CounLry updaLe

1


Mongo||an Lconom|c and M|n|ng Update - !"#$%&'($
*&+( , , , -.% /#00#12 %3 45&12(6
Desp|te attract|ve head||ne econom|c numbers 2013 was not a good
year for the Government of Mongo||a . . .
! lull year headllne Cu growLh of 11.7 wlLh lnflaLlon ~10 (and
lncreaslng) drlven by unsusLalnable SLaLe led lnLervenLlon and
pollcy
! ueLerloraLlng prlvaLe secLor envlronmenL, depleLlon of forelgn
reserves, emerglng sLrucLural balance of paymenLs deflclL, rlslng
lnflaLlon, maxed debL levels and global markeL condlLlons are
forclng change
! 1he CovernmenL of Mongolla (CoM") admlLs mlsLakes have been
made and ls commlLLed Lo lmprovlng" Lhe buslness envlronmenL

. . . |ots of words, but |s there act|on and |s |t |n t|me?
! 1here has been a 180 degree change ln CovernmenL rheLorlc over
Lhe lasL 12 monLhs wlLh leglslaLlve change coupled wlLh varlous
forced and/or volunLary sLeps forward supporLlng cause for
consldered opLlmlsm for probably Lhe flrsL Llme slnce 2C'12
! 8ecenLly lnLroduced and proposed change wlll Lake Llme for Lhe
beneflLs Lo be reallzed, parLlcularly glven Lhe LurbulenL prevlous 18-
24 monLhs and sLlll ever changlng envlronmenL. Wlll enough be
done and confldence resLored Lo avold lnLernaLlonal reserve belng
exhausLed ln Lhe nexL 12 monLhs?
! WlLh Lhe uS and Luropean economles seemlngly Lurnlng Lhe corner,
and lnLeresL raLes looklng llkely Lo rlse, Mongolla ls golng Lo have Lo
offer slgnlflcanL rlsk ad[usLed reLurns Lo aLLracL Lhe levels of forelgn
lnvesLmenL LhaL was avallable a few years ago and successfully
navlgaLe Lhe near Lerm squeeze on Mongolla's fx reserves
! ?ears of expanslonary pollcles have conLrlbuLed Lo domesLlc
vulnerablllLles placlng cerLaln secLors aL parLlcular rlsk
Ioundat|ons be|ng set for the next cyc|e of pr|vate sector act|v|ty
" Mongolla's Larnlshed lmage ln Lhe global markeLs eye, belng a
mlnlng drlven economy, dependenL on Chlna aL a Llme where Lhe
markeL ls underwelghL Lhe mlnerals secLor and concerns remaln.
.buL Chlna's near Lerm growLh raLes provlde a favourable ouLlook
for Lhe conLrarlan (and longer Lerm lnvesLor) glven Lhe valuaLlon of
mosL asseL classes and Lhe poLenLlal near Lerm caLalysL resoluLlon
on Cyu 1olgol SLage 2 flnanclng would provlde
" Clven Lhe fraglle sLaLe of Lhe domesLlc banklng and consLrucLlon
secLors, and proposed, well overdue, poslLlve reform ln Lhe
leglslaLlve envlronmenL of Lhe mlnerals secLor, lncludlng Lhe
proposed re-lssuance of new exploraLlon llcenses, we belleve LhaL
Lhe mlnerals secLor provldes Lhe besL leverage and rlsk proflle Lo a
poLenLlal upllfL ln Lhe cycle for prlvaLe secLor acLlvlLy

Lqu|ty kesearch]Meta| & M|n|ng]In|t|at|on of Coverage
SLaLesman 8esources LlmlLed



S Iebruary 2014 LqulLy 8esearch/ MeLals & Mlnlng /8esearch updaLe
Mongo||a Country Update
CounLry daLa
CaplLal clLy ulaanbaaLar
Land area 1,366,300 sq. km
opulaLlon 2.9 mllllon (2013)
Language Mongollan
Currency 1ogrog (Mn1)
l\ tote J lebtooty 2014.
MN11,722.u551
(-24X lo 12 mootbs)
llscal year !anuary - uecember

Lconom|c |nd|cators
Cu (per caplLa)
(uS$, 2012)

10bn (3,472)
8eal Cu growLh
(, 2013)

11.7
Cl
(, ?o? - uec'13)
12.3 (ln
ulaanbaaLar)
neL forelgn reserves*
(uS$)
4.1bn (uec-12)
2.3bn (uec-13)
*lncludes uS$1.3b soverelgn
bond proceeds



o||t|ca| structure
Cfflclal name Mongolla
lorm of sLaLe 8epubllc
LeglslaLure Slngle-chamber parllamenL
wlLh 76 members
resldenL Llbegdor[ 1s. of Lhe
uemocraLlc arLy
rlme
MlnlsLer
AlLankhuyag n. of Lhe
uemocraLlc arLy
LlecLlons !une 2016 (parllamenLary)
CenLral bank
governor
Zol[argal n.
arllamenLary
speaker
Lnkhbold Z. of Lhe
uemocraLlc arLy








Lr|c 2urr|n
+832 6893 3820 / +976 7010 0093
erlc.zurrln[resource-cap.com

Lnkhbayar Davaatseren
+976 9900 7069
enkhbayar[resource-cap.com

CounLry updaLe

2

Lxecut|ve Summary
Mlstokes moJe . . . bot wlllloq to cbooqe was Lhe general message
LhaL summarlzed Lhe lasL quarLer of 2013 from Lhe Mongollan
CovernmenL: from resldenL Llbegdor[ down Lo lndlvldual Ms. As we
dlscussed ln our lasL Mongollan Lconomlc and Mlnlng updaLe (11
Lh

SepLember 2013), !7843*#12 $#9 *31%5$ & 4:#%#4&0 8(:#3+; %5( 1#25%<$
+&:'($% 53.: 3: 5#$%3:= :(8(&%#12>6, a year ls ofLen a long Llme ln an
emerglng markeL and Lhe lasL Lwelve monLhs ls cerLalnly Lhe case for
Mongolla, lndeed over Lhe lasL 18-24 monLhs.
1he recenL conLracLlon cycle of a more (and unsusLalnable) SLaLe
envlronmenL commenced ln mld'12 and has seen prlvaLe secLor
conLrlbuLlon Lo Cu collapse from an esLlmaLed >80 Lo <30, lul
back Lo pre-C1 levels and Lhe currency near hlsLorlcal lows (and aL
lower levels Lhan when Lhe lMl lasL balled ouL Lhe CovernmenL).
Mongolla's Lra[ecLory ls Lhe mosL successful former SovleL sLaLe and
only counLry ln lLs reglon embraclng free-markeLs and democracy
whlch has been a poslLlve over Lhe lasL LwenLy years (albelL wlLh
numerous shorL-Lerm flucLuaLlons/cycles, such as Lhe currenL perlod,
seeklng Lhe balance beLween naLlonal prosperlLy and a buslness
envlronmenL aLLracLlve for Lhe requlred forelgn caplLal Lo advance lLs
economy).
ln a recenL 8loomberg lnLervlew Ch. CLgochuluu, ulrecLor general of
Lhe deparLmenL of SLraLeglc ollcy and lannlng aL Lhe MlnlsLry of
Mlnlng, and one of Lhe Lhree new Cyu 1olgol members represenLlng
Lhe CovernmenL of Mongolla, sLaLed, "1be molo messoqe ls tbot we ote
qlvloq mote oJvootoqes to tbe ptlvote sectot .lf tbete ls too mocb
5tote lovolvemeot lts oot qooJ. lost yeot wos tbe best lessoo. Whlle
many sLaLemenLs such as LhaL of resldenL Llbegdor[ and Ch.
CLgochuluu hlghllghL Lhe CovernmenL's acknowledgemenL of Lhe
currenL envlronmenL, many such sLaLemenLs are yeL Lo Lransplre lnLo
Langlble acLlon noLwlLhsLandlng Lhe naLural Llme lag, nor slgnlflcanLly
change Lhe underlylng buslness envlronmenL.
1haL sald, we are ln Lhe camp who belleve Lhere ls cause for consldered
opLlmlsm for probably Lhe flrsL Llme slnce Chalco's offer for SouLh Cobl
ln May 2012. Can Lhe CovernmenL noL afford Lo see Lhe underlylng
economlc envlronmenL deLerloraLe furLher? Whlle noL for Lhe rlsk
adverse, recenL leglslaLlve change, lncludlng Lhe new lnvesLmenL Law,
wlLh furLher proposed revlslons Lo revlve prlvaLe secLor acLlvlLles, wlLh
lul back Lo pre-C1 SLage 1 levels, supporLs a new upllfL ln Lhe cycle
from depressed asseL valuaLlons wlLh naLural Llme lag, parLlcularly
wlLhln Lhe mlnerals secLor. 1he mlnerals secLor ls an underwelghL
poslLlon ln Lhe ma[orlLy of lnvesLmenL porLfollos wlLh some lnvesLors
havlng recenLly commenLed, "Mooqollo ls ovetsolJ ooJ telotlve to otbet
Mooqolloo osset closses tbe mloloq sectot ls oow too cbeop to be
lqooteJ.
We noLe, afLer slmllar perlods of conLracLlon ln prlvaLe secLor acLlvlLy,
prevlous cycles have ofLen seen leglslaLlve change swlng Loo far,
creaLlng a perlod of unsusLalnable poslLlve growLh glven Lhe relaLlvely
modesL slze of Lhe Mongollan economy. WlLh reporLed progress
CounLry updaLe

3

Lowards a resoluLlon of Lhe proposed SLage 2 pro[ecL flnanclng for Cyu
1olgol, lndeed Lhe currenL economlc envlronmenL leavlng few oLher
alLernaLlve opLlons, and no elecLlons unLll 2016 we belleve Lhe nexL few
years could see anoLher slgnlflcanL growLh perlod ln forelgn dlrecL
lnvesLmenL and asseL valuaLlons.
Ioundat|ons be|ng set for the next cyc|e of pr|vate sector
act|v|ty
1he CovernmenL rheLorlc ln Mongolla has Lurned 180 degrees over Lhe
lasL 12 monLhs as Lhe underlylng domesLlc economlc envlronmenL
conLlnues Lo deLerloraLe wlLh lncreaslng acknowledgmenL LhaL Lhls ls
belng drlven by Lhe leglslaLlve and pollLlcal envlronmenL (unllke Lhe lasL
slgnlflcanL downLurn ln 2009, LhaL lead Lo Lhe prevlous lMl ball ouL
whlch was drlven by global markeLs).
Whlle headllne l? 2013 Cu growLh of 11.7 ls lmpresslve, wlLh some
forecasLs of hlgher growLh raLes ln l?2014 as C1 ramps up (resulLlng ln
Mongolla belng Lhe worlds' fasLesL economy - tbe cooomlst), Lhe
followlng are lndlcaLors LhaL such growLh ls noL susLalnable:
Lhe lack of prlvaLe secLor conLrlbuLlon (falllng from an esLlmaLed
>80 Lo <30 of Cu),
collapslng lul (48 yoy l?2013),
depleLlon of +uS$6 bllllon of recenL one-off" caplLal evenLs,
CuanLlLaLlve Laslng" wlLh +3 Lrllllon Mn1 (+uS$2 bllllon aL
averaged lx raLes) prlnLed by Lhe 8ank of Mongolla,
maxed publlc debL" levels (lMl esLlmaLes almosL 70 of Cu
2013, wlLh Lhe arllamenL re[ecLlng an lncrease Lo Lhe debL celllng
ln 4C'13),
lncreaslng lnflaLlon (12.3 yoy ln uec'13 ln u8, vs 6-7 ln mld'13),
depreclaLlng currency (down +20 v uSu), and,
worrylng levels of lnLernaLlonal reserves (down 46 yoy) has lead
Lo even Lhe World 8ank recenLly sLaLlng tbe cotteot ecooomlc
pollcles ote oot sostolooble qlveo tbe lotqe bolooce of poymeots
ptessotes ooJ tlsloq loflotloo" (nov'13).

Lven Lhe debL raLlng agencles have downgrade Mongolla's ouLlook and
varlous relaLed credlL raLlngs. ?ears of expanslonary pollcles have
conLrlbuLed Lo domesLlc vulnerablllLles placlng cerLaln secLors,
lncludlng Lhe banklng and consLrucLlon secLors, aL parLlcular rlsk.
1hls has noL gone unnoLlced by Lhe Mongollan pollLlclans, from boLh
sldes of CovernmenL. varlous acLlons, boLh lnLended and unLended,
have had an effecLlve of alerLlng Lhem and Lhelr elecLoraLe of Lhe
unsusLalnable naLure of Lhe lasL 18-24 monLhs cycle of conLracLlng lul
and prlvaLe secLor acLlvlLles wlLh lnlLlal plans and acLlons supporLlng a
poLenLlal Lrough havlng already occurred - refer Lo LxhlblL A varlous
forced and/or volunLary sLeps forward supporLlng cause for consldered
opLlmlsm for probably Lhe flrsL Llme slnce 2C'12.


CounLry updaLe

4

I|gure A: Lvent's support|ng the current cyc|e of contract|ng pr|vate sector act|v|t|es and va|uat|ons have reached a
trough
Ian'13: Cpen Sess|on of ar||ament |nc|ud|ng: ?@5( %#*( 5&$ 43*( A3: %5( "31230#&1 B3C(:1*(1% %3
%&'( D@ *&%%(:$ #1%3 #%$ 3/1 5&1+$6 res|dent L|begdor[
Slnce Lhen forced and/or volunLary sLeps forward wlLh Lhe followlng:
! No ma[or e|ect|ons unt|| 2016 - "eot of 1btee lectloos coocloJeJ (Aoq1J)
! Increased |nternat|ona| scrut|ny of economy & po||cy - 5ovetelqo (uec12) & 5omotol 8ooJs/1kO
tlqbts (uec1J)
! Awareness of State |mpact |n to pr|vate sector - 1kO tlqbts lssoe/kboo kesootces/5tooJotJ
8ook/klocoto coppet wtlte Jowo/O1 5toqe 2/MN1 Jevolootloo/lul coottoctloo (2n1J)
! Acknow|edgement of State |neff|c|enc|es - 8lq Covetomeot to 5mott Covetomeot loltlotlve,
resldenL's Cfflce blll Lo develop a culLure of pollLlcal responslblllLy, LeL's consLrucL and creaLe
Mongolla" (2P'13)
! Sh|ft towards pr|vate sector - ecooomlc eovltoomeot ooJ electotote ptessote to oJJtess
oosostolooble pollcy (2n1J)
! Improved |eg|s|at|ve stab|||ty (requlrlng superma[orlLy" Lo change) - llscol 5toblllty low (2n12) &
lovestmeot low (2n1J)
! S|gn|f|cance of Cyu 1o|go| Stage 2 f|nanc|ng - oew bootJ membets, pobllc soppott/teollzotloo, lmpoct
to lul & MN1 (2n1J)
! Adm|ss|on that the m|nera|s sector |s cr|t|ca| - focos oo O1 5toqe 2, ossocloteJ loftosttoctote ptojects,
oew Mloetols lollcy, teJoce qolJ toyolty tote, ptoposeJ tevlsloos to Mloetols low (locloJloq
tesomptloo of lssoloq explototloo llceoses)
! Internat|ona| ru|e of |aw - 5tooJotJ 8ook & kboo kesootces lssoes (2n1J)
! Iocus on |oca| ru|e of |aw, secur|ty of tenure & Government corrupt|on - tepetcossloos of 106-
llceoses lssoe (2n1J)
! Cpen|ng up to Iore|gn Investors - New lovestmeot low (effectlve Nov1J) -> leOte M&A wltb cbloese
qtoop Ioo14, fltst cbloese Jeol lo tbe pobllc spoce of tbe mloetols sectot sloce cbloolco fot 5ootb
Cobl lo Moy12
! Western pract|ces & structures - New 5ecotltles low (effectlve Ioo14)
Ian'14: "@5( *&#1 *($$&2( #$ %5&% /( &:( 2#C#12 *3:( &+C&1%&2($ %3 %5( 8:#C&%( $(4%3: EFA %5(:( #$ %33
*.45 G%&%( #1C30C(*(1% #%<$ 13% 233+, H&$% =(&: /&$ %5( -($% 0($$31,6 D|rector genera| of the
department of Strateg|c o||cy and |ann|ng at the M|n|stry of M|n|ng and Cyu 1o|go| member - Ch.
Ctgochu|uu

Source: 8esCap, klncora Copper
Whlle varlous pollLlcal sLaLemenLs made, and leglslaLlve change (such
as Lhe new lnvesLmenL Law, new SecurlLles Law) are undoubLedly
ma[or poslLlves, slgnlflcanLly more acLlon ls requlred Lo follow up
recenL words wlLh a number of key lssues unresolved, such as C1 SLage
2 flnanclng/lnvesLmenL AgreemenL, Lhe 106-llcense lssue, SLandard
8ank/khan 8esources lnLernaLlonal courL acLlons, Abu uhabl
lnvesLmenL Councll/ColomL 8ank arblLraLlon eLc, lmpacLlng lnvesLor
senLlmenL, securlLy of Lenure and LransparenL legal process concerns.
1he nexL 6 monLhs wlll be a crlLlcal perlod Lo resolve Lhese lssues or see
a furLher sLep(s) backwards ln Lhe WesL's percepLlon of Mongolla's
CounLry updaLe

3

soverelgn rlsk. Lxcludlng Lhese aforemenLloned lssues, lL ls also llkely
LhaL a poslLlve caLalysL" wlll be requlred glven Mongolla's recenL Lrack
record and Lhe currenL sLaLus of Lhe global markeLs (ln parLlcular
consensus for Chlna and exposure for naLural resources), ln order Lo
regaln lnvesLors aLLenLlon and confldence. lndeed, Lhe 1urquolse Plll
8esources (18C) rlghLs lssue absorbed caplLal LhaL could oLherwlse
been deployed for oLher Mongollan relaLed opporLunlLles and acLlons
of Lhe CovernmenL LhaL have, ln a few lnsLances, slgnlflcanLly lmpacLed
Lhe wealLh of forelgn shareholders (khan 8esources courL case, MMC's
lnfrasLrucLure acqulslLlon, klncora Copper's $7 mllllon wrlLe-down for
Lhelr Lwo revoked llcenses [more Lhan Lhelr markeL caplLallzaLlon aL Lhe
Llme] as parL of Lhe 106-llcense lssue, Lhe 18C rlghLs lssue eLc).
Cyu 1o|go| - the cata|yst aga|n?
8esurrecLlon of collapsed SLage 2 pro[ecL flnanclng back Lo Lhe Lable
wlLh a very close daLe of March 31
sL
ls a surprlslng poLenLlally poslLlve
developmenL. 1he unexpecLed close daLe leads us Lo belleve LhaL
slLuaLlon ln ulaanbaaLar and/or London ls very fluld and Lhere could be
a wlndow of opporLunlLy openlng up for resoluLlon afLer 12 monLhs of
negoLlaLlons and numerous false sLarLs.
We belleve Lhe CoM and lLs C1 board members wlll noL look Lhls glfL
horse ln Lhe mouLh agaln, parLlcularly afLer Lhe slgnlflcanL negaLlve
lmpacL re[ecLlng Lhe uS$4.2 bllllon proposal LhaL was puL Lo Lhe C1
board ln Aug'13 had, and glven Lhe favourable Lerms of Lhe proposed
pro[ecL flnanclng desplLe Lhe global markeLs slgnlflcanLly movlng
agalnsL Lhe CoM and lnvesLors over Lhls perlod. 8ecenL sLaLemenLs and
feedback has been a sub[ecL Lo" agreemenL could be ln place as early
as Lhe end of Lhe monLh (a Llmellne more or less needed Lo meeL Lhe
currenL pro[ecL flnanclng Llmellne, acknowledglng Lhls has been
exLended Lhree Llmes already).
AL Lhe same Llme Lhe recenL CoM lnLernaLlonal roadshow and
economlc/pollLlcal envlronmenL has placed furLher pressure on Lhe
CoM slde Lo resolve Lhe C1 lssues. We noLe LhaL Mongollan auLhorlLles
have been under conLlnually lncreaslng pressure Lo resolve C1 such as
M 8.Amar[argal's aLLempLed reslgnaLlon and Lhe 180 degree Lurn for
"otqeot oeeJ fot ptoqtess oo O1" by prevlously harsh M
C.8ayarsalkhan LhaL could be lndlcaLlve of changlng senLlmenL ln
arllamenL, besldes conLlnued pressure from Lhe M. We belleve any
resoluLlon would sLlll mosL llkely need Lo be raLlfled by Lhe arllamenL,
wlLh Lhe Sprlng sesslon noL scheduled Lo commence unLll Aprll 3
Lh
.
WlLh lul back Lo a level of pre-C1 SLage 1 (clrca 3 years ln reverse), lL ls
clear LhaL Lhe leglslaLlve and pollLlcal envlronmenL has noL made Lhe
mosL of Lhe largesL slngle mlnlng lnvesLmenL pro[ecL ln norLheasL Asla
ln bulldlng a susLalnable economlc envlronmenL around Lhls surge ln
forelgn lnvesLmenL and prlvaLe secLor acLlvlLy. 1haL belng sald,
resoluLlon of SLage 2 and approval of lLs developmenL provldes a
slmllar opporLunlLy Lo creaLe Lhe nexL and susLalned upllfL ln Lhe cycle
wlLh Lhe beneflL of havlng a larger and more maLure economy wlLh
recenL poslLlve leglslaLlve process supporLlng Lhls foundaLlon.
CounLry updaLe

6

Mongo||an M|nera|s Sector - |ong overdue |eg|s|at|ve reform
ln Lhe second week of !anuary a new Mlnerals ollcy was approved by
Lhe arllamenL, full blll noL yeL avallable, whlch ls expecLed Lo provlde
Lhe framework for a revlsed Mlnerals Law ln Lhe flrsL half of Lhe year,
mosL llkely Lo be approved early ln Lhe Sprlng sesslon of arllamenL.
8ecenL communlcaLlon from Lhe MlnlsLry of Mlnlng and Lhe rlme
MlnlsLer, ln parLlcular aL Lhe recenL ?ear 2023-lorum on !anuary 13
Lh
,
are LhaL sLeps are Lo be shorLly Laken Lo address varlous overhanglng
lssues (revlsed Mlnerals Law, 106-llcense lssue, Long named Law, C1
eLc) Lo Lhe leglslaLlve envlronmenL Lo provlde sLablllLy and a more
favourable envlronmenL for Lhe prlvaLe secLor.
1here was an apparenL awareness LhaL more aLLenLlon ls Lo be pald Lo
exploraLlon, lL ls a dlfferenL sklll seL and rlsk proflle Lo mlnlng, and LhaL
Lhe SLaLe wlll noL be acLlvely parLlclpaLlng ln Lhls. 1he MlnlsLry ls
worklng on Lhe Lenderlng procedures, whlch could be a ma[or caLalysL
Lo see lncreased exploraLlon acLlvlLles and Lurn around Lhe ouLlook for
Lhe secLor. WlLhouL overdue change ln Lhe near Lerm Lhe exploraLlon
secLor ln Mongolla wlll baslcally become non-exlsLenL ln Lhe nexL few
years glven Lhe age, and llmlLed land mass, of exlsLlng exploraLlon
llcenses. 1he resumpLlon of lssulng new llcenses wlll poLenLlally be a
key caLalysL for boLh sLraLeglc groups and lnvesLors.
I|gure 8: Mongo||an M|nera|s Sector - A handfu| of pro[ects dr|v|ng the wor|d's fastest grow|ng economy
! The Economist forecasts Mongolia to be the worlds fast growing economy in 2014 for the second year running thanks to its
mining industry

17% of
GDP
81% of
Exports
23% of Budget
Revenue
73% of
FDI
Mining sectors contribution to Mongolias:
! Current GDP is only about $11b pa, of which 17% comes from mining, but Mongolia is estimated to have $2 trillion of
commodities in the ground why such a limited contribution?
! It is estimated that a total 0.8M ha, or only 0.5% of land area of Mongolia is claimed by Mining Licenses and that active
licenses with actual mining only account for 0.18M ha or 0.01 % of the total land area. Total exploration and mining licenses
covered <10% of the country with limited historical exploration across most of the country
! Reliance on just a few projects places pressure and risks on a few key counterparties, commodities and concentrated
selected few rural development as illustrated by Oyu Tolgoi currently ramping up production, the current weak coal price
impacting the economics of Erdenes Tavan Tolgoi (& other coal operations) and Erdenet having been in production since
1978 and being depleted. It is worth remembering OT was discovered by a junior after a major had already explored and
walked away

Source: klncora Copper
CounLry updaLe

7

I|gure C: Mongo||an M|nera|s Sector - A dy|ng exp|orat|on sector

Source: klncora Copper

1he recenLly approved new Mlnerals ollcy, revlslon Lo Lhe Mlnerals
Law reduclng gold royalLy raLes, poLenLlal resoluLlon of Lhe 106-llcense
lssue and expecLaLlon of flnal revlslons Lo Lhe Mlnerals Law ln Lhe
Sprlng sesslon of arllamenL provldes Lhe foundaLlon for many of Lhe
key lssues lmpacLlng exploraLlon Lo be resolved.
1he changlng leglslaLlve envlronmenL, lncludlng Lhe new lnvesLmenL
Law, wlLh furLher proposed revlslons Lo revlve prlvaLe secLor acLlvlLles
ln Lhe mlnerals secLor, wlLh lul back Lo pre-C1 SLage 1 levels, coupled
wlLh Lhe proposed SLage 2 pro[ecL flnanclng for Cyu 1olgol supporLs a
new upllfL ln Lhe currenL cycle from depressed asseL valuaLlons wlLh
naLural Llme lag, parLlcularly ln Lhe mlnerals secLor. 1he mlnerals secLor
ls an underwelghL poslLlon ln Lhe ma[orlLy of lnvesLmenL porLfollos wlLh
some lnvesLors have recenLly commenLed, "Mooqollo ls ovetsolJ ooJ
telotlve to otbet Mooqolloo osset closses tbe mloloq sectot ls oow too
cbeop to be lqooteJ.
CounLry updaLe

8

Lxterna| r|sks an overhang on a|ready frag||e bank|ng and
construct|on sectors
?ears of expanslonary pollcles have conLrlbuLed Lo domesLlc
vulnerablllLles placlng cerLaln secLors, lncludlng Lhe banklng and
consLrucLlon secLors, aL parLlcular rlsk. Whlle lL would seem lnLulLlve
LhaL wlLh 11.7 Cu growLh ln 2013, and forecasLs of double dlglL
growLh ln aL leasL Lhe nexL year or Lwo, LhaL Lhe banklng and
consLrucLlon secLors would be ln good flnanclal healLh and provlde
aLLracLlve leverage Lo Mongolla's longer Lerm developmenL we belleve
Lhese secLors are ln a relaLlvely fraglle sLaLe, lmpacLed by a slgnlflcanL
credlL squeeze (eg lul collapslng 48) and slgnlflcanL unsusLalnable
CovernmenL pollcy (lncludlng Lhe ln[ecLlon of a meanlngful porLlon of
recenL CuanLlLaLlve Laslng" and Lhe +3 Lrllllon Mn1 recenLly prlnLed
by Lhe 8ank of Mongolla).
1he World 8ank ln lLs !anuary 2014 ost Aslo ooJ loclflc cooomlc
ltospects reporL, sLaLed LhaL Lhe basellne assumpLlons for Lhe reglon,
and Mongolla, locloJeJ o qtoJool oJjostmeot of qlobol floooclol
cooJltloos, bot o mote JlsotJetly teoctloo of floooclol motkets to o
ootmollzotloo of cooJltloos lo tbe uolteJ 5totes ooJ elsewbete coooot
be excloJeJ. lo socb o sceootlo, copltol flows coolJ Jeclloe btlskly by os
mocb os 80 petceot fot o petloJ of sevetol mootbs, plocloq extteme
ptessote oo cooottles wltb lotqe cotteot occooot Jeflclts (comboJlo,
loo, luk, loJooeslo, Moloyslo, ooJ Mooqollo), ovetvoloeJ teol effectlve
excbooqe tote (Mooqollo), lotqe sbott-tetm Jebt exposotes (cbloo,
loJooeslo, Moloyslo, 1bollooJ - 8esCap: noLlng LhaL Lhe flrsL repaymenL
of Lhe uS$1.3b Chlnggls 8ond ls due ln 2013) ooJ/ot llmlteJ tesetves
(comboJlo, lljl, loo luk, Mooqollo, lopoo New Coloeo, ooJ vletoom).
lndeed Lhey hlghllghLed LhaL counLrles where yeots of expoosloooty
pollcles bove coottlboteJ to Jomestlc voloetobllltles ote pottlcolotly ot
tlsk. lo socb sceootlos, tbose cooottles tbot boJ o slqolflcoot cteJlt
expoosloo lo 2007-2012 (cbloo, Moloyslo, Mooqollo, 1bollooJ,
vletoom) woolJ expetleoce o splke lo Jebt setvlcloq costs, o sbotp tlse
lo ooo-petfotmloq looos, ooJ ptessote oo tbe bolooce sbeets of books,
oll of wblcb woolJ polckly ttoosmlt to leoJloq ooJ lovestmeot octlvlty-
ooJ lo extteme coses coolJ ooJetmloe floooclol stoblllty ooJ leoJ to o
bookloq ctlsls. 8efer Lo llgures u, L, l, C for an lllusLraLlon of relaLed
key economlc lndlcaLors for Mongolla from Lhe lMl.
1he Mongollan consLrucLlon and bank secLor has been Lhe deflclL of
slgnlflcanL poslLlve SLaLe pollcy (lncludlng Lhe 8 morLgage
programmes) and slgnlflcanL dlrecL ln[ecLlons of caplLal, also noLlng Lhe
fallure of Savlngs 8ank ln 2013. lncreaslng concerns are emerglng
regardlng governance and sLablllLy of a number of Lhe counLrles oLher
largesL banks. 1hls Lrend ls evldenL ln recenL reporLs from Lhe debL
raLlng agencles and also clearly hlghllghLed by reporLs LhaL Abu uhabl
lnvesLmenL Councll (AulC) has commenced arblLraLlon wlLh Mongolla's
largesL prlvaLe lender (wlLh a quarLer of deposlLs), ColomL 8ank,
because of lLs concerns over Lhe lender's weak corporaLe governance
sLandards.
CounLry updaLe

9

kope around the neck
ln november, resldenL Llbegdor[ announced hls new ltom 8lq
Covetomeot to 5mott Covetomeot lnlLlaLlve ln a Lwo-hour Lelevlsed
naLlonal speech LhaL lncluded several sLrong worded sLaLemenLs such
as tbe O1 Jlspote ls tbe petfect exomple of wby tbe Covetomeot sboll
oot owo epolty lo ptlvote bosloesses ooJ Mooqollos opptesseJ closs
ls tbe ptlvote sectot. 1hls laLesL lnlLlaLlon ls one of many largely almed
Lo obollsb lotetfeteoce of tbe stote lo bosloess opetotloos" and Lo
ptomote tbe ecooomlc qtowtb of ptlvote eotltles. 1hls ls parLlcularly
poslLlve, as domesLlc and forelgn rheLorlc are ofLen very dlfferenL.
An unprecedenLed delegaLlon of senlor governmenL offlclals and
buslness leaders [olned resldenL Llbegdor[ on hls vlslL Lo Slngapore
and Pong kong ln november wlLh slmllar delegaLlons Lhen golng onLo
Lurope and norLh Amerlca. 1hls roadshow was almed Lo promoLe
Mongolla as an lnvesLmenL desLlnaLlon followlng leglslaLlon of Lhe new
lnvesLmenL Laws passed a monLh earller. 1he resldenL wllllngly
admlLLed Mongolla had made mlsLakes, buL hlghllghLed LhaL Lhe
governmenL ls commlLLed Lo lmprovlng Lhe buslness envlronmenL,
relgnlLlng forelgn dlrecL lnvesLmenL flows, and fosLerlng Mongollan
growLh. Iost llke otbets, we Jo moke mlstokes. 1bete bove beeo
momeots wbeo we JlsoppoloteJ tbe lovestots. 8ot becoose we ote
opeo, we coo cottect tbe mlstokes ooJ flx tbe ptoblems. Such publlc
sLaLemenLs abroad Lo a degree have puL a rope around Lhe
governmenL's neck Lo follow Lhrough wlLh Lhese sLaLemenLs, wlLh
pressure Lo do so glven Lhe underlylng domesLlc envlronmenL and
Mongolla's dependence on new forelgn caplLal/slgnlflcanL forelgn debL.
1hese road shows also provlded a forum for Lhe medla and lnvesLors Lo
ralse Lhe slgnlflcance of varlous oLher lssues lmpacLed lul, such as C1,
Lhe 106-llcenses, overhang relaLlng Lo Lhe Mlnerals Law eLc, and
appeared Lo have a dlrecL lmpacL Lo Lhe speed of a number of lLems of
proposed reform - we saw Lhls flrsL hand wlLh Lhe approach Lo Lhe 106-
llcense lssue.
eLro MaLad (MA1u.Ln) ls Lhe besL performlng sLock ln Lhe uk AlM
markeL ?1u drlven by farm-ouL rumors wlLh a Chlnese SCL. 1hls would
noL have been posslble before november when Lhe new lnvesLmenL
Law came lnLo affecL whlch placed slgnlflcanL resLrlcLlons on SCL
lnvesLmenLs ln Mongolla, parLlcularly ln Lhe mlnlng secLor. CLher
anecdoLal feedback ls conslsLenL wlLh Lhls rumor regardlng forelgn
SCLs resumlng due dlllgence acLlvlLles wlLh Lhe recenL proposed offer
for leCre's (ASx llsLed) Mongollan lron ore developmenL pro[ecLs
lllusLraLlng Lhe flrsL Chlnese M&A acLlvlLy ln Lhe Mongollan mlnlng
space slnce Chalco's offer for SouLh Cobl.
CounLry updaLe

10


llgure u: Chlnggls bond proceeds ralsed reserves ln laLe-
2012. Cross reserves amounLed Lo uS$2.23 bllllon ln
uecember
llgure L: 8ecenL growLh appears Lo have ouLsLrlpped
producLlon capaclLy conLrlbuLlng Lo lnflaLlon whlch was
agaln on `Lhe rlse laLe 2013 (12.3 y/y ln u8 uec'13) also
lmpacLed by Lhe recenL devaluaLlon of Lhe Mn1


Source: lMl (!an'14 reporL) Source: lMl (!an'14 reporL)

llgure l: rlvaLe secLor credlL acceleraLed 38 Lo uec'13,
ouLpaclng deposlL growLh
llgure C: 8anks loan-Lo-deposlL raLlo subsLanLlally exceeds
Lhe average for Lhe lasL 8 years


Source: lMl (!an'14 reporL) Source: lMl (!an'14 reporL)

CounLry updaLe

11

CLk1IIICA1ICN AND DISCLCSUkLS

Ana|yst Cert|f|cat|on
We hereby cerLlfy LhaL all of Lhe vlews expressed ln Lhls research reporL accuraLely reflecL our personal vlews abouL Lhe sub[ecL company
or companles and lLs or Lhelr securlLles. We also cerLlfy LhaL no parL of our respecLlve compensaLlon was, ls or wlll be, dlrecLly or
lndlrecLly, relaLed Lo Lhe speclflc recommendaLlons or vlews expressed ln Lhls research reporL.

Important D|sc|osures
kesource Investment Cap|ta| L|m|ted ("kesCap") ls a bouLlque lnvesLmenL bank worklng wlLh cllenLs ln connecLlon wlLh mergers and
acqulslLlons, pro[ecL developmenL, publlc and prlvaLe caplLal ralslngs and oLher sLraLeglc maLLers. 8esCap has offlces ln ulaanbaaLar,
Mongolla and Pong kong and has a dedlcaLed focus advlslng on fronLler markeL relaLed LransacLlons.

D|sc|a|mer
1hls reporL ls made for lnformaLlon purposes only, and does noL consLlLuLe an offer, sollclLaLlon of an offer Lo purchase, hold, sell, lnvesL
or make any oLher flnanclal declslon. ln maklng declslons, lnvesLors may rely on Lhelr own examlnaLlons of Lhe parLles and rlsks lnvolved.
lnformaLlon conLalned ln Lhls reporL ls obLalned from Lhe sources belleved Lo be accuraLe and rellable. 8ecause of Lhe posslblllLy of
human or mechanlcal error as well as oLher facLors such lnformaLlon provlded 'as ls" wlLhouL warranLy of any klnd and 8esCap, ln
parLlcular, make no represenLaLlon or warranLy, express or lmplled, as Lo accuracy, Llmellness, compleLeness, merchanLablllLy or flLness
for any parLlcular purpose of any such lnformaLlon. 1he reporL may have been senL Lo Lhe Company ln order LhaL Lhe Company may
hlghllghL any facLual lnaccuracles conLalned ln lL buL Lhe Company has noL necessarlly made any commenL on lL. All oplnlons and
forecasLs conLalned ln Lhls reporL are enLlrely Lhose of Lhe auLhor(s) (and are noL necessarlly Lhe vlews held LhroughouL 8esCap). lor Lhe
avoldance of any doubL 8esCap has no auLhorlLy whaLsoever Lo glve any lnformaLlon or make any represenLaLlon or warranLy on behalf
of Lhe Company, any of lLs shareholders or any oLher person ln connecLlon LherewlLh and Lhls reporL has noL been auLhorlzed or
approved by Lhe Company. under no clrcumsLances, 8esCap has any llablllLy Lo any person or enLlLy (-les) for (a) any loss or damage ln
whole or ln parL caused by, resulLlng from, or relaLlng Lo, any error (negllglble or oLherwlse) or oLher clrcumsLances or conLlngency
wlLhln or ouLslde Lhe conLrol of any of Lhelr dlrecLors, managemenLs, offlcers, employees, or agenLs ln connecLlon wlLh compllaLlon,
analysls, lnLerpreLaLlon, communlcaLlon, publlcaLlon or dellvery of any such lnformaLlon, or (b) any dlrecL, lndlrecL, speclal,
consequenLlal, compensaLory or lncldenLal damages whaLsoever (lncludlng wlLhouL llmlLaLlon, loss proflLs) even lf 8esCap ls advlsed ln
advance of Lhe posslblllLy of such damages, resulLlng from Lhe use of or lnablllLy Lo use, any such lnformaLlon. 1here ls an exLra rlsk of
loslng money when shares are boughL ln some smaller companles, someLlmes alLernaLlvely known as penny shares". 1here can be a blg
dlfference beLween Lhe buylng prlce and Lhe selllng prlce of Lhese shares. lf Lhey have Lo be sold lmmedlaLely, you may geL back much
less Lhan you pald for Lhem. 1he prlce may change qulckly and lL may go down as well as up. asL performance of lnvesLmenLs referred
Lo above ls noL necessarlly a gulde Lo fuLure performance and Lhe value of Lhe lnvesLmenL may go down as well as up. Some lnvesLmenLs
are noL readlly reallzable and lnvesLors may have dlfflculLy ln selllng or reallzlng Lhe lnvesLmenL or obLalnlng rellable lnformaLlon on Lhe
value or rlsks assoclaLed wlLh Lhe lnvesLmenL.


Address
SulLe 201, uPL Cfflce 8ulldlng, eace Avenue 10/3
SukhbaaLar ulsLrlcL 210648, ulaanbaaLar Mongolla
1el: +976 7010 0093
lax: +976 7010 0097
lor general lnqulrles: lnqulrles[resource-cap.com
Web: www.resource-cap.com

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