Mr O. OrkhonFirst Deputy CEO

August, 2011

Hong Kong

Mongolian Financial Services Industry

Strategic Coal Market Developments

Mr. Randolph S. KoppaPresident

Trade and Development Bank of Mongolia

Coal Mongolia February 9, 2012

• Demand trends

–Coking

–Thermal

• Supply Options

• Mongolia’s Position:

–Advantages

–Threats

• Conclusions and recommendations

OVERVIEW

CRUISING?

27

33

39

4550

3,7 4,2 7,1

16,621.1

0

10

20

30

40

50

60

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Mongolian Coking Coal Exports to China

Actual

Forecast

• Average price in 2011 $100 per ton• Average price in 2010 $50 per ton Source: Frontier Securities, TDB

MT

MORE AMBITIOUS PLANS

10 12 15 17 21 6

7 11

15 15

6

10

15

6

10

10

10 8

10

8

8

8

0

10

20

30

40

50

60

70

80

90

2011 2012 2013 2014 2015

MAKHunnu Coal MECSouthgobiErdenes TavantolgoiMMCDomestic consumption

Mongolian production prospect

in million ton

Source: Company data

RECENT HEADLINES

• “Met coal market falters; capacity forecasts sliced”

MetalBulletin January 19, 2012

•

MetalMiner October 26, 2011

• “China has ‘lost passion’ for coking coal imports, Sino

East Minerals director says” MetalBulletin January 11, 2012

• “Peabody expects boost in met coal demand”

MetalBulletin January 24, 2012

CHINA IS THE DRIVER FOR COKING COAL

• Steel production up 9% in 2011 to 683 mt

• World production up 6% to 1,490 mt

• China economy up 8.9%in 2011 Q3

• But…

• Is this a soft landing?

• Coking coal prices softening?

• Short term versus long term?

Consider this:

CHINA’S 2012 TO 2017 PLAN

• Resettlement and urbanization plans continue

• 100 to 150 million people affected

• 36 million new affordable housing units

• Housing starts will be 8 times rates in USA!

• Other housing and commercial construction will be needed to complete new settlements as urbanization rate grows from 48% to 54%.

And to get from here to there….

BEIJING, SEPTEMBER 20, 2010

HEBEI PROVINCE, CHINA100 Kilometer Truck Jam August 23, 2010

CHINA NOW #1 MOTOR VEHICLE PRODUCER

• 18 million produced in 2011

• Now 70 million vehicles in circulation

• 200 million by 2020

• Requiring more and better road infrastructure

Housing and transport drive half of steel demand.

STEEL DEMAND WILL CONTINUE GROWING

495 500574

627683

724767

813862

914969

0

500

1000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MT

6% per year is expected in China’s 5 year plan

Actual Forecast at 6% CAGR

DRIVING DEMAND FOR COKING COAL

mt

WITH INDIA FOLLOWING CLOSELY BEHIND

COKING COAL DEMAND TO RISE 40%

(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL

China 6 7 35 45 62 80 89 97 107

India 24 28 29 35 38 42 49 59 61

Japan 65 65 52 63 61 58 59 59 58

Korea 21 22 19 22 26 28 29 30 31

Other Asia 9 10 9 10 10 10 10 11 11

Europe 74 75 53 70 70 72 76 78 79

Middle East & Africa 5 5 3 4 5 5 5 5 6

North America 8 7 5 7 7 7 8 8 8

South America 17 16 13 17 19 22 23 24 26

Total 229 233 217 272 299 325 348 370 387

Global Coking-coal seaborne import market

Source: Australian Bureau of Agricultural and Resource Economics (ABARE), Trade data,McCloskey, Industry sources, CLSA Asia Pacific Markets

THE CHINA GROWTH RATE IS KEY

• 6% per annum growth in steel could be a conservative estimate.

• At 8% growth in steel production, an additional 10 mt to 40 mt per year will be needed through 2015

In addition, the coking coal import projections assume domestic coking coal production will grow at near historical rates. However, that may not be so.

HOME COKING

• China currently produces about 380 mt of coking coal for its steel mills

• Production growth is slowing

• Most mines are underground

• Costs are rising, as are safety concerns

• New furnaces require more hard coking coal

• Until scrap steel becomes significant, it is possible domestic coking coal production could be flat to declining, requiring greater imports

STRATEGIC SUPPLY QUESTIONS

• Will there be enough coking coal?

• Which countries can supply it?

• What will be the prices?

• Will Mongolia remain competitive?

MAJOR COKING COAL EXPORTERS

Australia 155 Mt Czech Republic 4 Mt

USA 51 Mt New Zealand 2 Mt

Canada 27 Mt Indonesia 2 Mt

Mongolia 16 Mt Poland 2 Mt

Russia 14 Mt South Africa 1 Mt

Top Coking Coal Exporters 2010

Source: IEA & World Steel Association

ONE UNDER WATER, BUT NOT FOR LONG

Queensland, Australia January 2011

NO WORRIES!La Nina only stays for two years January 2012

AUSTRALIA’S 25 MT SETBACK HELPED OTHERS

• Yet Australia remained largest coking coal exporter by far at over 130 mt in 2011

• USA export shipments up 6%

• Canada export shipments up 10%

• Major west coast ports investments noted

• Russia’s East Siberian Mechel’s mine began operation August 2011. Target: 8 mt

• Rail link 324 km to BAM completed

BAIKAL-AMUR MAINLINE

MECHEL’S NEW OPEN PIT COKING COAL MINE IN EASTERN SIBERIA

• Bought the mine and the uncompleted rail

spur in 2008 for USD 2.3 bn

• Just completed 324 km rail spur from Elga to

BAM, under own funding of USD 1.2 bn

• Close to Russian Far East ports

• Vostochny port handled 13 mt of coal in first

eight months of 2011, up 17%

VOSTOCHNY PORT

How much more can it handle without big investment?

PLUS ONE UP AND COMER

FORCING ITS WAY ONTO THE COAL MARKET

• Rapidly growing economy

• GDP up 6% in 2010, now close to USD 10 bn

• Very active mining sector

• Major players such as Rio Tinto, Vale present

• New major coking coal mine began exports August 2011 and shipped almost 1 mt

• Moving to get rail links improved

• Ranked 120th by Transparency International Corruption Index

YES IT’S MO… MOZAMBIQUE• Massive reserves of coal, especially coking, being

reported: Zambeze 1.7 bn tonnes, Cahora Bassa 1 bn

tonnes, Ncondezi 1.8 bn tonnes

• Major investment June 2011 by Rio Tinto in the Benga

project with 1.2 bn tonnes resources

• Vale opened Moatize mine mid 2011 with USD 6 bn

investment plan including an own funded USD 1 bn

new and improved 230 km railway through Malawi to

reach Nacala port

THROUGH MALAWI TO THE NACALA CORRIDOR

DESTINATION: INDIA

• Within 5 years Mozambique aims to export

50 mt of coking coal per year

• Mozambique located closer to India than Australia, Russia, Canada, USA and Mongolia

• Indian companies such as Jindal Steel, Coal India and NMDC investing in mines and logistics

• Brazil and Korea are other destinations

• Logistics will continue to be a challenge

TRANSPORTATION ECONOMICS 100 trucks, 2 trains or 1 vessel?

LET’S REVIEW THE BIDDING

• Over next 5 years:

• China should be importing 70 mt to 100 mt, or even up to 200 mt a year of coking coal, preferably hard

• India will be importing 40 mt to 60 mt a year

• The rest of the world will have modest increases in imports

• Mozambique, Australia and maybe Indonesia have advantages to supply India

OKAY, MONGOLIA, YOUR BID

Source: MMC

WHERE DOES THIS LEAVE MONGOLIA?

• Focused on China

• Sell to China

• Ship through China to Korea, Japan

• Produce a high quality coking product

• Maintain production cost advantages

• Reduce transport costs

Logistics and transportation economics KEY

HOW ARE THINGS GOING?

• Even without ideal mine and transport infrastructure, coking coal mines are advancing

• Paved road and wash plant for ER

• Improved border crossings

• China side wash plant to serve SGS

• China side rail links now complete to Ceke

• Paved 50 km road this year to Ceke in plan

• Mine site power plants next

PRODUCT/PRICE• 2011 conditions have provided good margins

• More diversification of client base

• Only about half of product is premium hard coking coal

• Soft coking coal price advantage versus Australian threatened by transport costs

• Hard coking coal more in demand for newer furnaces; price premiums to increase

• Remember, most of steel production in China is in coastal provinces

THREATS• Inflation: Cost increases of mining inputs

- Diesel: prices up 27% in 2011

- Labor: mining sector up 40% in 2011

• Currency appreciation of MNT vs. USD

- Trend over next five years up 20% to 30%

• Currency appreciation of RMB vs. USD

- Could increase transport costs in China

- Making Mongolian coal less competitive

As more hard coking coal supplies come on stream from the major producing countries, their prices and products could match and beat Mongolia’s.

China also could increase coking coal mining despite current disadvantages to do so.

COST TAKEOUTS• Paved roads to border

• ER/TT to border expanding to 4 lane

• SGS/ MAK to border 4 lane

• Railway from TT to/ through border

• On site wash facilities

• On site power

• Local production of diesel

• Upgrading existing Mongolian Railway

• Rail investment on Chinese side

RIDING THE RAILS

Source: South Gobi Sands

MEET CHARLIE CARBON

Travel with him to market

THE SLOW TRUCK, TRAIN, BOAT TO CHINA

• 250 km truck TT to Chinese border $20• Cross Border 20• 150 km truck to wash plant 10• Wash 15• 150 km truck to Baotou railhead 10• 1,100 km train to Qinhuangdao 45• 1300 km Boat to Shanghai 20

------• Total $ 140

Based on 2011 cost estimates by TDB and CLSA

CHALLENGES

• Maintaining attractive investment and operating climate for private initiatives in infrastructure and mine development

• Prioritizing government investment and expenditures to properly complement and support the coal mining initiatives

• Fostering the environment for value added processing and domestic product applications

• Managing inflation and Dutch disease impact

• Water and environment

THERMAL OR STEAM COAL

• Thermal coal reserves in Mongolia are vast

• China is a logical market given power needs

• Price levels and logistics issues have made the sale to China and seaborne markets relatively unattractive until now

• China’s demand for imports was seen modest

• China has been moving towards other alternatives, until……

REMEMBER THIS? Miyako City, Japan March 11, 2011

POWER SUPPLY PRIORITIES ADJUSTED

• Japan increased steam coal imports

• China increased steam coal imports

• Nuclear plant trend retarded

• Wind and other renewable methods stimulated

However, despite some reordering of the options for energy, Coal will remain king in Asia

COAL WILL FIRE ENERGY IN ASIA

Source: IEA World energy Outlook 2010

FAMILIAR PLAYERS IN THERMAL

Source: IEA & World Steel Association

MONGOLIA’S STRATEGIC OPTIONS FOR THERMAL COAL

• Export to China and seaborne markets

- Cost, logistics, infrastructure challenges

• Satisfy immediate domestic power needs

• Use technologies to achieve petroleum product independence

• Use coal to create and export electricity

• Use coal to create and export other value added products

CONCLUSIONS• Coking coal for China’s steel mills is a vital part

of Mongolia’s near term development

• Focus must be to address infrastructure and logistics issues to maintain inherent competitive advantages in coking coal production

• Good infrastructure and logistics can also spur thermal coal exports of substance

• Thermal coal presents the opportunity for Mongolia to achieve electrical, gas and liquid power independence, and to create coal based and coal intensive products for export

FOR INVESTORS IN COKING COAL

• The Mongolian Coal Mining Sector presents numerous

attractive investment opportunities

• Coking coal projects have already established their

attractiveness

• To the extent that these and new mines can demonstrate

their ability to offer quality and competitive products

delivered to end users, Mongolian mines and related

logistics providers will continue to be valued

investments

FOR INVESTORS IN THERMAL COAL AND COAL DERIVED PRODUCTS

• Mongolia offers opportunities for high tech, clean applications

• Ambitious projects and products can be supported by the market in China, which can be substantial, as well as Korea, Japan and beyond.

BANK HIGHLIGHTS

Bank Ratings by Moody’s

Financial Results (mln.USD)*■ Mongolia’s #1 corporate bank

■ Rapid growth and improving asset quality

■ Dominant market share in the corporate and SME client segments, FX, money and bullion markets

■ Leading international trade facilitator of Mongolia

■ The country’s first and still only the second time bond issuer on the international debt markets

■ Continuously strong credit fundamentals:

Very high profitability with well-managed cost/expenses

Diversified loan base and good quality assets

Prudent risk management and corporate governance

Senior Unsecured EMTN (foreign currency) Ba3 LT/ST Bank Deposits (foreign currency) B2/NP LT/ST Bank Deposits (domestic currency) Ba3/NP LT/ST Issuer Rating Ba3 Subordinated foreign currency issue B1 Local currency bank deposit Ba3 Outlook Stable

2008 2009 2010 2011

Total Asset 520.3 564.6 1065.0 1498.3

Total Loans 347.4 281.2 369.5 817.3

Total Deposits 404.6 435.1 912.2 1213.7*

Total Equity 54.0 47.1 78.2 127.7

Net Profit 12.9 10.5 16.5 34.7

Capital Adequacy 14.7% 13.0% 15.9 % 12.4%

ROA 2.8% 2.1% 1.5 % 2.3%

ROE 24.9% 19.5% 22.9 % 35.5%

MNT/USD = 1396.37

* Including bonds

HIGHLIGHTS OF TRADE FINANCE BUSINESS

• Mongolia’s #1 leading corporate bank

• Top international expertise derived from State Bankof Mongolia origins

• 60% market share of foreign remittances

• 57% of Mongolia’s trade finance relatedtransactions

• $160 million in trade finance credit facilities frominternational banks

• 26 correspondent accounts in all major currencies

BEST TRADE FINANCE BANK IN MONGOLIA 2011

• TDB has proven itself to be

the premier trade finance

facilitator taking the majority

of votes from world’s major

financial institutions to win

“The Best Trade Finance

Bank of Mongolia 2011”

award, by the journal GTR.

TDB Capital - OverviewTDB Capital, TDB’s wholly owned subsidiary, acts as its

investment banking arm. It is the first investment bank of

Mongolia, which provides corporate finance, research and

advisory, securities brokerage, underwriting IPO and debt notes

and asset management services. TDB Capital provides access

to the world’s capital markets for its institutional, corporate and

high net worth individual clients.

Thank you for your attention!

Juulchin Street - 7

Baga Toiruu - 12

Ulaanbaatar, Mongolia

Tel: 976-11-31 99 43

Fax: 976-11-31 24 18

Email: corrbanking@tdbm.mn

http://www.tdbm.mn

http://www.bankcard.mn

http://www.mongolianbusinessguide.com