Mongolia Projects & Investment SummitChallenges and Opportunities for Growth

Randolph S. Koppa, President, TDB Hong Kong, Nov. 16, 2015

CHALLENGES AND OPPORTUNITIES

FOR GROWTH IN MONGOLIA

• Review of past cycle, 2009 to 2015

• Past forecast of investment needs

• Progress on meeting these needs

• New Developments

• Current forecast of investment needs

• Potential sources of funds

• Roadblocks

• Outlook

OT INVESTMENT AGREEMENTOCTOBER 2009

• From 2003 to 2009 negotiations with Ivanhoe, Rio Tinto and Mongolian Government had been ongoing

• Agreement represented a real breakthrough as there had been significant resistance due to environmental and social concerns and distrust of letting a foreign company control this valuable resource.

2009 ASSESSMENT OF INVESTMENT NEEDS FROM 2010 to 2015

• Major mines $7 billion – $10 billion

• Power $2 billion

• Railroads $4 billion

• Roads $1 billion

• Urban Devel. $7 billion

• Water $0.5 billion

• Environment $1.5 billion

• Social $1 billion

• Business Capex $6 billion – $8 billion

----------------------------

Total $30 billion - $35 billion

SOURCES TO MEET THE NEEDS

• The Domestic sources could provide about one third of the investment needs or $10 billion

• FDI in mining should provide $10 billion

• Other FDI $1 to $2 billion

• From Sovereign and Bilateral loans $3 to $5 billion

• Foreign Lenders, such as IFIs and International banks will need to consider up to $5 billion

• Donors and NGOs $1 to $2 billion

FLOODS 2010/11 SPUR COAL MINING

• Mine Development $ 12 bn. to $ 20 bn.

• Infrastructure $ 8 bn. to $ 12 bn.

• Urban development $ 6 bn. to $ 8 bn.

• Agriculture $ 1 bn. to $ 2 bn.

• Industry and Commerce $ 15 bn. to $ 20 bn.

• Environment $ 1 bn. to $ 2 bn.

• Social $ 1 bn. to $ 2 bn.

• Financial Sector $ 1 bn. to $ 2 bn.

Totals: $ 45 bn. to $ 68 bn.

PROMPTING A REVISION OF THE NEEDS 2010 to 2015

WITH A REVISED SOURCING OF FUNDING

• FDI $ 11 bn. to $ 14 bn.

• Domestic sources $ 12 bn. to $ 18 bn.

• Sovereign Borrowing $ 3 bn. to $ 6 bn.

• Foreign Capital Markets $ 11 bn. to $ 16 bn.

• IFI & Foreign bank Loans $ 7 bn. to $ 12 bn.

• Donors and NGOs $ 1 bn. to $ 2 bn.

• Total $ 45 bn. to $ 68 bn.

AND A WARNING ABOUT LAGGING INFRASTRUCTURE

CHINGGIS BOND WAS RAISED FOR INFRASTUCTURE

• One of the goals was to enable completion of the rail way from TT to the Chinese border

• So far, all we have is a paved highway

• Truck transport costs make Mongolia’s hard coking coal product too costly

MONGOLIAN COAL EXPORTS

Source: NSO & TDBC

• Average price in 2011 $110 per ton• Average price in 2012 $100 per ton

2.5 3.3 4.27.1

16.7 21.1

14.3

22*

52

6570

0

10

20

30

40

50

60

70

80

2006 2007 2008 2009 2010 2011 Sep,2012 2013 2014 2015

Mt

ACTUAL FORECAST

* Revised forecast by TDB Oct

2012

IRON ORE EXPORTS

87 81

250

437

382

550

0

100

200

300

400

500

600

700

2008 2009 2010 2011 Sep, 2012

Actual Forecast

USD Mln

Source Oct 2012: NSO and TDB

COPPER PRODUCTION

70170 160

280

420

600

760

0

100

200

300

400

500

600

700

800

900

1000

2007 2009 2011 2013 2015 2017 2019

Erdenet Mining Corporation Oyu Tolgoi

‘000 Mt

Source 2012: Oyu Tolgoi

10.9

14.6

18.0

20.9

25.5

29.6

-5.0

0.0

5.0

10.0

15.0

20.0

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Actual Forecast Real GDP growth rate

USD bln %

NOMINAL ANNUAL GDP AND REAL GDP GROWTH

Source2012:IMF & NSO

BUT THINGS CHANGEDFIVE MAIN OBSACLES END 2012

• Fiscal and monetary policy

• Chinggis Bond and infrastructure

• SEFIL and minerals law

• Oyu Tolgoi

• Tavan Tolgoi (Erdenes Tavan Tolgoi)

REPRESENTING A PENTAGRAM

A FORM COPIED IN NATURE

WITH REGENERATIVE CAPABILITY

MEANWHILE THE COMMODITY CYCLE WAS TURNING AND CHINA SLOWING

Mln Mt/brl 2010 2011 2012 2013 2014 3Q2015

Coal 16.7 21.1 20.9 18.4 13.5 10.5

Copper concentrate 0.56 0.57 0.58 0.6 1.0 1.1

Iron Ore 3.6 5.8 6.4 6.7 4.2 3.4

Crude Oil 2.1 2.5 3.6 5.1 5.1 5.9

Source: National Statistical Office of Mongolia

Value 2010 2011 2012 2013 2014 3Q2015

Exports USD 2.9 bln USD 4.8 bln USD 4.4 bln USD 4.3.ln USD 5.7 bln USD 3.5 bln

Coking Coal USD 0.88 bln USD 2.27 bln USD 1.90 bln USD 1.1 bln USD 0.9 bln USD 0.4 bln

Iron ore USD 0.25 bln USD 0.44 bln USD 0.53 bln USD 0.7 bln USD 0.3bln USD 0.2 bln

Copper

concentrateUSD 0.77 bln USD 0.97 bln USD 0.84 bln USD 0.9 bln USD 1.7 bln USD 1.7bln

Crude oil USD 0.15 bln USD 0.25 bln USD 0.34 bln USD 0. 5 bln USD 0.5bln USD 0.3bln

Export Volume

Export Value

26

Trade FlowsMONGOLIA’S COAL AND IRON EXPORTS SLUMPED

PROGRESS ON MEETING NEEDS WAS STALLING

13.510

3

7.54

0.8

0.58

3

8.54

0.70

2

4

6

8

10

12

14

16

18

20

FDI Domestic Sovereing Foreign CapMkt

Foreign loans Donors

Received Pending To go

4

Progress to end of 2015, 85% of lower target

INVESTOR CONFIDENCE WAS HITTING

ALL REALIZED ACTION WAS NEEDED

• New laws on investment, mining and related were enacted

• New government formed end 2014 • Resolving OT and TT was the charge• Revised Fiscal Stability Law, new Debt Management

Law• Comprehensive Macro Adjustment Plan, Feb. 2015

In other words, the goal was: FOCUS: Build on the Good, Face the Bad, and Deal with the Ugly

THE GOOD (BLONDIE)

THE BAD (ANGEL EYES)

THE UGLY (TUCO THE RAT)

FOCUS, STARE DOWN,CONTROL

HIRE A PROFESSIONAL

MAJOR BREAKTHROUGH

• OT Phase 2 agreement reached

• $4.2 billion project financing agreement to be signed in December

• Largest mine development project financing ever

• $6.8 billion will represent Capital expenditures by OT over next seven years

• Represents confidence of International Finance Community and Rio Tinto in Mongolia

HELPS GIVE POSITIVE SIGNS

• CHP 5 power plant moving ahead with $1.5 billion loan package with a PPP structure

• $500 million TDB 5 year bond

• $161 million Sovereign 3 year Dim Sum bond

GDP GROWTH RATE WILL TURN UP LESS ROBUST BUT STEADY

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

-1,000.00

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

USD

mill

ion

FDI (Natural resources) FDI (Non-NR) OT capital spending GDP Growth (RHS)

2009-2014 OT, IMF, NSO, BOM 2015-2020 WORLD BANK

WB Forecast

WHILE NEEDS REMAIN LARGE

• Mining USD 15 bn. to USD 25 bn.

• Infrastructure USD 11 bn. to USD 17 bn.

• Urban development USD 7 bn. to USD 10 bn.

• Business Capex USD 15 bn. to USD 25 bn.

• Social & Environment USD 3 bn. to USD 5 bn.

• Financial Sector USD 4 bn. to USD 5 bn.

Totals: USD 55 bn. to USD 87 bn.

Total potential investment needs and opportunities 2015 through 2020

Some Major Projects

• $ 3 ETT (ER/Shenhua/Sumitomo?) Cons

• $ 1 bn Rail from TT to border (Shenhua?)

• $ 1 TT power plant (Tendering PPP)

• Rail from TT to Sainshand and beyond (Japan)

• Tsagaan Suvraga Copper mine (Germany?)

• Low income housing for UB ger districts

• New rail line to replace current main line

• Hydropower plant (China Development Bank)

HOW CAN NEEDS BE MET?

• FDI $ 14 bn. to $ 20 bn.

• Domestic sources $ 12 bn. to $ 19 bn.

• Sovereign Borrowing $ 4 bn. to $ 8 bn.

• Foreign Capital Markets $ 10 bn. to $ 18 bn.

• IFI & Foreign bank Loans $ 14 bn. to $ 20 bn.

• Donors and NGOs $ 1 bn. to $ 2 bn.

• Total $ 55 bn. to $ 87 bn.

INVESTOR REQUIREMENTS

• Strong Fiscal discipline

• Prudent monetary policy

• Improving legal environment

• Enforcement of agreements

• Good debt management

WORLD BANK OUTLOOK

• Real GDP rising to $16 billion in 2020

• Continuous trade surpluses

• External Sovereign Debt to GDP 39% in 2020

• FDI of $10 billion during next 5 years

• Current account deficit 9.4% in 2020

• Fiscal deficits under FSL moving down to 3.3%

Source: World Bank November 2015 Mongolia Economic Outlook

CHINA IS KEY EXTERNAL FACTOR

• China imported 36.4 mt of coking coal through Sept 2015, down 18% yoy

• Mongolia exported 10.4 mt to China during that time, down 13% yoy

• China imported 613 mt of iron ore in first 8 mos. of 2015, down only 0.2% yoy

• Mongolia exported 3.4 mt of iron ore to China in first 9 mos. of 2015, down 17.6% yoy

CHINA TURNS TO EXPORTS

EXCESS INVENTORY AND PRODUCTION

• China exported 52.4 mt of steel 1H 2015, expects to exceed 100 mt, up 8% from 2014 and roughly equal to all of Japan’s annual production

• EU ministers call for conference to discuss

• China’s coke exports 7.5 mt through October, up 15% yoy

• China exported 750,000 t of coking coal, through Sept 2015, up 26% yoy

CARS ARE NEXT

• GM announced 30,000 to 40,000 to USA 2016

CONCLUSIONS

• Mongolia has Taken action to stabilize its economy and attract foreign investment

• With investment in a few key mining and infrastructure projects Mongolia can profitably provide commodities to China even under lower growth scenarios

• Investors generally need to take a longer term view: however the levels of distressed assets could provide attractive near term returns

DAMAGED ARMS REGENERATING

THANK YOU! Thank you!

Contacts

47

Trade and Development Bank

14210 Peace Avenue 19

Sukhbaatar District 1st Khoroo

Ulaanbaatar, Mongolia

Swift: TDBMMNUB

www.tdbm.mn

Randolph Koppa

President

T +976 11 318970 ext. 1610

F +976 11 312418

E r.koppa@tdbm.mn

Orkhon Onon

First Deputy CEO

T +976 11 329087 ext. 1601

F +976 11 312418

E orkhon@tdbm.mn

Erkhembayar Baltsukh

Director

International & Corporate Relations Department

T +976 11 319943 ext. 1495

F +976 11 312418

E erkhembayar@tdbm.mn