09.02.2012 mongolia investment outlook, oscar mendoza

M O N G O L I A I N V E S T M E N T O U T L O O K

Securities

December 2011

COAL MONGOLIA

By Oscar Mendoza, COO Frontier Securities

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About Frontier Securities

1P R E S E N T A T I O N M A T E R I A L

Mongolia’s local investment bank with a global outreach

Frontier Securities is the first local Mongolian Securities firm with a global network and international expertise. Established by

Masa Igata in 2007, Frontier has been given full-service securities related license by the Financial Regulatory Commission (FRC)

of Mongolia. Since its establishment, Frontier‟s primary area of focus has been the cross-border investment banking business.

As a member of the Mongolian Stock Exchange (MSE), Frontier has a wide network of investor contacts in Japan, Hong

Kong, China, Singapore, United Kingdom and Germany among other Asian and European countries. Frontier‟s team in

Ulaanbaatar, Mongolia supports Mongolian companies in their fund raising efforts and strives to open the doors of Mongolia to

foreign investors.

Recognized as Mongolia‟s leading research and sales house, Frontier is well known for its innovative and independent research.

Various global media outlets such as Bloomberg, Reuters, Finance Asia, The Economist and The Wall Street Journal frequently

seek the opinions of Frontier‟s top-ranked research team.

Global client base

25%

20%

15%

10%

10%

5%

5%

3%7%

Others

Full-suite IB products offerings Annual conference

DCM & ECM capital raising

M&A

Corporate Restructuring

Private Equity

Financial Advisory

Frontier has been organizing annual

conferences focusing on capital

raising and investment opportunity in

Mongolia since its establishment in

2007. Our pre-conference and post-

conference mining tours receive

favorable responses from attending

international investors. In addition, our

Expert Series, a publication of annual

conference summary, is also

distributed through international news

outlets for investor‟s reference, helping

them make informed investment

decision on Mongolian related assets.

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Executive Summary

2

Attention to Mongolia‟s “growth story” and its investment potentials has never been higher. Amid the

ongoing financial turmoil and unprecedented volatility that put all market participants in stalemate, above-

average market returns became a distant past, and asset managers, institutional investors, and

investment bankers, alike, begin to question – “where could be the next „hot‟ investment destination?”

Whereas financial markets around the world patiently await some miracle economic rebounds, market

sentiment declines, and investor confidence continues to hit a new low. Mongolia, on the other

hand, represents a different investment story.

According to the World Bank‟s Quarterly Economic Update, Mongolia‟s GDP impressively grew at 17.3%

in Q2, and 20.8% in Q3 on a year-on-year basis. The year-end GDP growth is likely to reach 15%, if not

more, up from modest 6.4% in 2010. Given this growth momentum, IMF estimated that by

2012, Mongolia‟s GDP will top US$11.2 bn, and per capital GDP will reach US$3,931

Driven primarily by mining boom and tremendous infrastructure spending in the recent years, its currently

US$6 billion economy is still relatively small in size and scope, but is expected to be the fastest-growing

economy in the world in the next 5 years.

Elsewhere, growth and investment opportunity is obscure, whereas in Mongolia, the opportunity is

unquestionably everywhere. Although there are prevalent risks (e.g. liquidity, exchange rate, market and

political risks) associated with this overheating economy, the rising domestic demand, upward trend in

consumption and favorable economic outlook justify every investment decision to be made in this

resources-rich country.

P R E S E N T A T I O N M A T E R I A L

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Agenda


The mining industry and major mining projects 10

Page

3

Mongolia’s economic outlook 3

Discover Mongolia‟s investment opportunities 16

Investment projects 35

Country profile, growth prospect and GDP breakdown

Exports statistics

Implication of inflation and currency

Political risk

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Mongolia: country profile1

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Young, democratic and resources-rich country sandwiched by Russia and China


Territory: 19th largest country - 1,565,000 km2

Population: 135th in the world

3.1 millions (July 2011 est.)

1.8 people/km2 on average

180 people/km2 in the capital, Ulaanbaatar city

Terrain: Vast semi-desert and desert plains, grassy

steppe, mountains in west and southwest; Gobi Desert

in south-central

Landlocked; strategic location between China and

Russia

Political structure: Parliamentary democracy from

1991, 2 large parties (MPP and Democratic Party)

Current Prime Minister: S. Batbold (MPP),

2008 election results: MPP 46, DP 27, others 3

Current President: Ts. Elbegdorj (nominated from DP)

in office since 2008

Next Elections: June 2012

Main Religions: Buddhist (90%), Muslim

(5%), Shamanist and Christian (5%)

Life expectancy: Men – 66 years old, Women – 71

Literacy rate: 97.8%

Currency: Tögrög (1,315₮ = US$1 as of Nov

18th, 2011)

Inflation: 11.9% (as of Sept 2011)

GDP*: US$6.24 bn (2010, IMF)

Growth rate: 20.8% yoy (Q3:2011)

Per capita GDP*: $2,267 (2010, IMF)

No capital controls, free press and internet

Source: 1) Unless stated otherwise, all economic figures are obtained from the World Bank‟s Mongolia Quarterly Update (October 2011)

Note: “GDP” and “Per capita GDP” statistics are in current prices

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Mongolia’s GDP surged 20.8% yoy in Q3:2011, and robust growth is

expected to continue

5

With OT and TT operating at full capacity, Mongolia is the fasting-growing economy in the next 5 years


Source: IMF estimates (September 2011)

-15

-10

-5

0

5

10

15

20

25

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

9 000

10 000

%MNT bn1990 – 2016F real GDP (constant price of 2005) and GDP growth

GDP (MNT bn) % GDP growth

2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F

Mongolia %

GDP Growth8.9% -1.3% 6.4% 11.5% 11.8% 19.3% 14.8% 9.3% 15.6%

Inception of Oyu

Tolgoi

Tavan Tolgoi at

full capacity

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GDP breakdown by sector: 2009 vs 2010

6

While mining sector is the main driving force, emerging opportunities in other sectors exist


Source: National Statistics Office (NSO) – Macroeconomic Statistical Indicators

Note: * Exchange rate attributes to discrepancy in GDP figures (US$ = 1,300 MNT).

Mining sector contributes to nearly 20% of the country’s GDP composition

Non-mining sectors, especially services industry, are also gaining momentum in the recent years

906

989

327

121

20

66

333

421

34

166

164

369

51

68

206

240

95

21

19

455

0 500 1 000 1 500

Agriculture, forestry and fishing

Mining and quarrying

Manufacturing

Electricity, gas, steam and air …

Water supply; sewerage, waste …

Construction

Wholesale and retail trade; …

Transportation and storage

Accommodation and food …

Information and communication

Financial and insurance activities

Real estate activities

Professional, scientific and …

Administrative and support …

Public administration and …

Education

Human health and social work …

Arts, entertainment and recreation

Other service activities

Net taxes on products

US$ mm

2009 GDP by sectors at current pricesUS$5,070 mm*

1 010

1 385

410

153

25

82

458

517

42

201

122

394

54

77

232

266

107

24

21

771

0 500 1 000 1 500

Agriculture, forestry and fishing

Mining and quarrying

Manufacturing

Electricity, gas, steam and air …

Water supply; sewerage, waste …

Construction

Wholesale and retail trade; …

Transportation and storage

Accommodation and food …

Information and communication

Financial and insurance activities

Real estate activities

Professional, scientific and …

Administrative and support …

Public administration and …

Education

Human health and social work …

Arts, entertainment and recreation

Other service activities

Net taxes on products

US$ mm

2010 GDP by sectors at current pricesUS$6,350 mm*

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Mongolian exports resume its upward trend after 2009 recession

7

Resources-driven economy of Mongolia is vulnerable to commodity prices volatility


Source: National Development and Innovations Committee (NDIC) & National Statistics Office (NSO) – Sept 2011 Bulletin

1%

4%26%

11%

51%

1%

2%4%

US$3,190 mm in Mineral Exports (2011 I-X)

Refined copper & Copper alloysZinc

Copper

Iron

Bituminous coal

Molybdenium

Fluor spar

Gold

1%

5%

35%

11%

35%

2%

3%

8%

US$1,837 mm in Mineral Exports (2010 I-X)

Refined copper & Copper alloysZinc

Copper

Iron

Bituminous coal

Molybdenium

Fluor spar

Gold

127

1394

68 14767

2466

83 14259

3430

78 76

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

UK China Russia Canada

US$ mm

Mongolia’s major exports destinations

2009 2010 2011 (I-X)

0

500

1 000

1 500

2 000

2 500

3 000

3 500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US$ mm

Mining equipment and fuel imports contribute to the surge in Mongolia’s trade deficit

Exports Imports

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Inflation and currency outlooks

8

Annualized inflation is 10.8% with upside risk


Source: 1) IMF estimates (September 2011)

2) Bank of Mongolia, Exchange Rates Statistics

Generalized wage and price pressures from a booming

economy, expansion in fiscal expenditures, and large

government cash handout contribute to rising inflation.

Given the overheating economy (20%+ GDP

growth), rising policy rate measure (currently at 12.5%)

is implemented to curb price increases.

Yet, inflation is expected to reach 13% by 2011 year-

end. Double-digit inflation is likely to prevail at least until

2013.

BOM combats against inflationary pressure by

tightening monetary policy to ensure economic stability.

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% Percentage change in average consumer prices(2005 – 2016F)1

Annualized inflation

1 000

1 100

1 200

1 300

1 400

1 500

1 600

1 700

2.1.2006 2.1.2007 2.1.2008 2.1.2009 2.1.2010 2.1.2011

MNT per US$ MNT vs USD (2006 – 2011)2

MNT vs US$

MNT – 13% appreciation against US$ in 2010, the world’s second best performing currency

Upward trend in inflation

Capital inflows and exports drive MNT

Rising domestic consumption and demand for raw

materials from industrialized countries contribute to MNT

appreciation

In 2010, coal exports increased 2.3 times to 16.6

mm tons, and iron exports increased 2.2 times to

3.5 mm tons.

Further mild appreciation or FX stability is expected due

to large capital inflows for major mining projects.

With continued high real GDP growth, the real exchange

rate will have to adjust, either through nominal

appreciation or through inflation.

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Understand Mongolia’s political risk

9

Lucrative opportunities can be undermined by political uncertainty


Updates on

Mongolia’s politics

Political

uncertainty is not

uncommon in

emerging

marketplace

Since late September 2011, political pressure and hostile political climate became imminent

in the Mongolian government due to opposing views regarding foreign participation in OT IA.

A “highly organized” attack by anti-coalition government, in view of the upcoming election

context, aimed to destabilize the long-standing political status quo and discredit the Coalition

government. The anti-coalition MPs orchestrated nationalistic sentiment on the highly sensitive

issue of OT project to the public, in hope for gaining more votes in the election.

Given this vivid dynamics of Mongolian politics, minor revisions on terms and conditions of

OT and TT IAs can be expected along the way. The coalition government is, however, facing a

challenging task and dilemma in this political game.

Anti-OT IA, anti Coalition government MPs, in mid October, submitted to the Secretary of

Administrative Office a resignation petition to the PM, alleging the government‟s failure to

implement the parliament resolution regarding OT IA.

Regardless of anti coalition political force that elaborated a high-profile attack on the coalition

government, the authority suggested that by laws, it is impossible to have only the PM resign.

Thus, this political move is not likely to take any substantial effect on the government front.

Implication for

investors

Ultimately, the government needs to devise a solution that satisfies all parties, while concurrently

pursuing multi-facet objectives – restoring investor confidence, wining the public opinions

in the next election, and ensuring the continuity of rigorous economic growth.

Political shock undeniably casted a shadow and negative sentiment on the Mongolia

market, but the real economic engine is not much hindered. The rising political risk premium is

not meant to discourage foreign investment; however, investors should be more careful

about the investment timing. Political uncertainty involving OT, TT controversies is surely soon

to be stabilized

The bottom line

The take-away lesson is, like in many other marketplaces, political risk is not avoidable, but

certainly manageable. The best investment timing is early 2012, when the political risk is

fully factored in and discounted. Choose the right timing, choose the right

portfolio, Mongolian investment definitely yields rewarding return.

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Agenda



Page

10

Mongolia‟s economic outlook 3



Mining sector: the driving force behind Mongolia‟s growth

Forefront on Oyu Tolgoi and Tavan Tolgoi

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It is not possible to think of Mongolia without thinking about coal mining


Key estimates

Mongolia‟s total inferred coal resources as predicted around 152 bn tons ranking top 15 globally

The preliminary and detailed exploration activities resulted in about 23 bn tons of coal reserves

The proved coal reserves are 12.2 bn tons including 2 bn tons of coking coal and 10.1bn tons of

thermal coal

Source: World Bank and National Statistics Office (NSO)

16,620

35

55

0

10

20

30

40

50

60

2010 2011F 2015F 2020F

mtpaCoal export projection

91 113 161306

502

8951 048 1 035 1 005

1 407

0

200

400

600

800

1000

1200

1400

1600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US$ mmGrowth of mining GDP

CAGR = 35.6%

Major deposits in Gobi region

Tavan Tolgoi 6.4 bn tons

Thermal coal 4.6 bn tons

Coking coal 1.8 bn tons

Ukhaa Khudag (MMC)

499.9 mm tons of measured resources

286 mm tons proven and probably reserves

Nariin suhait (MAK)

identified 250 mn tons of bituminous

Ovoot Tolgoi (SouthGobi)

Extension of Nariin Suhait

Indicated reserve 150 mn tons

Highlights: Mongolian coal reserves

Coal: 9thlargest in the world with 20 billion tons of coal, 7

– 8 billions tons of which is high CV thermal and coking

coal with values in excess of US$100/ton

100 billion tons of lignite which could be readily exported

as power (US$500 bn)

2010 coal exports 16.6 mtpa worth US$877 mm

2011 YTD 11.7 mt worth US$1.16 bn

2011F by Frontier Securities 20 mtpa worth US$1.97 bn

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Mineral assets’ geographical locations: an ultimate blessing


Mining sector is the driving force of resources-rich Mongolia

Coking coal Bituminous coal Sub-bituminous coal Lignite

Most developments located hereMost mining developments are located in South Gobi area

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Major coal mining projects in Mongolia


Khushuut

Resource: 149.2 mt

2011 mining plan:

0.5mt

Ownership: MonEnCo

Zeegt, Shine Jinst

Resource: 93+ 229 mt

Ownership: Gobi coal

& Energy

Ovoot Tolgoi, Soumber

Reserve: 114mt

Resource: 360 mt

2011 mining plan: 4 mt

Ownership:

SouthGobiSands

Nariin Sukhait

Resource: 220 mt


Ownership: MAC and

MAC/QH

Baruun Naran

Resource: 253 mt

2011 mining plan: 1mt

Ownership: QGX

Ukhaa Khudag

Reserve: 288 mt

Resource: 578 mt

2011 mining plan: 7mt

Ownership: Energy Res

CHPP: 5 mt 2Q.2011, 5 mt 3Q.2011

Small TT

Resource: 20 mt


Ownership: TT JSC

Big TT

Resource: 6.4 bt


Ownership: Erdenes MGL

Ovoot

Resource: 330.7 mt

Ownership: Aspire Min

Ulaan Ovoo, Chandgana

Resource: 209 mt + 1.2 bt


Ownership: Prophecy Coal

Shivee Ovoo

Resource: 2.8 bt

Ownership: Shine

Shivee, Shivee

Ovoo, Erdenes MGL

Baganuur

Resource: 600 mt

Ownership: State owned co.

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Tavan Tolgoi


The world’s second largest coalfield is set to be privatized by Q1: 2012

Total reserve: 6.4 billion tons

Full capacity: expected to be reached by 2016

Estimated CapEx: US$2.4 billion

New workplaces, railroad, power supply

Current ownership: 100% Govt (SOE Erdenes TT)

2 blocks with separate governance structures

Western block: license owned by

Erdenes, production rights and development

costs to bidders

2 preliminary winners: China's Shenhua

(40%), Peabody Energy (24%) and a Russian-

Mongolian consortium (36%) (as of November

2011, the final decision is still pending at

GOM).

Eastern block: owned and operated by Erdenes

MGL through contract mining firms

ETT IPO is expected to launch by Q1: 2012

Global coordinator: Goldman Sachs, Deutsche Bank

Joint bookrunner: Macquarie, BNP Paribas

Erdenes TT‟s Easter block ownership rights:

- 51% owned by Mongolian Government

- 10% of shares to the Mongolian citizens

- 10% own by national enterprises

- 29% to IPO on foreign exchange

Thermal coal

2.4 bt

Amenable to coke

production 2.2 bt

Self-coking coal

1.8 bt

Source: Sum of various companies‟ projections

0

10

20

30

40

50

60

70

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Coal Production Projection

Others TT

Breakdown of TT coal reserves

0

10

20

30

40

50

60

70

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Coal Production Projection

Others TT

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Oyu Tolgoi (66% owned by Ivanhoe Mines)


Source: Ivanhoe Mines IDP-10 & Frontier Securities‟s projections

0

0,2

0,4

0,6

0,8

1

1,2

Ou

nces (

Mil

lio

ns

)OT Gold Production Projection

0

200

400

600

800

1000

1200

1400

1600

1800

Lb

s. (M

illi

on

s)

OT Copper Production Projection

Total Reserve: 81 billion lbs. of copper, 46 million oz of gold

Expected production: 2013

Projected investment: US$4.6 billion in pre-production capital

NPV at today’s metal prices: US$15 billion

Benefits/contribution to Mongolian economy:

average 34% increase in real GDP over 30 years

average 71.6% increase in export

average 10.3% increase in employment

up to 48 thousand new workplaces over the project life

time

Oyu Tolgoi Investment Agreement

(In full legal effect since March 2010)

Integrated Development Plan is released

Stabilized custom regime

Abolishment of Windfall tax

Government ownership 34%

Private investment in auto roads

Loss rollover period of 4-8 years

Stabilized tax regime

95% Mongolian employees

OT has the mineral resources to become one of the world’s top 3 copper-gold producers

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Agenda



Page

16


Discover Mongolia’s investment opportunities 16

Conclusion 35

Overview of Mongolian Stock Exchange (MSE)

Recent developments of the MSE: LSE partnership and SML

MSE‟s investment idea: Case study of Remicon JSC

Beyond the MSE: Foreign-listed equities with Mongolian assets

Opportunities in non-mining sectors

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MSE: the world’s best performing stock market in 2010


5-year trend of MSE performance is promising1

5-year Compounded Annual Growth Rate = 63.6%

138% gain in 2010

Source: 1) http://www.bloomberg.com/quote/MSETOP:IND/chart (accessed November 20th, 2011)

87%136%

446%

-28%21%

128%116%

-1

0

1

2

3

4

5

0

500

1000

1500

2000

2500

3000

3500MSE Market Cap

Market Cap (billion MNT)

% Change (from Previous period)

MSE still encounters a number of obstacles

that undermine investor confidence and

further expansion, including

Lack of liquidity

Under-developed legal and technology

infrastructure

Weak corporate governance

Misuse of insider information

Inadequate transparency

Regulatory uncertainty

Despite impressive growth, key challenges to development lie ahead

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http://www.bloomberg.com/quote/MSETOP:IND/chart

336 MSE-listed companies account for slightly over US$1 billion in

market cap


Source: Mongolian Stock Exchange (MSE)

Well- diversified portfolio of MSE TOP-101

19,1

19,4

30,6

33,8

50,7

101,5

179,7

245,8

249,7

457,1

0 50 100 150 200 250 300 350 400 450 500

Mogoin Gol

Aduunchuluun

Gobi

BDSec

Mongolian Telecom

Sharyn Gol

APU

Shivee Ovoo

Baganuur

Tavan Tolgoi

US$ mm

MSE TOP-10 market capitalization

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MSE reforms in strategic partnership with London Stock Exchange


Source: NDIC, Eurasia Capital, Research Note (January 19, 2011)

Under the agreement LSE will collaborate with the SPC in a number of areas, including:

LSE has appointed a management team at the MSE to oversee its development and privatization.

LSE‟s Millennium IT, the leading global exchange technology provider, will provide trading, surveillance

and post trading infrastructure to the MSE.

Using the LSE Academy, both parties will conduct a comprehensive training program on capital

markets infrastructure and legislative framework for MSE officers, clients and officers of the Mongolia

Financial Regulatory Commission.

LSE will advise the MSE on the modernization of market rules, procedures, structure and operation at

the MSE.

LSE will provide assistance in the broadening of tradable asset classes at the MSE, to derivatives and

ETFs.

LSE will work to implement an international standard Mongolian market index.

Win-win partnership

World-class trading

and surveillance

infrastructure

Better distribution

channel for

Mongolian issuers

and international

investors

Leverage on

experienced

management

capability

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Implication of MSE-LSE partnership: international IPOs and dual listing of

Mongolian SOE privatizations


Source: Citigroup (Framework) & NDIC (Masterplan: Action Plans)

National Program of

Corporate Governance

Amendments to the Company

Law

Integrate mandatory

permits, and reduce number of

permits

Protect Investors

New Banking Law

Government actions to bailout

strategic banks

Deposit guarantee

Freedom of Expression exists

Media are independent, but

controlled by private interests

Successful

Privatization

Environment

Stock Market Law

Independent Information

Database

Stock Market privatization

plan

Government Bonds to be sold

in international markets

Master plan to develop border

port

Foreign Trade Clearance

Fra

me

wo

rks

Tra

nsp

are

ncy

Ma

rke

t E

ffic

ien

cy

Well-resourced and

Independent Media

Competitive Independent, &

Transparent Banking System

Efficient & Transparent Legal

Framework

Effective Standards of

Corporate Governance

Efficient Stock Exchanges Competitive Capital & Output

Markets

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The latest Securities Market Law’s (SML) review is aimed to tackle various

challenges hindering the development of MSE


Source: Mongolian Stock Exchange (September 5, 2011)

Government of Mongolia, MSE and FRC implement a number of reform measures to nurture a sustainable

development of the country’s capital market.

Latest SML’s

reform

Improved Listing Rules:More clarified terms and

definitions:

More strict requirements and

emphasis on disclosure and transparency:

Promoted market activities and transactions:

- Incorporated parts of Official Listing

Rules from UK‟s Financial Services

Act;

- Set up listing and prospectus

requirements;

- Clarified where a prospectus is needed, and where it is not

- Adoption of international

standard, where feasible;

- More clarified definitions of various Securities Market terms

- More descriptive Broker, Dealer and

Underwriter responsibilities;

- Introduced the concept of Beneficial

Ownership, Trustees and Custodians;

- Clearer definition of the law‟s objectives

- Amended statements that would

have placed excessive liability on

Professionals;

- Removed text that are unnecessarily

too prescriptive and onerous;

- Added definitions and procedures related to Depository Receipts

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Our MSE’s top stock pick: Remicon JSC

P R E S E N T A T I O N M A T E R I A L22

REMICON JSC

Founded in January 2008 as a

subsidiary of HERA HOLDING

Listed on MSE in May 2008

In early 2011, RMC joined the

MSE TOP 20 index

One of the largest concrete

producers in Mongolia

Stock performance: 126% gain

YTD

EPS: 240 MNT (2011A), 301 MNT

(2012F), 594 MNT (2013F)

Snapshot

Ownership Structure

Financial Highlights*

Share price: 192 MNT (as of

Dec 6, 2011)

Historical high: 195 MNT

52-wk range: 50 – 163 MNT

YTD performance: 104.2%

Mkt cap: US$9.2 mm

(11.6 MNT bn)

Avg daily turnover: US$6,852

Free float: 16%

Gross margin (2012F): 45%

EBITDA margin (2011A): 24%

Note: * Unless indicated otherwise, US$1 = 1,240 MNT throughout this presentation

P.Byambasuren 3% Frontier

12%Hera Holding

6%Gaul11%

Remicon JSC21%

Kh.Gankhuyag24%

D.Saranchuluun7%

Other shareholder

16%

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Remicon JSC, market leader in the cement industry


Post-FPO production prospect

The investment will be used for new cement plant:

The plant will be located in the Dornogovi province

which is 350 km east from Ulaanbaatar.

Capacity is maximum 900 ton cement a day.;

Production will start in 2012 with 75 %of the total

capacity.;

Further production capacity will be enhanced and

in 2016 the plant will be in full capacity;

Plant will be in operation 7 months a year.

A top cement manufacturer offers US$10 mm FPO for

cement plant construction

Will be the largest supplier of concrete/cement in

Mongolia in 2011;

Listed in 2008 with current US$8 mm market cap, and

net income will be close to US$1 mm by end of 2011;

Production has increased more than 12 times since

2009 to date;

The Mongolian construction industry is growing

rapidly, and the demand of concrete is high;

The FPO prospectus will be submitted to the FRC by

end of July 2011;

Company overview Cement market

111,9140,8

179,8

269,3

110,8

166

222,9

396,3

214,8

303,3

2005 2006 2007 2008 2009

Дотоод ИмпортDomestic Imported

Use of proceeds

Cement production vs imports (’000 tons)

14%

10%

64%

4%

0.2%7.8%

Purcahse of land and limestone depositBuilding

Machinery & equipmentVehicles

Office furniture

Working capital

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Follow-on Public Offering of Remicon

24

FPO overview


Securities type: Common stock

Nominal value: 100 MNT

Offering price: 190 – 238 MNT

Total number:39,460,000 shares (with 15% Over-

allotment Options)

Total capital raised:7,497,400,000 - 9,391,480,000 MNT

(approx. US$6.0 - US$7.6 mm)

Use of proceeds:Construction of a new cement

manufacturing plant

Placement:Private placement and book-building

for institutional investors

Underwriter: Frontier Securities

Registration and

settlement:

Mongolian Securities Clearing House

and Central Depository

Executive summary FPO timeline

Total number of shares

outstanding

Number of existing shares

New issues through FPO

118,139,464 shares (100%)

39,460,000 shares

(33.4%) 78,679,464 shares

(66.6%)

Change in

shareholding

structure

August 2011

October 2011

September 2011

November 2011

Prospectus submission

Regulatory approval

Shareholder meeting within 30 days

following the announcement

Issue Opening and Closing dates in

early October

Determination of Offer price

FPO report submission to MSE and

PRC

Announcement of RMC shareholder

meeting

MSE registration procedure

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The financials justify investment rationale


Cash flow from operating

activities

2013-2017 Euro,

1750₮

Dollar,

1200₮2013 2014 2015 2016 2017 Total

Total Revenue 14,175,000 17,350,200 17,697,204 18,051,148 18,412,171 85,685,723 48,963 71,404

Returns of goods sold 70,875 86,751 88,486 90,255 92,060 428,428 244 357

VАТ(10%) 1,288,636 1,577,290 1,608,836 1,641,013 1,673,833 7,789,611 4,451 6,491

Net Revenue (1-2-3) 12,815,488 15,686,158 15,999,881 16,319,878 16,646,276 77,467,683 44,267 64,556

Cost of goods sold 7,494,920 8,448,079 8,658,174 8,778,394 9,095,556 42,475,125 24,271 35,395

Gross profit (4-5) 5,320,568 7,238,078 7,341,706 7,541,484 7,550,719 34,992,557 19,995 29,160

Total operating expenses 1,121,450 1,125,189 1,146,563 1,150,549 1,155,137 5,698,891 3,256 4,749

Operating income (6-7) 4,199,117 6,112,889 6,195,142 6,390,935 6,395,581 29,293,666 16,739 24,411

Income before taxes 3,319,677 5,233,448 5,315,702 5,511,494 5,516,141 24,896,463 14,226 20,747

Income taxes, 10% 331,967 523,344 531,570 551,149 551,614 2,489,646 1.422 2,074

Net income 2,987,709 4,710,103 4,784,131 4,960,345 4,964,526 22,406,817 12,803 18,672

Growing productivity

Lowing cost

Improving margin

2013 – 2017 Valuation

FPOUS$71.4 in revenue

US$18.7 in net profit

2.03 year payback period

2013 – 2017 cash flow projection

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Investment opportunities beyond the MSE


Foreign-listed equities with Mongolian assets and operations

Company Market Market Cap (US$)*

Ivanhoe Mines TSX/ NYSE 14.1 bn (NYSE)

Centerra Gold Inc. TSX / Frankfurt 4.7 bn (TSX)

Mongolian Mining Corp HKEx 3.0 bn

SouthGobi Energy Resources TSX/ HKEx 1.3 bn (HKEx)

Mongolia Energy Corp. HKEx 0.7 bn

Petro Matad LSX 63 mm

Prophecy Coal Corp TSX 137 mm

Mongolia Growth Group CNSX 10 mm

Some of the world‟s largest mining

companies own strategic assets in

Mongolia. This investment inflow

represents a tremendous growth for

the overall economy, and wealth of the

nation. The next slides highlight

mining majors that Frontier has

established relationship with.

Note: Market cap data as of November 21, 2011M O

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Foreign-listed equity: Prophecy Coal Corporation


Subsidiary status of NKL leads to

mispricing of PCY.

PCY has market cap (as of

September 7, 2011) of C$131.3 mm,

and owns 43.7% of Prophecy

Platinum Corp (TSX-V: NKL),

NKL’s recent groundbreaking gain

(5d, 36.9%, 1m, +92.26%, 3m,

+419%) is due to its discovery of 1.04

mm oz PGM+Gold1 INDICATED and

10.97 mm oz PGM+Gold INFERRED

for the Wellgreen Project, Canada

PCY and NKL

Note: 1) “PGM+Gold” refers to platinum group metals and gold

Undervaluation

C$131.3 mm Mongolian assets of PCY

are valued as low as C$25 mm.

NKL‟s market cap is C$242.9 mm (as

of September 7, 2011).

If PCY‟s market cap is deducted by its

43.7% ownership of NKL, it thus can

be concluded that all Mongolian

assets of PCY are valued at only

C$25 mm i.e. C$131.3 mm subtracted

by 43.7% of C$242.9 mm.

This analysis implies that PCY is

tremendously UNDERVALUED.

Strong BUY

recommendationPCY undervalued with respect to

rising market cap of NKL, mispricing

since July 2011 onwards – PCY

+12.11% vs NKL +419.08%

Other development updates on PCY‟s

business fundamentals include coal

sales agreements 92,000 tons with

Mongolian and Russian buyers, as

well as progress on establishment of

Ulaan Ovoo deposit

NKL’s Wellgreen announcement

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Foreign-listed equity: Ivanhoe Mines


Ivanhoe Mines Ltd. is a mining company focused on the

development of its discoveries in the Asia-Pacific

Region.

Core assets are composed of:

66% interest in the Oyu Tolgoi copper and gold mine

development project in Southern Mongolia;

57% interest in Mongolian coal miner SouthGobi

Resources (SGQ: TSX, 1878:HK);

50% interest in Altynalmas Gold Ltd. to develop the

Kyzyl Gold Project in Kazakhstan;

62% interest in Ivanhoe Australia (IVA:ASX, TSX).

Key developments on the Oyu Tolgoi deposit:

30-year investment agreement signed with government: will insure

stabilized tax rates and regulatory provisions for the construction

and operation of the Oyu Tolgoi copper-gold mining complex;

Oyu Tolgoi to contain approximately 81 billion pounds of copper

and 46 million ounces of gold in measured, indicated and inferred

resources;

$2bn invested over the last 4 years & $4.5bn budgeted over the

next 3 years for completion of first phase;

Production to be ramped up to 450,000t of copper and 330,000

ounces of gold annually within 5 years from the expected initial

production date in 2013.

42%

16%

6%

5%2%

2%

27%

Shareholders' structure

Rio Tinto Plc

Friedland

Fidelity

Caisse De Depot Et Placement Du Quebec

Goldman Sachs

Artio Global Management, LLC

Others

Source: http://www.bloomberg.com/quote/IVN:CN/chartM O

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http://www.bloomberg.com/quote/IVN:CN/chart

Foreign-listed equity: SouthGobi Resources


SouthGobi Resources is a premium coal

production and development company focused

on exploration and development of its

Permian-age metallurgical and thermal coal

deposits in Mongolia's South Gobi Region to

supply a wide range of coal products to

markets in Asia.

SouthGobi owns three significant coal projects

in Mongolia: a producing mine, the Ovoot

Tolgoi Mine; and two development projects, the

Soumber Deposit and the Ovoot Tolgoi

Underground Deposit. In addition, SouthGobi

holds mineral exploration licenses in Mongolia.

Key data on the Oyoot Khural basin:

• *Permian-age coal bearing basin only 40 km from

China

• *Rail infrastructure and coal loader constructed by

Chinese to access

SouthGobi's leadership in the Ovoot Khural Basin:

• *Substantially covered by SouthGobi's exclusive

mining and exploration licences

• *89% of SouthGobi's resources located there

• *Operating infrastructure in place

57%

14%

29%

Shareholder structure as of May 1st, 2011

Ivanhoe Mines Ltd

China Investment Corp

Other public float

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Foreign-listed equity: Mongolian Mining Corporation


MMC is the first Mongolian company which

has carried out a global equity offering at Hong

Kong Stock Exchange with a total of 719.42

million shares at range of HK$ 10.92 per share

on February 8th , 2011.

.

• The company currently has 499.9 million tonnes of

measured and indicated resources and 286 million

tonnes of proven and probable reserves measured by

JORC standards. MMC received 30 years of mining

rights for the UHG deposit and MV11952 license

covers 2960 hectares, which could also be extended

twice every twenty years.

• MMC‟s Ukhaa Khudag (UHG) open pit coking coal

mine is located 240km away from the Mongolia-

Chinese border at Gashuun Sukhait where it will

further transport coking coal to high end users of

China at a comparably lower price.

• Company highlights fact that it is a low cost

producer.

Projected Production

46%

12%5%

3%

8%

6%

20%

Corporate Structure of MMC

MCS Mining Group Limited

Petrovis Resources Inc.

Shunkhlai Mining LLC

EBRD

Kerry Mining

Ancora Investment No 2 Limited

Public

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Various types of investment assets in frontier market


Investment opportunities in Mongolia

DCM

ECMJVs /

Strategic Investment

Private Equity

Mongolia-based assets across different key industries provide investment products for different capital

requirement, investment mandates and risk / return profiles.

Mongolia’s investment opportunities

Unprecedented economic growth with

vast natural resources

Access to a wide range of investment

products

Diversification and risk mitigation

Developing legal and financial

infrastructure (i.e. capital markets)

Prevailing growth opportunity in other

sectors

Investor-friendly environment

Flexible arrangement (in case of JV, PE

and strategic investment)

Mongolia-based assets represent future growth and attractive investment return

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Government policies support and justify “hot” investment opportunities

in non-mining businesses


Favorable policies for non-mining

The government wants to ensure that other backbone industries are developing

Policy-making and

implementation by the Government

The economy does not over-rely

on mining to prevent “resources

course.” “Extractive economy” is not

sustainable, as resources will be

eventually depleted.

Development of financial and

legal frameworks continues – for

example. MSE reform, revision of

Securities Markets Law etc.

Liberalization policies promoting

fair competition and

transparency, favorable regulatory

landscape, tax benefits and other

incentives are put in place to

encourage investment..

Infrastructure improvement (e.g.

transportation, utilities, telecommunic

ations etc.) is facilitated by

participation from private sector, for

example, via PPP platform.

Investment justification

“Hot”

investment

opportunities in

non-mining sectors

Growing

population and

consumption needs

Higher living

standard, prom

ising economic growth

More

purchasing

power /

disposable income

Favorable

external

factors (low

competition,

supporting govpolicies etc.)

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Opportunities beyond the mining sector, changing momentum in the

GDP composition


555

1 217

1 057

317

812

1 918

2 461

911

0 1 000 2 000 3 000

Agriculture

Industry, Construction

Services

Net taxes on product

US$ mm

GDP growth by sector – 2006 vs 2011F

2011F

2006

Percentage growth

(2006 vs 2011F)

Agriculture 46.3%

Industry, Construction 57.6%

Services 132.8%

Net taxes on products 187.9%

Source: National Statistics Office (NSO) – Sept 2011 Bulletin,

Rapid growth in mining results in consumption needs and development in non-mining industries

Growth in

mining

Development needs

of non-mining

industries

Rising consumption

needs

Non-mining

investment

opportunities

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Establishment of industrial

“cluster zones,” encompassing

various industries –

manufacturing, mining, metallur

gy, power/energy, petrochemical

, research & development etc.

in one strategic location

US$10 bn is needed for the

facility construction and

infrastructure development

US$2.5 bn is needed for

construction of rail transport

infrastructure to seaports

US$7.3 bn is required for a

complete infrastructure

development of TT mind

site, including power

generating, energy

supplies, property development

etc

Development of non-mining sectors and emerging opportunities outside mining

34

Case study 1: Tavan Tolgoi mining site


Case study 2: Sainshand industrial complex

HOT investment

opportunities in non-mining

More purchasing power,

disposable income, better

living standard

Growing domestic industries

Retail, manufacturing,

healthcare, real estate,

education, infrastructure, hospi

tality etc.

Rising consumption

needs

Development of non-

mining industries

Non-mining investment

potential is real and

realizable

Fast-growing

mining sector

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Agenda



Page

35




Examples of investment ideas

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In Mongolia, investment opportunities lie in a broad range of asset class


Asset description Investment type Industry Investment description

APIPProject-based

investment

Real estate, cement,

finance and natural

resources

Diversified investment opportunities

FeOre IPO on ASX Mining (Iron)AU$35 mm at 25 cent per share,

representing, 19.4% of the company

Lucky Strike

Equity (TSX-V: LKY,

OTCQX: LKYSF,

Frankfurt: LR2)

Coal mining Equity investment

Remicon JSC Equity (MSE: RMC) Cement manufacturingUS$ 6.0 mm – 7.6 mm investment

in FPO

Prophecy Coal Equity (TSX-V: PCY) Coal miningEquity investment in Prophecy and

its subsidiaries (PCY / NKL)

Gobi Coal Pre-IPO financing Coal mining US$ 20 mm – 30 mm in private

placement

YokozunaNET PE Internet provider US$ 3 mm in private placement

Mongolia Growth Group Equity (CNSX: YAK)

Insurance, asset

management, real

estate

Mongolia-focused property

development and diversified

financial services investment

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Disclaimer


Information in this presentation does not constitute invitation or application or investment advice or service provision

for sale and purchase of any stock, future, option or other financial product by Frontier Securities and its related

company. This presentation is not the recommendation to make a specific trade and guarantee for a specific product

whether it is appropriate or adequate for buyers. Also, although this presentation is prepared from the various

information sources we deem reliable, we shall not guarantee their accuracies and rightness. Moreover, past

performances do not suggest or guarantee for the future results. Thus, the Company shall not take responsibility for

the loss out of the decision based on its content. When making a contract on trades using the information in this

presentation, please consult with your business advisor, lawyer, tax & accounting advisor about investment product

prices, compatibility, value or other items beforehand. Information and services in this presentation and its provision or

usage shall not contradict to the applied laws and work guidelines or regulations of self regulating organization or shall

not be provided in the legal frame which does not admit such information and its provision; in the legal frame natural

person or legal body shall not use those information and service. Some of the products and services in this

presentation may not be applied for all the legal frames or not all customers may not use. Also, the Company may

change or delete information or others items in this presentation without previous notice.

Contact:

Frontier Securities

Email: [email protected]

Tel: +976-70119999

Address: #705, Blue Sky Tower

Peace Avenue 17, 1st khoroo

Sukhbaatar, District,

Ulaanbaatar, Mongolia

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mailto:[email protected]

09.02.2012 mongolia investment outlook, oscar mendoza

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