The Nautilus Institute The Mongolian Minerals Sector, Future Plan Regionial Cooperation BAYARBAT Sangajav, Deputy Director, Finance and Investment Department Head of International Cooperation Division Ministry for Mineral Resources and Energy 22nd September 2010 The Nautilus Institute

Ministry of Mineral Resources and Energy, Mongolia Content COUNTRY’S OVERVIEW: MINERAL SECTOR DEVELOPMENT: MINERAL SECTOR’S POLICY BACKGROUND FUTURE PLAN: MINING AND INFRASTRUCTURE PROJECTS Ministry of Mineral Resources and Energy, Mongolia

OVERVIEW OF THE ECONOMY KEY NOTES Nominal GDP down in 2008 due to fall in commodities price Copper and gold price near record high in 2010, GPD expected to go up Estimated GDP growth in 2010 is 7.5% according to Med-term socio-economic guideline Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia ECONOMIC PROJECTION KEY NOTES IN MEDIUM TERM, 2010-03: Utilization of so-called “Strategic mining deposits” will fuel Mongolia economic growth Inflation will be stable around 8.0% per year Increased output of mining products will boost export and international reserves Jobs created in the mining sector will reduce overall unemployment level 2010 2011 2012 2013 GDP growth 7.5% 8.2% 7.8% 20.8% GDP per capita (in USD) 1772.3 1987.5 2216.3 2782.2 Inflation (CPI) 7.1% 8.6% 8.1% Trade balance (in million USD) -356.3 -686.0 -473.0 1877.3 International reserves (in million USD) 1936.3 3090.7 4710.9 8267.9 Unemployment 3.1% 2.9% 2.8% 2.7% Source: Bank of Mongolia, National Statistical Office, Ministry of Finance, IMF and World Bank staff estimates Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia SOVEREIGN RATING STANDARD AND POORS BB- BB- NEGATIVE STABLE (released on 2009/11/20) MOODY’S B1 B1 (released on 2009/11/25) FITCH B B (released on 2009/10/12) RATING RATIONALE: Successful implementation of IMF Standby program to stabilize fiscal and external liquidity position Central bank agreed to more flexible exchange-rate regime Parliament ratification of Investment agreement on Oyu Tolgoi mining deposit Policy coordination between government authorities improved DRIVERS FOR UPGRADE: -Alleviate overdependence on commodity price fluctuation -Investment in mineral projects that boost economic growth and employment -Prudent allocation of expected large fiscal revenues from expanding mining sector -Continuation of ongoing and planned fiscal, monetary and banking sector policy adjustments beyond IMF program Source: Bank of Mongolia, National Statistical Office, Ministry of Finance, IMF and World Bank staff estimates Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia DOING BUSINESS 2010 Ease of... Doing Business 2010 rank Doing Business 2009 rank Doing Business 60 56 Starting a Business 78 61 Dealing with Construction Permits 103 104 Employing Workers 44 49 Registering Property 25 20 Getting Credit 71 68 Protecting Investors 27 Paying Taxes 69 87 Trading Across Borders 155 156 Enforcing Contracts 36 35 Closing a Business 110 Note: Doing Business 2009 rankings have been recalculated to reflect changes to the methodology and the addition of two new countries. Source: International Finance Corporation and World Bank, Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia MINING PRODUCTION ¹ Production 2005 2006 2007 2008 2009 1 Fluorspar ore, thou.tn 233.4 239.4 245.0 219.1 344.2 2 Flotation concentrate, thou.tn 93.7 108.3 109.9 115.7 115.3 3 Copper concentrate, thou.tn 126.3 129.7 130.2 126.8 129.8 4 Molybdenum concentrate, tn 1153 1403.9 1978.3 1783.6 2408.7 5 Tin /50%/, tn 47.0 - 27.5 87.5 15 6 Tungsten /68%/, tn 78.2 182.2 244.5 141.9 38.6 7 Coal, thou.tn 7517.1 8074.1 9237.6 9691.6 13163.9 8 Gold, kg 21900 21267 18087 15184 9803 9 Cathode copper, tn 2474.5 2618.4 3006.5 2586.6 2470.1 10 Iron ore, thou.tn 167.7 180.0 265.1 1387.4 1379.0 11 Zinc, thou.tn /wet/ 22.8 154.7 143.6 156.5 12 Copper wire, tn 195.5 221.2 13 Molybdenum oxide, tn 157.8 2664.0 2112.2 Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia GEOLOGICAL OVERVIEW Area of Exploration License (3659), Mining License (1085) 38,5 mln. he 24,6% State Special Protected and Special Purpose area 69,6 mln. he 44,5% Area for tender bid on license granting 35,9 mln. he 23,0% Area of open for license grant 12,4 mln. he 7,9% Ministry of Mineral Resources and Energy, Mongolia

FDI IN THE MINING SECTOR Mineral Sector Products bln. tugrigs Investment mln. USD Investment Amount of Industrial Production Source: Mineral Resources Authority of Mongolia and National Statistical Office Ministry of Mineral Resources and Energy, Mongolia

MINERALS SECTOR IN THE ECONOMY Gross Domestic Product Total Industrial Production Export Source: Mineral Resources Authority of Mongolia and National Statistical Office Ministry of Mineral Resources and Energy, Mongolia

MINERALS TAXATION REGIME 2002 2003 2004-2005 2006 Since 2007 Corporate Income Tax 15% and 40% 15% 30% 15% 25% 10% 25% Customs duties 5% 0% Royalty 2.5% 2.5% and 5% VAT 10% Export tax on minerals (gold copper etc) Source: Mineral Resources Authority of Mongolia and National Statistical Office Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia Content COUNTRY’S OVERVIEW MINERAL SECTOR’S POLICY BACKGROUND MINING AND INFRASTRUCTURE PROJECTS Ministry of Mineral Resources and Energy, Mongolia

THE MONGOLIAN GOVERNMENT POLICY ON MINING SECTOR (Action Plan of the Mongolian Government for 2008-2012) Speed up the development of the mining sector, renew its legal environment, turn strategic and large mining deposits into economic circulation and develop and implement Mongolia’s industrial program. Research into geological formations, spread up and location of mineral resources, prepare general assessment, develop geological mapping and intensify other research and survey works. Increase the proven reserve of uranium and select the strategically important investors who are interested in investing into uranium mining. Develop the legislations of geology and mining sector and adhere to the policy where the state ownership percent would be more than 51% in the strategic deposits where the geological prospecting was conducted at the expenses of state budget fund and the reserve was proven. Ministry of Mineral Resources and Energy, Mongolia

FUTURE TRENDS AND PROSPECTS To adapt the advanced technology to build a mineral processing, refinery, melting, and value-added factories through conducting studies. To provide assistance in commercializing strategic and large deposits into economic circulation. To develop a policy of infrastructures depends on the regions in order to involve strategic deposits into economic circulation. To conduct research and make recommendations to improve and update the legal environment. Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia INVESTMENT AGREEMENT Investment agreement can be concluded if an investment of more than 50.0 mln. 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. Ministry of Mineral Resources and Energy, Mongolia

PUBLIC – PRIVATE PARTNERSHIP The Parliament of Mongolia passed law on Public-private partnership to define principles and scope of cooperation of the Government and private sector partnership. The law concept defines: The main sectors of PPP (big infrastructure and mining projects) The main form of PPP (show service by contract, management contract, renting contract, consensus, establishing joint legal entity) The action proposal for creating favorable environment of PPP The issue of risk sharing etc. Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia EVERY DOLLAR SPENT IN MINING CREATES ADDITIONAL DEMAND OF 1.84 DOLLARS IN OTHER SECTORS Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia Content COUNTRY’S OVERVIEW MINERAL SECTOR’S POLICY BACKGROUND MINING AND INFRASTRUCTURE PROJECTS Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia Major Deposits Ministry of Mineral Resources and Energy, Mongolia

Background information Strategically important mineral deposits Deposit name Type of minerals Reserves and Resources 1 Nariin Sukhait fossil coal 125.5 million tones 2 Baganuur brown coal 600.0 million tones 3 Erdenet copper, molybdenum 1.2 billion tones at 0.51% Cu and 0.012% Mo 4 Gurvan Bulag uranium 16.1 tones 5 Oyu Tolgoi copper, gold 26.3 million tonnes copper, 819 tones gold 6 Tavan Tolgoi 6.4 billion tones 7 Shivee Ovoo 646.2 million tones 8 Mardai 1.1 tones 9 Dornod 28.9 tones 10 Tomortei iron 229.3 million tones at 51.15% Fe 11 Tsagaan Suvarga 10.6 million tones oxides at 0.42% Cu and 0.011% Mo, 240.1 million tones sulphides at 0.53% Cu and 0.018% Mo 12 Burenkhaan phosphor 192.2 million tones at 21.1% Phosphor 13 Tomortein Ovoo zinc 7.7 million tones at 11.5% Zn 14 Asgat silver 6.4 million tones at 351.08g/tone Ag 15 Boroo gold 24.5 thousand tones at 1.6g/tone Au Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia Strategic deposit: Major final products Energy coal Domestic consumption Power Plant Coal gasification Coal Coking coal Export 150 bln ton Oyu Tolgoi Erdenet Tsagaan suvarga Copper Copper product Copper 40 bln ton Steel casting production Tumurtei Tumur Tolgoi Bargilt Iron 1.0 bln ton Export Mardai Dornod Gurvan bulag Ulaan Kharaat Yellow Cake Uranium Nuclear Power Plant 1.4 mln ton Ministry of Mineral Resources and Energy, Mongolia

INFRASTRUCTURE PROJECTS Project name Est. budget (in million USD) Duration Oyutolgoi 4000.0 2010-2015 Tavantolgoi 800.0 Copper refinery 1000.0 Metallurgy complex 2011-2016 Coking chemical plant 700.0 Oil refinery 900.0 2011-2015 Coal chemical plant “Tavantolgoi” Power plant 400.0 Power plant No.5 300.0 2010-2016 New railroad Highway: Altanbulag – Ulaanbaatar – Zamiin-Uud 1200.0 Upgrade metropolitan roads Roadway development In order to deploy strategic mining deposits at the highest efficiency, the infrastructure must be developed The Government of Mongolia declared 26 infrastructure and development projects to implement with the highest priority -Refer to the Government decree #320 issued on October 14, 2009 THE MINISTRY OF FINANCE, MONGOLIA

INFRASTRUCTURE PROJECTS COPPER REFINERY Enormous copper deposits in Erdenet and Oyu Tolgoi Refine to add value Some “Feasibility study” is done Capable of refining 860 thousand tones copper Estimated budget 1.0-1.8 billion USD OIL REFINERY -Oil products are 100% imported -Must process and supply internally to support development of mining sector Capable of producing 2.0 million tones oil products Estimated budget 1.0 billion USD NEW RAILROAD -Railroad grid includes southern area where mining deposits are -Present capacity is transferring 15 million tones of goods -TT & OT products alone expected to reach 40 million tones per year Estimated budget 800 million USD

Favorable economic conditions Main indicators point in positive direction Debt situation is sustainable Political stability Positive outlooks from rating agencies Financing needs Deployment of Strategic mining deposits Development of infrastructure to support mining projects Alternative external financing sources Access to international market Sovereign benchmark rate is needed Encouragement from major financial institutions and investment houses

Ministry of Mineral Resources and Energy, Mongolia EXPECTED RESULTS Source: National Development and Innovation Commission Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia EXPECTED RESULTS Source: National Development and Innovation Commission Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy, Mongolia EXPECTED RESULTS Source: National Development and Innovation Commission Ministry of Mineral Resources and Energy, Mongolia

Ministry of Mineral Resources and Energy Mongolia United Nations str. 5/2 Government bldg. 2 Ulaanbaatar 210646 Tel: +976-11-263296 Fax: +976-11-330627 E-mail: cooperation@mmre.energy.mn