05.25.2011, PRESENTATION, 2nd Mongolia investment forum main takeaways, Eurasia Capital
2nd Mongolia Investment Forum: Main Takeaways
Today, May 25th, Eurasia Capital held its second annual Mongolia Investment Conference which
was a big success. With more than 150 attendees including Mongolian public and private sector
leaders and international and regional investors from over 20 countries, the conference profiled
many of the extraordinary investment opportunities Mongolia has to offer and conference
participants left the day expressing their strong interest in taking part in the Mongolian growth
The conference began with an opening speech by Vice Minister of Finance of Mongolia Mr.
Gankhuyag welcoming participants from around the world to Mongolia and thanking Eurasia
Capital for holding this important investment event. He said that Mongolia had undertaken a long
journey in its transition to a market economy and with two decades of reforms and development
Mongolia is now well positioned as a well functioning market that is increasingly attractive to
foreign and domestic investment. He stated that the Mongolia Investment Conference organized
by Eurasia Capital is a great example of these changes and the international partners at the
event coming to explore business opportunities in Mongolia reflects the extent of transition
Mongolia recently underwent.
Budget deficit revised down to 6.7% for 2011, Vice Finance Minister says
The Vice Minister highlighted selected recent economic performance indicators. Although
Mongolia was hit hard by the global financial crisis, the economy stepped into recovery with 6.1%
growth in 2010 and is performing even better this year, hitting a historical high of 9.7% real
growth in 1Q2011, he said. He continued by stating that nominal GDP growth hit a remarkable
24.9% in 1Q2011 while Inflation remained in single digits at 5.5%. MNT appreciation is making
local financial instruments more attractive, as well as helping to contain inflation. Strong revenues
brought budget surplus in 1Q2011 too. Initially, 9.9% budget deficit was anticipated for 2011.
However, it was revised down to 6.7% for the current year, Mr. Gankhuyag informed the
He noted that developments such as Oyu Tolgoi agreement, IPOs of Mongolian Mining Corp
(MMC) and other mining companies and offering of 10% of Erdenes Tavan Tolgoi shares to
domestic enterprises brought about current performance of the Mongolian economy. Erdenes
Tavan Tolgoi share offer at nominal price incentivized domestic businesses to register and pay
taxes, Mr. Gankhuyag said.
Vice Minister pointed at some bottlenecks in Mongolian economy. Lack of infrastructure remains
as a bottleneck and timely investments are needed to eliminate them, he said. The country needs
new rail routes, border crossings, equipment, etc. Eliminating bottlenecks in financial markets
may allow Mongolia Stock Exchange (MSE) to compete with Hong Kong Stock Exchange and
Shanghai, he stated. "We need to dream big and aim high" Mr. Gankhuyag said. He noted that
contracting London Stock Exchange to manage and modernize MSE is a welcome development
in that direction.
Vice Minister Gankhuyag informed the audience that Tavan Tolgoi negotiations are still
underway. Each Mongolian national will receive 536 Erdenes Tavan Tolgoi shares plus one share
of Erdenes MGL, a state assets holding company. The Development Bank is in the final stages of
management team negotiations, according to the Vice Minister. The Development Bank will issue
MNT800bn bonds guaranteed by the government. Additional MNT-bonds equivalent to
US$200mn will be placed on MSE to fund construction and cashmere sector. And finally,
Mongolia Stabilisation Fund has already accumulated US$50mn in the current year. The fund is
expected to help to overcome risks of commodity prices volatility. The fund targets to accumulate
MNT183bn this year.
Mongolia is Global Outperformer in Next Decade, Alisher Ali of Eurasia Capital Describes
Mr. Alisher Ali, Chairman of Eurasia Capital, called Mongolia as a "global outperformer" over the
next decade. He said that Mongolia will be the world's fastest growing economy in the next ten
years primarily thanks to substantial increase in investments, exports and overall income. He
recommended seven asset classes that investors should focus in investing: local equities, stocks
of internationally listed companies, the Mongolian tugrik (MNT), fixed income instruments, private
equity/pre-IPOs, property and infrastructure.
Net Capital Inflow is up 2.7 times y-o-y in 1Q2011, According to Deputy Governor of Bank
Mr. Zoljargal, Deputy Governor of the Bank of Mongolia (BoM) started his speech by comparing
2010 numbers which are totally different with the 2009 numbers. He said 2010 numbers are
exciting and represent big changes. For the next two years he gave positive outlook for the
economy and expressed readiness of the central bank to solve the challenges. During 2011 he
informed that from the monetary policy prospective the BoM will be focused on "two wild horses"
to control, namely, inflation and appreciation of the MNT. According to the National Development
and Innovation Committee (NDIC) estimations, the Mongolian economy will grow not less than
7.5% for the next ten years. NDIC projected that in 2011 GDP will grow 7.5% and will top double
digit growth level of 20.6% in 2014 and gradually slows down to 16.9% in 2020 making Mongolia
one of the fastest growing economies in Asia (China, India, Indonesia, Vietnam).
Commenting on foreign trade Mr. Zoljargal said that it is very important for Mongolia. The big
change in Mongolian foreign trade structure happened last year when coal exports value
surpassed copper exports by US$100mn to reach US$877.8mn meaning that coal is more
important than copper until Oyu Tolgoi starts production. Talking about terms of trade (ToT)
(export price index/import price index) which shows the ability of the country to finance its imports
Mr. Zoljargal said that ToT ratio is stable and high although it declined from its high level of
approximately 2 in March 2008 to 1.25 in January 2009. As of March of 2011 ToT ratio is more
than 1.5. Mr. Zoljargal noted that month on month (m-o-m) ToT change is very important for the
BoM and BOM is looking closely to m-o-m changes. He said that m-o-m change in ToT is
positively correlated to the international prices of oil, copper and coal. Change in export price
index stayed stable from February to July 2010.
Talking about net capital inflows Mr. Zoljargal informed that net capital inflows started growing
gradually in April 2010 and in December 2010 reached the highest level ever making the whole
year net capital inflows to reach US$1.6bn growing 5.3 times compared to 2009. This year net
capital inflows from January to March is up 2.7 times compared to the same period of 2010. He
also noted that the trend to go like this for coming years which will create difficulties to manage
the capital inflows. In 2010 Mongolia experienced US$931.5mn current account deficit and
according to Mr. Zorjargal it is going to be negative for 2-3 years. He also noted that current
account may stay negative and then turn positive until all capital goods (machinery, equipment
etc) imported and used for production purposes and to increase the exports. But he said that
capital and financial account surplus will fully finance current account deficit. In 2010 the sum of
capital account, direct investment and portfolio investment was US$2.14bn. BOM projects that
the next year Balance of Payments (BOP) will reach to US$870mn.
Mr. Zoljargal said that the main job of the BoM is to look at the purposes and composition of the
capital inflow into Mongolia, whether it is for the long term investment, short term investment or
for speculative purposes. The BoM will sterilize the short term effects of net capital inflow and will
no do anything about long term capital inflow, he pointed. The MNT appreciated 3% so far this
year and according to Mr. Zoljargal the BoM didn't intervene but when the volatility comes in
affecting daily business the BoM will not tolerate any volatility and will intervene. Objective of the
BoM this year is to smooth excessive volatility in the exchange rate whilst opportunistically build
up international reserves, he said. The BoM didn't intervene from the beginning of this year and
believes that market is far more efficient than a year ago. According to the central bank's
estimations, last year the MNT appreciated 32% and 17% in real and nominal terms,
On the back of huge capital inflow the BoM had to increase money supply (M2) and money
supply increased 67% last year. At the same time the central bank conducted sterilization
operations to mitigate the potentially undesirable effects of capital inflows which caused the
inflation to come down to 13%. Inflation was 7% and 5.5% in March and April this year. Mr.
Zoljargal praised the government's efforts on controlling supply shocks and ensured that there is
nothing to worry this year. To the concern of general public regarding reliability of the low
inflation numbers for this year Mr. Zoljargal explained that the numbers are real because the
government of Mongolia was able to control meat and food prices which normally account for
60% of Mongolian consumer basket. Mr. Zoljargal said that one third of inflation is "imported"
from China (prices in China have been increasing and reached 5% last year) and Mongolia can't
do anything about it and have to take it as granted as long as Mongolia has 9% economic growth.
Mr. Zoljargal said that if the government does not do any shocks on supply and demand sides
inflation level will be stable.
According to Mr. Zoljargal loan-to-GDP ratio which shows financial depth of the country was 48%
in 2008. If compared to the ratio of countries as Japan (293%), China (126%) and South Korea
(113%) the Mongolia may be underpenetrated and have a room to grow, but according to him the
Mongolian banking system is on the safe line.
Talking about government budget Mr. Zoljargal indicated that budget revenue is growing and at
the same time budget expenditure is also growing. To the concerns that the Mongolia may be
overheated Mr. Zoljargal remarked that Mongolia is in its early stage of development and it is just
Mr. Zoljargal believes that CNY5bn currency swap agreement signed with China in early May this
year will improve credibility of the MNT and helps the MNT to be convertible in the future. He
also informed that serious part of the Mongolian M2 is in CNY.
According to Mr. Khashchuluun, Chairman of NDIC, Mongolian GDP is estimated to exceed 10%
and be around 12% in this year and GDP per capita will reach nearly US$3,000. By 2015 GDP
will increase 14% and GDP per capita to reach around US$6,000, Mr. Khashchuluun said.
Erdenes Tavan Tolgoi IPO Expected at the Beginning of Next Year
IPO of Erdenes Tavan Tolgoi is expected in the beginning of 2012, Mr. Enebish Executive
Director of Erdenes MGL said. He informed that Erdenes Tavan Tolgoi had already started
mining activities on the Eastern Tsankhi coalfield with 250,000 tonnes of coking coal currently
ready to be exported.
According to Mr. Enebish, Tsankhi and Borteeg coalfields primarily contain coking coal. NorWest
estimates suggest that Eastern Tsankhi coalfield contains 1,078mn tonnes of JORC compliant
coal resources with 78% being coking coal. Erdenes TT JSC will hire a contract miner to develop
the coalfield. Western Tsankhi coalfield contains 1,204mn tonnes of coal resources with coking
coal accounting for 65% of resource. Mongolia is currently in the process of selecting
development partner for the Western Tsankhi coalfield.
Mr. Enebish informed that full production capacity of the mine will be 15Mt per year which will be
reached in 2014. The mine life is not less than 50 years. As of May 15, 2011, 1.6 million BCM of
pre-striping was performed. Approximately 250 thousand tons of coal are uncovered and now
being prepared for export. The Resource report of the Eastern Tsankhi area or Erdenes Tavan
Tolgoi mine area was commissioned (in April). The Eastern Tsankhi Coalfield Feasibility Study on
mining of 15 Mtpy for Erdenes-TT mine was approved (in April). Water for Erdenes Tavan Tolgoi
will be taken from Balgasiin Ulaan Nuur underground water deposit (resources 465 l/sec) which is
70km from coal t deposit.
Mr. Enebish said that Erdenes MGL is planning to establish other subsidiaries around other
assets in holds, including Oyu Tolgoi. He said Erdenes OT will be established without specifying
24-hour Trading System to be Installed at MSE by Q42011
Chairman of MSE Mr. Bold said that the exchange is negotiating with legal firms on Erdenes
Tavan Tolgoi listing issues whether listing should take place in London or Hong Kong or both and
what instruments like ADR, GDR or common stocks to use. Whole 24 hour tradable internet
trading system will be introduced to the MSE under the agreement with the London Stock
Exchange (LSE). By Q3 or Q4 2011, the system will be installed. Mr. Bold stated that the key
challenge with the clearing house is that it is a separate entity. MSE is waiting for the LSE's
recommendations. At this stage there is no specific guidance whether the clearing house should
be separate from MSE or unified or a subsidiary. He added that over the next months there will
be many changes.
Banking Assets to Double, Loans to Surge 50% y-o-y in 2011, Mongolian Bankers Say
Trade and Development Bank (TDB) President Mr. Randolph Koppa stated that the banking
sector loans grew 35% y-o-y in Q12011 and are expected to grow over 50% in 2011. And Mr.
Batzaya of Khan Bank said banks' assets would double in 2011 and therefore the banks will have
enough capacity to seed the loan growth.
Banking sector represents 95% of the Mongolian financial sector, Tenger Financial Group CEO
Mr Bold said. He said that to increase the investor base, Mongolia needs to reform the pension
and insurance market. Insurance sector would be very interesting target for strategic and financial
investors since the Mongolians' net income is expected to increase significantly. Leasing is
another interesting area, he added. There are a few true leasing companies.
Oyu Tolgoi Project, Rio Tinto, by Mr. Peter Nicholls, General Manager - Commercial
General Manager of Rio Tinto's Commercial Department Peter Nicholls said that Rio Tinto is
proud of being involved at Oyu Tolgoi project which is dubbed to be a "country-changing" project.
Rio Tinto currently owns 42.1% and took the management of Oyu Tolgoi project following the
agreement signed with Ivanhoe Mines in December 2010. He informed that Mongolian Directors
of the Oyu Tolgoi LLC recently visited Rio Tinto's headquarters in London to exchange views. The
Directors also visited Rio Tinto's Salt Lake City copper mine in Utah, which has been in operation
for over 100 years. Mr. Nicholls said that on Oyu Tolgoi project Rio Tinto is implementing its best
international practice obtained from operating in over 40 countries. After Mr. Nicholls said that Rio
Tinto has a strong position in the UK and Australian markets and employs approximately 77,000
people who are working in the world class operations. Rio Tinto's 2010 global gross sales
revenues were US$60bn. Rio Tinto has operations on the pristine tundra in the far north of
Canada, in the Namib Desert, in the remote Kimberley region of Western Australia.
Mr. Nicholls said that Rio Tinto believes that Oyu Tolgoi is the best undeveloped copper and gold
project in the world and when it reaches full production in 2018 it will be a top five global copper
producer – and one of the world's biggest producers of gold. Oyu Tolgoi has 2.6Bt of
resources while reserves are 1.4Bt. The average annual production is forecasted to be 450,000
tonnes of copper and 330,000 ounces of gold with the potential for a mine life being 50 years. Mr.
Nicholls also added that South Gobi region is a highly prospective region with further exploration
potential. Oyu Tolgoi is expected to be a first quartile cost producer which means it can withstand
the lower priced end of the commodity price cycle.
Talking about Oyu Tolgoi investment agreement Mr. Nicholls said that the Government of
Mongolia will receive majority of the economic benefits generated by the Oyu Tolgoi project
through taxes, royalties and dividends. There are seven main areas of commitment in the
agreement; the terms of investment, taxation, procurement, infrastructure, employment and
training, regional development and environment. Mr. Nicholls said that Rio Tinto and Ivanhoe
Mines have invested US$2bn over the last four years and US$4.5bn is budgeted for the
completion of first phase of the project between 2011 and 2013. Construction work is underway
on massive infrastructure projects in the South Gobi; the airport, the paved road to Gashuun
Sukhait, the 220kv power line. He informed that 12 major construction projects in the South Gobi,
Choyr and Darkhan are all 100% managed by Mongolian contractors for a total of over US$40mn.
Mr. Peter Nicholls said that so far they have engaged 2,833 Mongolian suppliers and last year
they gave signed contracts with 103 local suppliers in Khanbogd and Dalanzadgad for the
amount of US$1.5mn.
According to Mr. Nicholls the study named "The development of the Oyu Tolgoi copper mine: an
assessment of the macroeconomic consequences for Mongolia" commissioned by Rio Tinto and
prepared by the team of independent economists led by Dr. Brian Fisher, Chairman and
Managing Director of BAEconomics Pty Ltd shows what Dr Fisher has called "a tide of growth
that will float everybody's boat." According to the study the Mongolian economy is expected to
grow more than 10% a year for the next ten years, meaning that by the year 2020 the size the
economy will more than double, as Oyu Tolgoi ramps up to full production. The study doesn't
show the effect Oyu Tolgoi is already having on the economy. Mr. Nicholls said that the
investment agreement prompted a surge of international confidence in Mongolia and there has
been an influx of foreign investment in the city. Compared to January 2010 the production of
wooden doors and windows is up 258%, production of sawn wood is up 300% and the production
of cement has doubled in January 2011. The net income of restaurants in Ulaanbaatar was up
800% in January this year. Economists predict that 4 additional jobs will be created for every job
at Oyu Tolgoi.
Prophecy Resources, by Mr. David Jan, CFO
Prophecy acquired new resource estimate of more than 1.2Bt of coal for Chandgana project
which is open pit mineable. The huge resource means there are abundant fuel for power plant for
decades. Moreover Chandgana power plant project is currently the largest of its kind undergoing
licence application with the Mongolian Government. Prophecy plans to use clean coal mine melt
supply integration concept. Chandgana project is strategically located between Ulaanbaatar and
Beijing capable of supplying low cost stable electricity to Mongolia and further on to Beijing.
According to the presentation, buying electricity from Mongolia saves China carbon credits and
creates value added products made in Mongolia. Initial capacity of Chandgana power plant is
600MW and it is expected to be expanded to over 4,200MW and beyond making Chandgana
power plant the largest in Mongolia and major energy source to China. Chandgana will be located
60km far from Mongolia's existing power grid and can be quickly integrated to the Mongolian
system and replaced costly Russian power imports.
The project is align with the Mongolian energy plan and has low execution risk, according to the
presentation. Modern 800KV DC lines will pass through the Mongolian land and connects
Chandgana power plant with Beijing. China Consumed 1.09 trillion KWH of power in the first
quarter of 1Q2011. The construction of Chandgana Power plant is planned to be started in the
1Q2013. In addition to electricity, power plant will transform coal to liquid. South Korea will build
US$3bn railway which will pass Chandgana and link it to both China and Russia. According to the
presentation, international banks are interested in providing money for the power plant. Monnis
has invested in Prophecy supporting its operations in Mongolia. Prophecy is looking for Asian
listing to capture further gains.
Newcom Group, by Mr. Byambasaikhan, Managing Director of Newcom Group
Newcom Group is a diversified holding company engaged in air transport, energy, real estate,
financial services, telecom and other sectors. The iconic business of the group is Mobicom, the
first GSM standard mobile operator in the country. According to Mr. Byambasaikhan, the Group is
focusing on infrastructure related investment opportunities as one of the most attractive options.
Although, Mongolia is very advantaged in terms of location (next to world's second largest
economy) and possesses vast potential, infrastructure remains to be the main bottleneck that is
undermining country's development. The need for adequate infrastructure across various sectors
creates investment opportunities. The company is building wind power plant with a capacity of
50MW, which will be the first plant to be connected to the electricity grid in Mongolia since 1985.
The success story of wind farms in Inner Mongolian region of China proves that Mongolia
possesses significant wind resources. Also, project is supported by the favorable investment
environment in the sector, as Government emphasizes clean energy generation.
Company signed strategic partnership agreement with General Electric, focusing in various
sectors of the Mongolian economy. Recently General Electric established representative office in
Ulaanbaatar. 2 weeks ago, Newcom's other subsidiary Eznis airlines, signed partnership
agreement with ANA one of global airline companies. Eznis will soon start flights to Japan.
Newcom believes that after the legislative reforms, PPP projects offer attractive investment
Mongolia Development Resources, by Mr. Marat Utegenov, Executive Director
Mongolia Development Resources (MDR) is MSE listed property and infrastructure developer
with the mandate to provide broad possibilities for investors to have exposure to real estate
sector of Mongolia. The property would be the next investment attractive sector after mining in
Mongolia, Mr. Utegenov stated.
MDR made an IPO on MSE in December 2007, raising MNT 13.2bn and currently it is one of the
few listed companies which provides non-resource exposure to investors. Growing income per
capita plus good conditional mortgages will make property sector growing. Businesses are
expanding and therefore more offices will be needed. MDR is focusing on Ulaanbaatar; second
tier cities, i.e. Erdenet, Darkhan, and Dalanzadgad (DZ); and other mining towns
Current real estate market of DZ is insufficient to meet the demand of adequate office buildings,
hospitality and industrial spaces. At least there is no proper B Class office in DZ. So that MDR
acquired a land to develop a six story building with conference hall, office space and full serviced
apartments. The project is to be completed by 2012Q1 for sale and rent.
Also, MDR is running full serviced apartments' project on BayanMongol Residences in central
Ulaanbaatar. One entire block containing 60 units are being served to meet corporate clients
offering full serviced apartments.
Mongolian Star Melchers (MSM), by Laurenz Melchers, CEO
At the beginning of his speech, Mr. Melchers mentioned several non-resource sectors such as
logistics, healthcare, education, agriculture and leisure are also attractive for investment. MSM
which is mainly an importing company that brings the global brands to Mongolia has an effective
distribution system. It has 3 distinctive departments: industrial, automotive and distribution. MSM
is the largest supplier of the exploration equipment, according to the CEO of the company. The
company believes that the country will need large number of trucks for mining companies as road
and rail infrastructure is inadequate. Other equipments offered are in such sectors as air and
power, water treatment, personal safety, washing plants. The company is major importer of
consumer goods and automobile brands as Mercedes, Chrysler, Jeep, Dodge and Fuso.
Oyunu Undra Group, by Alex Horbazs, COO
The company is established in 1992 and currently employs 1,100 people. Initial operations of the
company were related to the petroleum products' import from Russia. Currently, the company is a
diversified entity focused on mining, banking, property, tourism, health care and others. It was the
first private company in Mongolia that built molybdenum plant. Arbayan tungsten-lithium deposit
is advanced stage project valued at US$150mn. The group owns Mongolian Financial Group and
is majority shareholder in Transbank, fully licensed commercial bank. It is the exclusive distributor
of Grundig brand. It also owns license for mobile satellite operations and operates tv channel.
One of the significant exposure of the company is related to property development. Oyunu Undra
owns significant land properties around Zaisan Area and is working in several developments the
value of which is estimated at US$225mn. These include high end residential, luxury hotel and
office properties. The company is interested its subsidiary companies within next 2-3 years.
Just Group, by Mr. B. Enkhbat, Director, Business Development
Just Group is a diversified investment group. Initial operations of the company were related to
petroleum products' import from Russia, which remains to be major business line. It owns 41
petrol stations and 4 oil products tank farms. Other activities of the company are related to
agriculture, international trade, construction, banking (owns Savings Bank), mining and others. It
currently employs 3000 people. During 2010, the Groups consolidated sales exceeded MNT
248bn. Ollon Ovoot Gold LLC (subsidiary) owns a gold mine located in South Gobi region. Mr. B.
Enkhbat, introduced upcoming bond offering by Just Agro LLC, also subsidiary of the group. Just
Agro owns 11 slaughter/meat processing plants which produce carcass meat and semi finished
meat products. Production is currently exported to Russia, company plans to export meat to
Arabian companies starting from this year. Just Agros' market share is 32% in total livestock
procurement; 26% in slaughter capacity and 30% in meat and semi-finished meat storage.
Just Agro is planning to offer bonds, so called "Meat-Bond". The proceeds from the offering will
be used for OPEX, procurement of livestock and increasing production capacity. It will be the first
bond to be issued to purchase livestock.
Bond issue details are: offer date: 1st half 2011; amount: MNT30bn; maturity: 1 year; Interest
rate: 16.2% (to be approved by the Financial Regulatory Commission of Mongolia)
Guarantee terms: assets of the company (company is valued at MNT45bn); sales agreements;
meat stock of 16,000 tons.
The company plans to export 12,600 tons of beef and horse meat to Russia, 4,500 tons of mutton
to Arab countries, 6,000 tons of meat to state reserve and supply meat to domestic market.
Eurasia Capital is a pan-regional investment bank with a focus on Mongolia and Central
Asia. Headquartered in Ulaanbaatar, the Firm offers cross border M&A and advisory,
capital raising, sales & trading and research services to its international and regional
clients including government agencies, major energy and resource companies, sovereign
wealth funds, private equity groups and global portfolio investors. www.eurasiac.com
Eurasia Capital is a member of Global Alliance Partners (GAP) and M&A