Mr. Layton Croft, VP External Affairs and Corporate Citizenship, South Gobi Resources

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The Profits of Mongolia: Perspectives of a Foreign Miner
Layton Croft, VP External Affairs and Corporate Citizenship, SouthGobi Resources
Mongolia Investment Summit 2010, 14 October 2010, Hong Kong
Good morning. Sain baitsgaana uu? Ta buhendee ene ugluunii mendiig amgalan ailtgiya.
My name is Layton Croft and I work for SouthGobi Resources. Our President and CEO
Alex Molyneux is unable to speak at today’s conference, and he has asked me to make
remarks in his stead. Hopefully what I have to say will add value to you as a prospective or
current foreign investor in Mongolia’s minerals and mining sector.
I am honoured with the privilege to share some of my thoughts with you all today. I will
share my own views and insights about being a foreign investor operating in Mongolia’s
minerals sector today. My opinions are my own and don’t necessarily reflect the official
position of my company.
I am not an investment banker, nor an economist, nor an equities analyst – so today I won’t
speak about commodities forecasts, equities valuations, sovereign risk, or the Chinese
demand outlook for Mongolian coal.
But I will talk about the equally important “softer side” of foreign investment in Mongolia,
which is something I have first-hand experience with.
I am a passionate student and advocate of Mongolia, and I am always proud, and humbled,
when my Mongolian friends and colleagues tell me I am part-Mongolian.
I have lived and worked in Mongolia for about 15 years in all – from living in Bayanhongor
Aimag, to spending time working and traveling in all 21 aimags and a hundred soums across
the country, and for many years with my family in Ulaanbaatar. I am also intimately familiar
with the Gobi region, where so much of the mining action is these days.
Over those years I worked as an educator, an economic development advisor, and for the
past five-and-a-half years, I have managed external affairs and corporate citizenship for two
mining companies – first with Ivanhoe Mines and the Oyu Tolgoi project beginning in 2005,
and since this past summer with SouthGobi Resources.
My time and experiences in Mongolia, and especially with my Mongolian friends and
counterparts, have taught me a lot, given me special insights, and have fostered in me a deep
love and passion for Mongolia, which I reckon is with me for life.
My point with all of this is that, deep in my own heart, I really want Mongolia to win. And
by “win” I mean a combination of a lot of things: reducing and eliminating poverty,
expanding and spreading prosperity, ensuring human security, growing the economy,
diversifying and protecting the economy, building human capital, preserving and promoting
cultural identity and cultural heritage, protecting national security and sovereignty, and
protecting and conserving natural resources such as water, air, and pastureland. Importantly,
“winning” for Mongolia means doing all of the above by Mongolians, for Mongolians, and
distinctly in a “Mongolian way.”
I would argue that ‘great investment opportunities with world-class upside potential’ is only
part of why Mongolia is such an exciting place today.
The other part, equally as important, is that there are amazing national development
opportunities with world-class transformational upside potential for Mongolia.

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The Mongolia story isn’t just about getting rich or richer. It’s equally about the ability of a
small country sandwiched between two giants to be the master of its own destiny, and to
map out and achieve a bold vision for a better future for itself and all its citizens, and on its
own terms.
If, and when, that happens, everyone wins, including us foreign investors.
Today I want to touch on three themes that I believe are important for success:
• The importance of being there
• The importance of understanding the political economy
• The importance of adding and leaving behind value (not just making and taking it)
The Importance of Being There
Simply put, and I know this is common sense stuff: to be a successful foreign investor
operating in Mongolia – in mining or any sector – you have to be there. This is in my view
the most fundamentally important thing for foreign investors.
For us to be successful foreign investors in Mongolia, we need to live in Ulaanbaatar, or in
the countryside, depending on our business. We need to learn Mongolian language, and
Mongolian culture.
We need to live and breathe alongside and among Mongolian people. We need to make
Mongolians friends, take walks in their shoes, see through their eyes.
We need to read books about Mongolia written by Mongolians, like Baabar. (Plug Baabar…)
To be successful foreign investors in Mongolia, we need to study and work constantly to
understand the cultural, psychological and socio-political implications of Mongolia’s
nomadic history and what it means, in both historical and contemporary terms, to be
“nomadic.”
And importantly, to be successful foreign investors in Mongolia, we need to not only
tolerate risk, but we need to tolerate ambiguity, and uncertainty, and unpredictability, and
different logical frameworks for doing things. Put another way, just because things might not
make sense to us does not mean they don’t make sense.
We need to respect Mongolian people and “the Mongolian way,” recognizing that by respect
I mean through our behaviors and not just our words or intellectual acknowledgement.
And fundamentally, we need to do all of the above all the while keeping our core personal
and corporate values, responsibilities, and integrity firmly intact, and unshakable.
Sure, doing all of this requires a sense of adventure, but succeeding in a so-called “frontier
market” like Mongolia also requires patience, and humility. As a rule of thumb, it’s usually
better to listen first and then talk rather than to talk first and then listen.
Although Mongolians value directness, being subtle and nuanced and diplomatic at the right
times is often more effective than emphatic arm-waving or table-pounding.
Mongolia may have a 30% poverty rate, but it has a 100% pride rate. And Mongolian pride is
admirable, and remarkable.
As foreigners, there is a lot to learn from Mongolian people – the way they look at the world,
the way they think and behave, their fierce individualism and stubborn self-confidence, their
industriousness and self-reliance, their willingness to try new things and take risks, and their
openness and accessibility as people.

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But also as foreigners, our behavior and how we are perceived is critical. And because
Mongolia is a small, intimate community where you don’t need a Twitter account for
everyone else to know what you’re up to – building and protecting your individual and
corporate reputation is paramount. Looking for shortcuts down shadowy alleys is not
advised. Transparency is advised.
The real upside to Mongolia investments is going to come not necessarily to foreign
investors who get in, but more likely to those with the ability to stay in. And to that end,
patience is not only a virtue but an essential business tool.
I have found that “actively waiting,” as opposed to, say, “passively waiting,” is the best way
to deal with what can seem like inaction, backsliding or an opaque outlook when it comes to
moving your business forward. The “legend of the Oyu Tolgoi Investment Agreement” is a
good example here.
It took more than five years for Ivanhoe Mines and the Government of Mongolia to
negotiate and finalize the seminal agreement that has since helped open the floodgates to the
country’s current foreign investment feeding frenzy. And while many lessons were learned
from the protracted negotiations over what became one of the most politicized deals in
modern Mongolian history – the patience and steadfast commitment to the process and for a
“win-win” outcome exhibited by Ivanhoe, Rio Tinto, and by the Mongolian government,
parliament and people, was key to how and why it all worked out in the end.
But now, with the OT deal done and dusted, and despite all the heady headlines and sexy
superlatives describing Mongolia as the latest, last, best and greatest investment frontier
market – making progress takes time, and patience.
This sometimes requires taking one step back after two steps forward, which itself
sometimes feels like two steps back after one step forward. But it is important not to think
linearly and two-dimensionally. It is important to think laterally, and multi-dimensionally.
Zero sum thinking is not advised.
That is because so much of what is happening in Mongolia today – economically, politically,
socially – is not only new for us as foreigners, but much of it is also new for Mongolians too.
Things are changing so quickly and so there isn’t always a well-worn playbook for how to get
things done. But that’s where Mongolians’ sense of confidence, self-reliance and pragmatic
industriousness comes in.
Earlier I said ‘just because something does not seem logical to us doesn’t mean it is illogical
to Mongolians’.
Think about Mongolia’s urban traffic culture. Sure, UB was planned decades ago when
planners were not encouraged to think about rapid, large-scale growth, in-migration and
everyone being able to own their own car. So congestion is bad and getting worse.
But for those of us who drive, and ride, in UB traffic on a daily basis, we know how dynamic
and sometimes dramatic the experience can be. This is an apt metaphor I believe for how, as
a foreign investor, the more you are in the traffic, and the better you learn how to really “go
with the flow,” as it were, the more you understand the logic behind how it is going.
I tend to see UB traffic culture as being an extension of Mongolia’s nomadic, horse-riding
heritage. But the point here is that learning how things are done is not enough. You have to
understand and appreciate why they are done, and to some degree, you have to learn how to
do them yourself.
All of this leads me to the point that we need to understand, and learn how to do things,
“the Mongolian way.” Never forget the significance of the fact that it was Mongolian people

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– and not just their great leader acting alone – who established the largest land empire in
human history. It was an extraordinary achievement, and it was done in a Mongolian way.
So no foreigner coming into Mongolia should ever underestimate, or discount, what it
means to work with, and do business with, Mongolians. Central to success in this regard is
understanding and respecting how Mongolians think, and how Mongolians do business.
It is not advised to parachute in with big money and big ideas and expect immediate success.
Which brings me back to the subject of this first theme: being there. And to “be there”
effectively takes time, and commitment, and transparency, and good corporate governance,
and patience, and humility, and the ability to understand the Mongolian way. Investing via
remote control, or just coming in when it’s warm outside, doesn’t work, and won’t work.
In sum, I would like to say, even at the risk of sounding cute, that, as foreigners, investing
our money is the easy part. As or more important is investing our time, and that means
building meaningful, and trust-based relationships, professional and personal relationships,
with Mongolians.
Just look at Ivanhoe’s share price today. Or Petro Matad’s. And then look at the Mongolian
relationships and partnerships those companies have, and the time they invested into those
relationships, and so on.
So that’s “being there.” Now…
The Importance of Understanding the Political Economy
Everyone talks, rightly so, about how strong and healthy and promising Mongolia’s young
democracy is. It is truly a best-in-class success story of transitioning rapidly and successfully
to a free market democracy, not only in a post-Soviet context, but compared with anywhere
in the world. The point is, a lot of countries can learn a lot from Mongolia.
Ever since I first started getting to know Mongolian people, in the summer of 1994, I was
struck by how “democratic” the Mongolian character is – and by “democratic” I mean “little
D” democratic, or not in a partisan or political sense. Mongolians, to generalize, possess
innate curiosity, openness, individualism, confidence, and an interest in learning new things
and applying that new knowledge in practical ways. “Little D” democratic.
I think that is a key reason why Mongolia’s “big D” democracy, even though it is only 20
years old, is so strong and has such a bright future ahead.
But as someone once said, good democracies are messy, and sometimes not as efficient as
their citizens always want them to be. Mongolia is no exception.
In light of Mongolia’s relative youth as a democracy, the fact that good democracies are
messy, and the blinding spotlight of attention now shining on Mongolia from all corners of
the globe as a red hot investment destination…..I want to speak briefly about the
importance for us as foreign investors of understanding Mongolia’s political economy, and
then using that understanding to inform our strategic decisions and tactical moves.
As a general rule of thumb, it is never wise for a foreign investor to be seen as interfering or
meddling in the internal political affairs of a host country. After all, as foreigners, we are
guests, not voters.
And so while I would never suggest that a foreign invested company should be political in
the “big P,” partisan sense of the word – I do think being politically literate, and better yet,
sophisticated, is wise.

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My point is closely linked to, and an extension of, my previous comments on “being there”
and building a wide range of personal, professional, individual and institutional relationships
– with all kinds of Mongolian people from all walks of life, partisan affiliations, with all kinds
of perspectives and opinions, including critics and opponents of foreign-investors.
Like I said, Mongolia’s democracy is strong and getting stronger, and everyone has a voice
and many people like to speak up. It’s important as foreign investors to listen, and study,
what people are saying, how they are saying it, to whom, and to what end.
Studying Mongolia’s political economy can be a full-time job, but it is worth it, and valuable
to us foreign investors. Every country has politics, political intrigue, political rivalries,
etcetera, and Mongolia is no exception.
But Mongolia’s political dynamics are vibrant, colourful, and ever dynamic! Things are
always happening, and what might otherwise be seen as a small news blurb buried on page 8
of a mid-sized newspaper, could in fact contain useful information to you, the foreign
investor, that could provide valuable insights or a key piece you need to better understand
and operate in the larger puzzle that is the operating context you are in.
My advice here is not that we should be political. In fact, I feel strongly that we should be a-
political.
But as foreign investors we should be politically knowledgeable, and savvy, constantly
analyzing current events and trends shaping Mongolian political and economic affairs, both
in the public sector as well as in the civic sector.
We should be neutral but networked, and knowledgeable. (plug BCM and MNMA…)
To the extent that we can see Mongolia’s political economy in ways similar to how
Mongolians see it, and with the filters and analyses that Mongolians use to process all the
information flying around, we should.
I can think of several examples of issue areas or events that we should strive to understand
from a Mongolian perspective.
The first is poverty. Mongolia’s extraordinary mineral wealth is drawing unprecedented
worldwide attention and interest against the backdrop of an economy that is growing swiftly,
but for a society that is increasingly divided by socio-economic disparity.
Poverty is a real issue, and the good news is that it is also a real priority for the incumbent
government and the current parliament.
Progress is being made to reduce poverty and to spread the wealth that is being generated as
far and wide as possible.
But foreign investors are sometimes implicated in the debates around poverty in Mongolia,
and not always in a favourable light.
As foreign-invested minerals and mining companies, we are always going to be under
particular scrutiny when it comes to the perceived imperative for us to create new Mongolian
jobs, improve livelihoods, and help reduce poverty.
Another important political economy issue is Mongolia’s “third neighbor” policy. This is as
poignant and important as ever for Mongolian foreign policy and domestic policies and
policy makers.
No foreign investor can hide, or change, the national flag their company is associated with.
But it is important to pay close attention and understand the complex and powerful political
dynamics within and among Mongolian political parties and politicians themselves vis-à-vis
companies and their respective national flags.
I spoke earlier about partnerships, and there is a growing trend for foreign investors to sign
MOUs or incorporate joint ventures with Mongolian companies, or companies from other

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countries also operating in Mongolia. This is a good thing and one to be encouraged,
especially the idea of us foreign investors partnering with Mongolian companies.
Lastly, I want to make mention of elections. Every four years it seems Mongolia’s “election
season” becomes longer and more amped up than the previous one, with fiercer
competition, more sophisticated, and costly, campaigning, and more people wanting to get
into politics.
I reckon that the June 2012 parliamentary and May 2013 presidential elections will be no
exception. There are signs already that for some, the 2012 election campaign has already
begun, albeit unofficially.
My point here is that – and if the 2008 and 2009 election season is an accurate guide – the
coming months over the next two years are going to be characterized by an uptick, maybe a
flurry, maybe a blizzard…..of political maneuverings and machinations driven by the 2012,
and after that, the 2013, elections.
The Election Law governing the upcoming 2012 elections will be new compared with that
governing the 2008 elections, the fact of which may itself increase the possibility for
politicized intrigue before, during and after the election.
And in light of progress made on Oyu Tolgoi since 2008 and the fact that Tavan Tolgoi
looms larger than ever on the horizon – largely thanks to the courage and hard work of
Mongolia’s current and unique coalition government – I reckon there will be a fair share of
politicization of these and other projects vis-à-vis foreign invested mining companies in
coming months and probably until the summer of 2013.
But that’s fine. That’s what happens in a good, healthy democracy.
My point here is that foreign investors need to be aware of what is driving and being driven
by the political economy all around us, so we can be informed and intelligent about how we
operate effectively and profitably in such a dynamic environment….and so we can protect
ourselves insofar as we don’t get sucked into being political, or politicized, when we
shouldn’t want to be.
And now…
The Importance of Adding and Leaving Behind Value
(not just making and taking it)
I want to make 2 key points here: 1) it is harder than ever as a foreign investor operating
in Mongolia’s mining sector to demonstrate competitive advantage; and 2) value adding
is the name of the game.
Mongolia’s so-called Wolf Economy is no longer a cute nickname; it is being proven
every day. And it’s not coincidence that Mongolians like to be associated with this
animal. Wolves are revered by Mongolians perhaps more than any animal other than the
horse, because wolves possess an abundance of hiimori -- which is one of my favourite
Mongolian words, since it is virtually impossible to completely translate it into English.
Hiimori basically connotes special, almost mystical power that gives one not only
competitive advantage in its environment, but also a kind of spiritual protection, or
enlightened sophistication.
Yesterday marked a very important milestone for Mongolia’s emerging “world
economy” – it was the first day of trading of a Mongolian majority-owned public

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company listed on a major world stock exchange, and it happened right here in Hong
Kong!
I applaud and want to congratulate Mongolian Mining Corporation. (clap) MMC has not
only done a superb job of a pioneering the tapping of global capital markets for
Mongolian companies, but it is also a leader among mining companies in the Mongolian
domestic market of public opinion, and pride.
In addition to its share price, MMC’s social license to operate is strong and getting
stronger. Sure, its competitive advantage vis-à-vis Mongolian citizens and foreign-
invested companies (like the one I work for) is that it can plant and wave the Mongolian
flag with genuine authenticity. But MMC’s story is a prelude, and a harbinger of what is
to come, and what is coming fast.
The point is, more than ever before, foreign-invested companies operating in Mongolia’s
minerals and mining sector have to be competitive not just with other foreign
companies, but with Mongolian companies as well. We have to not only differentiate
ourselves, but we have to prove to Mongolians – public officials and private citizens
alike – how we can and do add value and why we are valuable for Mongolia. If we want
to succeed, we have to deliver value not only to our shareholders, but equally so to our
Mongolian stakeholders. This is a new paradigm.
Yesterday at this conference there was discussion about “country risk.” I think the
flipside of that coin is “investor risk.” Increasingly, Mongolian-owned and operated
companies – like MMC, Newcom, Tavan Bogd, Bodi and others – are proving that they
can, and will, compete head-to-head with foreign-invested companies.
I offer two general suggestions for foreign companies to consider in terms of us adding
value to Mongolian stakeholders in addition to our own shareholders, and that go
beyond flag-waving and trumping up the political or diplomatic value of the nation or
continent your company affiliates with.
The first is for us to never forget the importance of quality, and to pay attention to
details. There is so much talk today of how big Mongolia’s resources are and how much
money is to be made in Mongolia. But unless and until foreign investors focus as much
on qualitative, non-commercial aspects of their investments – in terms of how they will
benefit Mongolian people and protect Mongolia’s natural environment – they will risk
losing competitive advantage.
What comes to mind here are opportunities to demonstrate best-in-class performance in
areas of health and safety, environmental management, livelihoods security and socio-
economic development – including and especially those methods which are participatory
and that fundamental include local communities.
A so-called “social license to operate” is no longer good enough. Now, to compete and
succeed in Mongolia, the local communities where we operate and our other Mongolian
stakeholders must have the “social desire for us to be operating there.”
It’s like the great rock song by Cheap Trick: “I Want You, To Want Me.” Foreign
invested mining companies need Mongolians to want us, and to need us, and for that to
happen, we must demonstrate why and how we add extra value and leave behind
tangible, lasting benefits for Mongolians.
It’s not just about social investments, charity and PR. It’s about being conscientious and
pro-active – as a mining company – in terms of understanding, protecting and
supporting Mongolian interests: Mongolian culture, Mongolian human development, and
Mongolian environmental conservation.

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CSR, or corporate social responsibility, is a buzzword that I struggle with as it is fuzzy
and hard to define. Instead, I think CSR in Mongolia should stand for: “Competitiveness
and Sustainability are Required.”
And since mining is inherently not sustainable insofar as it depends on exploiting finite,
non-renewable resources, the key to sustainability if you’re in the mining business in
Mongolia, is to focus on the Mongolian resources that are above the ground.
Oyu Tolgoi LLC has the saying “Oyunlag humuun Mongoliin bayalag,” or ‘Mongolia’s
greatest resource is its human capital’.
So I would advise foreign investors to be creative and find ways to demonstrate that
your company can accelerate the transfer of technical skills, professional knowledge and
on-the-job experience to Mongolian youth, so that the next generations of Mongolian
business, civic and political leaders will be part of a world-class Mongolian economy not
dependent on only the minerals and mining sector to keep growing and diversifying.
Some foreign invested companies, such as Red Path from Canada, are training
Mongolian young people overseas, bringing them back to Mongolia to work, and then
offering them expat packages to go abroad to work. This is what I am talking about in
terms of adding and leaving behind value. It means going the extra mile, all the time.
Finally on this theme of adding and leaving behind value for Mongolians, and related to
my earlier comments about relationships – I believe there is great upside in prioritizing
partnerships with, and participation by, local Mongolians in every aspect of our business
operations.
This can range from including local community members in participating in
environmental impact monitoring, to investing in local business incubation centers that
coach and mentor Mongolian businesses specifically so they can become long-term
suppliers, to consciously recruiting, hiring, mentoring, up-skilling, promoting and paying
expat salaries to Mongolians for senior management roles, instead of reflexively reserving
those roles for foreigners.
The best capacity building is a function of real partnership, and real participation, where
everyone has skin in the game. This is not always instinctive for foreign mining
companies, but it is a powerful way to build competitive advantage.
In closing…
I spoke earlier about how my passion for Mongolia and Mongolian people comes from
me genuinely wanting Mongolia to “win.” The good news for foreign investors is that
“win-wins” are possible, and encouraged, and that there are still opportunities for foreign
companies to help Mongolia keep winning.
My advice here is to build and grow Mongolian relationships and partnerships across the
board – don’t limit your relationship-building to just those people, institutions or sectors
that are ostensibly core to your business or business model. Cast the widest net. Jump in
with both feet. Live in a ger with a nomadic herder family in the Gobi for a week.
Seriously.
The truth is, so much of what is happening in Mongolia today is historical. Every day it
seems new milestones are achieved and records are set. The opportunities seem, and feel,
limitless. Things are changing with hyper speed. The only way to keep up, and stay one
step ahead, is to do at least the following three things:

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1) first, be there on the ground, visible and active, learning Mongolian language,
culture and heritage, building relationships and forging strategic partnerships
with Mongolians – be curious, be humble, be interested beyond the bottom line;
2) second, constantly study and work to understand the ever-evolving Mongolian
political economy landscape, and make strategic business decisions and tactical
moves accordingly; and
3) third, never forget that, with each passing day, the mere fact that you have capital
or access to capital is less and less of a unique competitive advantage in and of
itself. Therefore, as foreign investors we need to find other, non-capital ways to
be creative and competitive, to add and leave behind tangible value for
Mongolian stakeholders, and to do all of that in ways that grow our profits while
at the same time growing, and sustaining, and helping to diversify, the profits of
Mongolia.
Strategies for success as foreign invested mining companies working in Mongolia cannot be a
zero sum proposition. If you want to win, central to your strategy must be helping Mongolia
win as well.
Anhharlal tavsan bayarlalaa.
Thank you for your time and attention, and please enjoy the rest of the conference.