF approved an 18-month

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SBA in April 2009 for an amount equivalent to $242 million. Despite these issues
and the World Banks warnings, the spending plans in overall seem to be highly
unconstrained. The parliament members justified their move by asserting that no
matter what the government decides, there are always precautionary warnings
coming from the expert financial institutions, whereas the parliament makes their
resolutions based on their own estimates and specialist advisors.

9.6
2010 inflation: 13%
Supply side shocks in food prices main
contributor to increased inflation
towards end of 2010
Demand side inflation increasing, due to
pressures from governments 30% public
sector wage hike & public handouts

Inflation

After falling to as low as 8.8% in July 2010, inflation resumed its upward trend yet
again by the end of 2010. The overall 2010 CPI, inflation as stated by the Bank of
Mongolia, was 13%. Main factors behind the price increases mostly belonged to
the supply side. Food and energy prices climbed up due to adverse weather
effects in Russia, which boosted grain prices, and a disastrously cold winter in
Mongolia, destroying ample of livestock and escalating meat prices.
Higher volatility of the CPI index points to greater instability of the overall
economy. However unfortunate it is, this usually is the case with transition
economies. The central bank justifies its incompetence in handling inflation on the
grounds that the price increases were mainly due to the supply side, while the
banks intervention could predominantly soothe the demand side inflation. Such
an excuse will no longer work in the future, as demand side inflation is also
creeping up, especially with the upcoming government expenditures leaving no
spare capacity (consequences of the 30% public sector wage increases effective
from October 2010 and a continuation of the promised cash handouts to the
public). Therefore, and not surprisingly, the World Bank predicts two-digit
inflation figures over the year 2011.

Sep-10

May-10

Jan-10

Sep-09

May-09

Jan-09

Sep-08

May-08

Jan-08

Sep-07

May-07

Jan-07

Deflation occurred in Q4 2009

Sep-06

Inflation reached 36% in Sep 08

40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0

May-06

INFLATION, ANNUAL % CHANGE IN CPI

Source: Bank of Mongolia

Food prices are given the heaviest weighting in the consumer price index,
therefore supply-side shocks in food prices have the greatest effect on calculated
inflation levels in Mongolia.

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PROPORTIONAL CPI BASKET OF GOODS
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Education
Recreation &
Transport
Medical care
Electricity,
Water
Housing
Jun-10

Jan-10

Aug-09

Mar-09

Oct-08

May-08

Dec-07

Jul-07

Feb-07

Sep-06

Clothing
Apr-06

Food makes up over 40% of the CPI

basket of goods

Restaurants

Food

Source: Bank of Mongolia

9.7

In 2010, total external trade turnover reached $6.2 billion, an increase of $2.15
million or 53.5% over 2009. However, the external trade balance showed a deficit
of $378.7m in 2010, up $126.4 million or 50.1% compared to 2009.

TRADE, $ MILLION (12 MONTH ROLLING SUM)

Exports

Imports

Trade balance (right axis)

4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0

0
-200
-400
-600
-800
-1,000
Aug-10

May-10

Feb-10

Nov-09

Aug-09

May-09

Feb-09

Nov-08

Aug-08

May-08

Feb-08

Nov-07

-1,200
Aug-07

2010 trade turnover = $6.2bn, up 54%

2010 trade deficit = $379m, up 50%

Trade

Source: World Bank

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9.7.1
2010 exports = $2.9bn, up 54%

Exports

The latest update informs that In 2010, Mongolian exports totalled $2.9 billion, up
53.8% from 2009. Mineral products, natural or cultured stones, precious metal,
jewellery, coins, textiles & textile articles live animals, animal origin products, raw
& processed hides, skins, fur & articles thereof accounted for 98% of the total
export value amount, and approximately 85% of all Mongolian exports go to
China.
The contribution of copper to export growth is levelling off, whereas has become
the leading contributor to growth in exports. In February, copper contributed 53%
to export growth, though by August this had reduced to only 9%, whereas coal
contributed 40 percentage points of the 59% that was the year on year August
growth. The dollar value of coal shipments in August had increased year-on-year
by 172%, for an increase in total shipment volume of 146%, and coal made up
27% of all goods exported from Mongolia, up from 16% the previous year.

Gold and cashmere exports down

On the other hand, gold exports were down, despite gold prices once again
reaching record heights. This was most likely a result of the abolishment of the
st
68% windfall profit tax coming into play on January 1 2011, and hence gold
producers were withholding stocks until this time. Cashmere export remained
low, reflecting the effects of the devastating dzud last winter that destroyed
livestock.
2010 I-XII
EXPORTS

Coal now Mongolias largest export

commodity, accounting for 30% of all
exports

Coal
Copper
concentrate
Iron ore
Gold
Crude oil
Zinc ore
concentrate
Greasy
cashmere
Fluorspar
ore/concentrate
Combed
cashmere
Molybdenium
ore/concentrate
Rest exports

Volume

Value, $
million

% of total
exports

16.6 million tonnes

877.6

30.3%

568.7k tonnes

770.5

26.6%

3.5 million tonnes

250.9

8.7%

5.1 tonnes

178.3

6.1%

2.1 million barrels

154.9

5.3%

119k tonnes

134.1

4.6%

3k tonnes

104.9

3.6%

376k tonnes

63.2

2.2%

977 tonnes

68.8

2.4%

4.8k tonnes

52.0

1.8%

244.0

8.4%

Source: National Statistics Office of Mongolia

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China is Mongolias biggest trading partner. Currently around 85% of exports go to
the PRC.
EXPORTS, IN %
China

Russia

Other

100
80
60
85% of exports go to China
40
20

May-10

Jul-09

Sep-08

Nov-07

Jan-07

Mar-06

May-05

Jul-04

Sep-03

Nov-02

Jan-02

Mar-01

May-00

Jul-99

Sep-98

Nov-97

Jan-97

Source: Bank of Mongolia

9.7.2
Imports rising as economy recovers, in
particular machinery and equipment

Largest imports: diesel and petroleum

from Russia

Imports

Imports have continued to grow as the economy recovers. In 2010, goods and
services of value $3.3 billion were imported, up 53.3% on 2009. The increase in
demand for imported goods was primarily driven by rising demand for machinery
and transport equipment, reflecting increased industrial activity involved in
mining, construction and agriculture. These activities also added to petroleum and
diesel imports, which are the countrys largest import products, and are supplied
by The Russian Federation. Mongolia imported $400 million worth of diesel, $230
million worth of petroleum in 2010.
2010 I-XII IMPORTS
EU countries
Other countries of Europe
of which Russia
Northeast Asia

$ million

% of total

318.8

9.7%

1,148.6

35.0%

1,090.2

33.3%

1,386.7

42.3%

of which Japan

197.6

6.0%

of which China

1000.2

30.5%

121.1

3.7%

43.9

1.3%

Southeast Asia
Other countries of Asia
Africa

9.5

0.3%

America

199.8

6.1%

Australia

49.5

1.5%

Total

3,277.9

Source: National Statistics Office

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33.3% of all imports came from Russia in 2010, and 30.5% came from China,
maintaining the situation of Russia being the primary supplier and China being the
major buyer. The figure below displays historical proportions of imports that came
from the two neighbouring giants.
IMPORTS FROM RUSSIA AND CHINA, IN %
China

Russia

Other

100%
80%
60%
34% of imports from Russia, 30% from
PRC

40%
20%
May-10

Jul-09

Sep-08

Nov-07

Jan-07

Mar-06

May-05

Jul-04

Sep-03

Nov-02

Jan-02

Mar-01

May-00

Jul-99

Sep-98

Nov-97

Jan-97

0%

Source: Bank of Mongolia

9.8
Recovery after crisis due to strong policy
response and IMF loans

Successful policies included adopting and

stabilising a flexible exchange rate by
increasing policy rate 400bps, fiscal
responsibility laws and revised banking
laws

Implemented Policies

As the IMF judges, Mongolias recovery after the crisis was largely due to strong
policy responses made by the authorities and substantial aid coming from
international communities, including a loan from the IMF itself. According to the
IMF, a number of successful policies have been implemented:
1) A flexible exchange rate regime adopted in early 2009, supported by a
forthright 400 bps increase in the policy rate. The new regime efficiently
stabilized the foreign exchange market and Mongolias foreign reserves
reached $1.7 billion (29% of GDP) in September 2010.
2) Fiscal adjustments were made in 2009 and continued in 2010 creating
financing constraints and bringing down fiscal deficit to 0.4% of GDP.
Parliament passed a comprehensive fiscal responsibility law in 2010.
3) Parliament approved a revised banking law that strengthened the
regulatory framework. Tougher supervision regulations were issued
bolstering the banking system and ensuring that banks could play their
crucial role in fostering development by providing credit to the private
sector.

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9.9

Foreign Direct Investment

Inflow of FDI into Mongolia during 2005 2007 was equivalent to the total level of
direct investment received throughout 1990-2004. Net value in 2007 was 500
million USD, 67% of which was accounted for by mining alone and 22% by trade
and food.
FDI, $ billion
4
3.5
3
2.5
2
1.5
1
0.5
0

FDI is expected to total around $11

billion over the next 4 years

2007

2008

2009 2010(f) 2011(f) 2012(f) 2013(f) 2014(f)

Source: Trade and Development Bank

9.10 Currency
A flexible exchange rate regime was adopted in early 2009. Prior to 2005, when
exports were insignificant, the manufacturing industry was almost non-existent,
the overall supply of products came primarily from imports, and the supply of
international reserves were highly deficient, the de facto peg of the MNT against
USD in all probability was the most sensible way of protecting the currency from
continuous depreciation.
Recently, with the increasing amount of mining related foreign capital flowing into
the country, the Mongolian Tugrik started appreciating. In December 2010, the
MNT/USD rate gained in value 15% since January 2010, when it was 1,446, which
made it the second best-performing currency against the dollar in 2010.
EXCHANGE RATE, MNT/USD
1600
1500
1400
1300
1200
Jan10

Jan09

Jan08

Jan07

Jan06

Jan05

1100
Jan04

MNT second best performing currency

against the dollar in 2010

Source: Bank of Mongolia

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Banking Sector

10 Banking Sector
14 commercial banks active in Mongolia, of which the biggest are
Golomt Bank, Xac bank, Khan Bank and TDB (Trade &
Development Bank)

14 commercial banks, 188 NBFIs, 207

saving & credit (S&C) cooperatives

According to the Trade and Development Bank, the Mongolian financial sector
consists of 14 commercial banks, 188 NBFIs and 207 S&C (saving and credit)
Cooperatives. NBFIs provide similar products and services to banks such as loans
to small borrowers, money transfers and FX trading, although they do not take
deposits. S&C Cooperatives mostly provide micro-finance lending.

10.1 Background
During the transition from Soviet style
mono-banking to commercial banking,
several banking crises occurred in 1994,
1996 and 1998 due to high levels of nonperforming loans.

Mongolias banking industry grew from a centrally planned, soviet-style single

bank system in which the State Bank of Mongolia performed all banking duties
within the country. As Mongolia transitioned into a free-market economy in 1991,
the first steps taken by the government to reform the financial sector were the
development of a two-tier banking system in which the Central Bank controls the
activities of state-owned and commercial banks, who in turn took over all lending
activities to the public. The commercial banks that emerged inherited nonperforming loans from the former state bank and also approved loans to poorly
performing enterprises. Several banking crises occurred during the transition
period in Mongolia in 1994, 1996 and 1998 as increasing NPLs damaged the
solvency of the banking system. Many banks faced severe liquidity issues and
public confidence in the banking system fell. In addition, institutional weaknesses
in the new banks, inadequate regulatory frameworks and general macroeconomic
problems resulted in eventual deposit runs.
To restore confidence in the banks, the Government initiated financial sector
reforms, promoting an efficient financial system. Previously insolvent banks were
rehabilitated, state ownership in banks gradually divested and foreign ownership
in the banking sector increased to help improve competition and efficiency.

2006: reckless lending of S&Cs led to

flight of funds to safe commercial banks
2009: Anod Bank closure and Zoos Bank
into state-ownership due to liquidity
issues

The reckless lending practices resulted in collapse and closure of many S&C
Cooperatives in 2006 and ever since there has been a flight of funds from NBFIs
and S&C Cooperatives to commercial banks considered safe deposit holders. In
2006, the FRC was formed by the Government to regulate all financial institutions,
with the exception of commercial banks which remained under the Bank of
Mongolias supervision.

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Banking Sector
10.2 Banking sector performance during 2008/2009 financial crisis
In 2009, the total assets of the banking sector grew by 21.1% $3.57bn from the
previous year, of which foreign currency appreciation was responsible for 13.3 out
of the 21 percent of this growth. The liquidity of banks became an issue due to the
economic downturn, the insolvency of Anod Bank, and tugrik depreciation which
lasted until Q2 2009.

3,500

80

3,000

70
60

2,500

50

2,000

40
1,500

30

1,000

20

500

10

Total assets/GDP ratio, %

Total assets, $ million1

BANKING SECTOR ASSETS AND FINANCIAL INTERMEDIATION

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Note: 1. Exchange rate as of 31 Dec 2009

Source: Bank of Mongolia
The govt guarantee on deposits reduced
outflow of deposits

Bank deposits grew by 34.5% in 2009

The rate of decline in deposits, which had begun to decrease in October 2008,
began to slow as a result of the governments blanket guarantee on deposits, and
they soon reached pre-crisis levels of $2bn. However, Zoos Banks loan portfolio
deteriorated significantly, being unable to fully commit to repayment of
customers' money because of violating the limit of a single borrowers exposure,
and in November 2009 was taken into state ownership. However, the collapse did
not negatively affect the overall confidence of depositors, because in 2009 total
deposits totalled $1.46bn and grew by 34.5%. To provide liquidity support, the
Bank of Mongolia extended interbank loans of $77.6m to banks via new financial
instruments such as reverse repo, collateralized loan and foreign currency swaps,
and consequently the acid ratio of the banking sector grew by 16.6 percentage
points to 38.3% in 2009 compared to 2008.
The Mongolian government put a total of $53m on deposit into three banks, all of
which were repaid by the end of 2009. Total funding of $66.25m was given to 5
banks, who in turn lent $44.9m to 23 companies to support the gold mining
activities and improve their liquidity.
th

Until 25 November 2012, the governments blanket guarantee covers all money
on deposit. Although this has beneficial effects for the banking system, the
potential costs for the government (up to $2.5bn or 40% of GDP) could place
pressure on the state budget.

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Banking Sector
10.3 Strengthening of the Financial System
Bank examinations more driven by risk
assessments

Loan reserve requirements increased

Degree of prudence in the financial system in Mongolia has increased over the
last ten years, and particular focus has been placed on detecting potential
problems relating to loans. Some of the measures taken by the central bank
include: introducing prudential norms, better enforcement and supervision, loan
classification and loan loss provisioning systems. Banks undergo risk assessments,
loan loss reserve requirements have increased (1% reserve for performing loans,
5% for overdue loans up from 1%). Loans are classified as overdue if the interest
payments are overdue, not just on whether the principal is up to date.
Capital adequacy principles for banks in Mongolia are very similar to international
standards, and prudential norms were introduced to the Mongolian banking
sector in 1996.
For the tier 1 ratio, the minimum capital adequacy for commercial banks is
currently 6% and the total capital ratio is 12%. These figures have increased from
2% and 4% respectively. The Central Bank also increased the minimum paid-in
capital required for commercial banks to the current level of $6.5m and failure to
comply results in revocation of the banks license.

2005: Financial stability committee

To monitor the stability of the financial system, a financial stability committee was
established in 2005. The committee ensures public awareness of possible financial
crises, interacts directly with the management of financial institutions, and gives
financial support when needed.

From 2003-2009, deposits grew 5 fold,

loans grew 6 fold

Total deposits in the banking system from 2003-2009 increased 5x from $460
million to $2.42 billion and had further increased to $2.87 billion by mid 2010.
Similarly, loans which totalled $360 million in 2003, grew to $2.15 billion in 2009
at a CAGR of 35% for the six year period, and had further increased to $2.4 billion
by mid 2010. There is however still room for banks to lend more since the present
liquidity in the banking system remains above the minimum regulatory level of
12%.

Banks could further increase their loan

portfolios
Capital adequacy ratio for banking
system (mid 2010) = 14%

Banking sector capital (prepaid tax deducted) reached $190 million at the end of
2009, and increased by 21% to $226 million by mid 2010. The risk weighted
capital adequacy ratio for the whole banking system (one of the main indicators
of sectors ability to withstand risk) stood at 14% by mid 2010, exceeding the
minimum central bank requirement of 12%.

Max loan exposure to single borrower =

20% of banks total capital

Regulations have been tightened on lending to related and other parties, and total
loans to a single related party must not exceed 5% of a banks total capital, while
total loans to a single borrower must not exceed 20% of the banks total capital.

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10.4 Deposits and Loans
The following table sets forth the year-on-year credit and deposit growths of the
banking sector:
LOANS AND DEPOSITS AS OF 31 DECEMBER
$ millions, except percentages
1

2003

2004

2005

2006

2007

2008

2009

2010

Loans

353

485

688

977

1,644

2,108

2,124

2,350

% yoy

91.0

37.4

41.9

42.0

68.3

28.2

0.8

13.9

Deposits

457

563

814

1,081

1,781

1,782

2,385

2,825

% yoy

63.7

23.2

44.6

32.8

64.8

0.1

33.8

30.5

Loan/Deposit, %

77.2

86.1

84.5

90.4

92.3

118.3

89.1

83.2

Assumed MNT/USD rate = 1250.

Deposits include current, savings and time deposits.
Source: Bank of Mongolia, mid 2010
There are 4 banks who dominate commercial and retail banking in Mongolia who
extend approximately 70% of all loans 73% of all deposits. These banks are TDB,
Golomt Bank, Khan Bank and Xac Bank, and their market shares are shown in the
following table:
TDB

Golomt Bank

Khan Bank

Xac Bank

Assets

16.2%

23.8%

28.5%

6.6%

Loans

14.9%

22.9%

22.8%

9.2%

Deposits

16.7%

18.4%

33.9%

3.7%

Source: Public filings made by each bank, mid 2010

TOTAL LOANS OUTSTANDING ($m)
2500
2000
1500
1000
500

Oct-09

Jan-09

Apr-08

Jul-07

Oct-06

Jan-06

Apr-05

Jul-04

Jan-03

Oct-03

Apr-02

Jul-01

Oct-00

Jan-00

Apr-99

Jul-98

Oct-97

0
Jan-97

TBD, Golomt Bank, Khan Bank & Xac

Bank are the most significant commercial
banks

Source: Bank of Mongolia

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Largely increasing deposits into banks

Appreciation of the tugrik, commercial bank competition, rising incomes and

improved macroeconomic conditions have all helped increase bank deposits in
recent times. From 2003 to 2009, total deposits grew by a CAGR of 31.7% from
$464 million to $2.42 bill
billion
ion and further increased to $2.86 billion in 2010. Current
account balances totalled $840 million while time deposits totalled $1.69 billion
by mid 2010.

DISTRIBUTION OF LOAN PORTFOLIO BY ECONOMIC SECTOR

Agriculture

5.8%

Mining

13.2%

26.0%

Manufacturing
Construction

15.5%
7.1%

Motor vehicles
Real estate
14.4%

18.0%

Other

Source: Bank of Mongolia

63% of credit extended to private sector
36% to individuals
1.1.% to public sector

In 2001 the Government relaxed regulation on private real estate ownership,

which led to an expansion in credit for housing. In 2010, 63% of credit was lent to
the priv
private
ate sector, 36% to individuals and a mere 1.1% of loans were extended to
the public sector. The rate of default was 8.4% in 2010 (in 1999 this peaked at
51%).

Total loans outstanding,

$ billion1

2.50

80
70
60
50
40
30
20
10
0
-10

2.00
1.50
1.00
0.50

Aug-10

Apr-10

Dec-09

Aug-09

Apr-09

Dec-08

Aug-08

Apr-08

Dec-07

Aug-07

0.00

Annual growth, % yoy

Default rate = 8.4%

Note: 1.Assumed exchange rate: 1USD=1250MNT

Source: World Bank

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Banking Sector
10.4.1 Non-Performing Loans (NPLs)

NPL ratio (% of total)

Loans (% of total)

Other sectors
Wholesale and retail
Construction
Manufacturing
Mining and quarrying
Agriculture
0

10

15

20

25

30

35

Source: World Bank

10.5 Banking Interest Rates

INTER-BANK INTEREST RATES, %

25.0
20.0
15.0
10.0
5.0

May-10

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

0.0
Mar-08

In 2009, NPL ratio grew by 12.8

percentage points to 20%

The 2008/2009 financial crises and economic slowdown led to a decline in

turnover and an increase in the rate of defaulting loans. As of 2009, NPLs
increased by $60 million in the construction sector, $48 million in the
manufacturing sector, $33 million in trading, and $28 million in the mining sector
and total number of NPLs went up almost three fold within 2009, reaching $435
million. The NPL ratio in the year went from 7.2% to 20%, eroding bank profits,
who in turn limited extension of new loans due to the increased levels of risk.

Jan-08

In 2009, number of default loans

increased 2.8 fold

Source: Bank of Mongolia

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Commercial bank interest rates offered for MNT sight deposits are persistently
higher (approximately twice the rate) than those offered for USD sight deposits.

WEIGHTED AVERAGE OF CURRENT ACCOUNT INTEREST

RATES, %
Current account IR, MNT

Current account IR, USD

3.5
3.0
2.5
2.0
1.5
1.0
0.5
Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

0.0

Source: Bank of Mongolia

Commercial bank interest rates offered for MNT time deposits are persistently
higher (approximately twice the rate) than those offered for USD time deposits.
WEIGHTED AVERAGE OF TIME DEPOSIT INTEREST RATES
(12 MONTHS), %
Time Deposit IR, MNT

Time Deposit IR, USD

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

15.0
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0

Source: Bank of Mongolia

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Banking Sector
While back in February 1998 it cost 48% to borrow money from a bank in MNT
and around 40% in USD, in February 2010 the monthly loan interest rates fell to
around 20% in MNT and 14% in USD.
AVERAGE MONTHLY LOAN RATES, %
Loan rate, MNT

Loan rate, USD

Paid rate

60.0
50.0
40.0
30.0
20.0
10.0

Feb-10

May-09

Aug-08

Nov-07

Feb-07

May-06

Aug-05

Nov-04

Feb-04

May-03

Aug-02

Nov-01

Feb-01

May-00

Aug-99

Nov-98

Feb-98

0.0

Source: Bank of Mongolia

Assumed exchange rate throughout this

section: 1USD = 1250MNT

10.6 Bank Asset Quality

Three banks dominate the Mongolian banking sector, constituting around 69% of
the countrys total banking assets.

H2 2010:
Total loans: $2.4 bn
Performing loans grew 16% yoy
NPLs grew 16.5% yoy

According to Trade and Development Bank estimates, in August 2010 loans

totalled around $2.4 billion, performing loans and non-performing loans (NPLs)
grew by $268 million (16.1%) and $46 million (16.5%) respectively, while past-due
loans declined by $29 million (25.5%), all compared to the same period the
previous year. The top four commercial banks non-performing loan ratios fell to
3.7% on average in H2 2010 from 4.9% in H2 2009. Such good news implies
improvement of asset quality in Mongolia.

Impairment Ratio

TDB

Golomt Bank

Khan Bank

Xac Bank

5.0%

2.5%

5.4%

1.7%

Source: Public filings made by each bank, mid 2010

Q1 2010: Agric. sector loans = $124m

In 2009 the sectors with greatest loans were retail, manufacturing, mining and
quarrying, jointly accounting for 61% of total credit. Agriculture sector loans have
increased at a 40% CAGR since 2004 and reached $124 million in Q1 2010. The

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Banking Sector
table below shows loans and deposits in the banking sector as percentage of GDP
for 2008 and 2009.
2008

2009

Loans (% of GDP)

40.1

37.0

Deposits (% of GDP)

36.3

52.6

Source: Bank of Mongolia, EIU Mongolia Country Report August 2010

ASSET QUALITY BY INDUSTRY, AS OF 31 DECEMBER

2008
Performing

2009

Past due

Nonperforming

Performing

Nonperforming

Past due

Agriculture, hunting, forestry and

fishing

84.7%

4.2%

11.1%

73.3%

2.1%

24.6%

Mining and quarrying

74.2%

9.6%

16.3%

78.0%

4.0%

18.0%

Manufacturing
Electricity, gas, steam and air
conditioning supply
Water supply, sewerage, waste
management and remediation
activities

90.9%

3.5%

5.6%

76.0%

4.2%

19.8%

88.4%

11.1%

0.5%

76.8%

3.5%

19.6%

96.9%

0.3%

2.8%

98.0%

0.3%

1.7%

Construction
Wholesale and retail trade, repair
of motor vehicles and motorcycles

83.4%

6.0%

10.5%

62.1%

7.7%

30.2%

92.1%

2.2%

5.8%

80.0%

4.1%

15.9%

81.7%

1.1%

17.2%

67.6%

7.7%

24.7%

95.2%

1.4%

3.3%

87.9%

3.4%

8.7%

Transportation and storage

Accommodation and food services
activities
Information and communication

82.9%

8.6%

8.5%

91.9%

0.4%

7.8%

Financial and insurance activities

94.5%

0.1%

5.4%

85.9%

0.4%

13.7%

Real estate activities

Professional, scientific and technical
activities
Administrative and support service
activities
Public administration and defence;
compulsory social security

92.5%

1.6%

5.9%

81.9%

6.8%

11.3%

94.7%

0.0%

5.3%

85.9%

12.5%

1.5%

92.6%

1.9%

5.5%

74.9%

15.2%

9.9%

99.5%

0.0%

0.5%

97.6%

0.6%

1.8%

Education
Human health and social work
activities

72.8%

1.7%

25.5%

73.7%

3.3%

23.1%

94.8%

1.7%

3.6%

90.6%

1.8%

7.5%

Other

93.3%

2.6%

4.1%

91.4%

2.2%

6.4%

Total

89.3%

3.6%

7.1%

78.0%

4.6%

17.4%

Source: Bank of Mongolia

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10.7 Banking System Capitalisation
Minimum cap. requirement = $6.4mn
2010 general cap. adequacy ratio = 14%
(2.3% above required)

The minimum capital requirement for commercial banks ordered by the Bank of
Mongolia is MNT 8.0 billion ($6.4 million). Mongolian banks are in general very
well capitalised and according to the Trade and Development Bank indicators, the
banking systems average capital adequacy ratio increased to 14% in 2010 (2.3%
above the minimum requirement) from 13.3% in 2008.

Capital Adequacy
Ratio

TDB

Golomt Bank

Khan Bank

Xac Bank

13.9%

14.5%

17.2%

13.9%

Source: Public filings made by each bank, mid 2010

10.8 Banking Law of Mongolia (2010)

The following information has been provided by the Trade and Development Bank
of Mongolia. Commercial banks and their activities are governed by the Banking
Law of Mongolia. A new Banking Law was adopted in March 2010 for better
implementation of state policies and stability and efficiency of the banking sector.

10.8.1 Summary of the Ammended Banking Law

Transfer of a Banks Shares

Banks must inform the Bank of Mongolia (BoM) in the following cases:
if the size or structure of their share capital changes
if a party attempts to become a shareholder with significant influence
in a bank, or an existing shareholder with significant influence changes
the size or structure of their ownership interest in the bank

A shareholder with significant influence in one bank is not allowed to

become a shareholder with significant influence in another bank, along
with related parties.

Capital requirements

Minimum amount of paid-in capital for banks as determined by the BoM

is MNT 8.0 billion ($6.4 million at 1USD = 1250 MNT exchange rate).

A bank may distribute dividends only if, following the dividend payment,
it will continue to meet the mandatory prudential ratios set by the BoM

A bank must quantify decreases/increases in its capital in accordance

with the profits earned or losses accrued from banking activities and
fluctuations in the size of its compulsory reserve fund

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Allocation of funds from the reserve fund will be administered by the

BoM and the Ministry of Finance (MoF)

Law on Deposit Guarantee (2008)

In line with the Deposit Guarantee Law effective until November 2012,
the Mongolian Government must insure all current accounts and deposit
accounts of citizens and legal entities at Mongolian commercial banks

Fully covers the risk of non-repayment by banks

Deposits of related persons, depositors or holders of subordinated or

convertible debts and deposits from the interbank market or from
foreign banks and financial institutions are excluded from this scheme

Law on Executing Domestic Settlement Transactions by National Currency

(2009)

All payments and settlements within the territory of Mongolia must be

conducted in MNT (domestic transactions cannot be made in foreign
currency)

MNT contracts can not be indexed to any foreign exchange index

Savings deposits, loans from bank and non-bank entities, other

equivalent services, and derivative financial agreements and their
obligations can be expressed and executed in foreign currencies

Accounting Law (2001)

All business entities must adopt and adhere to international accounting

standards, and submit audited quarterly financial statements and reports
to the MoF

MoF and accounting associations are responsible for formulation of

generally accepted accounting principles and implementation of
international accounting standards

The Accounting Council is responsible for developing accounting forms

and methodology, and for training of professional accountants

MoF is responsible for implementation of reforms to accounting and

auditing systems

Mongolia has three accounting associations:

The Accounting Council (26 members),
The National Association of Certified Public Accountants (200 associate
unlicensed accountants)
The Union of Finance Specialists Association (MoF accountants)

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10.9 Banking Sector 2010 Summary
Trade and Development Bank inferences inform that:
NPLs as % of total loans fell to 17%
Levels of NPLs were high
Real i.r. plummeted
Bank lending more concentrated
MNT deposits rose 51% yoy
Nominal i.r. remained high

In Q3 2010 non-performing loans with arrears in principals as

percentage of total outstanding loans declined to 17% from 25% in
November 2009.
General levels of NPLs were considerably high throughout 2010.
Real interest rates plummeted, resulting in negative returns, especially
on depository accounts, due to inflationary pressure.
Bank lending further concentrated with around 50 largest borrowers
accounting for approximately 30% of total loans or $690 million.
MNT deposits continued to rise reaching $1.3 billion in mid 2010 (51%
increase yoy), despite falling real interest rates on deposits, owing to the
Deposit Guarantee Law and greater currency appreciation expectations
Nominal interest rates on lending and borrowing remained high as
banks needed capital due to liquidity problems

10.10 Banking sector prospects

Weaknesses of the banking sector
remains a priority

Great possibilities in front of commercial

banks

Credit demand will increase

Banks must be restructured

Increasing supervision from BoM

Limited coverage of Deposit Guarantee

Business activities increased in 2010. Nevertheless, coping with the fundamental

weaknesses of the banking sector in Mongolia remains a top priority for the
officials in charge. Based on the experience gained from the recent turmoil, the
necessity to create a sound banking system to cushion against future frictions in
the economy is now deemed to be a matter of utmost importance.
On account of the ongoing mining boom and expected economic prosperity,
commercial banks in Mongolia at present have the possibility to develop a firm
basis for continued growth by improving their internal control, corporate
governance and risk management solutions.
Demand for credit will substantially increase in the coming five years as greater
necessity for capital will spread across all sectors in the economy. Commercial
banks must be prepared to meet the rising demand in order to ensure that the
flow of funds in and out of the country will not circumvent the local banks.
The collapse Anod and Zoos sent an essential signal that financial institutions in
Mongolia have to be restructured to a certain degree. The Bank of Mongolia is
working on implementing a better supervisory system, such that each banks
operations will be examined independently and in stages.
Protection provided by the Deposit Guarantee Law is not indefinite. The scope of
this move taken by the government to rescue the banking industry on the verge of
its collapse has now been confined. According to the July 2010 amendments to
the Deposit Guarantee Law, banks will have to pay a fee equivalent to 0.5% of
cashable deposits in order to be entitled for future governments protection
against insolvency. The extent of the guarantee has also been limited, the
following items have been removed from the coverage:

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Banking Sector
-

Amendments to Deposit Guarantee in

line with international principles

current accounts and deposits assembled from the interbank market,

foreign banks and financial institutions
current accounts and deposits of individuals and their related parties
who have loans and other assets
guarantees and letters of credit and other contingent liabilities in a
specific bank
cashable deposits with interest rate that exceeds the BoMs refinancing
rate

These amendments were made in line with international principles, such that
excessive risk taking by commercial banks is restrained and fiscal burden to
taxpayers is reduced, preventing against ill-treatment of regulations in favour of
commercial banks self interest.

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The Central Bank

11 The Central Bank

The Bank of Mongolia (BoM) is the central bank of Mongolia. It
reports to Parliament and is independent from the Government.

According to the Bank of Mongolia, their main objectives are to formulate and
implement monetary policy by regulating money, supervising banking activities,
organising inter-bank payments and settlements, holding and managing the
States foreign currency reserves and issuing currency into circulation. The Bank is
headed by a Governor, managed by a 12-man Board of Directors and has a
representative office in London.

11.1 Bank of Mongolia Monetary Policy

Final decision making at the BoM on monetary policy is done by the President of
the Bank, although his decision is supposed to be based on the advice of the 12
strong management board. Board meetings are regularly held and discuss the
following issues:

Changing or keeping the policy rate

Defining the principles of open market operations
Defining the amount of long term central bank bills
Changing or keeping the reserve ratio requirements
Approving or introducing new policies or regulations on monetary policy,
and additions or amendments on existing regulations
Discussing state monetary policy, monitoring and evaluating current
results, presenting the decisions to the parliament and getting approval
Forecasting economic indicators
Balancing foreign exchange rates according to monetary policy

Source: Bank of Mongolia

11.2 Bank of Mongolia Policy Rate

In the case of the Bank of Mongolia, monetary policy works by taking excess
money out of the economy and placing it in the Central Bank Bill. The interest rate
on the Central Banks 7 day bill has been named the official Bank of Mongolia
policy rate since July 2007. When this rate moves it affects the interest rates
offered by commercial banks, and it is not only the indicator of the monetary
direction of Mongolia but also the inter-bank rate. The Central Bank bill has a 7
day term at fixed interest and is traded every Wednesday on the inter-bank
market. All other rates are derived from the policy rate:

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Repo rate (15%) = policy rate +4%

Collateralized loan rate (19%) = policy rate +8%
Overnight rate (20%) = policy rate +9%

Source: Bank of Mongolia

Policy Rate
Jul 07
6.40%
Oct 07
7.40%
Nov 07
8.40%
Mar 08
9.75%
Sep 08
10.25%
(inflation = 34%)
Mar 09
14.00%
Sep 09
10.00%
Apr 10
11.00%

In July 2007, the initial Bank of Mongolia policy rate was 6.4%. In October and
November of 2007 the Bank increased it by 1%, in March 2008 it increased 1.35%
and by a further 0.5% in September 2008, and thus it reached 10.25%. By
November 2008, it was 9.75%. By the end of 2008/start of 2009 the global
slowdown resulted in inflation reaching 34% in Mongolia, and so the BoM rate
was hiked to 14%.
The Bank rate was subsequently reduced in May, June and September of 2009 to
10%. Due to the particularly harsh winter of 2009/2010 (dzud), from April 2010
the Human Development Fund started to allocate money to people, resulting in
rising inflation. The Bank of Mongolia increased the policy rate by 1%, and it is
now at 11%.

BANK OF MONGOLIA POLICY RATE, %

14.0
13.0
12.0
11.0
10.0
9.0
8.0
Dec-10

Oct-10

Aug-10

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Jun-09

Aug-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

Feb-08

Dec-07

7.0

Source: Bank of Mongolia

11.3 Central Banks non-standing facilities

11.3.1 Collateralized loan

BoM can provide 90 day loans to banks
in financial difficulty. 2009 collateralised
loans = $84m

Banks that have good long-term liquidity but get into short term problems can be
lent money up to 90 days, but with collateral backing. The collateralised loan rate
was 8% higher than the policy rate at the start of 2010. In 2009, the Central Banks
collateralised loan balance was $84 million. $77 million was extended according to
The Deposit Insurance Law and $6.3 million of it extended according to
Collateralised Loan Regulation

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The Central Bank

11.4 Objectives of monetary policy
No restrictions on inflows or outflows of
foreign currency in Mongolia

A goal of the Bank of Mongolia is to insure the stability of the Tugrik. The capital
account is open in Mongolia, meaning there are no restrictions on inflow or
outflow of international currencies or international investment or trade. An open
capital account, low inflation control through interest rate mechanisms and
stability of the exchange rate cannot all be simultaneously controlled as they are
not all mutually exclusive, and only a combination of 2 can be controlled. Because
inflation and exchange rate stability usually takes five or more years to harmonise,
the BoM only focuses on keeping inflation in check and lets the exchange rate be
determined by market forces. CPI is not supposed to exceed 8% according to the
State Monetary Policy Guidelines (2010). If CPI remains lower than 8% and
exchange rate fluctuations are kept at a sensible level then Inflation and exchange
rate stability are assumed, respectively.

11.5 Bank of Mongolia Standing Facilities

11.5.1 Overnight loan

An overnight loan which starts before the closing of the clearing transaction and
ends at the beginning of the next clearing transaction is available at a rate of 9%
higher then the policy rate, at present.

11.5.2 Repo financing

$367m was given through repo financing
in 2009

Loans from the central bank with a Repo rate 4% higher than the policy rate and a
term of up to 90 days can be lent to commercial banks with collateral of central
bank bills, government bonds, or bonds of the Mortgage Corporation of Mongolia
(MIK). $367 million was given through repo financing in 2009 at an average rate of
16.84%.

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11.6 Central Bank Bond Rate
CENTRAL BANK BOND RATE, % (1998-2010)

Jan-10

Apr-09

Jul-08

Oct-07

Jan-07

Apr-06

Oct-04
Jul-05

Jan-04

Apr-03

Jul-02

Oct-01

Jan-01

Apr-00

Jul-99

Oct-98

Jan-98

40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0

Source: Bank of Mongolia

Mongolian bond market highly underdeveloped

The Mongolian economy is 95% reliant on the banking industry, and the bond
market is very primitive. As a result, government bonds, despite being the least
risky investment vehicle, are hardly ever used. The Central Bank Bond is
preferred.

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Mongolian Taxation System

12 Mongolian Taxation
System
The general rate of tax in Mongolia is 10% income tax for
individuals and corporation earnings under MNT 3bn ($2.4m)
and 25% on corporation earnings over MNT 3bn. VAT is 10%

12.1 General Taxation

A taxpayer is the Mongolia tax system comprises of taxes, fees and payments. The
State Great Khural (Parliament) of Mongolia is authorized to introduce or amend
taxes by law.

12.1.1 Taxpayers
The following individual, business entity or organization, which have taxable
income, property in possession, and rights:
1) A citizen of Mongolia;
2) A foreign resident and a stateless person in the territory of Mongolia, a
non-resident person who gains income in Mongolia;
3) Foreign and domestic business entity, organization and fund in the
territory of Mongolia, legal person which is not located in the territory of
Mongolia, but gains income in this country;
4) A Representative Office of a foreign business entity or organization which
gains income in Mongolia.

12.2 Corporate Income tax

12.2.1 Taxpayers

A corporate entity is a taxpayer, provided it produces revenue subject to

tax at the end of each accounting year or is bound to pay tax under this
law, notwithstanding the absence of taxable profits.
A taxpayer defined above can be either a permanent resident or nonresident taxpayer of Mongolia.
Permanent resident taxpayer in Mongolia means the following corporate
entity:
A corporate entity incorporated under the laws of Mongolia;
A foreign corporate entity with its head office located in
Mongolia;

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Mongolian Taxation System

Non-resident taxpayer in Mongolia is the following corporate entity:

A foreign corporate entity that conducts its business in Mongolia
within the frame of its representative office;
A foreign corporate entity that earns income in Mongolia in a
form other than that set forth in the previous bullet point
A representative office means any of the following that partially or
wholly carries out business activity of a foreign corporate entity:
Branch (unit, section);
Plant;
Trade and/or service unit;
A mine that extracts oil, natural gas or other natural resources.

12.2.2 Tax Rate

If annual taxable income is 0-3 billion MNT, it shall be taxed at the rate of
10 percent. If annual taxable income exceeds 3 billion MNT, it shall be
taxed at 300 million MNT plus 25% of income exceeding 3 billion MNT.
Taxpayer's income is taxed at the following rates:
-

Income from dividend at 10%;

Income from royalty at 10%;
Income from gaming and lottery at 40%;
Income from sale or rental of erotic publication, book, and video
recording and erotic performance at 40%;
Income from sale of immovable property at 2%;
Income from interest at 10%;
Income from sale of right at 30%;
If a representative office of a foreign company transfers its
profits overseas, the transferred income at the rate of 20%

The following income of a non-resident-taxpayer earned in Mongolia is

taxed at the rate of 20%:
Dividend income received from a corporate entity registered
and operating in Mongolia;
Loan interest and guarantee payments
Income from royalty, leasing interest, payment for
administrative expenses, rent, management expenses, and
income from use of tangible and intangible asset;
Income from goods sold, work performed and services provided
in the territory of Mongolia.

12.2.3 Tax exemption

The following income of a taxpayer is tax exempt:

Interest of government notes payable (bond);

Income stated in paragraph 1. of the previous section and income from
divided earned by a non-resident.

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Mongolian Taxation System

Taxpayer operating in the territory of Mongolia under a product-sharing

contract in oil industry and derived from sale of its share of product;
Income of a cooperative earned from sale of its member's products
through intermediary services.

12.3 Personal income tax law of Mongolia

12.3.1 Taxpayer

A citizen of Mongolia, foreign national and stateless person who resides

in Mongolia and earns income subject to tax for the tax year or who is
liable to pay tax, even though the same income is not earned, must be a
taxpayer.
The taxpayer is classified as a resident taxpayer of Mongolia and nonresident taxpayer of Mongolia.

A resident taxpayer of Mongolia

The following individuals are a resident taxpayer of Mongolia:

An individual with a residence in Mongolia;
An individual who resides in Mongolia for 183 or more days in a
tax year;
A civil servant of Mongolia appointed to work overseas.
A foreign national appointed at a foreign diplomatic mission, consulate,
the United Nations, and their branches and his/her family members who
reside in Mongolia are not considered residents of Mongolia.

A non-resident taxpayer of Mongolia

A taxpayer who does not possess a place for residence and did not reside
in Mongolia for more than 183 days in a given year.

12.3.2 Tax rate and amount

A tax rate of 10% is imposed on the annual amount of the income of

anyone who is specified.
The following tax rates are imposed on the income specified in the
following provisions of this law:
-

Tax rate on income from sale of immovable property is 2%;

Tax rate on income earned by creating a scientific, literature,
and art work, innovating a new work, product prototype, and
advantageous design, organizing and participating in a sports
competition and cultural performance, and on income from
rewards from a sports competition and cultural performance,
and prizes is 5%;

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Mongolian Taxation System

-

Tax rate on income from quiz, gambling, and lottery is 40%

12.4 Value Added Tax (VAT)

Value Added Tax at the rate of 10% is imposed on the supply of taxable goods and
services in Mongolia, and on imports into Mongolia.

12.4.1 Scope of VAT

VAT is levied on the following in Mongolia:




Work performed and services rendered in Mongolia;

All goods imported into Mongolia to be sold or used; and
Goods exported from Mongolia for use or consumption outside
Mongolia.

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Mongolian Stock Exchange

13 Mongolian Stock
Exchange
The second smallest bourse in the world by market cap, yet the
second best performing market in the world in 2010

13.1 Overview
1991 MSE established
475 companies initially floated after
privatization of state property

1994: Law of Securities and Exchange

1995: The Corporate Law
1996-2004: $32m shares traded in this
period. A few had gained large stakes in
the companies
Nov 2010: 325 companies on MSE, only
30 stocks actively traded

In 1991, the Mongolian Government established the Mongolian Stock Exchange

(MSE) with the intention to implement its Privatization Policy as a base of
transition from a central planned economy to a market economy. During the first
phase of privatization between 1991 and 1995, $17m of state assets were
privatized by distributing vouchers worth $8 to every citizen of Mongolia, and 475
companies were floated on the MSE.
As the Mongolian Parliament enacted the law of Securities and Exchange and The
Corporate Law in 1994 and 1995 respectively, the secondary market began by
establishing 28 brokerage firms. But during the start of the secondary market
between 1996 and 2004, shares worth over MNT38.8bn ($32.1m) had been
traded and a few people had bought a large proportion of the shares, taking single
control of the companies. As of the end of November 2010, there are 325
companies listed on the MSE and over 80% of stocks are held by a few people or
free float of the overall market is lower than 20%. There are around 30 stocks
actively traded on the MSE.
NUMBER OF LISTED COMPANIES

325

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

436 430 418

410 401 403 402 395 392
387 383 376
358

1997

1996

1995

475 458

Source: Financial Regulatory Committee (FRC)

Since 1996: $233m raised in govt bond,
corporate bond and public offerings

Since 1996, MNT275.7bn ($233.2m) has been raised by issuing a government

bond, a corporate bond and a public offering of shares through the MSE. The first
government bond trading was held in 1996 and corporate bond trading was

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Mongolian Stock Exchange

introduced in 2001. To date, government bonds worth MNT200.2bn ($171m) and
corporate bonds worth of MNT12.9bn ($11m) have been issued.
GOVERNMENT BONDS, MNT BILLION
250.0
200.2
200.0
150.0
100.0
50.0

11.1

0.1

30.8 41.7 21.7

39.6
12.5 6.8 4.5

30.0
1.5
1996-2010

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

0.0

Source: MSE
CORPORATE BONDS, MNT BILLION
12.92

2.60

2001-2010

2010

2009

2008

2007

2006

0.69 0.42 0.50

2005

2003

2002

1.81

2004

2.96 2.74
1.20
2001

14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0

Source: MSE
14 IPOs raising $51m: 1 IPO was
unsuccessful

Since the first IPO on the MSE completed in 2005 by Hotel Mongolia, there have
been 14 IPOs raising a total of $51m. Out of them, 1 IPO was unsuccessful, two
companies were bankrupted and one company changed operation.

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FUND RAISING THROUGH IPO, MNT BILLION
70.0

62.52

60.0
50.0
40.0

34.01

30.0
16.95

20.0

2.70

0.40
2010

8.42
0.04

2009

10.0

2005-2010

2008

2007

2006

2005

0.0

Source: MSE
Market Cap/GDP = 15%

LSE recently won bid for tender of

management

Although in recent years the MSE has had formal connections with over 10
Exchanges, signed an MOU with 7 stock exchanges, become a member of
Federation of Euro-Asian Stock Exchanges (FEAS) and the Asia Oceania Stock
Exchanges Federation (AOSEF), the Mongolian Stock Exchange is still the second
smallest bourse in the world after Laos. Penetration rate is very low compared
with other emerging and frontier markets, with a Market Cap/GDP ratio of only
15%, but the Mongolian stock exchange has already stepped towards the verge of
a new development era. Recently, the London Stock Exchange won the bid for
tender of the management of the MSE with its reforming vision that includes
normal custody, electronic trading and audited financials published in English.

13.2 The second best performing market in the world

Top-20 index up 6 fold in 3yrs

The MSEs benchmark index called Top-20 surged six-fold over the last 3 years
due to the following very positive factors:
1) Enormous, world-class mineral projects such as Oyu Tolgoi, the largest
copper deposit in Asia, and Tavan Tolgoi, the second largest,
undeveloped coal deposit in the world, are expected to bring in 2 to 3
times the current GDP in direct investment into this small, narrowly
based economy, causing a significant spill-over effect.
2) Investors optimism about the local listing of at least 10% of the
strategically important deposits stake in accordance with the new
mining law.
3) Inflow of foreign funds into capital market on the back of further
privatization of MSE listed coal mines which are undervalued (enterprise
value to reserve ratio of lower than 1x).
In the short term, the biggest risk of portfolio investment into the MSE is the
intention of major shareholders of some blue-chips to buy out shares cheaply.

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In last year:
Tavan Tolgoi (biggest company on MSE,
coking coal) up 300% ($170m)
Shivee Ovoo up 325% ($115m)
Baganuur up 185% ($110m)
Sharyn Gol up 525% ($52m)

The best contributors to the growth in 2010 were mostly coal miners such as
Tavan Tolgoi (known as small TT), the biggest company on the MSE and a coking
coal mine exporting coal to China, which surged $170m or 300% in the last year.
Shivee Ovoo, one of the strategically important deposits of Mongolia, rose $115m
or 325% in the last year. Baganuur, another strategically important deposit and
the second largest company at on the MSE, increased $110m or 185%. Sharyn Gol,
the first coal mine among the MSE listed mining companies which made an
internationally recognized JORC resource statement on their deposit, is up $52m
or 525% YTD.

15 mining companies on MSE

On the MSE, there are just 15 mining companies, out of them 10 are coal miners
and the remaining 5 are geological exploration companies. But only 6 of them are
over $5m market cap companies.

Additional 18 mining companies

operating in Mongolia listed abroad

In addition to the potential development of the domestic capital market, there are
18 mining companies operating in the Mongolian mining sector listed on the
international stock exchanges, worth over $29bn or 5 times the Mongolian GDP,
and all Mongolian leading business groups are still not listed on the domestic
market.

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14 Mining
Mongolia is considered one of the last mining frontiers.

14.1
Mongolias resources remain mostly
untapped

Only 27% of the Mongolian land has

been mapped to a scale of 1:50000

Possibilities to invest in many large-scale

investments, including Tavan Tolgoi

Mining Sector

Mongolia is now in the spotlight for something other than Chinggis Khans name.
Recently explored Mongolias vast mineral resources have caught the attention of
many investors. The history of resource identification goes back to when British
exploration te
teams
ams first came to the country over a century ago. During the era
when Mongolia has been a Republic and a satellite state of the Soviet Union,
Russian scientists discovered numerous mineral deposits with significant reserves.
Some of them were brought into function, including Erdenet Mining Corporation
(EMC), a copper concentrate producing Mongolia
Mongolia-Russian
Russian joint venture, located in
the city of Erdenet. Today the copper factory remains a key constituent of the
government revenue and is one of the biggest copp
copper
er deposits in the world.
Although the Russians did some work, much remains to be done. Only around
27% of Mongolian land has been mapped to a scale of 1:50000, therefore, the
resources remain mostly untapped. The Oyu Tolgoi deposit has been named the
bigg
biggest
est undeveloped copper and gold deposit in the world. Apart from Oyu Tolgoi,
there is a good number of other large
large-scale
scale investments, including the Tavan
Tolgoi coal deposit, studied later in this section, which is about to be privatised in
2011.
Since the shift towards a market economy, the developments in the mining sector
have been consistent, efficient and fast, especially throughout the past decade.

2006: Windfall Profit

Tax set
1990: Mongolia
opened: Foreign
Investment Law
passed

90 91

92

93

1994: QGX Gold

enters Mongolia

1998: Areva signs

uranium exploration
deal

Jul 2008: Protests in

Ulaanbaatar

June 2002: Cameco

gol buys Boroo gold
2009: Windfall Profit
Tax repealed

94

95

96

97 98

1997: Minerals Law

passed

99

00

01

02

03

May 2000: Ivanhoe

enters Mongolia

04

05

06

2004: Western
Prospector enters
Mongolia
2009: Chinese buy
Western Prospector
(uranium)

07

08

09

10
Oct 2009: Chinese
CIC invests $500
million in SGQ coal
and $700 million in
iron ore

2009: Oyu Tolgoi

investment
agreement signed

Source: Business Council of Mongolia

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Mining
Estimated value of total reserves =
$1.3trillion
Mining sector:
81% of exports
32% of government revenue
30% of GDP

Mongolia is rich in natural resources, especially in gold, copper, coal, uranium,

molybdenum, tin, tungsten and oil deposits. The estimated value of total
resources is $1.3 trillion. Among the commodities, coal, copper and gold have
attracted the majority of investments thus far. While the agricultural sector was
the former largest contributor to government revenue, the role of the mining
sector in the economy continues to grow, making it the current major force
behind Mongolias economic growth and development. Now the mining sector
accounts for approximately 81% of Mongolias total exports, 32% of government
revenue and 30% of GDP. The latest updates inform that the industry employs 45
thousand people in total, which represents around 5% of the countrys total work
force. The governments attempt to create a favourable investment environment
within the country through reformed tax regime and other legal frameworks is
paying off. Numerous small and large-scale investors are being attracted to
Mongolia these days, some are even willing to invest into very seed-stage
projects. Involvement of mining giants like Rio Tinto, and interests of Peabody,
Shenhua, Japanese and Korean consortiums to participate in the privatisation and
development of the countrys largest coal deposit, all indicate towards Mongolia
turning into one of the top performing mining investment destinations of today
and tomorrow.

ROLE OF MINING SECTOR IN NATIONAL ECONOMY, IN %

100

In GDP

In manufacturing industry

In export

50

0
2002

2003

2004

2005

2006

2007

2008

2009

Source: National Statistics Office

Annual Production
Commodity
Coal
Copper
Gold
Iron ore
Uranium

2006
8mt
0.37mt
22t
0.18mt
0

2007
8.8mt
0.37mt
17t
0.26mt
0

2008
9.8mt
0.36mt
15t
1.39mt
0

2009
13.2mt
0.37mt
10t
1.38mt
0

Proven

Probable

Reserve
20bt
67.3
136t
264mt
-

Reserve
152bt
1.2bt
125,000t
1.6bt
62,000t

Source: National Statistics Office & Mineral Resources Authority of Mongolia

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MAJOR PLAYERS
Coal

Copper

Gold

Iron ore

Uranium

ErdenesTavan Tolgoi

Erdenet

Centerra Gold

Darkhan Steel

Khan
Resources

SouthGobi
Resources

Ivanhoe
Mines/Rio
Tinto

MAK

Iron Mining
International

Western
Prospector

Energy
Resources

Western
Prospector

QGX

Cameco

Mongolia
Energy Corp.

Areva

Peabody Energy

Voyager
Resources

North Asia
Resources
Haranga
Resources

Cameco
Areva

Altain Khuder

Aspire Mining
Gobi Coal and
Energy
Prophecy
Resource Corp.
Xanadu Mines
MAK

REVENUE FROM EXPORTS, (M1-M8 2009 vs. M1-M8 2010), $ MILLION

600
500

485

2009

2010

400
300
200

133

100

85

98

137
35

41
Fluoride

Molybdenum

Iron ore

Crude oil

Zinc

Gold

Coal

0
Copper

Mining revenues climbed massively from

2009 - 2010

500

Source: Ministry of Mineral Resources and Energy of Mongolia

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14.2

Exploration and Geological Mapping








The geological map for 99.1% of Mongolia has been produced at a scale
of 1:200,000
The geological mapping of 27.1% of Mongolia based on the general
exploration work has been carried out at a scale of 1:50,000
1:500,000 scale map covers the basic geology for hydro-survey of 84% of
Mongolia
22.5% of Mongolia covered by gravimetric survey at scales of 1:200,000
and 1:100,000
The aerial magnetic survey has been conducted for 60% of Mongolia at a
scale of 1:200,000
Two maps of scales of 1:50,000 and 1:25,000 have been produced using
aerial multi-spectral survey for 32% of Mongolia.

The geological mapping of 27.1% of Mongolia based on the general

exploration work has been carried out at a scale of 1:50,000
Average 0.4% of the territory is subject to new mapping projects every year
Source: Mineral Resources Authority of Mongolia

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The aerial magnetic survey has been conducted for 60% of Mongolia at a
scale of 1:200,000

Source: Mineral Resources Authority of Mongolia

14.3

Licenses
Exploration license
Quantity

Domestic
Companies
Foreign
Companies
Total

Mining License
Quantity

2,572

Area, Ha
million
22.89

1,087
3,659

Total
Quantity

746

Area, Ha
million
0.24

3,318

Area, Ha
million
23.13

16.08

339

0.22

1,426

16.30

38.97

1,085

0.46

4,744

39.43

st

Source: Mineral Resources Authority of Mongolia (1 Jan 2010)

Source: Mineral Resources Authority of Mongolia

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14.4
Coal Mongolias number one export

Coal

Coal is now Mongolias number one export. Initially miners were attracted to the
countrys gold, copper and molybdenum reserves, however, the magnetism has
shifted towards coal riches now, giving Mongolia the new title of The Saudi
Arabia of Coal. The value of its immense coal reserves has increased threefold, as
the country is located right in between two of the worlds biggest resource
consumers, Russia and China.
30

COKING COAL EXPORTS TO CHINA, MILLION TONNES

20
10
0
2007

2008

2009

2010

2011(f)

2012(f)

Source: National Statistics Office and Trade and Development Bank

COAL RESOURCES

Source: Mineral Resources Authority of Mongolia

Tavan Tolgoi: 6.4bn t coal
Total: 152bn t coal

By the amount of reserves, Tavan Tolgoi (TT) is Mongolias biggest coal deposit,
with around 6.4 billion tonnes of coal, a quarter of which consists of high quality
coking coal. Except for TT, there are many other attractive coal deposits and the
total reserves of the country is estimated to be 152 billion tonnes. A majority of
reserves, although proven, have not been developed due to lack of investment

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and infrastructure. Among the producing ones, the following are the most notable
coal mines:
Baganuur = 1.3bn t brown coal, supplies
domestic market

1) The largest player in the economy and the main supplier to local consumers
is Baganuur coal mine, containing an estimated reserve of 1.3 billion tonnes
of brown coal. The government owns the majority of the company (The
ownership structure is better explained in the Equity Research part of this
report as the company is listed on the Mongolian Stock Exchange). Baganuur
was founded during Soviet times. Due to government control and necessity
to maintain the sale prices at artificially low levels for local consumers,
Baganuur is currently operating at a production scale significantly below its
potential and is incapable of spending capital on new equipments. The mine
is, in general, suffering from under-investment as no investor is interested in
a loss-generating, state controlled company. Baganuur is included in the list
of state properties to be privatised in 2011-2012.

Mongolia Mining Corporation = 500mt

coking coal, South Gobi province, 245km
from Chinese border

2) Foreign investors are mostly attracted to coking coal reserves of Mongolia,

one of the main inputs to steel production, as there is growing demand
coming from China. The PRC has stopped exporting coal in 2007 and its
imports of coking coal grew from 8.5 million tonnes in 2008 to 50 million
tonnes in 2010, representing 8% of the countrys total consumption.
Mongolia Mining Corporations (formerly Energy Resources) advancements
in coking coal production have attracted immense attention from global
investors. The company, which is currently extracting coal from its 500
million tonnes Ukhaa Khudag deposit, located in the Tavan Tolgoi region, has
grown tremendously since its establishment in 2005. The mine is located
245 km from the Mongolian-Chinese border. They were the first Mongolian
company to be listed on the Hong Kong stock exchange, raising $748 million
(15% higher than the planned $650 million), in October 2010. Mongolia
Mining Corporation has obtained all necessary permission to put a railway
south to the Mongolian-Chinese border from their Ukhaa Khudag mine. The
construction of a paved road by the company is under way and is expected
to be completed in Q1 2011.

Obtained approval for railway

construction
Paved road to be completed Q1 2011

st

1 Mongolian company to be listed on

HKEx ($748m)

Mongolyn Alt Corp = 134mt coal, 900km

south of UB, 50km from Chinese border

Open-pit mine
Production capacity=3mtpa due to
infrastructure constraints
No rail link, investing in new wash plant

MAK JV with Chinese Qinhua Corp

3) Another major private coal supplier is Mongolyn Alt Corp. (MAK). The
company began operations in the gold sector, then expanded into coal
extraction by obtaining the license for its Nariin Sukhait coal deposit situated
900 km south of Ulaanbaatar and 50 km from the Mongolian-Chinese border
pass Shiveekhuren. Nariin Sukhait is an open-pit mine, like the majority of
other coal mines in Mongolia, and contains 134 million tonnes of high-rank,
low-ash and low-sulphur coal reserves. The current production capacity
remains at 3 mtpa due to infrastructure constraints and is expected to
increase to 5-8 mtpa once railway is in place. MAK is constructing a coal
wash plant in order to increase the value of its product. The company is
faced with some logistics problems, as the Mongolian side of the border
mainly consists of earth road.
MAK has also created a joint venture with Qinhua Corporation of China and
obtained another license nearby its main project. The Chinese provided the
required capital enabling further growth of the company.

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SouthGobi Resources = 114.1mt thermal
and coking coal
2010: 4mtpa
2012: 8mtpa
Off-take agreement signed with
Winsway for 3.2mt, at least 2mtpa to be
sold to Winsway
Coal supply agreement
-

with NAEG for 450kt in 2011

with a large international
company for 500kt in 2011

Owns 20% of Aspire Mining

2010 revenue from coal = $877m

2015 coal exports to China 30-50mtpa

Mongolia to replace Australia as main
coal supplier to PRC

4) SouthGobi Resources (SGQ) Ovoot Tolgoi project is certainly one of the

largest foreign investments in the coal field of Mongolia. The deposit is
situated 42 km from the Mongolian-Chinese border pass Shiveekhuren,
making it the closest coal supply to the PRC, with proven and probable
reserves of 114.1 million tonnes of thermal and coking coal. Ivanhoe Mines
and China Investment Corporation currently own around 54% and 13% of
SGQ respectively. The company is listed on Toronto and Hong Kong stock
exchanges. On top of their main project, SouthGobi owns 18 more
exploration licenses and intends to spend around $20 million annually on
continuous exploration. The reported production target for 2010 was 4
mtpa, with an expected increase to 8 mtpa in 2012. China is the main buyer
of SGQs coal. In Dec 2010, South Gobi signed an off-take agreement worth
3.2 mln tonnes of coal with Winsway Coking Coal. The two companies also
entered into a strategic alliance agreement whereby SGQ has committed to
sell a minimum of 2 mtpa of coal to Winsway. Also, in Dec 2010, SouthGobi
signed a coal supply agreement with North Asia Energy Group Limited
(NAEG) for the sale of 450k tonnes of coal in 2011 and another contract for
500k tonnes of coal in 2011 with a large international company. Recently, in
late December 2010, SGQ completed its private placement with Aspire
Mining and currently owns around 19.9% of the company. Aspire is an ASX
listed company focused on developing the Ovoot coking coal project, located
in Northern Mongolia, which contains 331 million tonnes of JORC resources.
As Mongolia has vast mineral reserves and large areas of unpopulated land, the
country is in need of foreign investments, which would be the driving force behind
this underdeveloped countrys future growth. In 2010, total coal exports reached
$877 in value, growing by 135% in volume and 187% in value from 2009.
Mongolia borders with the PRC, which purchases more than 70% of its coal
exports. According to forecasts, the coal sales to China could reach 30-50 mtpa by
2015. Historically, Australia has been the major coal supplier to the PRC. However,
it could soon be replaced by Mongolia as the latter is located closer and has
plenty to offer.
COAL PRODUCTION, MILLION TONNES

14.0
12.0
2010 coal exports: 16.6mt

10.0
8.0
6.0
4.0
2.0
0.0
2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Ministry of Mineral Resources and Energy of Mongolia

In 2010 Mongolian coal exports reached 16.6 million tonnes.

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Beyond Tavan Tolgoi...

Although Tavan-Tolgoi is one of the worlds largest unexploited coal deposits,

Mongolias riches are not limited to TT. Apart from the mentioned mines, there
are dozens of other coal resources in the country.
MAJOR COAL DEPOSITS IN MONGOLIA

Note:
(8) (14): numbers indicate resources as reported by the companies
(1) - (7): numbers indicate reserves as defined by China Reality Research
Source: World Bank, US Geological Survey, Ministry of Fuel and Energy of Mongolia
and China Reality Research

14.4.1 Tavan Tolgoi

Total Reserve: 6.4bn t
25% of reserves: coking coal
Ownership: 100% Government
(Erdenes MGL)
A strategic deposit
550 km south of Ulaanbaatar, 200 km
from Chinese border
Discovered by Soviet exploration teams

Tavan Tolgoi (TT) is one of the largest unexploited coking and thermal coal
deposits in the world, with total estimated resources of 6.4 billion tonnes, a
quarter of which consists of high quality coking coal. It is located 550 km south of
Ulaanbaatar and 200 km from the Mongolian-Chinese border. The deposit was
discovered by Soviet exploration teams in 1950 and the initial drilling work
continued throughout the 1960s and 1970s. After the 1990 Democratic
Revolution and a transition to market economy, private sector explorers were
allowed to search for more mineralization in the area. BHP Billiton took the
initiative and started drilling. However, the company stopped exploration and
Energy Resources LLC (currently Mongolia Mining Corporation), a consortium of
major Mongolian companies, acquired the licenses, as it had the necessary capital
when many others did not. The Mongolian government approved amendments to
the Minerals Law in 2006 by identifying fifteen resource-rich areas as Strategic
Deposits, including Tavan Tolgoi.

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Initial drilling: 1960-1970s
Initial license owner: BHP Billiton
Ukhaa Khudag block belongs to
Mongolia Mining Corp
Deposit is to be privatized in 2011
Eastern Block:
10% to citizens
10% to Mongolian companies
(via MSE)
29% to IPO (via MSE and e.g.
HKEx)
51% to government
Western Block:
To strategic investors who will
assume full responsibility,
including infrastructure
development

Substantial challenges remain

International mining giants interested in

TT
2012: 15mtpa through contract mining
Paved road from TT to Chinese border is
complete
Railway construction required

In 2007, Erdenes MGL LLC, a state-owned limited liability company was

established to represent the state interest in utilization of strategic deposits. The
government acquired back the majority of TT ownership from Energy Resources in
March 2008, leaving only the Ukhaa Khudag block in the companys possession.
Various expansion options for Tavan Tolgoi have been evaluated since then, and
in 2009 it was announced that the state would delegate 49% of ownership rights
to private mining companies. In early 2010, however, the government reversed its
statement by declaring that a 100% government ownership would be retained.
By the end of 2010, the Mongolian government put forward a new arrangement
to both strategic investors and contract miners, which is still effective today. The
overall deposit has been divided into two blocks, Eastern and Western. In late
2010, a new company Erdenes-Tavan Tolgoi LLC was established under the
Erdenes MGLs umbrella to hold the license and account for the management of
the deposit. In Q1 2011, through Erdenes-Tavan Tolgoi LLC, 10% of ownership
rights of the Eastern Block is to be distributed to the citizens of Mongolia for free,
another 10% is to be sold to private enterprises on the Mongolian Stock Exchange,
29% is to be released through both domestic and international stock exchanges to
investors and a 51% stake is to be retained by the government. Funds raised
through domestic and international IPO will be devoted to financing the
infrastructure and working capital of the Eastern Block. The Western Block,
however, will be handed over to strategic investors who will assume entire
responsibility for the blocks development, mine infrastructure and coal
marketing, independent from the government of Mongolia. Contract miners will
be able to participate in the development of the Eastern Block for a fixed service
fee, while strategic investors will be obliged to transfer a portion of their future
income to the government of Mongolia.
Challenges include the preparation of draft contracts, conduct of an adequate
bidding process and, above all, selection of the best suited contract miners,
strategic investors, and all other related parties including investment banks, legal
advisors, auditors and so forth. The Tavan Tolgoi coking coal deposit has attracted
interest from many of the international mining giants, including Chinas Shenhua
Energy Co., Peabody Energy Corp from the US, a Russian consortium led by
Gazprom, Brazils Vale, Indias International Coal Ventures Pvt, a joint venture of
five state-run companies, Anglo-Australian Rio Tinto Plc and BHP Billiton. The
th
deadline for investors to submit their proposals was 17 January 2011. The
th
deadline for contract miners to express their interest is the 27 January 2011.
Sources inform that the government is planning to extract 15 mtpa through
contract mining from the Eastern Block in 2012.
Although construction of a paved road to the Chinese border is almost complete
by now, infrastructure challenges remain in the Tavan Tolgoi region, including
railway construction, electricity and water supply, and border crossing
arrangements.

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14.5

Copper/Gold

2010: 568k t of Cu exported, worth

$771m (26.4% of exports)

Copper has been the top Mongolian export commodity up until very recently. In
2010, Mongolia exported 568k tonnes of copper concentrate totalling $771
million in value. That represented 26.5% of total exports.

EMC current largest producer of Cu ore

and concentrate

Currently the largest Mongolian copper mine in production is Erdenet Mining

Corporation (EMC), a Mongolian-Russian joint venture established in 1978, 51%
and 49% owned by the Mongolian and Russian governments, respectively. The
deposit is included in the top ten list of the worlds largest copper-molybdenumporphyry mineralisation areas, and is situated 400 km north-west of Ulaanbaatar.
In 2010 Erdenet copper mine alone accounted for about 12% of the Mongolian
GDP and was responsible for all of Mongolias copper ore and concentrate
production.

nd

Mongolia 2 largest in world by Cu

reserves
Oyu Tolgoi = Erdenet x3

nd

Mongolia is ranked 2 in the world by copper reserves, including its massive, soon
to be fully developed Oyu Tolgoi (OT) copper and gold deposit. OT is considered to
be three times larger than EMC. Ivanhoe Mines have announced that the
commercial production at Oyu Tolgoi mine will begin in 2013 following an initial
start-up in late 2012.

High copper and coal exports, compared

to modest exports of gold

Source: European Bank of Reconstruction and Development

Centerra Gold - dominant producer of
gold
BG reserves almost depleted
OT development to change everything

Gatsuurt deposit: 100% owned by

Centerra Gold
Mining in Gatsuurt not allowed

Thus far the dominant company in the gold sector has been Boroo Gold (BG), a
wholly owned subsidiary of Centerra Gold and one of the earliest foreign
investment agreement deals in Mongolia. Boroo Gold started production in 2003,
and in 2003-2009 the company extracted around 1.26 million oz of gold. Contrary
to BG, whose reserves are almost depleted by now, a magnificent upcoming event
is the full development of the Oyu Tolgoi project, which contains 46 million oz of
gold.
The exploration license for Gatsuurt deposit with proven reserves of 1 million oz
of gold also belongs to Centerra Gold. Whether or not the Mongolian government
will allow the company to proceed with the development of the deposit remains
unclear. In November 2010, the Ministry of Mineral Resources and Energy of
Mongolia announced that 1,782 mining licenses held by private companies and

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254 alluvial-gold licenses would be revoked. Four small licenses of Centerra Gold
were included in the revocation list.

OT = worlds largest undeveloped

copper-gold deposit

14.5.1 Oyu Tolgoi (copper-gold, Mongolia)

Oyu Tolgoi is the world's largest undeveloped copper-gold deposit. It is situated
550 km south of Ulaanbaatar and in 80 km from the Mongolian-Chinese border.

Source: Ivanhoe Mines

Oct 09: Oyu Tolgoi Investment
Agreement signed
34% - Mongolian government
66% - Ivanhoe Mines (42% owned by Rio
Tinto)
March 2010: Investment Agreement
took full legal effect
Resources:
81bn lbs Cu (37mt)
46m oz Au (1,431t)
Initial production expected in Q3, 2012
Commercial production to commence in
2013
Southern Oyu open pit mine: 100k Cu
t/day from Q3 2012

A long-term Investment Agreement has been signed between the Mongolian

government, Ivanhoe Mines and Rio Tinto in October 2009 for the development
of Oyu Tolgoi copper and gold mine. According to the terms of the Agreement,
34% of Oyu Tolgoi ownership belongs to the state and the remaining 66% belongs
to Ivanhoe Mines. The international mining giant Rio Tinto became Ivanhoe
Mines strategic partner in 2007 and currently owns 42% of the company.
After the governments assessment of progresses made after the initial signing of
the Investment Agreement, the contract came into full legal effect in March 2010.
Based on Ivanhoe Mines estimates, the Oyu Tolgoi deposit contains around 81
billion lbs (37 million tonnes) of copper and 46 million (1,431 tonnes) oz of gold in
measured, indicated and inferred resources.
Currently construction of the mining complex is progressing ahead of schedule
and Oyu Tolgois first production of copper concentrate is expected in Q3 2012
from the Southern Oyu block. Ivanhoe Mines expects commercial production to
start in 2013.
The Southern Oyu part of the project is being developed as an open pit mine. A
copper concentrator plant and other facilities are being built around the area. At

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full capacity, the Southern Oyu open-pit mine will provide 100k tonnes of ore per
day.
Hugo North underground mine: 85k Cu
t/day from 2015

The Hugo North division of the project is being developed as a block-cave mine,
which will yield the first output in 2015. At full capacity, the Hugo North deposit
will produce 85k tonnes of ore per day. When the underground mine comes into
operation, the processing capacity of the copper concentrator will be expanded.

30-50 years of stable tax and regulatory

provisions

In accordance with the Minerals Law of Mongolia, Oyu Tolgoi is a strategic deposit
and qualifies for 30 years of stabilized taxes, including corporate income tax,
customs duty, value-added tax, excise tax, royalties, exploration and mining
license fees, immovable property and/or real estate taxes, and other regulatory
provisions. There is an option to extend the terms of the Investment Agreement
by an additional 20 years.

14.6
Iron ore production commenced in 2007

Iron ore

Iron ore mining in Mongolia commenced in 2007. Steel production is expanding at

an accelerated rate in China and the country is increasing its imports of iron ore
from Mongolia.
IRON ORE PRODUCTION, MILLION TONNES
3
2.5
2
1.5
1
0.5
0
2007

2008

2009

2010 (I-X)

Source: Trade and Development Bank

Iron ore exports = 8.7% of total exports

Iron ore extraction is rapidly growing in Mongolia, and now accounts for 8.7% of
all Mongolian exports.

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IRON ORE EXPORTS, $ MILLION
400
2012: iron ore exports to reach $375m in
value

300
200
100
0
2008

2009

2010 (I-X) 2011 (f)

2012 (f)

Source: Trade and Development Bank

2010 iron ore exports = 3.5mt
($251m)

The Trade and Development Bank (TDB) of Mongolia made their forecasts in
October 2010, predicting the iron ore exports from Mongolia to rise to $250
million in value in 2011. However, the December figures from the National
Statistics Office suggest that in 2010 Mongolia exported 3.5 million tonnes of iron
ore, worth $251 million. The TDBs 2011 forecast has already been realised in
2010. This means that iron ore exports could reach over $350 in value by the end
of 2011.
MAJOR PLAYERS

Large Iron ore investors in Mongolia:

2008-2010 was a period of substantial investments in the iron ore sector of

Mongolia.

Singapore sovereign wealth fund + Hopu

Investment = $300m in Iron Mining
International

In 2008, Singapores sovereign wealth fund, in partnership with Hopu Investment,

a private equity fund, endowed $300 million in Iron Mining International (formerly
Lung Ming) which owns the Eruu Gol iron ore asset in Mongolia. China Investment
Corporation (CIC) invested another $700 million in the same company in October
2009. All three funds are of substantial size, managing portfolios of $120 billion,
$2.5 billion and $300 billion respectively. Eruu Gol deposit contains 304 million
tonnes of iron ore in reserves. Iron Mining International was planning an IPO in
early 2011, however currently there is no news on their progress with the
intended listing.

China Investment Corp. (CIC) = $700m in

Iron Mining International

Taishen Development = 79mt of iron ore

reserves, bought by NAR

North Asia Resources Holdings Limited (NAR) entered into a framework

agreement with Taishen Development LLC to acquire full equity interest in the
company in August 2010. Taishen has exploration and mining licenses for two
iron ore deposits situated in the Dundgobi and Dornogobi provinces of Mongolia
close to the Choir Govisumber province train station. The first deposit contains 79
million tonnes of proven iron ore reserves and its license had been issued for
thirty years in 2007.

Haranga Resources with five iron ore

projects raised $25m from ASX IPO

Another notable player in the industry is Haranga Resources, a majority owner

and developer of five iron ore mining projects in Mongolia. The projects are
located close to the existing and planned infrastructure and the target market for
Haranga Resources iron ore production is mainland China. In mid December

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2010, the company raised $25 million in an Australian Stock Exchange IPO. As
informed by the management, the initial offering was heavily oversubscribed.
IRON ORE DEPOSITS

Note: map also includes the planned East-West railway

Source: Ministry of Road, Transportation, Construction and Urban Development of
Mongolia

14.7
June 08: Mongolia is an oil producer
Oil sector under-explored
Largest explorers:

PetroChina
Petro Matad (London AIM listed)

2010 crude exports = 2.0m barrels

($155m)

EBRD invested $6m in Petro Matad

Oil discovered from the first well

Oil

Although Mongolia started exporting crude oil in 1998, it was officially recognised
as an oil producing country in June 2008. The current oil exporting capacity is
insignificant because of infrastructure constraints. Mongolias total oil exploration
prospects, covering an area of 614 thousand square km, are divided into 25
blocks.
The existing capacity for further oil exploration is immense as Mongolia remains
significantly under-explored. The major players in the industry are PetroChina and
Petro Matad, an AIM-listed, Mongolian company. Both companies have heavily
invested in their respective oil projects. PetroChinas investment started in 2005
when they purchased three exploration blocks (XIX, XXI, XXII) from Soco
International Plc, a London-based oil producing company, for $93 million. In
2010, Mongolia exported 2 million barrels of crude oil worth $155 million.
Compared to 2009, this was an increase of 7% in volume and 34% in value.
EBRD took an equity position of 17% in Petro Matad by investing $6 million in
December 2009. Petro Matad is the parent company of an oil exploration group
and its main shareholder is Petrovis LLC, which is the largest importer and
distributor of petroleum products in Mongolia with widespread retail and
wholesale network. In July 2010, the company discovered significant amounts of
oil from its first well Davsan Tolgoi-1 located in block XX, and the companys share
prices soared 55% on the AIM market.

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Goal: self-sufficiency in oil

The Mongolian governments main intention is to reach self-sufficiency in oil

products based on domestic resources and it is undertaking the possible means to
contribute to the exploration process and the further expansion of the petroleum
producing potential of Mongolia.

Target market: China, the worlds second

largest consumer

Mongolias southern neighbour, China, is the worlds second largest consumer of

oil after the US. Half satisfied by imports, the PRCs consumption reached 8.3
million barrels per day in 2009. By 2011, Chinese oil demand is expected to grow
to 9.6 million barrels per day taking up 37% of the global increase in demand. This
justifies the presumption that oil blocks in Mongolia have the potential to be
highly profitable once they start producing.

Marubeni Corp + Toyo Engineering = oil

refinery in Mongolia ($600m)

In October 2010, it was announced that Japans Marubeni Corporation and Toyo
Engineering have agreed to construct an oil refinery in Mongolia, 200 km north of
Ulaanbaatar. The estimated project cost is $600 million and the two companies
are planning to assume full responsibility for maintenance and operation of the
refinery. The plant is to commence producing in autumn 2014 with a daily
capacity of 44k barrels.

CRUDE OIL EXPORTS TO CHINA, MILLION

BARRELS
2.5
2
1.5
1
0.5
0
2008

2009

2010

Source: Trade and Development Bank

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OIL AND GAS DEPOSITS

Note: map also includes the planned East-West railway

Source: Ministry of Road, Transportation, Construction and Urban Development of
Mongolia

14.8
Controversy around Khan Resources
licenses unresolved

Dornod is a strategic deposit

Uranium

Russia estimated the Mongolian uranium reserves at 30 thousand tonnes while

the Mongolian government identifies the resources as 62,000 tonnes. The recent
controversy surrounding the uranium sector in Mongolia has caught the attention
of many. Khan Resources, a Toronto-based company, had two exploration licenses
for uranium mines in the Dornod province of Mongolia. The main deposit was
producing occasionally from 1988 to 1995 under Soviet administration. However,
since 1995, no further mining has occurred in the area.
The Dornod uranium deposits are included in the list of the fifteen strategic
deposits, like TavanTolgoi and Oyu Tolgoi. Therefore, the government of Mongolia
is entitled to a maximum of 50% ownership rights of the resources. Historical
Russian exploration work lay at the heart of the claim for ownership of the
licenses.

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URANIUM DEPOSITS

Note: map also includes the planned East-West railway

Source: Ministry of Road, Transportation, Construction and Urban Development of
Mongolia

14.9
Stronger measures on environmental
protection and rehabilitation

Minerals Laws and Taxes

Recently, measures on environmental protection and rehabilitation issues have

been strengthened in Mongolia. Now the local administrative bodies are given
more regulatory power and private license holders have many more duties to
comply with.

14.9.1 Strategically Significant Deposits

Identified:
1,170 deposits
7,654 occurrences
60 types of minerals

Approximately 1,170 mineral deposits and 7,654 occurrences have been identified
in Mongolia to date. The occurrences include over 60 types of minerals, including
copper, gold, coal, molybdenum, iron ore, uranium, tin, tungsten, silver, zinc and
fluorspar. Fifteen deposits have been acknowledged by the government as
strategically important.
According to the Minerals Law (2006), a deposit is considered to be strategically
important, if it:

15 strategic deposits

If a deposit is strategic, government

takes up to 34%-50% of ownership rights

has an influence on Mongolias national security, economic and social

development (such as all uranium deposits)
contains minerals that have strong international demand
yields annual revenues exceeding 5% of GDP

If a deposit is identified as strategically important to Mongolia, the government is

allowed to acquire up to 34% of ownership rights from the license holder, if the
exploration work has been financed purely with private funds, and up to 50% of
ownership rights, if the exploration work has been financed partially with state
funds, including capital invested during the Soviet times.

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DEPOSITS OF STRATEGIC IMPORTANCE

Source
Source: Mineral Resources Authority of Mongolia

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OVERVIEW OF STRATEGIC ASSETS

Deposit

Minerals

Reserves and quantity

State of development,
start date, output p.a.

Ownership structure

Estimated capex

Tavan
Tolgoi

Metallurgical
coal

6.4 bn t

Partial production, rampup in 2011, 15-30 mtpa

100% Erdenes MGL

1
LLC

US$ 2.4 bn (US$ 1.6

in the first 3 years)

Nariin
Sukhait

Metallurgical
coal

125.5. mn t

Feasibility study

100% private (South

Gobi Resources, MAKQinhua JV)

Baganuur

Lignite coal

600.0 mn t

Production, 2.8 mtpa

75% SPC , 25% locally

listed

Shivee
Ovoo

Lignite coal

646.2 mn t

Production, 2.0 mtpa

Mardai

Uranium

0.001 mn t at 0.119%
O3U8

Feasibility study

Dornod

Uranium

0.029 mn t at 0.175%
O3U8

Feasibility study

21% SPC, 21% Russian

Gov, 58% Khan
Resources

Gurvan
Bulag

Uranium

0.016 mn t at 0.152%
O3U8

Feasibility study

100% private
(Chinese company)

Tomortei

Iron ore

229.3 mn t at 51.15% Fe

Feasibility study

100% Darkhan
Metallurgical factory
(100% owned by SPC)

US$ 100 mn

Oyu Tolgoi

Copper, gold

37 mn t of copper,
1,431 t of gold

Commercial production
in 2013

34% Erdenes MGL,

66% Ivanhoe Mines

US$ 6 bn

10

Tsagaan
Suvarga

Copper,
molybdenum

10.6 mn t of oxides at
0.42% Cu/0.011% Mo;
240.1 mn t sulphides at
0.53% Cu/0.018% Mo

Feasibility study

100% private (MAK)

US$ 200 mn

11

Erdenet

Copper,
molybdenum

1.2 bn t at 0.51% Cu/

0.012% Mo

Production, 569k t of
concentrate

51% SPC, 49% Russian

Gov

US$ 150 mn for

downstream plant

12

Burenkhaan

Phosphorite

300 mn t at 19.0% P2O5

Feasibility study

13

Boroo

Gold, ore

0.025 mn t at 1.6g/t Au

Close to depletion

14

Tomortein
Ovoo

7.7 mn t at 11.5% Zn

Production, 0.07 mn t of
zinc

N/A

15

Asgat

Zinc

Silver

6.4 mn t at 351.08g/t Ag

Feasibility study

90% SPC, 10% locally

listed (operational
part); rest owned by
Erdenes MGL
100% private (Khan
Resources)

Total US$ 200 mn

100% private (four

private companies)
100% private (Boroo
Gold)
100% private
(Tsairminerals JV)

US$ 500 mn

100%
Mongolrostsvetmet
(50% SPC,
50% Russian Gov)

US$ 47 mn

Source: Worley Parsons, Ministry of Mineral Resources and Energy, State Property Committee of Mongolia

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Note: 1. Erdenes MGL state owned limited liability company
2. Other sources estimate Baganuur reserves at 1.3 billion tonnes
3. SPC State Property Committee of Mongolia

14.9.2 Overview of Foreign Investment

(The following information has been provided by legal firms active in Mongolia,
including Dewey & LeBoeuf)
The Mongolian Foreign Investment Law (FIL) was adopted in 1993 and
subsequently amended. According to the Law, the minimum amount accepted as
foreign investment is US$ 100k. The FIL gives similarly positive treatment to both
foreign and domestic investors with regard to control, use and removal of their
investments. Foreigners can repatriate income and profits earned. A Stability
Agreement (i.e. stabilization of taxes) is obtainable, the eligibility for and terms of
which depend on the degree of investment.
Foreign Ownership

Foreign Investors can own 100% of any registered business and it is not
legally required to have a Mongolian partner
Exceptions
In line with the Minerals Law adopted in 2006, the Government
of Mongolia is entitled to obtain up to 34% or 50% share of any
deposit identified as strategically important
In line with the Uranium Law adopted in 2009, the Government
of Mongolia is entitled to obtain at least 51% share of any
company engaged in uranium exploration and mining through
MonAtom LLC

Registration of Foreign Investment

Any company with 25% or more foreign direct investment has to be

registered as a foreign-invested firm with the Foreign Investment and
Foreign Trade Agency (FIFTA)
FIFTA is fully responsible for the registration process and currently
operates under the supervision of the Ministry of Foreign Affairs and
Trade (MFAT)
FIFTA certifies the environmental practices and technologies of
registered foreign companies

Currency Issues

Investment funds, profits, revenues, debt service and lease payments are
easily convertible and transferrable in various currencies.
Mongolian companies are allowed to open offshore bank accounts
Foreign-held interest bearing bank accounts are subject to a tax rate of
20%
All domestic transactions must be conducted in local currency (MNT)

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Resolving Disputes

Mongolia is a signatory to the Convention on the Recognition and

Enforcement of Foreign Arbitral Awards (CREFAA, New York Convention)
Mongolia is a signatory to the Convention on the Settlement of
Investment Disputes (CSID, Washington Convention)
Mongolia has signed Bilateral Investment Treaties (BITs) with numerous
countries
Benefits of BITS and CSID Conventions
Disputes can be resolved via international arbitration
 Domestic courts can be avoided
Broad protection standards are provided under international
law
 Measures may have an effect equivalent to expropriation
 Provides investors with fair and equitable treatment

14.9.3 Foreign Investment in Mining

Exploration and Mining Licenses

Mineral resources are the States property

Only legal entities registered in Mongolia can hold exploration and
mining licenses
Exploration Licenses
Initially granted for 3 years
The license can be extended twice, each extension comprising a
3-year period
The license holders are required to spend the following
minimum amounts on exploration from the second year
onwards
 2nd and 3rd year miners must spend at least US $0.5 per Ha
annually
 4th to 6th year miners must spend at least US $1.0 per Ha
annually
 7th to 9th year miners must spend at least US $1.5 per Ha
annually
Mining Licenses
Initially granted for 30 years
The license can be extended twice, each extension comprising a
20-year period
5% royalties are applied on export sales
Active mining companies must ensure that 90% of their
workforce consists of Mongolian nationals
A license holder who invests $50 million or more can enter into
a special Investment Agreement with the Government

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Foreign Ownership

The Minerals Law adopted in 2006 gives the Government of Mongolia

the right to obtain an equity stake in all strategically important deposits
up to a 50% stake if the exploration of the deposit has been
partially financed with the States funds
up to a 34% stake if the exploration of the deposit has been fully
financed with private funds
The Government has to pay for the share it takes at a fair market value
Holders of the mining licenses for strategic deposits must sell no less
than 10% of the shares on the Mongolian Stock Exchange
Currently it is unclear how this provision of the Law will be
implemented

Investment Agreements

Investors who undertake to invest more than $50 million within the first
five years of their mining operations are eligible to enter into a special
Investment Agreement with the Government of Mongolia
The Investment Agreement can create fiscal and legal stability
The Government acts through the Cabinet of Ministers represented by
cabinet members responsible for taxation, geology, mining and
environmental issues
Maximum duration of the Investment Agreement:
for investments worth US$ 50 - 100 million: 10 years
for investments worth US$ 100 - 300 million: 15 years
for investments in excess of US$300 million: 30 years

Environmental Issues

The license holders must prepare the following documents:

an environmental impact assessment
an environmental action plan which addresses all adverse
impacts identified in the environmental impact assessment
The license holders must deposit 50% of their environmental protection
budget for a particular year in a special bank account supervised by the
Government
Current mining license holders are responsible for environmental
liabilities incurred by former license holders

Taking Security

The license holder may pledge mineral licenses and immovable property
and register such pledge with FIFTA
Only banks and other financial institutions can be registered as pledgees
of mineral licenses
Key issue: only Mongolian legal entities (or nationals) can hold
mineral licenses
There is no system to register pledges over movable property

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Recent Changes to the Mongolian Tax Code

st

Effective from the 1 of January 2007, the Tax Code creates a level
playing field between foreign and domestic investors
In 2009, the allowance to carry forward losses has been extended from 2
to 8 years
This was a condition for the development of the Oyu Tolgoi
project
In 2009, Parliament revoked an exemption on VAT taxes of 10% on
equipments used to bring a mine into production

Elimination of Excess Profits Tax on Gold and Copper

Windfall Profits Tax law passed in 2006

It imposed 68% tax on profits from gold and copper mining
 Gold: tax was applied when the gold price reached US$ 850/oz
 Copper: tax was applied when the copper price reached
$2,600/t
st
The Parliament abolished the Windfall Profits Tax, effective from the 1
of January 2011

Law on Prohibition of Mineral Exploration in Water Basins and Forest Areas

(2009)

The Law prohibits mining in water basins and in forested areas

According to the Law, licenses to explore or mine mineral resources
within an area no less than 200 meters from a forest or water resource
must be revoked or modified
The Law grants local officials the power to determine the actual areas to
be mined
Local officials can extend the 200 meter threshold
The Law requires the Government to give compensation to the license
holders for previously incurred exploration expenses or the revenues lost
due to standstill of operations

Uranium Law (2009)

Created the Nuclear Energy Agency of Mongolia (Regulatory Authority)

Created MonAtom, a new state-owned holding company, to maintain the
uranium assets that the government will demand back from the current
rights holders
Revoked all uranium exploration and mining licenses, and required all
possessors to re-register those licenses (for a fee) with the Nuclear
Energy Agency
Required investors to accept that MonAtom has the right to acquire 51%
share of the license holders company without compensation
Created a uranium-specific licensing and regulatory regime
Independent of the regulatory framework set out in the
Minerals Law (2006) for developing other mineral and metal
resources

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-

The state can issue distinct licenses for uranium exploration on a

property otherwise dedicated to other mineral and metals
exploration

14.9.4 Progressive royalties on minerals

th

The State Information Digest was published on the 27 December 2010.

According to the new release, the Law on Minerals has been amended and now
includes progressively increasing royalties on 23 types of minerals.
PROGRESSIVE ROYALTIES ON MINERALS

No

11

Mineral

Unit

Copper

tonnes

Gold

Iron

Zinc

Raw coal

ounce

tonnes

tonnes

tonnes

Threshold
market price,
US$

Percent levy
ore

concentrate

product

0-5000

0.0

0.0

0.0

5000-6000

22.0

11.0

1.0

6000-7000

24.0

12.0

2.0

7000-8000

26.0

13.0

3.0

8000-9000

28.0

14.0

4.0

Above 9000

30.0

15.0

5.0

0-900

0.0

900-1000

1.0

1000-1100

2.0

1100-1200

3.0

1200-1300

4.0

Above 1300

5.0

0-60

0.0

0.0

0.0

60-70

1.0

0.7

0.4

70-80

2.0

1.4

0.8

80-90

3.0

2.1

1.2

90-100

4.0

2.8

1.6

Above 100

5.0

3.5

2.0

0-1500

0.0

0.0

0.0

1500-2000

1.0

0.8

0.4

2000-2500

2.0

1.6

0.8

2500-3000

3.0

2.4

1.2

3000-3500

4.0

3.2

1.6

Above 3500

5.0

4.0

2.0

0-25

0.0

25-50

1.0

50-75

2.0

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12

13

Processed coal

Final product
(half-coke,
coke, gas,
liquid fuel,
coke chemical
product)

tonnes

tonnes

75-100

3.0

100-125

4.0

Above 125

5.0

0-100

0.0

100-130

1.0

130-160

1.5

160-190

2.0

190-210

2.5

Above 210

3.0

0-160

0.0

160-190

0.5

190-210

1.0

210-240

1.5

240-270

2.0

Above 270

2.5

Source: State Information Digest

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Agriculture

15 Agriculture
Currently replaced by mining, the agriculture sector formerly has
been the backbone of Mongolias economy and the major driver
for peoples living standards.

Agriculture focused on animal husbandry

Pastureland is the backbone of
agriculture
1% of land cultivated with crops
Self-sufficiency in grains and potatoes

Livestock accounts for over 80% of

agriculture
First cooperatives founded in 1930s

2010: total livestock 32.8m heads

80% of cropland devoted to grain

cultivation
Crop cultivation yields are low and
inconsistent
Largest farms: 270 sq km

2010: 1.7mt of harvest

The agriculture sector formerly has been the largest contributor to Mongolias
economy, accounting for more than 20% of the countrys GDP and representing
around 14% of foreign currency revenue. The industry development has been and
still is largely constrained by harsh climatic conditions, long winters and
insufficient precipitation. To date, only 1% of Mongolias arable land is cultivated
with crops. The majority of vegetables and food products, except livestock, are
imported from China. The overall sector is mainly focused on animal husbandry,
therefore pastureland is the backbone of Mongolias agriculture. Previously
around 80% of the total territory used to be occupied with pastureland. However,
this proportion is decreasing due to the current advancements in the mining
sector. Mongolia has recently become self-sufficient in grains and potatoes.
The livestock sub-sector, which accounts for more than 80% of agriculture
production, is primarily focused on sheep, goat, cattle, horse, camel, yak and pig
husbandry. Livestock is extensively distributed throughout the entire territory,
with greatest concentration of horses and cattle in the north-central regions and
of goats and camels in the west-southern regions of Mongolia. The earliest
agricultural cooperatives were founded in the 1930s following the governments
policy to systematize herders with their livestock. With assistance from the Soviet
Union, the number of cooperatives were increased and their sizes expanded in
the mid 1950s.
According to the National Statistics Office, by the end of 2010, there were 1.9
million horses, 2.2 million cattle, 270 thousand camels, 14.5 million sheep and
13.9 million goats in Mongolia, summing to 32.77 million heads of livestock. In
total 11.3 million heads of animals were lost due to dzud (explained later in this
section)
Crop cultivation areas are concentrated in the northern regions of Mongolia,
especially around the Orkhon and Selenge river basins, owing to moister land.
Around 80% of cropland is devoted to cultivation of grains such as wheat, barley
and oat. The remaining part is primarily devoted to fodder crops or hay. The subsector generates rather low yields that vary heavily each year depending on the
weather conditions. A trivial fraction of the crop land is occupied by gardening of
potatoes, yet the output is enough to satisfy the demand coming from 2.7 million
people residing in the country. On average, the largest state-owned farms spread
over an area of 270 square kilometres and normally encompass some livestock
production.
In 2010, Mongolia produced 355 thousand tonnes of cereal (9.3% decrease yoy),
168 thousand tonnes of potatoes (11.1% increase yoy), 82 thousand tonnes of

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vegetables (5.5% increase yoy), 1.1 million tonnes of hay (24.1% increase yoy) and
31 thousand tonnes of hand-made fodder (21.1% increase yoy), totalling 1.7
million of harvest.

CULTIVATED CROP LAND USE , THOUSAND HA

Sown, 195

Fallow, 147

Abandoned, 4
79

Unused, 376

Source: Ministry of Food Agriculture and Light Industry of Mongolia

15.1
Dzud = cold and windy winters
Animals perish from dzud

Dzud

Dzud is a terminology explaining extremely cold and windy winters, throughout

which livestock perish from starvation as it becomes impossible to find fodder.
Herder households sometimes categorise the phenomenon as black, white and ice
dzuds. The first type is caused by low growth of fodder crop in summer followed
by a cold winter, the second type is caused by heavy snow falls, regardless of the
previous months harvest. The third type is a consequence of heavy rain falls
which create an ice coverage on top of the soil, freezing all the hay. As a result of
each type of dzud, livestock perish through malnourishment.
It is possible to prepare for dzud by drying and storing hay during the warm
seasons and by building winter shelters in advance for the livestock.

Q4 2009 Q1 2010: 7.8m livestock lost;

45,000 people left without animals
2009: livestock = 16% of GDP

Dzud can easily slay over 1 million heads of animals. According to UN estimates,
the white dzud which occurred in late 2009 and early 2010 had a cruel impact and
by the end of April 2010, over 7.8 million heads of livestock (around 17% of total
livestock) were lost and 9,000 households (45,000) were left without animals. In
2009, livestock accounted for around 16% of GDP. According to the National
Statistics Office, by the end of 2010, the total loss increased to 11.3 million heads,
including 13.5 thousand horses (301% decrease yoy), 423 thousand cattle (16.3%
decrease yoy), 7.5 thousand camel (2.7% decrease yoy), 4.8 million sheep (24.9%
decrease yoy), 5.8 million goats (29.4% decrease yoy). Compared to 2009, the
total number of agricultural animals in Mongolia fell by 25.7%.

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Real Estate

16 Real Estate
The capacity to build residential properties in Ulaanbaatar is
enormous, especially considering the increasing number of
expats and foreign executives arriving in Mongolia.

Residential property prices rose four fold during the period 2002-2008, after
which they fell to 2007 levels as a result of the global recession. In the beginning
of 2010, the average price per square meter of an apartment in Ulaanbaatar was
$800.
DYNAMICS OF RESIDENTIAL PRICES IN ULAANBAATAR
($/sqm)
1100

1200
1000

800

800

400

800

590

600
250

330

400

450

2004

2005

200
0
2002

2003

2006

2007

2008

2009

Source: Global Property Guide, Mongolian Properties

COMPARATIVE RESIDENTIAL PRICES ($/sqm)
4,500

650

Bishkek

475

Tashkent

800

Ulaanbaatar

1,200

Baku

1,550

Almaty

1,900

Kiev

5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0

Moscow

2002-2008: residential property prices

quadrupled

Source: Global Property Guide, Mongolian Properties

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Factors behind the real estate industry growth:







Mining boom, economic development and higher foreign direct

investment; more foreign executives and diplomats coming to Mongolia;
increasing living standards and greater number of wealthy citizens
Lack of contemporary apartments; over 1 million people residing in
Ulaanbaatar (40% of the population); lack of per person living space in
the capital city (7 square meter per person)
Mongolian households are bigger in size compared to Russia and Eastern
Europe, having on average 4.1 persons
Child benefits and population growth
Migration of rural households to Ulaanbaatar
Difficult living conditions in ger districts

2008: 15,000 foreign residents and 4,000

expats in Mongolia

Figures suggest that in 2008, over 15 thousand foreigners and 4 thousand expats
were residing in Ulaanbaatar. As a result, in 2008, the residential property yields
in Mongolia were among the highest in all of Asia, hovering around 15% to 18%,
with accommodation prices rising 30% yoy.

2009: property prices fell 30%

Because of the global recession and plunging copper prices, which was the main
export commodity of that time, residential property prices in Mongolia fell by
around 30% in 2009. The banking sector experienced a collapse of two banks and
commercial banks in general stopped providing loans to the citizens.

Oyu Tolgoi agreement, economic

recovery, provision of mortgage loans

The signing of the Oyu Tolgoi Investment Agreement (Oct 2009) facilitated
substantial inflow of foreign capital into the mining sector, laying the foundation
for complete economic recovery and robust future growth. The top banks of
Mongolia started offering mortgage loans by the end of 2009. The recent success
in economic performance gives a solid reason to presume that the demand for
residential properties in the country is about to hike. Foreign residents are
allowed to own a property in Mongolia. The special license that qualifies their
ownership rights is the Immovable Property Ownership Certificate.

Demand expected to increase

2007-2010: Ulaanbaatar population

increased 30%
Offer to exchange 2-room apartments
for 0.07 Ha land
100,000 apartments for low-income
people to be constructed ($6.2bn)

Substantial existing capacity

Statistics suggest that the population of Ulaanbaatar increased 30% to 1.1 million
in three years from 2007. More than half of the residents live in ger districts
surrounding the city. The government is working on a project to replace the ger
districts with proper residential complexes. An announcement has been made in
October 2010 that the authorities are willing to exchange two-room apartments
for 0.07 Ha of land in ger districts. The master plan is to construct residential
complexes in those areas comprising 75 thousand apartments for lower-income
people. The two-room replacements are meant to be a temporary provision of
accommodation for the land owners, who will be entitled to obtain housing from
the new complexes once they are fully constructed. Other projects designated for
25 thousand households are to be developed in provincial areas across Mongolia.
The estimated budget for the construction of all 100 thousand apartments is $6.2
billion.
The capacity to build residential properties in Ulaanbaatar is enormous, especially
considering the increasing number of expats and foreign executives arriving in
Mongolia. Being aware of such possibilities, several real estate suppliers have
started constructing new large-scale residential buildings, some of which are

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Numerous large-scale ongoing projects

complete by now. Mongolian Propert

Properties
ies is the largest real estate company based
in Ulaanbaatar, which is owned by Asia Pacific Investment Partners, an investment
company focused on opportunities in Mongolia. Mongolian Properties has just
finished the construction of the Regency Residence (97
(9 apartments) and is
currently working on the Olympic Residence (135 apartments) project. Tenants
are now allowed to move into the former complex. The latter project is to be
finished by 2013. Bodi Group, one of the largest companies in Mongolia, which
ow
owns Golomt Bank, is also building a 84-villa
villa complex in the Sanzai area outside of
Ulaanbaatar.

100 real estate developers, only 10 are

professional

Figures indicate that around 100 real estate developers are currently active in
Mongolia, out of which 10 can be considered as professional. With further
economic growth and development of the financial sector, provision of mortgage
loans by banks is expec
expected to increase substantially.

Source: Trade and Development Bank

Property market, recent research
Lack of residential property

Currently there is a significant lack of supply in the residential property market

throughout Mongolia. The demand for adequate accommodation and commercial
property is high and expected to hike further due to the mining boom, inflow of
capital, rising num
number
ber of expats and improvement in living standards.

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Number of expats

35,000

200%

30,000

150%

25,000
20,000

100%

15,000

50%

10,000

0%

5,000
0

-50%
2008

2009

2010

2011

2012

Expat population growth

Real Estate

2013

Source: Broker research

Large-scale property projects are to be developed in the South Gobi province of
Mongolia, a home to grand deposits like Oyu Tolgoi and Tavan Tolgoi.

LUXURY RESIDENTIAL PROPERTY PRICES ($ per 1 sqm)

25,000 22,200
20,000
15,000

11,900
9,500

10,000

7,050 6,900

5,000

5,200 5,000 4,500

3,150 3,100

1,700

Ulaanbaatar

Kuala Lumpur

Almaty

Ho Chi Minh

Perth

Bangkok

Shanghai

Beijing

Seoul

Singapore

Hong Kong

Source: CBRE, Savills, Global Property Guide, Krisha Magazine

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GRADE A OFFICE RENTAL PRICES ($ per 1 sqm)
70

63

61

60

57

54

50
38
30
24

24

23

Bangkok

31

Kuala Lumpur

31

30

Taipei

40

22

20
10

Ulaanbaatar

Almaty

Beijing

Shanghai

Ho Chi Minh

Perth

Seoul

Singapore

Hong Kong

Source: CBRE, Savills, Global Property Guide, Krisha Magazine

Ulaanbaatar the capital city

of Mongolia (2000)

Ulaanbaatar the capital city

of Mongolia (2010)

2010: construction/installation works

nationwide $281m (up 25.6% yoy)

In 2000, Ulaanbaatar was a soviet-style city with little construction activity taking
place, whereas in 2010 it has transformed into a contemporary city with an
extraordinary boom in real estate development. In 2000, the Mongolian GDP was
$1 billion, the GDP per capita was $456 and Ulaanbaatars population was 791
thousand. In 2010, however, the numbers have grown to over $6.6 billion, $1,745
and 1.1 million, respectively. Recently Mongolia has been named the Saudi
Arabia of Coal and many predict that Ulaanbaatar is about to follow the
footsteps of Astana and Doha in terms of their success and achievements in
transformation. According to the IMF estimates, Mongolias real GDP growth is to
exceed 25% by 2013-2014. The countrys GDP per capita is expected to rise faster
than the PRCs, reaching $5,000 by 2012 and $12,000 by 2015, which is equivalent
to what an average resident of Shanghai earns today.
The capacity for new residential developments in the main cities, including
Ulaanbaatar, is immense. For instance, Dalanzadgad, the centre of the South Gobi
province, will be the next main destination for domestic and foreign workforce,
where construction of new housing, industrial complexes, offices and hospitals
will be required. There are approximately 18,000 people residing in the city and
most of them live in traditional gers. Another example is Sainshand city, where a
$10 billion industrial complex (park) is being developed which will increase the
value of Mongolian mineral resources. The park will contain a coal handling and
processing plant (CHPP), a copper smelter, an iron pellets plant, an oil refinery and
other facilities. Property developers and financiers should see the mine sites as
the main destination for real estate related investments.
The latest update informs that construction and installation works implemented
in Mongolia throughout 2010 grew 25.6% from 2009 and reached 351 billion MNT
(around $281 million) in total. Domestic construction companies executed 93% of
those (30% increase in activity yoy), while foreigners accounted for the remaining
7%.

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17 Infrastructure
Mongolias infrastructure, or lack of, is the most serious inhibitor
to developing its resource wealth. However, there are many
ambitious projects and foreign investment commitments to
improve the situation.

17.1
Trans-Mongolian railway (2,215 km) is
Mongolias main rail line

Agreement signed on improvement of

Ulaanbaatar Railway company

Railway

The Trans
Trans-Mongolian
Mongolian railway, which is Mongolias main rail link connecting
co
the
countrys borders with Russia and China, stretches across 2,215 km. The line starts
at Ulan
Ulan-Ude
Ude town, passes through Ulaanbaatar, then reaches Zamiin-Uud
Zamiin
and
Erenhot, where it joins the Chinese railway. There are a few diverted short routes
br
branching
anching out from the main line that link passengers to the main cities such as
Erdenet and Darkhan. Apart from the Trans
Trans-Mongolian
Mongolian railway, a short link
connects the eastern city Choibalsan, the centre of the Dornod province, with the
Trans
Trans-Siberian railwayy of Russia. Ulaanbaatar Railway, 50% owned by the Russian
government, is responsible for the operation of the main line.
In December 2010, the governments of Mongolia and Russia signed nine
n
cooperation agreements, including a contract on the enlargement of the
Ulaanbaatar Railway capital at equal contribution, which will help modernize the
company and facilitate the development of the required infrastructure in
Mongolia.

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17.2
96.7% of roads unpaved
Major investments expected

New paved road by Mongolia Mining

Corporation

Roads

Most roads in Mongolia are gravel road and 96.7% of the Mongolian road network
is unpaved. Investments into the sectors were boosted only after 2000, when the
US and major financial institutions like the World Bank and ADB contributed to
the development of road projects. As a result, 2,700 km of paved road were
added to the system, making the isolated regions of Mongolia more accessible.
As infrastructure constraints remain immense at this stage of the mining boom,
further investments are expected in rail and road networks. Mongolia Mining
Corporations new paved road from its Ukhaa Khudag deposit located in the
Tavan Tolgoi region to the Mongolian-Chinese border is soon to be fully
completed.
There is a paved road from Ulaanbaatar to the Mongolian-Russian border.

17.3
Only one international airport

Chinggis Khaan Airport, located in 15 km from Ulaanbaatar, is the one and only
international airport of Mongolia. There are a number of domestic airports linking
the capital city to isolated provinces. MIAT or Mongolian Airlines, a state-owned
company, is the largest carrier in the country and currently offers international
flights only. Among major global destinations, Mongolia is directly linked to Seoul,
Beijing, Tokyo, Moscow and Berlin. The main two domestic carriers are
AeroMongolia and Eznis Airways, which also organise charter flights to the main
mine sites.

17.4
Water is a scarce resource in Mongolia

Water is vital in mine development

Oyu Tolgoi team discovered an aquifer

Water supply ensured for 40 years
Environmental impacts will be minimal

Airports

Water

Due to dry weather conditions, water is a scarce resource in Mongolia. Some

regions of the country do not receive precipitation at all throughout the year.
There is the threat that Ulaanbaatars water supply may be significantly depleted
in the medium to long term.
Not only is water required for peoples everyday life, but it also facilitates
industrial activities such as coal washing. In general, production levels of all sorts
of mines heavily depend on water supply. Desert areas contain aquifers, but it is
hard to quantify the size and distribution of those.
In late 2010, Oyu Tolgois environmental team announced that they had found a
substantial amount of underground water deep beneath the Gobi desert. Experts
predict that the discovered aquifer will be capable of supplying the copper and
gold mine throughout the next 40 years. According to the announcement, even
after those years of utilization, water resources in the area will not be fully
depleted. The Oyu Tolgoi team is currently working to ensure that minimal
environmental impacts are caused by their activity in the region. Development of

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the aquifer will also be devoted to the improvement of conditions in nearby
towns.

Source: Trade and Development Bank

Estimated costs for developing water resources:

Water resources for Gobi: $300 million for ground resources

Diverting waters from northern rivers: $400 million
Solving Ulaanbaatars needs: $300 million
Total: $1 billion

Source: World Bank

17.5

Mining boom and infrastructure development

Although the mining boom is already ongoing in Mongolia, the realities of the
industry today include several issues requiring attention:
Isolation the mine sites are located in remote places, far away from
existing infrastructure
Insufficient infrastructure the existing infrastructure is highly
underdeveloped owing to the size of the country and the size of the
population
Technology, expertise and skilled labour deficiency related to
Mongolias development
Weak logistics system related to underdeveloped infrastructure and
lack of expertise
Undeveloped rural areas the biggest and most developed city is the
capital Ulaanbaatar, where 40% of the entire population resides
Environmental issues applicable to any country

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Largest deposits located in isolated areas
Poor access to basic infrastructure

Most of the large-scale

scale deposits are located in isolated areas, with very limited
infrastructure.
Connection to the electrical grid in Mongolia takes twice as long to obtain in
comparison with Russia, China and Kazakhstan. Power outages and water supply
failure
failures occur constantly.
ACCESS TO BASIC INFRASTRUCTURE (DAYS SPENT)
25
20
15
10
5

Obtain electrical connection

Water supply failures

East Pacific Asia

Kazakhstan

Russia

China

Mongolia

Power outages

Source: World Bank, Mongolia Sources of Growth Country Economic

Memorandum, July 26 2007
Ranked last for quality of infrastructure

88.4% - earth road

3.3% - paved road

As informed by the Business Council of Mongolia, the 2010 Global

Competitiveness Report ranked Mongolia last for the quality of overall
infrastructure out of 134 countries. There are no paved roads from Ulaanbaatar to
the Mongolian
Mongolian-Chinese border. Because of underinvestment, the countrys overall
railway capacity is substantially restrained. In addition, the half-Russian
half
ownership
of the current railway network is seen by many as an obstacle for development.
Currently in Mongolia, 88.4% of total roads are earth and only 3.3% are paved.

Earth road
88.4%

Improved road
Gravel

0.5%

Asphalt road
Cement road

0.2%

Others

3.1%
3.9%
3.8%

Source: Business Council of Mongolia

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Supply chain development potentials
Planned mining expenditures: $13bn
Mining service expenses: $1.3bn

Planned mining expenditures are to total $13 billion in the coming years, of which
$1.3 billion is to be spent on mining services.

Source: Business Council of Mongolia

2011-2015: expected FDI in mining
$25bn

The government of Mongolia hopes to attract up to $25 billion in foreign

investment for mining projects in 2011
2011-2015.
COAL CASE, MINING INVESTMENT REQUIREMENTS, % OF TOTAL

12%

26%
600MW power plant

16%

Open-cut coal mining

Railway
22%

24%

Coal beneficiation
Others

Note: Under 30 mtpa production scenario

Source: Business Council of Mongolia
2011-2020: investment in infrastructure
$5.2bn

Infrastructure development requires around $5.2 billion in investments from

2011
2011-2020.

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REQUIRED INVESTMENT IN MINING INFRASTRUCTURE (2011-2020)
Electricity

$2.7 billion

Town development

$1.5 billion

Land transport

$800 million

Water resource

$262 million

Total

$5.2 billion

Source: World Bank

The government is planning to build 2,600 km of paved East-West road and 5,600
km of new railroads:
Railway construction strategy:

st

Railway construction, 1 phase $3.0bn

Phase I (2010-2011), 1040 km: Tavan Tolgoi Sainshand - Choibalsan

route providing access to Russian far eastern ports
Phase II (2011-2012), 893 km: Nariin Sukhait - Shivee Khuren, Tavan
Tolgoi (Ukhaa Khudag) Gashuun Sukhait
Phase III (2012-2015), around 3,600km: the western railway lines from
Tavan Tolgoi (Ukhaa Khudag) through Nariin Sukhait

The railway infrastructure plan has considered all major mineral deposits. Around
$3.0 billion is to be spent on the first phase.

Source: Ministry of Road, Transportation, Construction and Urban Development of

Mongolia

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17.6
$10bn industrial complex in Sainshand

Industrial Park in Sainshand

An industrial complex is being built in Sainshand city, which is located at the

crossroads of the Trans-Mongolian and East-West rail lines. The latter is currently
under development and will link Tavan Tolgoi deposit with the Russian far-eastern
seaports, i.e. Vladivostok, through the Trans-Siberian rail route. Projected capex
of the entire complex is $10 billion.

SAINSHAND IND. PARK

Source: Ministry of Road, Transportation, Construction and Urban Development of
Mongolia
The Industrial Park is to include a CHPP (coal handling and processing plant), an
iron pellets plant, a copper smelter, an oil refinery and other facilities which will
increase the value of Mongolian mineral resources.
PLANNED PROJECT DEVELOPMENT PHASES

Source: State Property Committee

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Sainshand Park can increase Mongolias
GDP to $41bn

According to the estimates of the Ministry of Road, Transportation, Construction

and Urban Development of Mongolia, the construction of Sainshand Park and
associated industrialisation could increase the Mongolian GDP to $41 billion over
the next 11 years, compared to the current level of $6.6 billion.
Cumulative GDP growth over 2010-2021 is 45% higher under processing and
export scenario
$ billion
Extraction and exports (unprocessed)

26

Losses due to higher transportation costs

-4

Value added in transportation

Value added in processing and construction

11

Value added in power

Value added in other industries

Manufacturing and exports

40

Source: Boston Consulting Group, Oct 2010

17.7 Recent developments

The overall infrastructure investment needs are estimated to be around $5.2
billion throughout the next 10 years. Although the Mongolian government plans
to spend around $3.0 billion on the first phase of railway construction, it also
seeks to delegate some of the responsibility to individual companies.
Mongolia Mining Corporation (Energy Resources)
2011-2012: new railway, 240 km, 15mtpa

Q1 2011: new paved road, 18mtpa

Mongolia Mining Corporation (MMC) has obtained rights to construct a railway

directly from its Ukhaa Khudag deposit to Gashuun Sukhait (the MongolianChinese border) in 2011-2012. The company is doing so in order to increase their
operational efficiency and reduce transportation costs. The new railway will be
roughly 240 km in length. Although the target market for Ukhaa Khudags coal is
mainland China, MMC is also seeking to export their product to other seaborne
markets via the Gashuun Sukhait border pass. The new rail link is expected to
convey 15 mtpa at full capacity, primarily satisfying the companys own coal
transportation needs. Other mining companies, however, will be allowed to use
the railway in case of excess capacity.
Mongolia Mining Corporation has also started putting a 245 km paved road south
to the Gashuun Sukhait border pass from its Ukhaa Khudag mine. The road is to
be completed in Q1 2011 and will have a capacity of 18 mtpa. It will be used as a
principal coal haulage channel prior to the construction of their railway. The
project is intended to increase MMCs transportation capacity and reduce the
related costs directly affecting the companys profitability.

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Mongolia Russia - China
2011: new railroad from Tavan Tolgoi to
Choibalsan, 1,040 km, capex $3.0bn

Choibalsan is linked to Trans-Siberian

railway

New route will help develop Sainshand

Park

Authorities of Mongolia have selected a more expensive infrastructure

development option with the purpose of strengthening Mongolias sovereignty.
Recently it has been announced that a new railroad will be constructed in 2011
linking Mongolias largest coal deposit, Tavan Tolgoi, with Mongolias domestic
rail network. The alternative option was a direct route south to China.
International advisors and a group of parliament members voted in favour of the
alternative option, which would have been much cheaper. The selected option, as
explained by political leaders, would protect Mongolia from the possible
economic and political pressure from China if it becomes the principal importer of
Tavan Tolgoi coal.
The approved rail route will stretch 1,040 km north to Russia, from Tavan Tolgoi
to Choibalsan city, which is linked to the Trans-Siberian railway through
Sainshand. Approximately $3.0 billion will be spent on the development. Russian
wide-gauges will be used in the construction, rather than narrower Chinese
gauges that are common in many countries.
A number of factors influenced the choice of such an expensive option. The
principal reason was the back-up of Sainshand Industrial Parks development. Via
the new route, coal will be transported from Tavan Tolgoi to Sainshand.
Impediments to infrastructure development by individual companies

MMCs plan to build a railway impeded

Mongolia Mining Corporations plan to put a railway south to China from its
Ukhaa Khudag mine has been impeded by resistance from some political leaders,
who were greatly concerned that this would cause heavier economic dependency
of Mongolia on China.
Numerous Mongolians do not trust Chinas intentions towards their motherland,
especially after being controlled by the Manchu dynasty for 200 years.

SouthGobis plan to build a railway

terminated

In May 2010, SouthGobi Resources, engaged in coal exploration and mining

activity, terminated its plan to build a railway from its 114 million tonnes Ovoot
Tolgoi project to the Mongolian-Chinese border because of uncertainty over
government policy. The project is located only 42 km from the Chinese border,
hence a railway was deemed not essential.
Asian Development Bank

ADB is funding a logistics project at

Zamiin-Uud ($45m)

The Asian Development Bank (ADB) is funding a regional logistics development

project at Zamiin-Uud with $45 million in loans and grants, which will create a
new terminal with road and rail links. Zamiin-Uud is a remote south-eastern
Mongolia-Chinese border crossing, through which the majority of current export
and import products pass.
Once completed, the new terminal will offer contemporary customs and
quarantine facilities, which will make transit times shorter and increase capacity.
Management will be delegated to a contract operator. ADB will also participate in

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the training and support program of the government employees who will oversee
and implement the project.

$40m in loans
$5m in grants

ADBs funding will take up 63% of the total costs of $71.6 million. $40 million of
the assigned $45 million will be a 32-year loan with a 1% interest rate rising to
1.5%. The rest $5 million be given as a grant.
CADEX KK

Sep 2010: CADEX KK and Mongolian

Railway strategic alliance

CADEX KK of Japan and Mongolian Railway, a state-owned company, formed a

strategic alliance to improve the railway infrastructure of Mongolia in September
2010.
According to the agreement, CADEX KKs Mongolian subsidiary CADEX LLC
Mongolia will serve as a project manager and a business consultant to the
Mongolian Railway company in acquisition of new technologies and personnel.
The alliance is aimed at securing Mongolian Railways long-term growth.
By using its project management experience in Asia, large network, and human
resources base, CADEX will help Mongolia to catch new business opportunities,
develop a stable freight transportation system and achieve efficient exploitation
of mineral resources.

17.8 Mining boom and air industry

Domestic airports are soon to start
handling international routes

International air travel from Mongolia is limited to a number of destinations.

Domestic airport infrastructure is already in place to begin handling of
international routes from remote mine sites.
International air routes are split between numerous carriers
MIAT (Beijing/Berlin/Irkutsk/Seoul/Osaka/Tokyo)
Aeroflot (Moscow)
Korean Air (Seoul)
Air China (Beijing)
Domestic air routes are split between two carriers
Aero Mongolia
Eznis

Dalanzadgad (South Gobi centre) airport

can handle international routes

Requirement for new international routes is split evenly between domestic and
international carriers. Assignment of new domestic and international routes into
Mongolia is regulated by the Mongolian government and MCAA (Mongolian Civil
Aviation Authority). A new airport with paved runway was built in 2007 in
Dalanzadgad (540km south of Ulaanbaatar). This means that there is an existing
paved runway at the Oyu Tolgoi mine site capable of handling Airbus A320 and
Boeing 737 aircraft. The government is planning to transform four domestic
airports into international airports by 2014.

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Hong Kong market to open up to
Mongolia

The Hong Kong market is expected to be opened up to Mongolia on a regular

basis starting in 2011. Currently, the direct access to Ulaanbaatar from major
global financial centres is unavailable.

Note: London and New York time differences vary based on daylight savings time
Trial charter flights from MIAT (Summer 2010)
During summer 2010, MIAT planned 8 charter flights to Hong Kong but
only completed 7. Fragmented demand due to irregular flight times and
lower tourist season were seen as the cause for cancellation of the final
flight.
Mongolian travel agent Juulchin World Tours Corporation and Miramar
Travel in Hong Kong acted as agents.
The return fare was $550.
Planned charter flights from MIAT (beginning April 2011)
Twice per week service from Ulaanbaatar to Hong Kong will be organised
beginning from April 2011
The plan is to use existing Boeing 737-800
800 (with 162 seats) to fly to Hong
Kong
The return fare will be approximately $600-650
International air travel to Mongolia is expected to arise from expat growth at mine
sites and business tourist demand linking Ulaanbaatar with Australasia through
Hong
ong Kong.

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18 Privatisation of State
Properties
2011-2012 privatisation plans will allow international investors
to gain access not only to some of the world's largest unexploited
mineral resources, but also to the non-resource sector boom of
the fastest growing economy in the world.
1990-2010: SOEs were privatised
2011-2012: several SOEs to be privatised,
including Tavan Tolgoi

In order to facilitate expansion of the economy based on private sector

development, the Mongolian government started privatising state owned
enterprises (SOE) through bidding, international tender, and management and
ownership contracts over the past twenty years. A number of state properties are
on the list to be privatised in the following 2 years, including Tavan Tolgoi, a 6.4
billion tonne coal mine, a quarter of which consists of high quality coking coal. The
2011-2012 privatisation plan for the SOEs has been presented by Mr. Sugar, the
Chairman of the State Property Committee (SPC), at the "Mongolia: raising
capital" conference in June 2010.

1990: first round of privatisations,

unsuccessful exercise

This upcoming share issuance of Tavan Tolgoi will not be the first experience in
Mongolia. The country went through the first round of privatizations in 1991 with
pink and blue vouchers. Due to lack of involvement and participation of citizens,
the exercise was seen as unsuccessful. Afterwards, people turned to high interest
rate savings at Credit and Savings Cooperatives, which also ended up going
bankrupt swallowing a good portion of the middle-income populations savings.

International investors to benefit from

privatisations

Mongolia's plan to privatize its state-owned properties will allow international

investors to gain access to some of the world's largest unexploited mineral
resources.

18.1

2011-2012 privatisation strategy

18.1.1 Near term privatistaion targets

Baganuur, brown coal, 1.3bn tonnes

1.

Current production 3.0 mtpa

53% of the Mongolian central electricity system depends on the Baganuur coal
supply. Containing estimated reserves of 1.3 billion tonnes of brown coal,
Baganuur is the biggest coal supplier to coal consumers in Mongolia.

Capacity 4.0+ mtpa

75% state owned
15% owned by Firebird

Baganuur JSC

The coal mine satisfies 100% of TPP-2 (Thermal Power Plant 2), 100% of TPP-3
and 50% of TPP-4s (the biggest power plant in Mongolia) coal needs. Between
1996-2004, the Mongolian Government implemented a project to modernize and
expand the production capacity of Baganuur, taking $31.1m and $50.9m in loans
from the World Bank and the Japanese government respectively. As a result, the

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companys exploitation capacity reached 4.0 mtpa. However, currently Baganuur
extracts only around 3.0 mtpa due to old equipment and financial constraints. The
state owns 75% of the company and the biggest private shareholder is a New York
based investment fund Firebird, which possesses over 15% of the shares, the rest
is free float.
SPCs conditions of privatisation:

Coal resources must be evaluated by JORC standards

The mining license must be assessed in terms of a property
Power plant and coal liquefaction projects must be studied by
professionals, then implemented

Method:

2.
Mongolian electricity supply = 3 grids
Largest grid CES
CES = 5 power plants
CES capacity: 786.3 MW

Up to 51% of the current state-owned shares will be issued and offered

for sale

Erdenet Power Plant and TPP-3

The electricity system in Mongolia consists of three independent grids. The largest
one is the Central Energy System (CES), which covers the most populated area of
the country, including Ulaanbaatar. The installed capacity of the CES area is 786.3
MW, which is provided by five main power plants in Ulaanbaatar, Erdenet and
Darkhan. There are also two provincial centres with individual power plants that
are not connected to the main grids and meet the regional demand through local
networks.

Power Plant

Installed
Capacity
(MWe)

Available
Capacity
(MWe)

Capacity
Boilers
(MWth)

District
Heating
(MWth)

709.5

554.7

3,978.0

1,523.0

192.0

1961-1991

Darkhan

48.0

38.6

477.0

210.0

49.0

1966, 1986

Erdenet

28.8

21.0

318.0

140.0

24.0

1987-1989

Total CES

786.3

614.3

4,773.0

1,873.0

265.0

Ulaanbaatar
TTP-2,3,4

Indus.
Stream
(MWth)

Commissioning
year

Source: Energy Efficiency Technical Report, Ulaanbaatar

CES consumes 80% of domestic coal
supply
Constant power outages and water
supply failures

All five plants are coal-fired and of Soviet design. They are used in the production
of electricity, hot water, heating and steam. 80% of domestic demand for coal is
consumed by the CES. Power outages and water supply failures are common in
Mongolia because the central grid is unable to meet the daily demand at its peak
due to poor peaking potential of the plants.

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Current supply: 650MW
Current deficit: 120MW

The Mongolian electricity system currently produces 650MW, leading to a deficit

of more than 120 MW. The deficit is covered by expensive imports from Russia
and has been forecasted to increase to 500 MW by 2013, as a result of Mongolias
economic growth and mining related industrialisation.

2013 deficit: 500MW

SPCs conditions of privatisation:

Investment must be made to improve technology:

Heating capacity must be increased
Costs must be reduced

Method:

3.
MIAT largest carrier, state-owned

Privatization will be implemented via concession agreements

Mongolian Airlines MIAT

MIAT or Mongolian Airlines, a state-owned company, is the largest carrier in the

country and currently offers only international flights. MIAT flies to Beijing, Berlin,
Seoul and Tokyo. The company is planning to organise charter flights to Hong
Kong from Ulaanbaatar starting in summer 2011.
Method:
Privatization will be implemented via an international management and
ownership contract.
4.

LSE to manage MSE

Mongolian Stock Exchange (MSE)

The description of the MSE has been provided earlier in this report. In October
2010, the London Stock Exchange was selected as the international partner to
assist in reforming the MSE.
Method:
Privatization will be implemented via a management contract. An experienced
team will assume administration of the stock exchange. The contract terms will be
announced in early 2011.
5.

MTC national telecommunications

company
200+20 thousand customers
23% of total internet users

Mongolian Telecom

Mongolia Telecom Company (MTC) is the Mongolian national telecommunications

company that offers a variety of services to its customers. Currently Mongolia is
connected to 150 countries via MTC. The company also operates in mobile phone,
data network, cable TV, radio and TV broadcasting, and intranet network sectors.
It has 200k customers in the land line telephone segment and 20 thousand users
in the mobile phone segment. 23% of total internet users in Mongolia are MTCs
customers.

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The company was partially privatized in 1995, when a Mongolian-Korean
Mongolian
joint
venture was formed. Korean Telecommunications Company acquired 40%
ownership.

Share ownership structure after the first privatisation:

54% of shares owned by the Mongolian government
40% of shares owned by South Korean
rean KT Corporation
6% of shares owned by the citizens of Mongolia

Method:
The state will offer its portion of shares to be privatised to the Korean KT
Corporation first on a contractual basis. If an agreement can not be reached, the
state will open a tender.
6.

Mineral resources

The government will bundle in groups the state owned shares from the 15
strategic deposits by types of minerals and certain percentages of them will be
sold through domestic and international stock exchanges. New Joint Stock
companies will be established in the process.

18.1.2 Detailed maps of planned privatisations

The following are the detailed maps of the planned privatisation processes:

Source: State Property Committee

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Tavan Tolgoi coal mine (TT) is currently 100% owned by Erdenes MGL LLC which is
ful
fully controlled by the State Property Committee.
Tavan Tolgoi privatisation:
10% to citizens
10% to Mongolian companies
29% to IPO

Eastern block to contract miners

Western block to strategic investors

The SPC is going to split the deposit into two blocks. In October 2010, ErdenesErdenes
Tavan Tolgoi Ltd, a subsidiary of Erdenes MGL, was set up for the development
and operation of the TT coal deposit. Erdenes MGL is intending to retain 51%
ownership of the Ea
Eastern
stern Block and privatise the rest by splitting 20:29 between
Mongolian and international investors. That is, 10% will be distributed to the
citizens of Mongolia at no cost, 10% sold to Mongolian private enterprises at a
substantial price and 29% released through domestic and international stock
exchanges (IP0).
Funds raised through IPO will be devoted to financing the infrastructure and
working capital of the Eastern block. The Western
estern block, however, is going to be
handed over to strategic investors who will assume entire responsibility for the
blocks development, mine infrastructure and coal marketing independently from
the government of Mongolia. Contract miners will be able to participate in the
development of the Eastern block for a fixed service fee, while strategic investors
will be obliged to transfer a portion of their future income to the government of
Mongolia.

Source: State Property Committee

The State Proper
Property
ty Committee will bundle the coal assets it holds from the
strategic deposits, except Tavan Tolgoi, to create a Coal Asset Joint Stock
Company, and partially privatise that, retaining 70% of the shares and releasing
the remaining 30% on the domestic and in
international
ternational stock exchanges through an
IPO. The Coal Asset Company will in turn own 90% of Shivee Ovoo, 75% of
Baganuur, 34% of Nariin Sukhait, and 34% or higher stake of other coal deposits.

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Source: State Property Committee

The State Property Committee will bundle the copper and silver assets it holds
from the strategic deposits to create a Copper and Silver Joint Stock Company,
and partially privatise that, retaining 70% of the shares and releasing the
remaining 30% on the domestic and international st
stock
ock exchanges through an
IPO. The Copper and Silver Company will in turn own 51% of Erdenet copper
factory, 100% of Asgat silver deposit, 50% of Tsagaan Suvarga
copper/molybdenum deposit and 34% of the Oyu Tolgoi deposit.
Copper smelter in Sainshand to increase
valu of Cu resources

The plan is to construct a copper smelting factory in Sainshand to increase the

value of copper mines. The private sector will be the driving force for the
development of the project. If the government of Mongolia arranges for
construction of a copper smelter, then according to the Investment Agreement
between the government of Mongolia and Ivanhoe Mines:
-

Ivanhoe Mines must provide Rio Tinto's (or its affiliates) proprietary
p
technologies held in joint venture with Outokumpu,
Outokumpu for the operation of
the smelter.

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Source: State Property Committee

The State Property Committee will bundle the iron ore assets it holds from the
strategic deposits to create an Iron Assets Joint Stock Company, and partially
privatise that, retaining 70% of the shares and releasing the remaining 30% on the
domestic and international stock exchanges through an IPO. The Iron Assets
Com
Company
pany will in turn own 100% of Temurtei iron ore deposit, 34% of Temurtein
Ovoo zinc deposit, 100% of Temur Tolgoi iron ore deposit, and 100% of Darkhan
Metallurgical plant.

Source: State Property Committee

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The State Property Committee has already bundled the uranium assets it holds
from the strategic deposits and created a Uranium Assets company MonAtom
LLC. The privatisation plan is similar to the previous cases, to retain 70% of the
business and release the remaining 30% on domestic and international stock
exchanges through an IPO. Mon Atom will in turn own 51% of Central Asia
Uranium Company (58% owned by Khan Resources), 51% of Gurvan Bulag
uranium deposit, 51% of Mardai uranium deposit (also owned by Khan
Resources), 34% of Coge Gobi LLC (a joint Mongolia-French company, a subsidiary
of Areva), and 51% of Gurvan Saikhan uranium deposit. According to the Uranium
Law (2009), the State is entitled to control 51% of all uranium assets in Mongolia.

18.1.3 State Property Committe

(The following bullet points have been highlighted by the SPC)
Structure, duties and team

The State Property Committee is a Government agency with the

functions to own, use and protect state owned properties;
The State Property Committee operates with a total of 65 employees
including a Chairman, 8 part time members, 3 departments and 4
divisions. The Government designates a Committee member based on
the proposal of the Chairman.

Full powers of the State Property Committee

Administer the activities on improvement of ownership, storage and

protection of the state property and monitor its implementation;
Manage and oversee the recording of primary accounting documents,
census and balance sheets of the state property, monitor and control its
use and take measures to improve its efficiency;
Negotiate with relevant organization and determine planning, profit and
revenue distribution, remuneration norms and normative of a state
owned legal body;
Manage privatization of State Owned Enterprises based on a list
approved by the Government and report performance;
Provide professional and methodological assistances to manage local
properties;
Assign a state property representative in a state owned legal body and
monitor its activities;
Review and approve proposal and order of excluding immovable
property or movable property belonging to the fixed asset from account
and make a decision on new purchase;
Other powers specified in the law.

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18.1.4 Recent developments
Mongolian Stock Exchange
Contract agreement signed between
MSE and LSE

In December 2010, the London Stock Exchange (LSE) signed a contract agreement
with the Mongolian Stock Exchange (MSE). It was informed that LSE officials will
arrive in Mongolia in the third week of January, when the terms of the contract
agreement will be announced to the public.
Tavan Tolgoi

Erdenes Tavan Tolgoi, sole owner of

the deposit, holds 15bn shares.
Eastern block privatisation to domestic
investors in Q1 2011, afterwards IPO

Erdenes Tavan Tolgoi (TT) LLC, a subsidiary of the State Property Committee
owned Erdenes MGL, is the current fully authorised owner of TT licenses and
holds 15 billion shares. The delegation of 10% of the Eastern Blocks ownership
rights to the citizens of Mongolia and the sale of another 10% at a market price to
Mongolian private enterprises will be organized in Q1 of 2011. The planned IPO of
selling 29% of the same block on domestic and foreign stock exchanges will be
organized in stages and start being implemented as early as possible in 2011.
Tender for the contract miner of the Eastern Block is ongoing.
2011 plans:
To raise funds for project financing
To cooperate with international and domestic investment banks and
advisors in order to prepare for the IPO
To start work on infrastructure development, including water supply,
mine camps, power plant and roads.

Eastern block privatisation to domestic

investors in Q1 2011, afterwards IPO
Deadline for strategic investors:
17 Jan 2011
Deadline for contract miners:
27 Jan 2011

The tender for strategic investors for the Western Block has been officially
th
announced and closed on 17 January at 16:00. According to the latest update,
Chinas Shenhua Energy Co, Peabody Energy Corp from the US, a Russian
consortium led by Gazprom, a consortium of four Japanese trading houses,
including, Itochu Corp., Sumitomo Corp., Sojitz Corp. and Marubeni Corp., a
consortium of 10 South Korean companies, including Posco and Korea Electric
Power Corp., Anglo-Australian mining companies Rio Tinto and BHP Billiton,
Brazils Vale, and Indias International Coal Ventures Pvt, a joint venture of five
state-run companies, have expressed their interest to participate in the bid. The
tender for contract miners for the Eastern Block has been officially announced
th
and is about to close on the 27 January 2011.
Erdenet Factory, MongolRosTsvetMet and Dornod Uranium

14 December 2010, 9 cooperation

agreements signed between Mongolia
and Russia:
Debt settlement
Dornod Uranium JV
Erdenet + MonRosTsvetMet =
merger & IPO

In December 2010, on his last visit to Moscow, the Mongolian Prime Minister
Sukhbaataryn Batbold has signed nine cooperation agreements with his Russian
counterpart, Vladimir Putin. The negotiations included settlements on the
Mongolian debts to Russia and the national level joint venture, Dornod Uranium.
An agreement was signed specifying the business plan for the uranium deposit,
according to which the joint venture would start functioning in 160 days. It also
informed that the two existing Mongolian-Russian joint ventures, Erdenet and
MongolRosTsvetMet, may merge and market their stock. Together the two

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companies account for about 20% of the Mongolian GDP with Erdenet Copper
Mine taking up 26.5% of total exports. Extensive modernization of Erdenet Copper
Mine and MongolRosTsvetMet is currently in progress, and the privatisation
process is intended to considerably enhance the two companies competitiveness
and have a constructive effect on the Mongolian economy.

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Demographics

19 Demographics
A country the size of Western Europe with only 2.8 million
people...

59% below 30
27% below 14

Population growth rate 1.2%

In 2009, the National Statistics Office estimated that the population of Mongolia
was 2.8 million people. The population growth rate is approximately 1.2%. Around
59% of the citizens are below the age of 30 and 27% are below the age of 14.
Compared to EU countries and Japan that are going through a period of
demographic winter, Mongolias population is significantly younger. In
November 2010, the government conducted the 10 - yearly population Census,
the results of which are yet to be released in 2011.
POPULATION, IN THOUSANDS
2800
2700
2600
2500
2400
2300
2200
2100
2000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

2009: 2.8m people (NSO estimate)

Source: National Statistics Office

UNEMPLOYMENT RATE, % OF TOTAL LABOUR FORCE

14
12
10
8
6
4
2
0
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Source: IMF

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Demographics
13% unemployment rate in 2009

Since 1990: steadily declining fertility

rate

40% of population live in UB,

20% in other urban areas
40% in rural areas
30% are herders
90% of population: Khalkha Mongols

The unemployment rate in Mongolia has been lower than 4% since 2002.
However, during the peak of the economic crisis (2009) it reached 13% and now is
returning to its regular levels.
Since the transition into a market economy, the overall fertility rate (children per
woman) in Mongolia has been declining at a steep rate compared to other
countries in the world. According to UN estimations, the fertility rate in 19701975 was 7.3 children per woman, while in 2005-2010 the number has decreased
to 1.9.
Mongolia is becoming more urbanized with more rural population migrating to
the capital city in search of better living conditions. Currently about 40% of the
population live in Ulaanbaatar, around 20% live in Darkhan, Erdenet, provincial
centres and soum settlements and the remaining 40% live in rural areas. Seminomadic and nomadic herders make up around 30% of the entire population.
85% of Mongolias population consist of ethnic Mongolians, out of which 90%
consists of Khalkha Mongols. Buryats, Durbet and other ethnic groups make up
the remaining 10%. People of Turkic origin, including Kazakhs, Tuvans and Uzbeks
represent 7% of the population. The remaining 8% consist of Tungusic, Russian
and Chinese people, although most Russians have left the country after the
collapse of the Soviet Union.

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Languages

20 Languages
Many Mongolians have a good grasp of Russian and English

Official language Khalkha Mongolian

Cyrillic script adopted in 1937

The official language in the country is Khalkha Mongolian. One can encounter
other dialects such as Oiratian (spoken by Durbet) and Buryatian across the
country. Speakers of Khamnigan Mongolian also exist. The western region of
Mongolia is occupied by Kazakhs and Tuvans who speak languages of Turkic
origin.
Mongolians adopted the Cyrillic alphabet from Russia in 1937, before which they
used to write in their traditional vertical script.

Traditional Mongolian script

Widely spoken languages:
-

Russian
English
Chinese
Korean
Japanese
Western European

The majority people, especially the older population, speak fluent Russian, making
it the most popular foreign language in the country. Currently English is gradually
replacing Russian, being preferred among the younger generation. A substantial
number of Mongolians work and live in South Korea, prompting the Korean
language to also gain popularity in Mongolia. Plenty of youth are learning Chinese
with growing importance of China as the other neighbouring power. Japanese is
also widely spoken, especially due to the possibility to get access to Japanese
government funded scholarship programs. Older Mongolian academics, who
studied in Germany during the Soviet times, can speak fluent German. Because
households endeavour to send their children abroad for higher education (as long
as there are possibilities to support them throughout their stay) many younger
Mongolians today fluently speak Western European languages such as French,
German and Italian.

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Religion

21 Religion
Religious practices were largely impeded by the Communist
regime.

50% - Buddhists
40% - not religious
6% - follow Shamanism, Bahai &
Christianity
4% - Muslims

According to the CIA World Factbook and the U.S. Department of State, 50% of
Mongolia's population follow the Tibetan Buddhism, 40% are listed as having no
religion, 6% are Shamanist, Baha'i and Christian, and 4% are Muslims.

First Shamanism, then Buddhism, then

Socialism (destruction of monasteries),
then Democracy (resumption of religious
practices)

Following the Communist influence, throughout the XX century, religious practices

were largely restrained by the government. The Buddhist Temples were a
replication of the pre-socialist feudal system and the Khaan of Mongolia was the
th
head of the Temple (The 8 Jebtsundamba Khutuktu Bogd Khaan). In 1930, most
of Mongolias 700 Buddhist temples were destroyed and around 18,000 monks
(lamas) were killed under the regime led by Marshal Choibalsan, who held a
position equivalent to todays Prime Minister. While in 1924 there were around
100,000 Buddhist monks, by 1990 the number decreased to only 110.

Historically, various forms of Shamanism have been practiced and widely

accepted as the main religion by the Mongolian nomads. Tibetan Buddhism was
first introduced to Mongolia during the ruling of Yuan Dynasty and currently is the
most commonly practiced religion, although Shamanism is still popular. During
the Mongol Empire Islam was also favoured and the three khanates (independent
states of that time) adopted Islam.

Collapse of the Soviet Union and the Democratic Revolution of 1990 restored the
legitimacy of religious practices. The Tibetan Buddhism again became the most
practiced religion in Mongolia. Other religious streams were also resumed,
including Islam and Christianity. Statistics suggest that the number of Christians
rose from just 4 in 1989 to 40,000 in 2008.

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Equity Research

As of 16 Dec 2010

21.1 Tavan Tolgoi

Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

530,000
436.86
670,000
120,000 - 670,000
279
230
8,467
11.90%
293%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
EV/Resource
Dividend yield

5.27
6.53
116%
58%
-62%
59%
1
3.55
61%

Share price performance, MNT

Company brief: There are two companies named Tavan Tolgoi (TT). One is the 6.4
billion tonne deposit Tavan Tolgoi which is 100% owned by the state-owned
Erdenes MGL and the other one is Tavan Tolgoi JSC listed on the MSE. The main
Tavan Tolgoi deposit complex is partially owned by Erdenes MGL (6 mining
licenses), Mongolia Mining (1 mining license), Moril Luu (1 mining license), Broad
(1 mining license), Daitsuki (1 mining license) and Tavan Tolgoi JSC with 2 mining
licenses. The South Gobi provincial government owns 51% of TT JSC and the rest is
privately held. TT JSC is the biggest company on the MSE by market capitalization
and the third largest coal miner in Mongolia by production volume. In 2004, the
Company signed a coal export contract with a Chinese client and since then its
coal export to China has substantially increased. The company cooperates with
Tavan Tolgoi Trans private company in transporting coal to China. Although in
Gansu and Inner Mongolia semi-soft coal and hard coking coal prices are around
$85/t and $155/t respectively, the company is still selling their coking coal at
$7.5/t to the local market due to the state-regulated sale prices and is exporting
at around $25-35/t. Since 2007 the company almost tripled the extracting
capacity to 2mtpa. In 2009, they extracted over 2m tonnes with 170 employees.
Deposit: Tavan Tolgoi JSCs license area is 169ha located in the South Gobi region
of Mongolia, 250km from the Mongolian border with China and 550km from
Ulaanbaatar. The total proven reserve is 20.5m tonnes and the resource is 60m
tonnes of coking coal with a calorific value of 6,500-7,500kcal/kg, 20% ash and
8.5% moisture.

700

Financial highlights: In the last few years, total revenue increased due to the
companys investment of $1.0m into new technology and equipments. In 2009,
the company sold over 2.5mt of coal to both foreign markets and local clients, and
worked with $65.8m revenue and $29.5m of net profit. Revenue has surged 12
times since 2006 and 65 times since 2003. Cash cost per tonne of Tavan Tolgoi JSC
coal mine is approx $11-12, which is very low compared to international peers. As
a result of the low cost, Tavan Tolgoi JSC mines profitability is great (ROA at
103%, ROE at 116%, gross margin at 58% and net margin at 44.8%, as of FY2009).

500
400
300
200

12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

100
1/4/10

MNT'000

600

Key financials, MNT million unless otherwise stated

Shareholders

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Net debt/Equity, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
Sales growth, %

Provincial
governor

8%
7%

Ajnai
Corporation
51%
34%

Board members

Retail
shareholders

2007
32,564
12,863
24,425
15,519
638%
-37%
52%
40%
0.8
301%

2008
47,797
16,134
30,636
23,984
808%
-8%
45%
34%
2.2
47%

2009
95,436
42,753
81,178
58,835
1091%
-62%
58%
45%
1.0
100%

Equity Research

Source: Company data and SCH&CD

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Capital

January 24 2011

Equity Research

As of 16 Dec 2010

1.1

Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

10,600
8.74
11,000
2,800 - 11,000
222
183
71,023
11.37%
203%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
EV/Resource
Dividend yield

51%
11%
-541%
-15%
0.39
-

12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1/4/10

MNT'000

Share price performance, MNT

Shareholders

14%

Company brief: 53% of the Mongolian central electricity system depends on

Baganuur coal supply. Containing an estimated reserves of 1.3 billion tonnes of
brown coal, Baganuur is the biggest coal supplier to coal consumers in Mongolia.
The coal mine satisfies 100% of TPP-2 (Thermal Power Plant 2), 100% of TPP-3
and 50% of TPP-4s (the biggest power plant in Mongolia) coal needs. From 19962004, the Mongolian Government modernized and expanded production at
Baganuur by acquiring $31.1m and $50.9m in loans from the World Bank and the
Japanese government respectively. As a result, the companys exploitation
capacity reached 4mtpa. Currently the mine extracts 3mtpa due to central-region
demand, old equipments and financial constraints. The State owns 75% of the
company and the biggest private shareholder is Firebird investment fund, holding
over 14%, the rest is free float. Baganuur JSC is included in the 2011-2012
privatization plan, approved by the parliament of Mongolia.
Deposit: Baganuur coal deposit is one of the strategically important deposits of
Mongolia (area: 0.6ha, waste:10-60m on average, general coal seam: 10.3-17.2m,
coal seam in the central part: 25-96m). The mine is located 139km east of
Ulaanbaatar and has access to railway. Baganuurs strip ratio is around 1:1 to 6:1.
The total proven reserve is 600mt of coal with a calorific value of 3,2003,500kcal/kg, 12.9% ash and 32.9% moisture.
Financial highlights: Despite the mine making losses due to the regulated coal
prices, the reserve based valuation of Baganuur is significantly low compared to
international peers. Baganuurs EV/Reserve multiple is 0.39$/t. In 2009, the
company produced 3mt of coal at COGS of $30.5m or $10.15/t mining cost. SG&A
and other costs were $0.97/t. In 2009, the company operated with a gross margin
of 11%, an operating margin of 1% (due to the slight relaxation the sale price to
$12.54), net losses of $6.3m (due to exchange rate adjustments of debt and
interest rate payments). In December 2010, the Parliament made a decision to
cover all losses acquired from the exchange rate risk, inducing Baganuurs
shareholder equity to increase by around $13.8m. Currently the company has
$54.3m of long term debt on the balance sheet. In 2010, as part of the States
investment plan of $8.5m, Baganuur JSC purchased two additional 100t capacity
trucks for $2.9m.
Key financials, MNT million unless otherwise stated

11%

State

Master
Fund/Firebird
75%

Baganuur

Free Float

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Dividend yield, %
Sales growth, %

2007
34,308
-7,184
-342
61,466
105%
-1%
-21%
na
na
0%
7%

2008
43,174
-11,077
-528
64,776
109%
6%
-26%
na
na
0%
26%

2009
49,483
-9,121
-435
75,472
71%
11%
-18%
na
na
0%
15%

Source: Company data, SCH&CD and ResCap

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Equity Research

As of 16 Dec 2010

1.2
Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

12,800
10.55
14,900
2,400 - 14,900
172
142
3,063
1%
288%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
EV/Resource
Dividend yield

37%
8%
-1268%
-68%
0.08
-

Share price performance, MNT

16.0

Shivee Ovoo

Company Brief: Shivee Ovoo, an open pit mine, satisfies 25% of coal consumption
in Mongolia. 80% of Shivee Ovoo coal production is supplied to TPP-4, the biggest
power plant in Mongolia, and the remainder goes to Ulaanbaatar Railway,
MongolRosTsevetment, Bor Undur, Sainshand, Zuun Mod and others. The
Mongolian Government owns 90% of the company through Erdenes MGL and
9.0% is held by Firebird Fund. Production capacity of the company increased to
2mtpa owing to the $67.6m loan from the Japanese government obtained in
1998-2004. The company produces 1.4mtpa of coal. In 2010, the Parliament of
Mongolia established a cooperation contract to build a thermal power plant
relying on Shivee Ovoo coal deposit. The Mongolian and Chinese governments
signed an agreement to erect a 4800MW thermal power plant, from which
4500MW would be exported to China and the rest supplied to local consumers.
The Mongolian government plans to build TPP-5 in UB, which will utilise 4mtpa of
Shivee Ovoos coal. The Mongolian electricity consumption is 1,261kWh per capita
(3 times, 6 times and 13 times lower than Kazakhstan, Russia and Canada
respectively), however, the demand is inevitably increasing.
Deposit: Shivee Ovoo coal deposit, one of the strategically important deposits of
Mongolia, covers 4,293ha with a width of 35km and a length of 15km, located
260km southeast of Ulaanbaatar and in 20km from the Choir railway station, one
of the stops of the Trans-Mongolian rail line. Total proven reserve is 600mt of
brown coal and 2.7bn tonnes of resources. Out of the proven reserve, 564mt is
economically viable. Coal contents are 2,963-4,407kcal/kg calorific value, 40% ash
content, 8.5% of moisture, 0.5% sulphur and 43% volatile material.

14.0

MNT'000

12.0
10.0
8.0
6.0
4.0

12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

2/4/10
3/4/10

1/4/10

2.0

Key financials, MNT million unless otherwise stated

Shareholders
1%
9%
State

Master
Fund/Firebird
90%

Financial highlights: At present, resources of the deposit is significantly

undervalued considering the uncertainty over future dealing pipeline of Shivee
Ovoo and regulated tariffs on electricity and coal prices. The coal mine had
operational margins of 1%, 5% and 7% in 2007, 2008 and 2009 respectively, even
though the company incurred net losses due to the exchange rate adjustments of
long term debt. The company has accumulated $63.7m of debt on the balance
sheet as a result of the long term loan, which was obtained in 1998-2004 to
increase the companys mining capacity. In December 2010, the Parliament made
a decision to cover all losses acquired from the exchange rate risk, inducing Shivee
Ovoos shareholder equity to increase by around $13.1m.

Free Float

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Dividend yield, %
Sales growth, %

2007
10,813
-566
-42
68,325
49%
3%
-5%
na
na
0%
10%

2008
14,731
-6,318
-471
70,242
55%
8%
-43%
na
na
0%
36%

2009
16,202
-11,048
-823
92,244
45%
10%
-68%
na
na
0%
10%

Source: Company data, SCH&CD and ResCap

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Equity Research

As of 16 Dec 2010

1.3

Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

1,855
1.53
2,000
630 - 2,000
138
114
18,612
8.10%
194%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
Dividend yield

4.35
17.31
31%
23%
119%
13%
7.58
5%

APU

Company brief: APU is the fourth largest company on the MSE by market cap. It is
the leading brewery and alcohol producer in Mongolia, taking up over 50% of beer
and over 40% of vodka markets. The company distributes their products through
over 6000 trade and shopping centres nationwide, the largest distribution
network in Mongolia. APU has registered the vodka trademark "Chinggis Khan" in
over 20 countries worldwide. On June 11, 2010, APU opened a new brewery
factory with a capacity of 58.4m litres/year of beer, after receiving a $25m loan
from the EBRD in May 2010. In 2009, APU produced 230,000 hectolitres of beer
with about 700 employees. The company has an intensive plan to double its
brewery capacity by 2014.
Market presence: APU is the biggest player in the beer market. The other major
players in Mongolia are MCS and GEM. APUs market share in the beer market has
increased dramatically in recent years.
Financial highlights: In the last 2 years, the companys revenue increased 9 times
to $59.9m and total assets increased 1.8 times to $49.4m. Gross margin is robust
at 22%. In FY2009, ROE reached 31%, the highest in the companys history, on the
back of net sales increasing 61% and high leverage of 1.24 x of D/E ratio. In 2009,
the company expanded sales into urban markets.

Share price performance, MNT

2.5

1.5
1.0
0.5

12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

0.0
1/4/10

MNT'000

2.0

Shareholders

Key financials, MNT million unless otherwise stated

8%

40%

Shunkhlai

52%

Two key
shareholders
Free float

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Net debt/Equity, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Dividend yield, %
Sales growth, %

2007
10,114
367
5
39,751
0.84
517%
20%
4%
na
6%
nmf
na

2008
53,799
3,856
52
47,918
0.63
127%
21%
7%
na
29%
5%
432%

2009
86,867
8,070
109
71,858
1.01
119%
23%
9%
7.6x
31%
5%
61%

Source: Company data, SCH&CD and ResCap

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Capital

January 24 2011

Equity Research

As of 16 Dec 2010

1.4

Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

3,626
2.99
9,000
2,100 - 4,000
94
77
800
5.30%
58%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
Dividend yield

2.82
17.75
9%
16%
12%
14%
16.6
-

4.5
4.0
3.5
3.0
2.5

12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

2.0
1/4/10

Company brief: Mongolian Telecom was established the under name of

Mongolian Telecommunication Company (MTC) in 1992. Then MTC was divided
into two separate companies, Information Communication Network Company
(ICNC) and Telecom Mongolia JSC. ICNC is currently a 100% state owned company
and Mongolian Telecom was partially privatized. Mongolia Telecoms
shareholders are the Mongolian Government - 55%, Korean Telecom - 40% and
the rest is free float. Mongolia Telecom is a quasi-monopoly in the land line
telecommunications sector. The company has branches in all aimag and soum
centres in Mongolia. The company also offers Wireless Local Loop (WLL), internet
and internet based services. Mongolia Telecom is the leasing backbone from
(ICNC) and has its own fiber optic network along the railway. The WLL network of
Mongolia Telecom Company was introduced with South Korean LG Electronics
Companys help. A network, with a capacity of over 10,000 users, 7 base stations
and a CDMA-based wireless network called MY Phone, was introduced on July
8th, 2002. Within its expansion of services, the company introduced CDMA
450MHz, NGN+CDMA+IN, payment systems at such banks as TDB, Khan and
Savings and extended its prepaid card distributors network with ATMs.
Market presence: The number of fixed telephone subscribers per 100 people is
5.3, which is far below the world average of 17.8. The number of mobile phone
subscribers per 100 people is 82.2, well above the world average of 67. The
overall Mongolian telecommunication basic network leased by the ICNC consists
of 3,100km of analogue, and approximately 900km of digital lines connecting
Ulaanbaatar and provincial centres. Mongolia Telecom has access to the INTELSAT
satellites in the Indian Ocean region and to the Express-6 satellite of the
INTERSPUTNIK system. The Wireless Local Loop (WLL) services were newly
introduced in May 1999. The Mobile phone market has undergone a remarkable
boom, with mobile phone users increasing 26% yoy to 2.38m as of June 2010.
However, in current years, customers of fixed telephones have been decreasing at
about 10% per annum.

Share price performance, MNT

MNT'000

Mongolia Telecom

Shareholders

Financial highlights: In current years, the companys revenue has been decreasing
due to the shrinking fixed telephone market in Mongolia. The companys
introduction of new services could not offset the decrease in revenue land line
services.

Key financials, MNT million unless otherwise stated

5%

State

40%

Korean
Telecom
55%

Free Float

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Net debt/Equity, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Sales growth, %

2007
31,471
5,321
206
41,487
0.83
-3%
22%
17%
19.6
16%
na

2008
26,655
2,776
107
39,736
1.09
-11%
16%
10%
9.3
8%
-15%

2009
24,657
2,893
112
38,147
1.26
-11%
16%
12%
16.6
9%
-7%

Source: Company data, SCH&CD and ResCap

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Capital

January 24 2011

Equity Research

As of 16 Dec 2010

1.5
Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

10,300
8.49
13,500
1,696 - 13,500
74
61
31,282
8.14%
507%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
EV/Resource
Dividend yield

51.66
337.04
17%
11%
545%
4%
63.16
0.5
-

Share price performance, MNT

16.0

MNT'000

14.0
12.0
10.0
8.0
6.0
4.0
2.0

12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

1/4/10

0.0

Master Fund/Firebird
Batmunkh Batkhuu

54%
22%

Sharyn Gol Energo

Batbold

3% 1%
3%
0% 3%

Company Brief: Sharyn Gol is the only MSE listed coal mine with an approved
JORC resource. In 1995, the company was partially privatized and floated on the
MSE and in 2005 it became a 100% private company. The company has a capacity
to extract 2mtpa of coal. It produces around 0.5mtpa and 80% of its coal is
supplied to Darkhan and Erdenet Thermal Power Plants (TPP). Currently, the
company is owned by a New York based Fund Firebird (54.4%), local management
team (38.8%) and the rest is free float. As the Major shareholders want to convert
the company into a western style coal company, the business is undergoing fullscale restructuring. The board has been changed with 2 Australians and 2
Americans and a new British CFO was appointed. They are proposing to expand its
drilling program to 30k meters.
Deposit: Sharyn Gol deposit is located 50km south of Darkhan city and 240km
north of Ulaanbaatar, and connected through railroad to the cities. The deposits
total license area is 1,8ha. According to the company management, the total
reserve is over 100-150mt of coal as a result of additional drilling of 16K meters.
Sharyn Gol recently found new coal seams, as well as highly mineralised
continuation of the current coal seams they are mining at the moment on the
license area. The coal quality is high grade thermal coal and in some places semisoft coking coal. According to the companys announcement made on 10 October
2010, a new coal seam was discovered and most coal samples have a calorific
value of over 7,000kcal/kg on an air-dried, ash-free basis as of early laboratory
results.
Financial highlights: The companys EV/Reserve multiple of 0.53$/t is relatively
cheap compared to international peers. Regulated low coal prices and delays with
payments for delivered coal by the TPPs cause financial problems to the company.
In FY2009, despite the fact that companys production decreased by 22% to 426kt,
net profit increased to the highest point of $180m since 1998 as a result of
reduced non-operational costs. As for exports, historically the company sold coal
to Russia and China (2006, 2007). For the company to be able to export coal to
China $70 million must be spent on infrastructure, in which case production
capacity could be increased to 2.5 mtpa.

Key financials, MNT million unless otherwise stated

Shareholders

14%

Sharyn Gol

MDR
Balihuu Dambachultem

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Net debt/Equity, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Sales growth, %

2007
8,198
173
24
12,590
2.84
1005%
9%
2%
nmf
17%
17%

2008
10,526
61
8.5
10,790
2.10
737%
10%
1%
nmf
5%
28%

2009
8,812
219
30
9,535
2.22
545%
11%
2%
nmf
17%
-16%

Anod Bank
Free Float

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1.6
Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

5,749
4.74
9,002.00
3,850 - 7,700
45
37
13,764
16%
42%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
Dividend yield

1.8
29.09
6%
27%
38%
15%
13.22
-

Share price performance, MNT

Company brief: Gobi JSC is the leading producer of cashmere and camel wool
th
products in Mongolia and the 5 largest manufacturer in the cashmere market
worldwide, with an annual capacity to process 1,000 tonnes of raw cashmere, 200
tonnes of raw camel wool and 40 tonnes of sheep and yak wool. The companys
products are sold through its own stores and vendor companies in the domestic
market, and mostly through vendor companies in the international market. Even
though historically 80% of its products are exported to international markets,
essentially Europe (60% of its export), in current years exports have been
tightening. In 2009, 71.5% of total sales were derived from the domestic market
and 28.5% from export. The company has over 130 partners in over 30 countries.
According to management estimates, in 2009 Gobi held 42% of market share in
the domestic finished products market.
Market presence: China and Mongolia are the two biggest pure cashmere
producers with 60% and 30% of the worlds pure cashmere market share
respectively. Chinese cashmere traders and companies buy as much as 75% of
Mongolian raw cashmere and the rest is bought by domestic cashmere
manufacturers. China is key to the Mongolian cashmere sector in terms of
cashmere products and raw cashmere purchases.
Financial highlights: Over the last 3 years, the companys sales outside of
Mongolia decreased and domestic sales rose sharply. In 2009, domestic sales
increased 44% and foreign sales decreased 39%. However, the company has
activated marketing efforts internationally, opening their own shops in North
America and Europe. But in 2010, their product competitiveness in foreign
markets weakened on the appreciating national currency versus the greenback.
As a result, managements ambitious goal to increase sales up to $100m by 2012,
recovering Gobi brands reputation and former market internationally, appears
challenging. Gobis vertically integrated business model allows it to control
production costs, with the exception of raw material costs.

8.0
7.5
7.0
6.5
MNT'000

Gobi

6.0
5.5
5.0
4.5
4.0
3.5
12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

1/4/10

3.0

Key financials, MNT million unless otherwise stated

Shareholders

Tavan Bogd

74%

Foreign 2
stakeholders
11%
16%

Free float

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Net debt/Equity, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Sales growth, %

2007
20,282
-732
-93.92
27,069
2.22
24%
8%
-4%
na
-3%
16%

2008
19,585
689
88.35
30,778
1.92
34%
18%
4%
15.4
3%
-3%

2009
20,247
1,501
192.51
34,018
1.48
38%
27%
7%
13.2
6%
3%

Source: Company data, SCH&CD and ResCap

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1.7
Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

2,500
2.06
4,000
1,600 - 2,700
28
23
7,267
19%
56%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
Dividend yield

5.69
-9%
5%
1%
-

BDSec

Company brief: BDSec is a local brokerage firm in Mongolia. The company was
established in 1991 under the name of Bayandukhum in the Tuv aimag (Central
province) as a part of the privatization program in Mongolia. BDSec was the first
underwriter in Mongolia licensed by the Financial Regulatory Commission in 2004.
The company is now licensed with brokerage, dealer, underwriting and
investment advisory services. Major shareholders are Mr. Dayanbilguun,
Alexander Zwahr, Master fund-1 LLC and Master fund-2 LLC (together Firebird
Fund)
Market presence: BDSec is the largest brokerage firm by transactions made on
the MSE with a market share of 50% in total trading turnover. They serve 17% of
domestic account holders and 47% of foreign account holders at the Securities
Clearing House and the Central Depository of Mongolia.
Financial highlights: In 2009, due to the crisis, the companys total assets declined
17% to $3.96m. As the company revenue decreased 13% to $1.45m in 2009, gross
profit sharply fell and the company had net losses of $380k. As a result,
shareholders equity decreased 5% to $3.88m.

Share price performance, MNT

2.9
2.7
MNT'000

2.5
2.3
2.1
1.9
1.7

12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

1/4/10

1.5

Key financials, MNT million unless otherwise stated

Shareholders

Management
team
56%

25%

19%

Master
Fund/Firebird

Free Float

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Net debt/Equity, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Sales growth, %

2007
2,020
991
121
2,111
2.36
3%
100%
49%
na
99%
na

2008
2,023
363
33
5,899
0.91
16%
64%
18%
na
10%
0%

2009
1,765
-455
-41
4,853
0.95
1%
5%
-26%
na
-9%
-13%

Source: Company data, SCH&CD and ResCap

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As of 16 Dec 2010

1.8
Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

7,000
5.77
8,331
450 - 8,331
22
18
127
8%
1334%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
EV/Resource
Dividend yield

10.34
53.84
19%
33%
14%
4.5
0.82
-

Aduunchuluun

Company brief: Aduunchuluun joint stock Company was established with

underground mining operations in 1954 to supply the Eastern Mongolian region
with coal and meet Choibalsan citys electricity demand. Later in 1969, the current
open-pit mining was given a start with a capacity of producing 200ktpa of coal. In
1979, with research from Russian economists and technical analysis teams, the
scope of operations was expended and capacity increased to 600ktpa. The current
capacity, with innovative technology and equipment, allows a production of 1.52mtpa. Today Aduunchuluun LLC, which functions with well trained workers and
skilled managers, is fully capable of satisfying Dornod Power Plants long term coal
needs. The deposit is included in the list of Mongolias tier-2 deposits of strategic
importance. Choibalsan city is connected to Russia by railway. Aduunchuuun coal
products can also be delivered to China via Russian and Eastern Inner Mongolian
railways.
Deposit: Aduunchuluun deposit is located in 5km from Choibalsan city, a centre of
the Dornod province, 650 km east of Ulaanbaatar and 100 km from the
Mongolian-Chinese border. The total proven reserves and resources of brown coal
are 241.3mt and 423.8mt respectively with gross calorific value of 3,203Kcal/kg,
9.9% ash content, 38.7% moisture, 1% sulphur and 45.8% volatile matter. The coal
seam is 25.65m in thickness, consisting of two layers, and is positioned 40-42m
below the surface.

Share price performance, MNT

Financial highlights: The companys gross margin is very high at 33% and
profitability is at 19%, even though the company sells their coal to local clients at
$6.6 per tonne.

9.0
8.0
6.0
5.0
4.0
3.0
2.0
1.0
12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

0.0
1/4/10

MNT'000

7.0

Key financials, MNT million unless otherwise stated

Shareholders

Management
team

8%

38%

54%

Two
shareholders
Free float

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Net debt/Equity, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Dividend yield, %
Sales growth, %

2007
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

2008
9.8
1.5
0.47
2,495
1.73
16%
22%
15%
nmf
0%
10%
n/a

2009
2,881
409
130.00
3,150
1.94
32%
33%
14%
4.5
19%
nmf

Source: Company data, SCH&CD and ResCap

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As of 16 Dec 2010

1.9
Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

1,250
1.03
1,410
750 - 1,410
17
14
10,678
26%

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
Dividend yield

0.61
35.24
60.25
-

Share price performance, MNT

Mongolia Development Resources

Company brief: Mongolian Development Resources (MDR) was the first property
and non-resource sector investment and project development company listed on
the MSE, with a focus on high-growth investment opportunities in Mongolia. In
December 2006, the company was initially established under the name Tuul
Songino Usnii Nuuts (Tuul Songino Water Resources) dedicated to infrastructure
development with a number of projects such as a Technical Water Facility,
Drinking Water Facility and a Pumped Storage Power Station. In December 2007,
Tuul Songino Water Resources conducted an IPO. Over 70% of the company stake
is owned by international investors mainly from the USA, Europe and Asia.
According to an extraordinary shareholders meeting held in December 2009, the
company decided to transform into a diversified investment company, stopping
three prior infrastructure projects due to the unviable nature of the three projects
caused by the state-regulated electricity tariff and the fact that the TPPs use fresh
water from aquifers at no cost.
Market presence: MDR pursues attractive investment opportunities across
various sectors (mainly finance, property, tourism, construction service and
materials, consumer goods, agriculture, media, professional service, mining and
metal and health care) in Mongolia and provides diversified exposure to the
Mongolian economy for local and international investors. The company is to
launch a non capital raising Global Depositary Receipt program, an advanced
capital market instrument, with the Bank of New York Mellon, in order to attract
new international investors.

1.5

Financial highlights: Since IPO in December 2007, the main source of the
companys revenues were from non-operational income of interest accruals on
the companys cash placed in term deposits with local banks. Since a new
management team was appointed, the companys main operation is transferred
to investment operation. Therefore, from 2010, the main revenue is to be derived
from investment yields they receive.

1.4
MNT'000

1.3
1.2
1.1
1.0
0.9

12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

1/4/10

0.8

Key financials, MNT million unless otherwise stated

Shareholders

Provincial
governor

8%
7%

Ajnai Corporation
51%

Board member

34%
Retail
shareholders

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Net debt/Equity, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Sales growth, %

2007
26
-90
-6.57
27,798.06
0.79
-43%
90%
-338%
nmf
0%
na

2008
487
35.47
28,341.76
0.60
-33%
na
na
7.12
2%
na

2009
-145
-10.58
13,324.43
5.16
-43%
na
na
nmf
-1%
na

Source: Company data, SCH&CD and ResCap

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As of 16 Dec 2010

1.10 Mogoin Gol

Stock data
Price, MNT
Price, US$
The peak, MNT
52Wk Range, MNT
Mkt cap, MNTbn
Mkt cap, US$mn
Avg daily turnover, US$
Free float, %
YTD performance, %

10,349
8.53
11,376
1,970 - 11,367
9
7
1,021
9%
425%

Company brief: Mogoin Gol mine was established in 1970, and now supplies coal
mainly to the centres of Khuvsgul and Zavkhan provinces and eastern soums of
the Zavkhan province. In 1983, 1989 and 1995 production capacity was expanded
with investments in new mining equipment and machines, increasing to 200ktpa
of coal production. In 1995, the company was partially privatized, floating 49% of
the company on the MSE. Then the state owned 51% was transferred to the
provincial governments ownership. Currently, the company has 74 employees. In
FY2009, Mogoin Gol JSC supplied 18K tonnes of coal to western provinces clients,
Zavkhan (71.4%) and Khuvsgul aimags (28.6%), providing them with energy and
heating.

3.78
nmf
0%
24%
36%
3%
nmf
0.59
-

Deposit: Located in the Tsetserleg soum of Khuvsgul aimag, 880km northwest

from Ulaanbaatar city and 209km west from the Khuvsgul province centre,
Mogoin Gol coal deposit is strategically important for the northern region of
Mongolia. The deposit covers an area of 89ha. Total reserve is a 13.6m tonnes of
coal with a calorific value of 5,200-7,100kcal/kg, 7.3% ash and 0.9% moisture, out
of which 3.6m is viable by open pit mining. Mogoin Gols average strip ratio is
about 5-7. According to the management of the company, the remaining total
reserve is 11.2m, out of which 3.1m was viable by open pit mining as of 2009.

Key indicators
P/BV
P/E
ROE
Gross margin
Net debt/Equity
EBITDA margin
EV/EBITDA
EV/Resource
Dividend yield

Share price performance, MNT

12.0
10.0

MNT'000

8.0
6.0
4.0
2.0

12/4/10

11/4/10

9/4/10

10/4/10

8/4/10

7/4/10

6/4/10

5/4/10

4/4/10

3/4/10

2/4/10

1/4/10

0.0

Financial highlights: In 2009, the company sold 18k tonnes of coal and worked
with $280k of revenue, gross margin of 24% and net margin of 1%. However, the
company is on track to surge production volume over 10 times through 2 separate
coal selling pipelines: 1) future dealing pipeline relating to electricity consumption
of Mongolian western regions, and 2) delivery of coal to the nearby Russia to
cover for lost production caused by Raspadskaya accident. The opening ceremony
of a 60MW thermal power plant (TPP), the first ever TPP in Mongolia with private
investment, to be built on the basis of Mogoin Gol coal mine, was held on June 20,
2010. On Dec 29, 2009, Yuanda Group Ltd, a Mongolia-China joint venture, and
New Asia Mining LLC signed an Engineering, Procurement, Construction and
Management contract (EPCM) with the Mongolian Ministry of Mineral Resources
and Energy to construct the 60MW TPP. It is expected that the commercial
operation of the TPP will start in early 2012, providing energy to two western
provinces of Mongolia including Zavkhan and Gobi-Altai with an average power
consumption of 15MW per year. According to the provincial government, once
the TPP operation starts, Mogoin Gol JSC will supply 200k tonnes of coal annually
to its prospective TPP, increasing current production volume 12 times.
Key financials, MNT million unless otherwise stated

Shareholders
Provincial
government
40%

51%

Mogoin Gol
Energy/Transneft
9%

Free Float

Sales
Net profit
EPS, MNT
Total Asset
Current Asset/Non-Current Asset, %
Net debt/Equity, %
Gross margin, %
Net margin, %
EV/EBITDA, (x)
ROE, %
Sales growth, %

2007
na
na
na
na
na
na
na
na
na
na
na

2008
300
4
4.8
1,053
0.79
69%
24%
1%
nmf
1%
na

2009
351
4
4.8
3,172
0.67
36%
24%
1%
nmf
0%
17%

Source: Company data, SCH&CD and ResCap

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Equity Research
Analyst Certification
We hereby certify that all of the views expressed in this research report accurately reflect
our personal views about the subject company or companies and its or their securities. We
also certify that no part of our respective compensation was, is or will be, directly or
indirectly, related to the specific recommendations or views expressed in this research
report.

Important Disclosures
Resource Investment Capital ("ResCap") is a boutique corporate finance advisor working
with clients in connection with mergers and acquisitions, project development, public and
private capital raisings and other strategic matters. ResCap is based in Ulaanbaatar,
Mongolia with a dedicated focus advising on Mongolian-related transactions.

Disclaimer
This report is made for information purposes only, and does not constitute an offer,
solicitation of an offer to purchase, 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 report is 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 without warranty of any kind and ResCap, in
particular, make no representation or warranty, express or implied, as to accuracy,
timeliness, completeness, merchantability or fitness for any particular purpose of any such
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for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any
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use of or inability to use, any such information.

2011 Resource Investment Capital. All rights reserved.

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References
2

References
IMF (Oct 2010); Joint Statement by Mongolias Minister of Finance, Governor of the
Bank of Mongolia and IMF staff Mission, Press Release No. 10/387
IMF (Jun 2010); Mongolia: Joint IMF/World Bank Debt Sustainability Analysis Under
the Debt Sustainability Framework for Low-Income Countries, IMF Country Report
No. 10/166
World Bank (Oct 2010); Mongolia Quarterly Economic Update
CIA The World Factbook
Bank of Mongolia, Monetary Policy Guide for 2011
Bank of Mongolia (Nov 2010); Monthly Statistical Bulletin
Bank of Mongolia (Nov 2010); Managing Mongolias Growth: The Role of The
Central Bank
National Statistics Office, Monthly Bulletin (Dec2010)
Trade and Development Bank of Mongolia (Dec 2010); Mongolias Investment
Needs and Opportunities, Presentation
Trade and Development Bank Information Memorandum (October 2010)
Ministry of Road, Transportation, Construction and Urban Development of
Mongolia (Oct 2010); Mongolia: Building a Sustainable Economic Growth through
Downstream Industries and Rail Infrastructure, Presentation
Ministry of Food, Agriculture and Light Industry of Mongolia; Agricultural Policy
(2008-2010)
Business Council of Mongolia (Nov 2010); Mongolia Mining Supply Chain,
Presentation
Energy Efficiency Study of Thermal Power Plant #4 (2006); Technical Report
EBRD (Nov 2010); Mongolia Investment Summit in London, Presentation
Engineering and Mining Journal (Aug 2010); Mongolian Mining, Global Business
Reports
Eurasia Capital Management (Oct 2010); Mongolia Development Resources:
Property and Infrastructure Developer in Mongolia, Presentation
State Property Committee of Mongolia (Oct 2010); Privatizing Mongolias State
Owned Assets and What This Means for Investors, Presentation
Dewey & Le Boeuf (Nov 2010); Overview of the Legal Framework for Foreign
Investment in Mining and Infrastructure in Mongolia, Presentation
PricewaterhouseCoopers (2010); Mongolia Doing Business Guide 2010-2011
General taxation Law of Mongolia
Corporate Income Tax Law of Mongolia
Personal Income Tax Law of Mongolia
Wikipedia (Mongolia History and Public Relations)
Value Added Tax Law of Mongolia
Business Council fo Mongolia (BCM Newswire)

Some information in this report may have been derived from the following sources:
Business Council of Mongolia
World Bank
Bank of Mongolia
Eurasia Capital
Trade and Development Bank (esp. Information Memorandum Oct. 2010)
International Monetary Fund
Price Waterhouse Cooper (esp. Tax Law)

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Contacts

Contacts

ResCap
3rd Floor, Monnis Tower
15 Chinggis Avenue
1st Khoroo Sukhbaatar District
210648, Ulaanbaatar, Mongolia
Tel/Fax: +976 70100095
www.resource-cap.com

David Hanbury
david.hanbury@resource-cap.com
+976 99998853
Enkhbayar Davaatseren
enkhbayar@resource-cap.com
+976 99007069
Uyanga Orgodol
uyanga.orgodol@resource-cap.com
+976 99094282

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