BUSINESS COUNCIL of MONGOLIA NewsWire

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Issue 122, June 11, 2010

NEWS HIGHLIGHTS:

Business:

Prophecy and Japanese firm in marketing agreement on Ulaan Ovoo coal;

Hunnu acquires 60% interest in yet another coal project;

SouthGobi to repurchase shares from June 15;

Aspire Mining encouraged at drilling results;

Chinese company seeks deeper foothold in Mongolia;

Khan Bank first to offer financial leasing service;

No private land to be allowed around strategically important deposits;

Move One expanding operations in Mongolia;

Burberry Group opens shop in Ulaanbaatar;

ARMZ takes controlling stake in Uranium One.

Economy:

Party groups, Standing Committee unanimously approve draft TT agreement;

PM reported keen to sell 20-30 percent TT shares to Mongolians;

MPs criticize excessive bond sales in 2009;

IMF, World Bank urge better fiscal management if aid is to continue;

Deputy Minister says IMF warning must be heeded;

Copper hits 8-month low as Eurozone fears mount;

Gold hits new peak as risk aversion resurfaces;

Chile raises 2010 copper view to USD3.20/lb;

Audit faults wording of loan agreements;

Banker sees many challenges ahead for the economy;

Standing Committee favors new royalty rules;

Zamiin Uud economic free zone to be ready in 2012, says director;

MNCCI joins international financing institution;

Does the workers’ revolt mark end of China’s cheap labor era?

Labor unrest in China reflects changing demographics, awareness of rights;

Chinese exports surge in May;

Fixing the credit rating business requires big changes;

Chinese cleantech firms outperforming U.S. and Europe.

Politics: If new railway is narrow-gauge, it will need Chinese technical staff;

MPs’ group says dismissing 7,000 state staff can save MNT50 billion a year;

MP calls for separate agency to help create employment;

Summit members, including Mongolia, condemn Israel over Gaza raid;

Government wants work on new universities to begin;

Plan to have Mongolians replacing Chinese drivers in mines;

China noncommittal about granting easier transit facilities;

Buriyat President eyes a piece of Mongolia’s tourist traffic;

PM inaugurates women’s conference;

Government to spend over MNT600 million for Naadam;

Bitumen price rise halts road repairs;

MCA to rebuild road to Nalaikh.

*Click on titles above to link to articles.

BUSINESS PROPHECY AND JAPANESE FIRM IN MARKETING AGREEMENT ON ULAAN OVOO COAL Prophecy Resource Corp. and Sojitz Corporation of Japan have entered into an exclusive agreement to jointly market thermal coal from Prophecy's 208-million-ton Ulaan Ovoo coal deposit to buyers in China. The agreement also covers Japan and Korea, provided that the coal is sold through the Chinese land border from Mongolia. By capitalizing on its extensive expertise in international coal trade, Sojitz Corp. and its Beijing affiliate, Sojitz (China), will assist Prophecy on a best efforts basis in securing letters of intent and/or offtake agreements from potential coal buyers for its thermal coal in advance of planned 2010 mining operations. Sojitz will also advise Prophecy on the best pricing parameters including volatility concerns as they apply to specific markets. Sojitz is a widely respected international corporation involved in a multitude of businesses including but not limited to energy (coal, LNG, oil & gas), metals, chemical and functional materials and machinery. Mr. Lee, Chairman of Prophecy, has said the marketing agreement “symbolizes the confidence we now have in each other and indicates the desirability of Prophecy coal in the vast and lucrative Asian marketplace”. Wardrop Engineering is developing a prefeasibility study specific to the reserves and economic sensitivities of the Ulaan Ovoo deposit. The study is expected to be released in 45 days. On May 11, Prophecy entered into a mine services agreement with Leighton Asia Ltd. for the equipment leasing and mining operation at the deposit. Mine site establishment will commence in July, 2010, to ensure 250,000-ton production in 2010. Ulaan Ovoo is located within 10 km of the Russian border. Source: Prophecy Resource Corp.

HUNNU ACQUIRES 60% INTEREST IN YET ANOTHER COAL PROJECT ASX-listed Hunnu Coal has yet again increased its footprint in Mongolia with the acquisition of a 60% interest in the Buyan coal project, within the Taval Tolgoi coking coal field. The company said on Tuesday that the acquisition of the Buyan project was strategic, as it had existing infrastructure in place, and was within one of the world‟s largest coking coal fields. The company would now be undertaking a detailed exploration project during the coming months, as part of its exploration strategy in the South Gobi region. Last week, Hunnu had acquired a 60% interest in the Tsohio coal project, which was about 40 km from its existing Khuree 2 project.

Source: www.miningweekly.com SOUTHGOBI TO REPURCHASE SHARES FROM JUNE 15 The Board of Directors of SouthGobi Resources has authorized a share repurchase program to purchase up to 2.5 million common shares of the company on each or either of the Toronto Stock Exchange and the Hong Kong Stock Exchange, in aggregate representing approximately up to 5 million common shares or 2.7% of the current outstanding common shares of the company. The share repurchase program will commence on June 15. The Board decided on the repurchase program “as the current market price may not reflect the underlying value of SouthGobi's common shares”. The program will not impact on SouthGobi's growth plans.

Source: SouthGobi Resources ASPIRE MINING ENCOURAGED AT DRILLING RESULTS Aspire Mining continues to achieve encouraging drilling results from its wholly-owned Ovoot Coking Coal Project in northern Mongolia. Recently the company has completed a further 5 holes which intersect with coal seams of significant thickness. Once a second drill rig is mobilized next week, the drilling program will be expanded from 4,500 meters to 10,000 meters. The recent issue of 50 million fully paid shares at a price of AUD0.09 per share to raise AUD4.5 million was oversubscribed. The company Chairman, Mr. David McSweeney, said this was “a vote of

confidence for the company‟s measured development strategy” for the project. Source: Aspire Mining

CHINESE COMPANY SEEKS DEEPER FOOTHOLD IN MONGOLIA China Nonferrous Metal Industry's Foreign Engineering and Construction Co (NFC) is planning more overseas mergers and acquisitions to expand its mineral wealth, and is also boosting its presence in mineral-rich nations like Canada and Australia to have bigger bargaining power in the global arena, said Mr. Wang Hongqian, its general manager. Mr. Wang said in developing countries like Mongolia and Laos, NFC will continue to focus on exploring minerals, most of which are needed to satisfy domestic demand for natural resources. "We're very cautious when taking steps to expand overseas, given the complicated investment environment in different countries, from changing local policies and cultural gaps, to adverse climate conditions and poor infrastructure," he said. The company has successful overseas expansion experience. Tsairt Mineral Co in which NFC owns 51 percent stake and Mongolian company Metalimpex Co the balance, has become the biggest joint venture mining company in Mongolia. It has contributed USD57 million to Mongolia's exchequer since starting operations in August 2005. The company has produced 537,100 tons of zinc concentrate and sold output worth USD372 million to China until April this year. NFC's zinc project has also provided nearly 500 employment opportunities in Mongolia, and directly lifted the nation's gross domestic product by 2 to 3 percent. "We're actively seeking more opportunities to cash in on the Chinese government's promise to develop the mining sector in Mongolia," Mr. Wang said, adding that other mineral resources, apart from zinc ore, will also be considered. Premier Wen Jiabao said in his recent visit to Mongolia that China will give economic aid, including grants and loans, to help the neighboring country with its mineral, communications and infrastructure projects. Source: China Daily

KHAN BANK FIRST TO OFFER FINANACIAL LEASING SERVICE Khan Bank has become the country‟s first bank licensed to offer equipment leasing services. Upon receiving the special permit from the Central Bank, it entered into agreements with two vendor companies, Hyundai and Khukh Tengeriin Oron LLC. Hyundai primarily deals in heavy machinery and meets the needs of large firms, while Khukh Tengeriin Oron manufactures wool processing equipment for mainly family businesses. The new service will contribute to the growth of small and medium enterprises by enabling entrepreneurs to use new and innovative machinery or equipment on financial lease from the bank. Khan Bank has announced that no collateral apart from the equipment itself is required to qualify for this service. Besides, the lessee may simultaneously act as an equipment vendor.

Source: Khan Bank NO PRIVATE LAND TO BE ALLOWED AROUND STRATEGICALLY IMPORTANT DEPOSITS No land around strategically important deposits such as Oyu Tolgoi, Tavan Tolgoi, and Khushuut will be allowed to be in private hands. Prime Minister S. Batbold has issued an order to this effect after studying a report prepared by the Ministry of Road, Transportation, and Urban Development. The Minister, Mr. Kh. Battulga, has said the decision will make some 37,000 hectares of land near strategic deposits specially protected areas. Expansion of mining operations means a lot of land will be necessary to build long-term human settlements. The ordinance aims at preventing people who were allocated land in the areas, or those who have bought those lands from them, from looking for deals. Asked what will happen to business enterprises, mining companies or others, who have acquired permission to construct something on land they own in the area, Mr. Battulga said there were only two or three such cases. The permission will be rescinded and there will be no compensation.

Source: Zuunii Medee MOVE ONE EXPANDING OPERATIONS IN MONGOLIA Move One is expanding their operations in Mongolia to meet the anticipated increase in demands for them with the imminent start of several new large-scale mining projects. The company is undertaking an investment plan to provide logistics services to companies involved in Oyu Tolgoi. Move One will be actively involved in this project, using the resources at its disposal to help the Mongolian government and its people. Founded in 1992, Move One is a multiple award winning, integrated assignment and moving

management company, providing services in logistics, relocations, moving, immigration and pet transportation across 51 locations in 37 countries on four continents. Its head office is in Dubai, and it has regional coordination centers in Budapest and Shanghai. Source: www.moveoneinc.com BURBERRY GROUP OPENS SHOP IN ULAANBAATAR The Burberry Group, a British luxury fashion house, has opened its own shop in Ulaanbaatar, in the Central Tower building near Sukhbaatar Square. The shop sells clothes for both women and men from collections like Burberry London and Burberry Brit, as also jewelry, handbags, sunglasses, wristwatches, shoes and other accessories. Source: News.mn

ARMZ TAKES CONTROLLING STAKE IN URANIUM ONE Russian State-owned Atomredmetzoloto plans to use Canada-based Uranium One, in which it has agreed to take a stake of at least 51%, as a vehicle for future global expansion in the uranium-mining sector, director-general Vadim Zhivov said on Tuesday. The two companies announced earlier in the day that ARMZ will take a controlling stake in Uranium One, in exchange for stakes in two uranium mines in Kazakhstan and USD610 million in cash. “We would like to use Uranium One as a global platform for future growth, and all the future acquisitions and all M&A activity will be on the basis of Uranium One,” he said. The deal will make the company one of the top five producers of the nuclear fuel by 2011, Uranium One CEO Jean Nortier said. ARMZ falls under Rosatom – the Russian State company controlling the nation's nuclear activities - and already holds 23% of Uranium One, most of which was acquired when it sold its 50% of the Karatau mine, also in Kazakhstan. Rosatom, like other nuclear utilities around the world, is actively looking to secure supplies of uranium to feed the growing number of nuclear reactors in operation and under construction.

Source: www.miningweekly.com

ECONOMY PARTY GROUPS, STANDING COMMITTEE UNANIMOUSLY APPROVE DRFAT TT AGREEMENT Following the unanimous approval given to the draft Tavan Tolgoi investment agreement by both party groups in Parliament on Monday and a similar consensus in the Standing Committee on the Economy on Tuesday to allow the draft to be debated in Parliament, the way seems to be clear for a smooth passage of the bill. If it indeed happens that way, it would be in marked and welcome contrast to the checkered career of the other major investment agreement related to Mongolia‟s mining resources, that on the Oyu Tolgoi copper-and-gold deposit. No date, however, has been fixed for the debate in Parliament. The discussion in the Standing Committee was perfunctory, with all members already aware of the provisions of the draft. Earlier, on Monday the party groups had met separately to discuss the draft and both had taken time to go through the provisions and seek clarification, but in the end both gave unanimous approval to the draft. Minister for Minerals and Energy D.Zorigt briefed media on Monday on the basic provisions of the draft agreement. The deposits will be fully owned by the state and “every Mongolian citizen will become a shareholder in the deposits once the coal enters market circulation”. The deposits will be split into two parts to be mined. A state-owned company will be established and no less than 10 percent share of at least 3.5 billion tons of deposit will be distributed equally to 2.7 million citizens. In addition to these free shares, all registered companies and citizens of Mongolia will be able to buy shares of the deposit when they are offered on the Mongolian Stock Exchange. The Mineral Law stipulates that no less than 10 percent of the total shares will have to be so placed. The MPRP MPs urged that everybody should have equal opportunity to buy shares at the stock exchange. Read more… Foreign investors and domestic companies or consortiums will have a chance to operate the mines. It is estimated that 30 percent of the total six billion tons of coal can be coked. Present estimates are that if 15 million tons of coal is coked annually, the state will earn more than USD 5 billion in the coming 30 years and if the quantity coked goes up to 30 million tons annually, the corresponding revenue will be USD16 billion. Mr. Zorigt clarified that once Parliament approves the draft agreement, the new company will be set up, specifically for Tavan Tolgoi, and its shares distributed. The state will continue to own both

the license and the deposits in both parts of while chosen companies will do the excavation and marketing on a contract. Source: English.News.mn

PM REPORTED KEEN TO SELL 20-30 PERCENT TT SHARES TO MONGOLIANS Prime Minister S. Batbold plans to list 20% to 30% of Tavan Tolgoi, the country's giant coking coal deposit, on the Mongolian Stock Exchange, a person familiar with the situation has said. Under the proposal, about half of the shares would be distributed to Mongolian citizens, with the rest reserved for sale to Mongolian companies, the person said. An initial public offering on the international market could be considered at a later stage, the person said. Mr. Batbold's plan is subject to approval from Mongolia's Parliament. The plan to list Tavan Tolgoi comes a few months after the prime minister announced plans to keep full government ownership of the asset, and to subcontract its development to foreign companies. The announcement dashed hopes that big foreign mining companies would have a chance to own the huge coking coal deposit, one of the largest in the world. Since then, the Mongolian government has been looking into a contract mining arrangement. Mongolian officials have been considering initial public offerings of various state-owned mineral assets and mining projects, as part of plans to capitalize on the country's abundant natural resources. Government officials previously had laid out a plan to list three companies for state-owned assets: one for mining assets, another for energy and a third for infrastructure. They now appear to prefer the idea of splitting the country‟s mining and mineral assets into a number of listings, instead of just one listing for the assets. Most Mongolian mining assets are held by state-owned holding company Erdenes MGL LLC. Mongolia has been working to upgrade and expand its stock exchange, which was established in 1991 with the goal of privatizing more than 400 big state companies. The stock exchange has a total market capitalization of around USD450 million. To help drive liquidity, Mr. Batbold has been pushing for companies with Mongolian assets to conduct dual listings on global exchanges such as Hong Kong, London or New York, as well as on the domestic bourse.

Source: The Wall Street Journal Asia MPs CRITICIZE EXCESSIVE BOND SALES IN 2009 The general reaction of MPs to the government‟s performance in regard to the economy last year was one of dissatisfaction as Parliament discussed last week a report on the execution of the general budget of 2009 and another report by the National Audit Agency on the budget. The reports put the budget income at MNT1.994 trillion or 32.9 percent of GDP, while expenses stood at MNT 2.337 trillion, or 38.6 percent of the GDP. The main reason why income fell short of the estimated MNT 2.79 trillion was that tax revenue was MNT189.5 billion less than expected, because of fluctuation in currency exchange rates. Besides, the recession led to 24,510 companies closing down or failing to make a profit. Some, including state-owned companies or joint ventures, did not pay tax, with no clear legal justification. The report claims Ulaanbaatar Railway, jointly owned by Mongolia and a Russian State-owned company, should have paid MNT 806 million, the Mongolian Stock Exchange MNT 27 million, and Mongol Post Bank MNT 125 million, while the Central Bank did not distribute any dividends. The Government sold bonds to keep itself going. According to the audit, a total of MNT 446 billion worth bonds were traded in 2009, way above the figure for the year before. This meant the government paid 2.7 times more as interest. A cross section of MPs criticized the way MNT 219 billion was taken from the Mongolia Development Fund to cover the budget deficit, calling it “extremely poor financial management”. They also said this was one reason behind the inflation, the fall in MNT value, and general economic weakness. Read more… Finance Minister S.Bayartsogt defended the sale of bonds by saying the Government had no choice. MNT 90 billion of bonds were sold to meet constant budget expenses, MNT 6 billion more raised the money to provide apartments to government employees, and another MNT 75 million was spent on providing support to gold miners. He justified these by saying the Government expected demand for apartments to revive construction companies, and increased gold production to replenish foreign currency reserves, arresting the fall of MNT and halting inflation. Since there were no savings from the past when the country had spent all that it earned, the Government could stave off a crisis only by selling bonds and seeking help from the IMF and the World Bank to meet a shortfall of MNT 700 billion.

Source: English.news.mn

IMF, WORLD BANK URGE BETTER FISCAL MANAGEMENT IF AID IS TO CONTINUE The budget revisions proposed by the Finance Minister are in limbo, but representatives of both the IMF and the World Bank have been meeting Mongolian leaders to impress upon them the need to quickly reject the proposals. They are also issuing not-so-veiled threats that help from international financial institutions can stop if Mongolia does not put its house in order. First, IMF representative P. Ramlogan met with First Deputy Premier and Democratic Party head N.Altankhuag and told him that the IMF could not complete its mandatory annual review of the Mongolian economy until the fate of the proposed fiscal stability law was determined in Parliament. Mr. Ramlogan emphasized that failure to keep the budget deficit under 5 per cent of the GDP and to create a fund where all income in excess of budget estimates will be put for later use, instead of being spent immediately, could lead to runaway inflation. He urged a review of the proposed budget revisions incorporating fresh programs of expenditure that would raise budget expenses by 17 percent. The IMF and other donor institutions may then be constrained to stop their assistance to Mongolia. Mr. Altankhuyag said the government was trying to follow the IMF advice. He suggested that the IMF should also talk to party groups in Parliament. Mr. Ramlogan then met with the leader of MPRP party group in Parliament, Mr. D.Lundeejantsan who told him that a working group was presently discussing the budget revision programs. Some days later two World Bank officials who deal with Mongolia, Mr. Jim Hagan and Mr. Klaus Roland called on Parliament Speaker D.Demberel. Mr. Jim Hagan was the World Bank‟s man here in the mid-1990s and said Ulaanbaatar was unrecognizable after 13 years. The population has grown, certainly leading to new problems but “properly managed urban growth is a measure of a country‟s development,” he said. Then he spoke of fiscal management and told the Speaker that the proposed budget revision, raising expenses, posed risks of inflation and more budget deficit. He urged Mr. Demberel to review the revision and to expedite banking reforms. The World Bank‟s directors cannot hold their board meeting until a decision is taken on the final form of the budget. Read more… The Speaker said the Government and Parliament understood their responsibility and are working to fulfill the goals set by donor institutions and Mongolia together. Parliament has established a working group to study how budget expenses can be reduced. The Government has been told that the budget deficit should not be more than five percent of GDP. Income from product price rise is being centralized in a risk fund. The Speaker also revealed that the Government and Parliament are devising ways to ensure that raising the salary of government employees has as little impact on the budget as possible.

Source: Zuunii Medee, Ardiin Erkh DEPUTY MINISTER SAYS IMF WARNING MUST BE HEEDED Deputy Minister for Finance T.Ochirkhuu has said Mongolia has to heed IMF warnings on the budget revision for if the Fund does withhold its loan, there will be no money for the Government to spend. The two party groups in Parliament and Standing Committees are discussing how to reduce expenses so that the budget deficit can be kept within stipulated limits. There will be some structural change, but not anything as big as abolishing one government agency which does not really save much money. He did not rule out job cuts, but thought it would be better to keep jobs and reduce salaries. Mr. Ochirkhuu hinted that the IMF felt Mongolia had overestimated income from mining, but was also insisting that whatever the amount of the extra revenue, it should be put into a special fund. Source: News.mn

COPPER HITS 8-MONTH LOW AS EUROZONE FEARS MOUNT Industrial metals sank on Monday, with copper hitting an 8-month low as investors sold off riskier assets on mounting fears over the Eurozone economy's health, which knocked down its single currency. At one stage, copper for three-months delivery on the London Metal Exchange fell to USD6,074 a ton, its lowest since October 13. Technical charts point to further weakness for LME copper which could soon breach USD5 814, a level last seen in early October 2009, said a market analyst. On open interest copper saw some 2,300 lots on Friday last week, bringing the total to its highest since end-May, but it was still more than 15,000 lots below its high struck in mid-April. "The U.S. and fundamental aspects in metals like declining stocks have formed a natural floor. Perhaps the floor itself will (now) be lower, the third quarter is quiet anyway because of the summer," an analyst said. Also knocking metals, data last week pointed to a slowdown in the pace of manufacturing activity in

China, the world's top metals consumer, as gradual monetary policy tightening took a toll on new orders. "China's economic growth has shifted into a lower gear following a very strong period in Q4-2009 and Q1-2010," Standard Chartered said in a note. "We expect China to slow over the next six months, but not dramatically." On the plus side, LME copper stocks, which indicate demand trends, fell to their lowest level since late December, and have now fallen from six and a half year highs hit in mid-February.

Source: www.miningweekly.com GOLD HITS NEW PEAK AS RISK AVERSION RESURFACES Gold hit a record dollar high above USD1,250/oz and new peaks in other currencies on Tuesday as concern over Europe's economic outlook lifted risk aversion. Spot gold rose as high as USD1,251.50/oz as against USD1,238.05 late on Monday. US gold futures for August delivery hit a record USD1,254.50. The precious metal is benefiting from fears the Eurozone's sovereign debt crisis may spread, weighing on global economic recovery, analysts said. From a technical perspective, gold's break higher on Monday has left it well positioned to make new highs, according to analysts who study charts of past price movements to determine the future direction of trade.

Source: www.miningweekly.com CHILE RAISES 2010 COPPER VIEW TO USD3.20/LB Chile's state copper think tank Cochilco has raised its forecast for copper prices to USD3.20 per lb in 2010 despite the ongoing market volatility stemming from Europe's debt woes. Cochilco, which helps set price views for the world's top copper miner Codelco, said it also raised its 2011 average copper price forecast to USD3.30 from USD3.20. U.S. copper futures on the New York Mercantile Exchange were at about USD2.90 per lb last week after trading this year between USD2.80 and USD3.60. "Better economic projections in some developed countries like the United States and Japan and a slower fall in demand in China have improved the price forecast for the year," said the Cochilco's study. Stronger global demand expectations have also increased the price forecast. Copper prices have been steadily rising since late 2008 when prices fell to nearly USD1.25 as the global recession cut demand for the metal used in power and construction. World copper demand is seen jumping 5.5 percent in 2011 to 19.1 million tons after a slight drop in 2010, Cochilco said. Global mined copper output would be relatively stable over the next two years. Copper output is seen falling slightly to 15.9 million tons in 2010 from the previous year and later recover to reach 16.3 million tons in 2011.

Source: www.miningweekly.com AUDIT FAULTS WORDING OF LOAN AGREEMENTS The audit report on the 2009 budget has said that in several cases the wording of the Government guarantee behind loans taken from abroad was so vague and convoluted that it is “hard to understand” who would finally be responsible for their repayment. The bureaucratic incompetence can be traced to frequent changes in officials in charge of preparing loan documents since 1993, thus failing to give individuals a chance to acquire the proper drafting skills. The report identifies loans worth MNT 5.7 billion concerning about 40 organizations as being so suspect. This is 14 percent of the total MNT 40 billion of loans for which the State stands guarantee. MNT 1.10 trillion of the total MNT1.34 trillion of loans taken from foreign countries and international financial organizations was distributed to government organizations and the remaining MNT 230 billion was given to private entities. The stipulated repayment period for MNT130 billion of loans is already over.

Source: News.mn BANKER SEES MANY CHALLENGES AHEAD FOR THE ECONOMY Trade and Development Bank Executive Director S. Orgodol says he has no regrets about choosing to come back to work in Mongolia in 2008, instead of extending his contract with the World Bank group, as this offered him a chance to contribute to national development. Looking back, he thinks the banking sector in the country is somewhat in the same position as a human adolescent, getting ready to face all the myriad challenges of the wide world that lies ahead. It must grow bigger and learn to follow global standards in structure, management, and capacity to serve the real economy. For this, it is essential to develop an investment and debt securities market. The present financial infrastructures cannot support large and efficient investment,

insurance, pension, and trust funds, and there is a serious lack of adequate credit information. Commercial banks constitute over 90% of the total financial sector, yet their total financial resources are much lower than the demands of a developing economy. Mr. Orgodol feels that with the anticipated boom in exporting mineral resources, it is imperative for Mongolia to set up a mechanism to ensure that exporters pay the right amount of taxes and that price agreements with importers are transparent. The economic potential of Mongolia‟s resources is acknowledged by the fact that even when the global economy is very much in crisis, several international firms engaged in extraction work in the country have managed to raise an enormous amount of capital for their work. The challenge before the Mongolian economy is how to optimally benefit from this large inflow of cash.

Source: Udriin Sonin STANDING COMMITTEE FAVORS NEW ROYALTY RULES The Standing Committee on the Economy yesterday decided 13-3 to send the draft law on graduated royalty rates to Parliament for discussion. One MP proposed to raise the minimum royalty rate to 7-8 percent, while some complained that how the income from the royalty would be spent had been left unclear.

Source: English.News.mn ZAMIIN UUD ECINOMIC FREE ZONE TO BE READY IN 2012, SAYS DIRECTOR Rejecting any charge of undue delay, Mr. Ya.Gantumur, director of the Zamiin Uud economic free zone, has said work on the general plan for the zone was progressing on schedule. Funding issues relating to infrastructure construction were finalized during the visit of Chinese Premier Wen Jiabao and MNT 10 billion had already been allocated from the state budget. The Government sees the Zamiin Uud free zone as a priority, Mr. Gantumur said. He said the selection of companies and factories to be based in the zone will be made only after the infrastructure is in place. “An economic free zone is like a small city, and land cannot be distributed there when there is no infrastructure, and no city planning,” he said. All units working from the zone will be fully exempt from paying taxes for five years. Then they will pay 50 percent tax for three years. Afterwards, there will be no tax relief. He saw the zone as fully operational in 2012. The most important areas of work are water and electricity supply, sewage, a 10-kilometer road, parks and street lighting.

Source: News.mn MNCCI JOINS INTERNATIONAL FINANCING INSTITUTION The Mongolian National Chamber of Commerce and Industry (MNCCI) has become a member of the Manila-based Association of Development Financing Institutions in Asia and Pacific (ADFIAP), the largest association of development financing institutions in Asia and the Pacific. ADFIAP counts among its members the Asian Development Bank and the World Bank. It has formal ties with the Economic and Social Council (ECOSOC) of the United Nations, allowing it access to briefings, seminars, consultations, conferences, research materials, publications and offices of all UN bodies.

Source: Montsame DOES THE WORKERS‟ REVOLT MARK THE END OF CHINA‟S CHEAP LABOR ERA? What are we to make of the labor unrest in China? Does it, mark the end of the cheap labor era? Probably not. But China is changing. Here, to underline this fact, is the opening of a recent story in China Daily: “The proportion of China‟s gross domestic product that goes toward wages has been shrinking for 22 consecutive years, a senior trade union official said on Wednesday.” The killer fact was that the share of wages and salaries in GDP dropped to a mere 37 per cent in 2005, from 57 per cent in 1983, and remained static since then. The story also reported the official‟s warning that “low pay, long working hours and poor working conditions for millions of workers are triggering conflicts and mass incidents, which pose a grave challenge to social stability”. The remarkably low share of wages and salaries in GDP makes China the most “capitalist” large economy in history. Until this is reversed, the much-desired shift to a consumption-driven economy cannot occur. China‟s demand will continue to depend, instead, on soaring investment. But the resulting high capital intensity is also a reason for the declining share of wages in GDP. Equally significant is official discussion of the case for higher minimum wages. The strike at the Honda plant could hardly have happened without official acquiescence. Yet what does this imply for the future? The freedom to strike is, in western eyes, a fundamental

right. The case for ensuring minimum standards in the treatment of workers is strong. But it is crucial to remember that those with jobs in large factories in successful coastal regions are among the more privileged Chinese. The big challenge is to spread higher incomes across the whole country. Read more… To achieve this, there has to be fundamental reform. This must include: shifting labor-intensive industry from coastal regions; supporting rapid growth of labor-intensive services; repricing underpriced capital; giving households a bigger share of the return on capital, via higher interest rates; creating stronger social safety nets and increasing direct spending on health and education services. Over time, a better balanced economy, with higher wages and standards of living, will emerge. Throughout, policymakers cannot forget the overriding aim of generating more and better employment opportunities for the population as a whole, not just for a minority. Source: The Financial Times LABOR UNREST IN CHINA REFLECTS CHAGING DEMOGRAPHICS, AWARENESS OF RIGHTS China has been hit with a recent wave of labor unrest, including strikes and partial shutdowns of factories, underscoring what experts call one of the most dramatic effects of three decades of startling growth: A seemingly endless supply of cheap labor is drying up, and workers are no longer willing to endure sweatshop-like conditions. China's export-driven growth has long been linked to its abundance of workers -- mostly migrants from the impoverished countryside who jumped at the chance to escape a hardscrabble rural life to toil long hours in factories for meager wages. If they were unhappy, they rarely expressed it through action, and if they did, they were quickly fired and replaced from among the hundreds of others waiting outside the factory gates. Now all of that has started to change. Shifting demographics, including years of effective population control through the government's "one child" policy, have left China short of younger workers, particularly in the crucial 15-25 age group that many factories rely on most. These young workers don't have to travel far from home like their parents did to find work. They are more aware of their rights. And having grown up in a more prosperous China, they are demanding a fairer share. "The first generation of migrant workers made a lot of money compared with their poor life before," said Cai He, dean of sociology at Sun Yat-sen University. "But right now the majority of migrant workers are in their 20s. They were born in the 1980s. Most of them have no farming experience" and "are more sensitive to the disparity between the wealth of the city and their own poverty". Cai added: "The younger people received a better education. They surf the Internet, use mobile phones and watch TV. Their awareness of their rights is much stronger than the older migrant workers." Read more… These young workers are asserting those rights in the form of work stoppages, slowdowns and demands for higher wages and shorter hours. The unrest was highlighted by a strike that began May 17 at Honda's transmission factory in the city of Foshan, where hundreds of workers walked off the job. The Japanese carmaker had to shut its four assembly plants in China. Around the same time, the Taiwanese-owned Foxconn electronics plant in Shenzhen, which assembles Apple iPhones and iPads, was struck by 10 suicides among its workers and three suicide attempts, which labor activists blamed on the stress of long overtime hours. Bus and taxi drivers also have staged strikes this year, affecting tens of thousands of passengers. The recent cases -- particularly the Honda strike -- are also noteworthy for receiving extensive coverage in the Chinese media. While labor unrest has become increasingly common across China in the past two years, experts said, most incidents typically go unreported. In mid-2008, China introduced a labor law that allows workers with grievances to file complaints and opens a new mechanism for mediation. Publication of the law probably made workers more aware of their rights, experts said. The number of 15- to 24-year-olds in China is set to fall by one-third over the next dozen years, from 225 million today to 150 million in 2022. As the number of young workers declines, the number of factories needing laborers has increased rapidly. "This is the beginning of a long process in which bargaining power is going to shift from the company to the workers," an analyst said. The labor unrest poses an acute challenge to China's ruling Communist Party and a dilemma for the All-China Federation of Trade Unions. That group, China's only officially sanctioned union, is supposed to represent workers, but in practice has worked more as a partner with the government

to enforce labor discipline and keep production high. A top official with the federation said the reason for the current unrest is the huge income disparity in China. He said the portion of the country's gross domestic product that has gone to wages has declined by almost 20 percent in the past two decades. But some say China's official union is itself part of the problem. "The labor union should promote fairness in society instead of promoting economic development," said a professor at the China Institute of Industrial Relations. "But in China, the labor union doesn't do that."

Source: The Washington Post CHINESE EXPORTS SURGE IN MAY Chinese exports jumped 48.5 percent last month despite the financial crisis in Europe, again increasing pressure on Beijing to appreciate its currency against the U.S. dollar. The strong increase in exports, which was much bigger than expected by analysts, meant that China recorded a trade surplus in May of USD19.5 billion, significantly larger than the USD1.7 billion surplus in April and the modest trade deficit China recorded in March. The figures suggested that the economic problems in Europe, which is China‟s largest export market, have yet to have any pronounced effect on demand for Chinese goods. However, economists cautioned that it could take several weeks before any difficulties in Europe would feed through to the trade numbers. Imports rose 48.3 percent over the same month last year. After taking into account calendar adjustments for the number of working days, Chinese customs said that exports rose 45.3 percent in May from a year earlier and were up 10.9 percent from April. Imports rose 41.7 percent from May last year, but fell 0.9 percent from April.

Source: The Financial Times FIXING THE CREDIT RATING BUSINESS REQUIRES BIG CHANGES Warren Buffett may be right that credit rating agencies got the U.S. housing bubble no more wrong than (nearly) everybody else. That does not make the damage from their sterling ratings of subprime mortgage products any easier to bear. The gatekeeper role into capital markets that CRAs‟ semi-official status grants them is too noxious to be allowed to continue. There are timid moves afoot to regulate credit raters more rigorously. The U.S. financial regulation bill seems set to put them under SEC oversight. The European Commission is proposing to open up the industry by forcing issuers to give all raters the same information. But on their own, these efforts do not solve the basic issue: highly fallible ratings, produced by agencies paid by the issuers, are used to elude capital requirements on banks‟ balance sheets. Fixing the credit rating business requires big changes, but less to the raters directly than to how the financial system uses them. Most important is to end the pseudo-official status of a select group of CRAs elevated by law and accounting rules into arbiters of our banking systems‟ risk management. The current system in effect puts regulators on the highly lucrative payroll of those they regulate. The only viable solution is for capital requirement rules to move away from ratings towards greater use of plain leverage caps. While it is unrealistic to do away with risk-weighting altogether, it should be done in a cruder, simpler fashion – for example, according to asset classes and specified fundamental information – than with ratings. Read more… Alone, this would encourage banks to load up on the riskiest assets they can find. So it must be combined with increased incentives for managers to avoid risk – if their bank fails, they should not be allowed to walk away rich – and for investors to pay greater attention. Tough disclosure rules for bank balance sheets would help, as would credible resolution regimes. This would greatly diminish the CRAs‟ role and make their failures and conflicts of interest of less concern. If issuers would no longer pay for ratings, so be it. Raters claim their usefulness is to help investors make better decisions; if so it is a service investors would pay for. Other conflicts of interest may result – but less so if ratings lost their importance, and certainly less severe ones than now. Equity markets thrive without ratings. The notion that bond markets need them exposes a dream of taming risk with false precision. We could do a lot better with less such wishful thinking. Source: The Financial Times

CHINESE CLEANTECH FIRMS OUTPERFORMING U.S. AND EUROPE China has outperformed Western countries in new energy and other clean technologies thanks to its focus on commercialization, rather than the technology itself, according to an industry observer. In

China there is a very practical view of investment in companies in the private sector, and that is also how the public sector views new technology and its implementation," she said during the launch of a new China Low Carbon Index (www.chinalowcarbonindex.org/). The index was launched in collaboration with the China Beijing Environmental Exchange and tracked the performance of a range of listed Chinese cleantech companies, and they had generally outperformed the market as a whole. "We looked at it versus the Shanghai Stock Exchange, the Hang Seng Index and Nasdaq, and not surprisingly, it has outperformed. There were two very good periods in 2007 and 2009. In 2008, markets pulled back very dramatically but generally it did outperform," she said. "The reason they are outperforming is that they are taking technology and turning it into profit. It should be a lesson for U.S. companies that it is not only about technology but also about commercialization." Read more… A number of U.S. companies involved in clean energy have complained that the tough regulatory environment at home was making it difficult to compete when it came to rolling out new technologies like carbon capture or coal gasification, but she said investors themselves might need to change their approach. Investors in the United States have tended to focus on "the attempt to leapfrog" by taking punts on potentially revolutionary but largely untested technologies, while China had focused on what had already been proven. "The approach that China is taking is having demonstration projects, trying new technology but having proven technology alongside it, and moving along a path of adoption rather than trying to leapfrog -- it is an interesting difference," she said. Source: Reuters.com

POLITICS IF NEW RAILWAY IS NARROW-GAUGE, IT WILL NEED CHINESE TECHNICAL STAFF It appears from informal conversations with government officials that in the event of Mongolia deciding to build a narrow-gauge railway to help export its mineral resources, through ports in either Russia or China or both, mostly Chinese people would be holding all the technical jobs on it. This is because our railway technicians lack the skills and training to operate a system they are not used to, and the new railway, if it is built, will be using up-to-date world standards. These standards are way beyond those used in the railways of Mongolia and the Russian Federation. It will take time before there is a sufficient number of Mongolians who have mastered 21st-century concepts of radio communication and electronics.

Source: Onoodor MPs‟ GROUP SAYS DISMISSING 7,000 STATE STAFF CAN SAVE MNT50 BILLION A YEAR Members of the working group charged with finding ways to reduce government expenditure met Speaker D.Demberel yesterday and offered suggestions that are unlikely to please anybody – neither their fellow MPs nor the public. They have calculated that dismissing 7,000 government employees will save MNT50 billion annually. The dismissed people can be given 6 months salary as severance pay, which will cost MNT13.3 billion. The group also wants less money to be spent on MPs‟official trips and on developing draft laws. The group found that all state-owned enterprises lost money in 2009, after making a profit in 2008, raising concern that the accounts had not been prepared properly. Many companies had imported expensive products in 2009 without any urgent need. The Speaker expressed concern at this and asked the group to make a thorough check of state-owned companies.

Source: Ardiin Erkh MP CALLS FOR SEPARATE AGENCY TO HELP CREATE EMPLOYMENT Ms. D.Arvin, chairperson of the Standing Committee on Social Policy, Education, Culture, and Science, has expressed her unhappiness that less importance is paid to employment generation than to welfare distribution. Her remarks follow the committee‟s recent review of how money in the Fund for Employment Support has been spent. An amount equivalent to 0.3% of the state budget is allocated to Fund every year, but the committee did not find that the money has been effectively spent. She and other members of the committee felt that better results would be obtained if employment generation was made the responsibility of an independent agency. She did not agree that a new agency would merely add to an already large bureaucratic structure.

She revealed that according to The Ministry of Social Welfare and Labor and the National Statistical Office there were 267,000 unemployed people in Mongolia, but a working group on social welfare has put the number at 500,000. The wide discrepancy in computation is inexplicable, but either figure shows that much more has to be done to create jobs in the country.

Source: Zuunii Medee SUMMIT MEMBERS, INCLUDING MONGOLIA, CONDEMN ISRAEL OVER GAZA RAID In a diplomatic coup for Turkey, all members of the Conference on Interaction and Confidence Building Measures in Asia (CICA), except Israel itself, condemned Israel's raid on a Turkish aid ship bound for Gaza at a summit on Tuesday, calling on the Jewish state to end its "inhuman" blockade of the Palestinian territory. President Elbegdorj led the Mongolian delegation at the meeting in Istanbul, which brought together Iranian President Mahmoud Ahmadinejad, Syria's Bashar al-Assad, Palestinian leader Mahmoud Abbas and Russia's Prime Minister Vladimir Putin, among others. A final declaration of the 20-member forum issued at the end of the two-day summit omitted any reference to Israel, which as a fellow member had objected to such mention. But Turkey's President Gul, who was acting as chairman of CICA, read a separate declaration in which all members except Israel criticized Israel's actions. CICA has been a low-key forum until now. Its members include: Afghanistan, Azerbaijan, China, Egypt, India, Iran, Israel, Jordan, Kazakhstan, Kyrgyzstan, Mongolia, Pakistan, Palestine, Republic of Korea, Russia, Tajikistan, Thailand, Turkey, United Arab Emirates and Uzbekistan.

Source: Reuters.com

GOVERNMENT WANTS WORK ON NEW UNIVERSITIES TO BEGIN The Government has asked concerned Ministers and province governors, and the Mayor of Ulaanbaatar to go ahead with previously approved plans to develop new university campuses. Soon after Prime Minister S. Batbold assumed office, it was decided that a campus of the Mongolian University of Science and Technology will be moved to Shivert on the southeast of the Nalaikh district. Private higher education institutes will also be granted land if they can enroll enough students. A campus of Dornod University, a planned new institute for studies in geology and mining, will be built in Erdenet, with support from the Erdenet Mining Corporation and the private sector. Another university for the technical sciences will be built in Darkhan-Uul province. Work on the new campuses will go on in stages and is expected to be completed by 2021.

Source: Udriin Shuudan PLAN TO HAVE MONGOLIANS REPLACING CHINESE DRIVERS IN MINES Mr. D. Batbaatar, a senior official at the Auto Transportation Agency of Mongolia, has said that the railway to be built around strategic deposits will be effective in transporting minerals only if there are roads linking it to the mines and surrounding habitations. The agency is busy preparing its plans for all the work that lies ahead. A problem, even at this preliminary stage, is that soil erosion has been noticed around mines. Building paved roads can never be economically viable in Mongolia, as they will not be used by enough cars to pay toll fees that would help recoup the invested capital. With not enough money for proper maintenance, the surface begins to deteriorate rapidly and the roads are almost unfit to be used after 10 years. The climate also contributes to the damage. In general, mining companies operating in Mongolia employ Chinese drivers, as there is a dearth of locals with special licenses. The agency is in talks with the Traffic Police Department to change the situation and Mr. Batbaatar is confident that in the next three years, there will be enough Mongolians to do the work that is almost monopolized by Chinese now.

Source: Udriin Sonin CHINA NONCOMMITTAL ABOUT GRANTING EASIER TRANSIT FACILITIES The only chance for landlocked Mongolia to get a fair price for its mineral resources is to sell directly to countries other than its two neighbors. But for this, it must have access to others‟ sea ports, and that access lies through vast areas of foreign land where movement of cargo is expensive and is controlled by others. The visit of Chinese Premier Wen Jiabao, whose team included 160 high-power businessmen, was marked by repeated assertions of the need and desire to developing a strategic partnership in mining, infrastructure, and agriculture, but there appears to have been not much progress in allowing Mongolia reliable and economical access to Chinese ports so that it can sell its minerals at international prices. The coal Mongolia sells to China fetches a very low price, for several reasons.

The Chinese business leaders talked about many things. A senior manager at the Shenhua Group, Mr. Ling Wen, said they had been the first to express interest in Tavan Tolgoi and to propose producing liquid fuel from coal and this gave them a special claim to it. The Head of Engineering International said, “We would be a good partner in infrastructure development.” None of them mentioned anything about Mongolia getting access to Chinese ports. It is believed our Prime Minister did raise the issue and asked for help to get easier transit facilities for Mongolian coal, but all he got from the Chinese Premier was “Let me think about it.”

Source: Zuunii Medee BURIYAT PRESIDENT EYES A PIECE OF MONGOLIA‟S TOURIST TRAFFIC President B.Nagovits of the Republic of Buryatia recently visited Moscow and met with the Russian Federation‟s President D. Medvedev and Prime Minister Putin to discuss several issues relating to his region, including some concerning Mongolia. Mr. Medvedev has agreed to study his proposal to allow third country citizens with a Mongolian visa to visit Buriyat without a visa for up to 72 hours. This will help the republic attract a part of the tourists who are visiting Mongolia in increasing numbers. Source: Onoodor PM INAUGURATES WOMEN‟S CONFERENCE Around 500 women from all over Mongolia assembled in Ulaanbaatar last week for a two-day national conference on Women and Human Development. In his inaugural address Prime Minister S.Batbold, who also heads the National Committee on Gender Equality, asserted that one of the priorities of the government was to provide all Mongolians, irrespective of gender, with jobs and income. The revenue from the mineral resources must be spent on women and their family and children, he said. He also read out messages to the assembly from the President and the Parliament Speaker. The forum received and discussed reports from various areas and debated issues on gender equality, human development, economics, realization of development goals, socio-economic development, community rights, democratic governance and women‟s participation in politics.

Source: Montsame GOVERNMENT TO SPEND OVER MNT600 MILLION FOR NAADAM The Government will spend MNT 642.3 million for the Naadam festival this year. The reserve fund will allot MNT100 million of this, with the rest coming from the Ulaanbaatar budget and from the income during the festival. MNT1.1 billion from the state road fund will be used to prepare a 3.6 km-road from a point at the Ulaanbaatar-Lun-Erdenesant road to the "G" stage near the horse racing arena in Khui Doloon Khudag. Related Ministries have been told to finish the work before July 5.

Source: Montsame BITUMEN PRICE RISE HALTS ROAD REPAIRS Most road repair work in Ulaanbaatar remains held up because some of the companies working are facing a cash crunch after the price of bitumen doubled since the autumn. Some important roads remain closed to traffic, causing inconvenience to the people. Deputy Mayor G.Munkhbaatar called a meeting on Wednesday and told all sides involved in the process of road repairs that the city administration would try to keep prices of materials unchanged this year. He proposed to hold another meeting soon to review the situation and prepare a plan of work.

Source: English.News.mn MCA TO REBUILD ROAD TO NALAIKH The Millennium Challenge Account of Mongolia (MCAM) has submitted to the city authorities projects and programs it plans to implement in Ulaanbaatar. These cover areas of infrastructure, health, education and the environment. The 17-km road from the Bayanzurkh checkpoint to Nalaikh will be re-constructed, and there are also projects targeted at reducing and preventing cardio-vascular illnesses, diabetes, cancer of the cervix, and road accidents. The Fresh Air project aims at reducing smoke in the ger areas, by helping production of smokeless furnaces and less polluting heating material. The Mayor was particularly enthusiastic about a proposal to see how far sawdust can replace coal. Source: Montsame

ANNOUNCEMENTS

MONGOLIA MINING INVESTMENT 2010 ON JUNE 21-22 IN SYDNEY

"Mongolia Mining Investment 2010", the first-ever Mongolian investment conference in Australia, will be held on June 21-22 in Sydney. Organized by Informa, the conference is being supported by Austrade, the Mongolian Embassy in Australia and BCM. The event will assist potential investors, Mongolian mining companies and all other related parties in developing strategic plans for further business openings in Mongolia.

Delegates will meet with influential government officials, mining and exploration companies, investors, traders, analysts, equipment producers and suppliers. The registration fee for Mongolia-based mining companies and Government officials is USD320. More information is available at www.informa.com.au/mongolia-investment.

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“BSPOT" on B-TV

BTV (Business TV) now telecasts a 10-minute English-language news program called BSPOT every evening from Monday to Friday at 21:30, taking most of the stories from the BCM NewsWire.

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“MM TODAY” on MNB-TV BCM is pleased to announce that Mongolian National Broadcasting continues its cooperation with BCM on “MM Today”. This English news program is aired every Friday for 10 minutes and is scheduled for 21:15 tonight. Tune in to watch this program that reports stories from today‟s BCM NewsWire.

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NEW POSTINGS ON BCM WEBSITES‟, „MONGOLIAN BUSINESS NEWS‟

The draft Tavan Tolgoi Investment Agreement which was submitted by the Government to Parliament is posted to BCM‟s Mongolian website (www.bcm.mn), „Mongolian Business News‟ for your review.

As some of you might have noticed, we are now posting some news stories and analyses relevant to Mongolia on the BCM website's „Mongolian Business News‟ as they come, instead of waiting until Friday to put them all together in the weekly BCM NewsWire. The NewsWire will, however, continue to be issued on Friday, and will incorporate items that are already on the home page, so that it presents a consolidated account of the week‟s events.

SPONSORS

ECONOMIC INDICATORS

INFLATION

Year 2006 6.0% [source: National Statistical Office of Mongolia (NSOM)]

Year 2007 *15.1% [source: NSOM]

Year 2008 *22.1% [source: NSOM]

Year 2009 *4.2% [source: NSOM]

May 31, 2010 *11.6% [source: NSOM]

*Year-over-year (y-o-y)

CENTRAL BANK POLICY LOAN RATE

December 31, 2008 9.75% [source: IMF]

March 11, 2009 14.00% [source: IMF]

May 12, 2009 12.75% [source: IMF]

June 12, 2009 11.50% [source: IMF]

September 30, 2009 10.00% [source: IMF]

May 12, 2010 11.00% [source: IMF]

CURRENCY RATES – June 10, 2010

Currency name Currency Rate

US dollars US 1,385.38

Euro EUR 1,656.08

Japanese yen JPY 15.15

British pound GBP 2,003.61

Hong Kong dollar HKD 177.61

Chinese yuan CNY 202.88

Russian ruble RUB 43.61

South Korean won KRW 1.11

Disclaimer: Except for reporting on BCM‟s activities, all information in the BCM NewsWire is selected from various news sources. Opinions are those of the respective news sources.