09.10.2014, Review and outlook of Mongolian investment environment, Bilguun A.

Review and outlook of Mongolia’s

investment environment

Bilguun Ankhbayar

MIBG SC

Current state

3.91₮4.16₮

4.89₮

5.50₮

6.14₮6.57₮

-1.30%

6.40%

17.30%

12.30%

11.60%

7.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

0.00₮

1.00₮

2.00₮

3.00₮

4.00₮

5.00₮

6.00₮

7.00₮

2009 2010 2011 2012 2013 2014

GDP (2005 base) GDP GrowthTrillion MNT GDP grpwth

%

2009-2014 GDP vs Growth

₮1,000

₮1,100

₮1,200

₮1,300

₮1,400

₮1,500

₮1,600

₮1,700

₮1,800

₮1,900

2009-2014 USD vs MNT

$0.62

$1.69

$4.71$4.45

$2.49

$0.75

$1.30

$1.71

$2.78

$3.33 $3.43

$4.00

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

2009 2010 2011 2012 2013 2014

FDI Government budget

2009-2014 FDI vs Gov Spending

₮0.00

₮0.50

₮1.00

₮1.50

₮2.00

₮2.50

2009-2014 Monthly unemployment benefit

costBillion MNT

The cause for drop in FDI

₮0.00

₮100.00

₮200.00

₮300.00

₮400.00

₮500.00

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

Turquoise Hill Resources share price performance

(2009-2014)

2009

Explore-124

Drill-67

2010

Explore-173

Drill-108

2011

Explore-302

Drill-190

2012

Explore-324

Drill-206

2013

Explore-142

Drill-79

Parliament

reviews OT

IA draft

OT IA

signed

68% windfall

profit tax

canceled

2010 budget

announced

at $758

million

$1.5 billion

was secured

from EBRD

and IFC

2011 budget

approved at

$2.1 billion

20 parliament

members petition

to change the OT

IA 34%-50%

Rio

increases

stake to

48.5%

MRAM revokes

SouthGobi

licenses in

relation to Chalco

bid

SEFIL passed

Parliament

election

Chalco bid

terminated

GOM wants to

renegotiate OT IA

OT begins

production

GOM says

Phase-2

funding will

need

approval

Cancellation

of SEFIL

Amended

Mineral Law

Domestic factors for the drop in FDI

1. Moratorium banning the issuance of new

exploration licenses -2010

2. 20 parliamentarians’ petition on OT IA -2011

3. Revocation of SouthGobi Resources license

-2012

4. Passing of SEFIL -2012

5. Draft Minerals Law -2012

6. Government’s request to renegotiate OT IA -

2012

7. Delay in OT phase-2 funding-2013-2014

Actions Cause

1. Democratic nature: Arthur Schlesinger’s

cyclical theory

2. Traditional and nomadic lifestyle

3. Past experience under communist regime

Is Mongolia the only country slowing down?

-1.30%

6.40%

17.50%

12.40%11.70%

-1.00%

5.80%5.80% 5.40% 4.10%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2009 2010 2011 2012 2013

Mongolia Chile

4.60%

6.20% 6.50% 6.30%5.80%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2009 2010 2011 2012 2013

Mongolia Indonesia

1.20%

7.30% 7.50%5.00% 6.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2009 2010 2011 2012 2013

Mongolia Kazakhstan

1.70% 2.00% 2.20%3.60% 2.70%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2009 2010 2011 2012 2013

Mongolia Australia

Source: World Bank

External factors- Weak commodities’ price

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Copper (USD per metric ton)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Gold (USD per troy ounce)

$0

$20

$40

$60

$80

$100

$120

$140

$160

Australian thermal coal (USD per metric ton)

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

Iron ore, China Import Price (USD per dry metric ton)

Source: Index Mundi

External factors- Investors’ sentiment

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

TSX.V Copper price Gold Price

Investor sentiment within the commodities

sector is at 5 year low

TSX.V- 114.53

Gold- 152.63

Copper- 218.18

Domestic outlook- Political barometer

45.50%47.50% 50.30%

38.60%37.80%

23.30%

15.80%13.50% 13.70% 15.30%

6.10%5.50% 5.10% 5.90% 7.10%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2010 2011 2012 2013 2014

Improve slightly Remain same Worsen slightly

What is your outlook on the economy in the next 5 years?

19.6%

29.6%31.8%

23.3%

22.6%

46.8%

43.3%43.3%

43.2%36.8%

25.7%

15.4% 14.7%

20.4%

28.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2010 2011 2012 2013 2014

Improving Stagnating Worsening

How would you rate the current state of the economy?

Improving

Worsening

Stagnating

Remain same

Worsen

Improve

What shareholding structure should be used to develop Strategic Mineral Deposits?

59.60%

55.80%

52.50%

54.00%

55.50%

57.00%

58.50%

60.00%

2013 2014

Mongolia's shareholding over 51%

6.90%

8.70%

0.00%

3.00%

6.00%

9.00%

12.00%

2013 2014

Equal shareholding

0.50%

0.80%

0.00%

0.30%

0.60%

0.90%

2013 2014

Foreign shareholding over 51%

Source: Sant Maral Foundation

Domestic outlook- Political barometer

17.3

27.1

16.9

34.2

16.5

28.9

15.3

35.4

8.9

34

14.6

39.7

9.5

35.4

8.6

43.2

11

40.3

8.4

35.2

0

5

10

15

20

25

30

35

40

45

50

Government should help the poor directly

Invest in long term social development programs such

as Public Education and Health Care projects

Cash handout for each citizen

Invest in economic development projects

2010 2011 2012 2013 2014

Where should mineral wealth be invested by the Government?

Source: Sant Maral Foundation

External outlook

$0$20$40$60$80

$100$120$140$160$180$200

Iron Ore Price (USD$) Forecast to 2025

$0

$20

$40

$60

$80

$100

$120

$140

Coal Price (USD$) Forecast to 2025

$0

$500

$1,000

$1,500

$2,000

Gold Price (USD$) Forecast to 2025

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Copper Price (USD$) Forecast to 2025

Source: World Bank

Domestic outlook and expectations

• New Investment Law

• Investment Fund Law

• Securities Market Law

• Mineral Law

• Petroleum Law

• Smart Government initiative

• Mineral policy

• Accessible Mineral Licenses

• Reduction in corruption

• Improvement in infrastructure

POSITIVE LEGAL

ENVIRONMENT

STABILITY

Current investment environment Uncertainties

• Oyu Tolgoi Phase-2 funding

• Tax dispute involving Oyu Tolgoi LLC

• Railway policy

• Erdenes Tavan Tolgoi IPO

Environment is ready

Catalyst event needed!

MIBG’s expectations

• Economic slowdown to continue

• Public more friendly towards FDI but future volatility is certain

• Government policy to support private sector

• Mineral discoveries will take place (Erdene Resource, Xanadu Mines)

Thank you for your attention• Any questions or comments regarding this document and the specifics of the transaction should be directed to

Bilguun Ankhbayar using the provided contact information below.

• Please visit us at: www.mibg.mn

• Please forward any questions or comments to:

Bilguun Ankhbayar

Chief Executive Office

Office: +976 1136 2620

Email: [email protected]

12

The opinions and/or views expressed in this information package do not necessarily represent the official

position of MIBG (Mongolian Investment Banking Group) LLC. The products, projects, or private entities

discussed in this document are presented for informational purposes only and do 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.

The information contained in this report has been obtained from sources that are believed to be accurate

and reliable but are not guaranteed by us and may be incomplete and subject to change without advance

notice.

Important Disclosures