MINERAL SECTOR OF MONGOLIA 4/11/2017 MINERAL SECTOR OF MONGOLIA Presenter J.BILEGSAIKHAN Head of Mining Department of Mineral Resources and Petroleum Authority of Mongolia 1

Present level of Geological investigation in Mongolia 99.1 % of the Mongolian territory is covered by geological mapping on a scale of 1:200 000, 24.8 % of the Mongolian territory is covered by general exploration work and geological mapping on a scale of 1:50 000, 84% of the Mongolian territory is covered by hydro-geological mapping on a scale of 1:500 000, 22.5 % of the Mongolian territory is covered by gravimetric survey on a scale of 1:200 000 and 1:100 000, 60 % of Mongolian territory is covered by aerial magnetic survey on a scale of 1:200 000, 32 % of the Mongolian territory is covered by aerial multispectral survey on a scale of 1:50 000 and 1:25 000.

24.8% of the Mongolian territory is covered by general exploration work & geological mapping on a scale of 1:50000. This figure is expected to increase every year by 0.2 to 0.5 %.

35.8% 56.1 mil.hectar 45.1% 70.4 mil.hectar 13.4% 21 mil.hectar 5.2% 8.1 mil.hectar 0.5%, 0.8 mil.hectar 100% 156.4 mil.hectar

Exploration budget Million us dollar

Exploration expenditure in 2006

The mineral sector’s impact on the Mongolian economy (1)   2002 2003 2004 2005 2006 GROSS DOMESTIC PRODUCT 10.10% 12.70% 17,3% 18.00% 30.1% GROSS INDUSTRIAL PRODUCT 47.30% 49.60% 64,7% 65,5% 72.2% EXPORT 56.70% 58.90% 70.80% 75,8% 76.1%

Production and Investment in Mining Preliminary estimations by MRPAM

Mining sector

Mining and petroleum production 2004 2005 2006 Copper in concentrate, th.tn 130,0 126,3 129.7 Molybden in concentrate, th.tn 1140,9 1153 1403.9 Cathode copper, tn 2376,0 2474,5 2618.4 Gold /chemical pure/, kg 18,6 21,9 20.5 Fluorspar concentrate, th.tn 104,8 93,7 108.3 Metallurgical fluorspar, th.tn 206,7 233,4 226.6 Coal, th.tn 6794,7 8255,8 7885.5 Crude oil, th.barr 197,6 200,3 366.8

Petroleum Exploration Blocks

Petroleum Exploration Blocks Active exploration under PSC: Petro China Daqing Tamsag – XIX, XXI, XII; Dongsheng Gazriin tos – 1997PSC; Petromatad – XX; China Golden Sea Petroleum - XV Application under consideration: Block number – II, III, IV, V, VI, XI, XII, XVI,XVII, XVIII, XXIII, Blocks for receiving applications: Block number – VII, IX, X north, X south, XXVI, Block receiving applications by countries: Canada -1, Australia-1, Russia-2, Mongolia-2, China-2 Open blocks: Block number – VIII, XIII, XIV, XXIV

Investment and Production Petroleum Sector

TAXES APPLICABLE TO MINING OPERATIONS 2002 2003 2004 2006 CORP. INCOME TAX 15% / 40% 15% / 30% 10% / 25% VALUE ADDED TAX (VAT) ON IMPORTED MINING EQUIPMENT 15% ROYALTY 2,5% 2,5% / 5% ROYALTY FOR PLACER GOLD PRODUCTION 2,5% 7,5% 5% VALUE ADDED TAX ON GOLD PRODUCTION 15%

WINDFALL TAX In 2006 the Mongolian parliament passed a law on excess profits tax (windfall tax). The windfall tax is imposed on gold when its LME-price exceeds 500 USD/ounce and on copper above a LME-price of 2600 USD/t. A tax rate of 68% applies to revenues that exceed above-mentioned price levels.

Taxes in the mining sector of Mongolia Effective tax rate 5 10 15 20 25 30 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 year percentage Gold, % Copper, %

Tax rates based on gold prices Effective tax rate/gold/ 0% 10% 20% 30% 40% 50% 60% 70% 80% 700 750 800 850 US$/ounce Effective tax rate Rate in total expense Gold price US$/ounce Effective tax rate Tax rate on total costs 700 28% 68.5% 750 32% 71.9% 800 34% 74.2% 850 37% 76.1%

Tax rates for different copper prices Price of copper US$/ton Effective tax rate Rate on total costs 4000 16% 23% 5000 24% 34% 5600 26% 37% 6000 29% 41% 6500 32% 45% 7000 36% 51% Effective tax rate /Copper/ 0% 10% 20% 30% 40% 50% 60% 4000 5000 5600 6000 6500 7000 US$/ton Effective tax rate Rate in total expense

Effective tax rate as calculated in paragraph 61 of Minerals Law 5 10 15 20 25 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 years % Gold, % Copper, %

AMENDMENTS OF THE NEW MINING LAW Strengthened issues on environmental protection and rehabilitation Extended rights of local administrative bodies License holders duties are increased Mining licenses are granted in two different ways: First come first serve basis on new exploration areas Tender biding on other areas

AMENDMENTS OF THE NEW MINING LAW Classification of Mineral deposits: - Deposits of strategic importance - Deposits of conventional mineral - Deposits of common mineral Governments Participation and Guarantee: the state may participate up to 50% jointly with a private legal person in exploitation of a mineral deposit of strategic importance where state funded exploration was used to determine proven reserves. The state may own up to 34% of shares of the investment made by a license holder of a mineral deposit of strategic importance where proven reserves were determined through funding sources other than the State budget.

Strategic deposits in production 1 ERDENET Copper molibdenium B+C1 = 3,2 mil t Cu, B+C1 = 90 thous t Mo, Orkhon Erdenet 6 BOROO Gold 36 t Selenge Mandal 2 BAGANUUR Brown Coal A+B+C1 = 511,4 mil t Central Bayandelger 3 SHIVEE OVOO A+B+C1 =564.0 mil t Govisumber 4 NARIIN SUKHAIT Hard Coal A+B+C1 = 88.9 mil t Southgovi Gurvantes 5 TOMURTIIN OVOO Zinc B+C1 = 1.329 mil t Sukhbaatar Sukhbaatar

Uranium deposits of strategic importance 1 Mardain gol Uranium C1 =1063 t (9.8 thous t) Dornod Gurvanbulag 2 Gurvan bulag C1+C2 =16073 t Dornod Bayandun 3 C1+C2 =58933 t Dornod Dashbalbar

Strategic deposits in pre-operation stage 1 TAVANTOLGOI Cooking and hard coal A+B+C1 = 2,5 bil. t Southgovi Tsogttsetsii 2 TOMURTEI Iron B=57,0 mil t, C1=100,7 mil.t Selenge Eroo 3 OYU TOLGOI Copper and gold   Southgovi Hanbogd 4 TSAGAAN SUVARGA Copper B+C1=1,08 mil.t Cu, B+C1=170,9 mil.t Ìî, Dornogovi Mandah 5 ASGAT Silver C1=976,6 t Bayan-Ulgii Nogoonnuur 6 BURENHAAN Phosphorus C1+C2 = 40,5 mil.t Hubsgul Alag-Erdene

LICENSE Period of validity of exploration licenses shall be 9 years. /3+3+3/ Pre-mine development operation /in з years under agreements/ Periods of validity of mining licenses shall be 70 years. /30+20+20/ Minimum exploration expenditure. / 0.0, 0.5, 1.0, 1.5 $/hа / Limited license transferring and mortgaging. Added an item stating that licenses can not be used for trading.

Royalty Royalties for domestically sold coal or other conventional mineral resources are equal to 2,5% of sales revenue Royalty for minerals other than specified above shall be 5,0% of sales revenue Distribution of Royalty revenues: 70 % into the State budget 20 % into the budget of the aimag or capital city 10 % into the budget of the soum or district

INVESTMENT AGREEMENT 50,0 - 100,0 million USD 10 years Investment agreement can be concluded if an investment of more than 50.0 mill USD is made within the first 5 years. 50,0 - 100,0 million USD 10 years 100,0 - 300,0 million USD 15 years 300,0 million or more USD 30 years The agreement with an investor will be made jointly by cabinet members responsible for financial, geological, mining and environmental issues.

Share price of Ivanhoe mines Early result from negotiation on the investment agreement of Oyu Tolgoi deposit Estimated resources Gold 1000 t Copper 32 mil. t Share holder Rio Tinto 10% Government of Mongolia 34% Ivanhoe mines 56% Tax holiday Windfall tax 0 during the invetstment agreement Other taxes under Law of Mongolia No tax holiday Time schedule Open pit mine 2010 Underground mine 2014 Copper smelter 2015 Export and import Gold product 100% to bank of Mongolia Power supply 100% national power stations will supply Share price of Ivanhoe mines

COPPER DEPOSIT LOCATIONS FOR MINING-NON-FERROUS METALLURGICAL FACTORY PROJECT 4/11/2017 TOMURTEI ERDENET CORP. SHARIIN GOL TSAV ULAAN HUTUL TAVAN TOLGOI TSAGAAN SUBRAGA OUY TOLGOI 29

Promising projects No. Name of deposits Kinds of minerals Reserves 1 Khust uul Iron (Fe) 4.4 million tons Fe 2 Tsav Lead, zinc 3.5 million tons ore, 226.2 thousands tons Pb, 123.3 thousand tons Zn 3. Bargilt Iron ( Fe) 31 million tons Fe 4. Tumurtei 229.3 million tons Fe 5. Oyu Tolgoi Copper, gold 24 million tons Cu, 720 tons Au 6 Tsagaan suvraga Copper, molybdenum 240.0 million tons ore, 1.3 million tons Cu, 48.2 thousand tons Mo 7. Ulaan 14.8 million tons ore , 186.4 thousand tons Pb, 245.8 thousand tons Zn 8. Mardai Uranium 924.6 thousand tons ore, 1104 tons U 9. Tavan Tolgoi Coal 7.0 billion tons 30

Prospective of production and predicted investment during the implementation of high promising projects

Strategic Alliances Rio Tinto-Ivanhoe (Copper, gold) Erdene Gold-Xstrata (Coal) Barrick-QGX (Gold, copper) Mitsui-Ivanhoe (Power, coal, infrastructure) BHP-Asia gold-Ivanhoe (Coal, copper) Troy resources-Rio Tinto Phelps Dodge-Fortress (Copper) Basic Element, Renova and Severstal (Coal) IUC-Denison-Mongolian and Russian Governments (Uranium)

Investors from Common Wealth in Mongolia No. Name of Company Number of exploration licenses Number of mining licenses Area in hectar Canada 1 Erdenemongol LLC 27   496 127 2 ENTRE LLC 8 373 028 3 Redhill LLC 57 539 4 Jaruslav Ruza 79 400 5 EAM energy LLC 21 655 763 6 UGL-Enterprises LLC 22 334 973 Subtotal 88 1 996 830 Great Britain Rio Tinto 15 987 Batu Mining 81 2 030 989 Asia Gold 87 1 984 799 Ivanhoe mines 80 3 542 764 Gobi gold 49  2 1 871 342 QGX 78 678 332 376 10 124 213 Australia Zanadu mine Inc. 13 403 972 Troy Resourses Mongolia 28 1 533 296 41 1 937 268 Total 505 14 058 311 33

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