MONGOLIA INVESTMENT CONFERENCE:
May 25, Chinggis Khaan Hotel, Ulaanbaatar, Mongolia
Eurasia Capital held its second annual Mongolia Investment Conference which was a big success. With more than 150 attendees including Mongolian public and private sector leaders and international and regional investors from over 20 countries, the conference profiled many of the extraordinary investment opportunities Mongolia has to offer and conference participants left the day expressing their strong interest in taking part in the Mongolian growth story.
The conference began with an opening speech by Vice Minister of Finance of Mongolia Mr. Gankhuyag welcoming participants from around the world to Mongolia and thanking Eurasia Capital for holding this important investment event. He said that Mongolia had undertaken a long journey in its transition to a market economy and with two decades of reforms and development Mongolia is now well positioned as a well functioning market that is increasingly attractive to foreign and domestic investment. He stated that the Mongolia Investment Conference organized by Eurasia Capital is a great example of these changes and the international partners at the event coming to explore business opportunities in Mongolia reflects the extent of transition Mongolia recently underwent.
Budget deficit revised down to 6.7% for 2011, Vice Finance Minister says
The Vice Minister highlighted selected recent economic performance indicators. Although Mongolia was hit hard by the global financial crisis, the economy stepped into recovery with 6.1% growth in 2010 and is performing even better this year, hitting a historical high of 9.7% real growth in 1Q2011, he said. He continued by stating that nominal GDP growth hit a remarkable 24.9% in 1Q2011 while Inflation remained in single digits at 5.5%. MNT appreciation is making local financial instruments more attractive, as well as helping to contain inflation. Strong revenues brought budget surplus in 1Q2011 too. Initially, 9.9% budget deficit was anticipated for 2011. However, it was revised down to 6.7% for the current year, Mr. Gankhuyag informed the audience.
He noted that developments such as Oyu Tolgoi agreement, IPOs of Mongolian Mining Corp (MMC) and other mining companies and offering of 10% of Erdenes Tavan Tolgoi shares to domestic enterprises brought about current performance of the Mongolian economy. Erdenes Tavan Tolgoi share offer at nominal price incentivized domestic businesses to register and pay taxes, Mr. Gankhuyag said.
Vice Minister pointed at some bottlenecks in Mongolian economy. Lack of infrastructure remains as a bottleneck and timely investments are needed to eliminate them, he said. The country needs new rail routes, border crossings, equipment, etc. Eliminating bottlenecks in financial markets may allow Mongolia Stock Exchange (MSE) to compete with Hong Kong Stock Exchange and Shanghai, he stated. "We need to dream big and aim high" Mr. Gankhuyag said. He noted that contracting London Stock Exchange to manage and modernize MSE is a welcome development in that direction.
Vice Minister Gankhuyag informed the audience that Tavan Tolgoi negotiations are still underway. Each Mongolian national will receive 536 Erdenes Tavan Tolgoi shares plus one share of Erdenes MGL, a state assets holding company. The Development Bank is in the final stages of management team negotiations, according to the Vice Minister. The Development Bank will issue MNT800bn bonds guaranteed by the government. Additional MNT-bonds equivalent to US$200mn will be placed on MSE to fund construction and cashmere sector. And finally, Mongolia Stabilisation Fund has already accumulated US$50mn in the current year. The fund is expected to help to overcome risks of commodity prices volatility. The fund targets to accumulate MNT183bn this year.
Mongolia is Global Outperformer in Next Decade, Alisher Ali of Eurasia Capital Describes
Mr. Alisher Ali, Chairman of Eurasia Capital, called Mongolia as a "global outperformer" over the next decade. He said that Mongolia will be the world's fastest growing economy in the next ten years primarily thanks to substantial increase in investments, exports and overall income. He recommended seven asset classes that investors should focus in investing: local equities, stocks of internationally listed companies, the Mongolian tugrik (MNT), fixed income instruments, private equity/pre-IPOs, property and infrastructure.
Net Capital Inflow is up 2.7 times y-o-y in 1Q2011, According to Deputy Governor of Bank of Mongolia
Mr. Zoljargal, Deputy Governor of the Bank of Mongolia (BoM) started his speech by comparing 2010 numbers which are totally different with the 2009 numbers. He said 2010 numbers are exciting and represent big changes. For the next two years he gave positive outlook for the economy and expressed readiness of the central bank to solve the challenges. During 2011 he informed that from the monetary policy prospective the BoM will be focused on "two wild horses" to control, namely, inflation and appreciation of the MNT. According to the National Development and Innovation Committee (NDIC) estimations, the Mongolian economy will grow not less than 7.5% for the next ten years. NDIC projected that in 2011 GDP will grow 7.5% and will top double digit growth level of 20.6% in 2014 and gradually slows down to 16.9% in 2020 making Mongolia one of the fastest growing economies in Asia (China, India, Indonesia, Vietnam).
Commenting on foreign trade Mr. Zoljargal said that it is very important for Mongolia. The big change in Mongolian foreign trade structure happened last year when coal exports value surpassed copper exports by US$100mn to reach US$877.8mn meaning that coal is more important than copper until Oyu Tolgoi starts production. Talking about terms of trade (ToT) (export price index/import price index) which shows the ability of the country to finance its imports Mr. Zoljargal said that ToT ratio is stable and high although it declined from its high level of approximately 2 in March 2008 to 1.25 in January 2009. As of March of 2011 ToT ratio is more than 1.5. Mr. Zoljargal noted that month on month (m-o-m) ToT change is very important for the BoM and BOM is looking closely to m-o-m changes. He said that m-o-m change in ToT is positively correlated to the international prices of oil, copper and coal. Change in export price index stayed stable from February to July 2010.
Talking about net capital inflows Mr. Zoljargal informed that net capital inflows started growing gradually in April 2010 and in December 2010 reached the highest level ever making the whole year net capital inflows to reach US$1.6bn growing 5.3 times compared to 2009. This year net capital inflows from January to March is up 2.7 times compared to the same period of 2010. He also noted that the trend to go like this for coming years which will create difficulties to manage the capital inflows. In 2010 Mongolia experienced US$931.5mn current account deficit and according to Mr. Zorjargal it is going to be negative for 2-3 years. He also noted that current account may stay negative and then turn positive until all capital goods (machinery, equipment etc) imported and used for production purposes and to increase the exports. But he said that capital and financial account surplus will fully finance current account deficit. In 2010 the sum of capital account, direct investment and portfolio investment was US$2.14bn. BOM projects that the next year Balance of Payments (BOP) will reach to US$870mn.
Mr. Zoljargal said that the main job of the BoM is to look at the purposes and composition of the capital inflow into Mongolia, whether it is for the long term investment, short term investment or for speculative purposes. The BoM will sterilize the short term effects of net capital inflow and will no do anything about long term capital inflow, he pointed. The MNT appreciated 3% so far this year and according to Mr. Zoljargal the BoM didn't intervene but when the volatility comes in affecting daily business the BoM will not tolerate any volatility and will intervene. Objective of the BoM this year is to smooth excessive volatility in the exchange rate whilst opportunistically build up international reserves, he said. The BoM didn't intervene from the beginning of this year and believes that market is far more efficient than a year ago. According to the central bank's estimations, last year the MNT appreciated 32% and 17% in real and nominal terms, respectively.
On the back of huge capital inflow the BoM had to increase money supply (M2) and money supply increased 67% last year. At the same time the central bank conducted sterilization operations to mitigate the potentially undesirable effects of capital inflows which caused the inflation to come down to 13%. Inflation was 7% and 5.5% in March and April this year. Mr. Zoljargal praised the government's efforts on controlling supply shocks and ensured that there is nothing to worry this year. To the concern of general public regarding reliability of the low inflation numbers for this year Mr. Zoljargal explained that the numbers are real because the government of Mongolia was able to control meat and food prices which normally account for 60% of Mongolian consumer basket. Mr. Zoljargal said that one third of inflation is "imported" from China (prices in China have been increasing and reached 5% last year) and Mongolia can't do anything about it and have to take it as granted as long as Mongolia has 9% economic growth. Mr. Zoljargal said that if the government does not do any shocks on supply and demand sides inflation level will be stable.
According to Mr. Zoljargal loan-to-GDP ratio which shows financial depth of the country was 48% in 2008. If compared to the ratio of countries as Japan (293%), China (126%) and South Korea (113%) the Mongolia may be underpenetrated and have a room to grow, but according to him the Mongolian banking system is on the safe line.
Talking about government budget Mr. Zoljargal indicated that budget revenue is growing and at the same time budget expenditure is also growing. To the concerns that the Mongolia may be overheated Mr. Zoljargal remarked that Mongolia is in its early stage of development and it is just warming up.
Mr. Zoljargal believes that CNY5bn currency swap agreement signed with China in early May this year will improve credibility of the MNT and helps the MNT to be convertible in the future. He also informed that serious part of the Mongolian M2 is in CNY.
According to Mr. Khashchuluun, Chairman of NDIC, Mongolian GDP is estimated to exceed 10% and be around 12% in this year and GDP per capita will reach nearly US$3,000. By 2015 GDP will increase 14% and GDP per capita to reach around US$6,000, Mr. Khashchuluun said.
Erdenes Tavan Tolgoi IPO Expected at the Beginning of Next Year
IPO of Erdenes Tavan Tolgoi is expected in the beginning of 2012, Mr. Enebish Executive Director of Erdenes MGL said. He informed that Erdenes Tavan Tolgoi had already started mining activities on the Eastern Tsankhi coalfield with 250,000 tonnes of coking coal currently ready to be exported.
According to Mr. Enebish, Tsankhi and Borteeg coalfields primarily contain coking coal. NorWest estimates suggest that Eastern Tsankhi coalfield contains 1,078mn tonnes of JORC compliant coal resources with 78% being coking coal. Erdenes TT JSC will hire a contract miner to develop the coalfield. Western Tsankhi coalfield contains 1,204mn tonnes of coal resources with coking coal accounting for 65% of resource. Mongolia is currently in the process of selecting development partner for the Western Tsankhi coalfield.
Mr. Enebish informed that full production capacity of the mine will be 15Mt per year which will be reached in 2014. The mine life is not less than 50 years. As of May 15, 2011, 1.6 million BCM of pre-striping was performed. Approximately 250 thousand tons of coal are uncovered and now being prepared for export. The Resource report of the Eastern Tsankhi area or Erdenes Tavan Tolgoi mine area was commissioned (in April). The Eastern Tsankhi Coalfield Feasibility Study on mining of 15 Mtpy for Erdenes-TT mine was approved (in April). Water for Erdenes Tavan Tolgoi will be taken from Balgasiin Ulaan Nuur underground water deposit (resources 465 l/sec) which is 70km from coal t deposit.
Mr. Enebish said that Erdenes MGL is planning to establish other subsidiaries around other assets in holds, including Oyu Tolgoi. He said Erdenes OT will be established without specifying time.
24-hour Trading System to be Installed at MSE by Q42011
Chairman of MSE Mr. Bold said that the exchange is negotiating with legal firms on Erdenes Tavan Tolgoi listing issues whether listing should take place in London or Hong Kong or both and what instruments like ADR, GDR or common stocks to use. Whole 24 hour tradable internet trading system will be introduced to the MSE under the agreement with the London Stock Exchange (LSE). By Q3 or Q4 2011, the system will be installed. Mr. Bold stated that the key challenge with the clearing house is that it is a separate entity. MSE is waiting for the LSE's recommendations. At this stage there is no specific guidance whether the clearing house should be separate from MSE or unified or a subsidiary. He added that over the next months there will be many changes.
Banking Assets to Double, Loans to Surge 50% y-o-y in 2011, Mongolian Bankers Say
Trade and Development Bank (TDB) President Mr. Randolph Koppa stated that the banking sector loans grew 35% y-o-y in Q12011 and are expected to grow over 50% in 2011. And Mr. Batzaya of Khan Bank said banks' assets would double in 2011 and therefore the banks will have enough capacity to seed the loan growth.
Banking sector represents 95% of the Mongolian financial sector, Tenger Financial Group CEO Mr Bold said. He said that to increase the investor base, Mongolia needs to reform the pension and insurance market. Insurance sector would be very interesting target for strategic and financial investors since the Mongolians' net income is expected to increase significantly. Leasing is another interesting area, he added. There are a few true leasing companies.
Oyu Tolgoi Project, Rio Tinto, by Mr. Peter Nicholls, General Manager - Commercial
General Manager of Rio Tinto's Commercial Department Peter Nicholls said that Rio Tinto is proud of being involved at Oyu Tolgoi project which is dubbed to be a "country-changing" project. Rio Tinto currently owns 42.1% and took the management of Oyu Tolgoi project following the agreement signed with Ivanhoe Mines in December 2010. He informed that Mongolian Directors of the Oyu Tolgoi LLC recently visited Rio Tinto's headquarters in London to exchange views. The Directors also visited Rio Tinto's Salt Lake City copper mine in Utah, which has been in operation for over 100 years. Mr. Nicholls said that on Oyu Tolgoi project Rio Tinto is implementing its best international practice obtained from operating in over 40 countries. After Mr. Nicholls said that Rio Tinto has a strong position in the UK and Australian markets and employs approximately 77,000 people who are working in the world class operations. Rio Tinto's 2010 global gross sales revenues were US$60bn. Rio Tinto has operations on the pristine tundra in the far north of Canada, in the Namib Desert, in the remote Kimberley region of Western Australia.
Mr. Nicholls said that Rio Tinto believes that Oyu Tolgoi is the best undeveloped copper and gold project in the world and when it reaches full production in 2018 it will be a top five global copper producer – and one of the world's biggest producers of gold. Oyu Tolgoi has 2.6Bt of resources while reserves are 1.4Bt. The average annual production is forecasted to be 450,000 tonnes of copper and 330,000 ounces of gold with the potential for a mine life being 50 years. Mr. Nicholls also added that South Gobi region is a highly prospective region with further exploration potential. Oyu Tolgoi is expected to be a first quartile cost producer which means it can withstand the lower priced end of the commodity price cycle.
Talking about Oyu Tolgoi investment agreement Mr. Nicholls said that the Government of Mongolia will receive majority of the economic benefits generated by the Oyu Tolgoi project through taxes, royalties and dividends. There are seven main areas of commitment in the agreement; the terms of investment, taxation, procurement, infrastructure, employment and training, regional development and environment. Mr. Nicholls said that Rio Tinto and Ivanhoe Mines have invested US$2bn over the last four years and US$4.5bn is budgeted for the completion of first phase of the project between 2011 and 2013. Construction work is underway on massive infrastructure projects in the South Gobi; the airport, the paved road to Gashuun Sukhait, the 220kv power line. He informed that 12 major construction projects in the South Gobi, Choyr and Darkhan are all 100% managed by Mongolian contractors for a total of over US$40mn. Mr. Peter Nicholls said that so far they have engaged 2,833 Mongolian suppliers and last year they gave signed contracts with 103 local suppliers in Khanbogd and Dalanzadgad for the amount of US$1.5mn.
According to Mr. Nicholls the study named "The development of the Oyu Tolgoi copper mine: an assessment of the macroeconomic consequences for Mongolia" commissioned by Rio Tinto and prepared by the team of independent economists led by Dr. Brian Fisher, Chairman and Managing Director of BAEconomics Pty Ltd shows what Dr Fisher has called "a tide of growth that will float everybody's boat." According to the study the Mongolian economy is expected to grow more than 10% a year for the next ten years, meaning that by the year 2020 the size the economy will more than double, as Oyu Tolgoi ramps up to full production. The study doesn't show the effect Oyu Tolgoi is already having on the economy. Mr. Nicholls said that the investment agreement prompted a surge of international confidence in Mongolia and there has been an influx of foreign investment in the city. Compared to January 2010 the production of wooden doors and windows is up 258%, production of sawn wood is up 300% and the production of cement has doubled in January 2011. The net income of restaurants in Ulaanbaatar was up 800% in January this year. Economists predict that 4 additional jobs will be created for every job at Oyu Tolgoi.
Prophecy Resources, by Mr. David Jan, CFO
Prophecy acquired new resource estimate of more than 1.2Bt of coal for Chandgana project which is open pit mineable. The huge resource means there are abundant fuel for power plant for decades. Moreover Chandgana power plant project is currently the largest of its kind undergoing licence application with the Mongolian Government. Prophecy plans to use clean coal mine melt supply integration concept. Chandgana project is strategically located between Ulaanbaatar and Beijing capable of supplying low cost stable electricity to Mongolia and further on to Beijing. According to the presentation, buying electricity from Mongolia saves China carbon credits and creates value added products made in Mongolia. Initial capacity of Chandgana power plant is 600MW and it is expected to be expanded to over 4,200MW and beyond making Chandgana power plant the largest in Mongolia and major energy source to China. Chandgana will be located 60km far from Mongolia's existing power grid and can be quickly integrated to the Mongolian system and replaced costly Russian power imports.
The project is align with the Mongolian energy plan and has low execution risk, according to the presentation. Modern 800KV DC lines will pass through the Mongolian land and connects Chandgana power plant with Beijing. China Consumed 1.09 trillion KWH of power in the first quarter of 1Q2011. The construction of Chandgana Power plant is planned to be started in the 1Q2013. In addition to electricity, power plant will transform coal to liquid. South Korea will build US$3bn railway which will pass Chandgana and link it to both China and Russia. According to the presentation, international banks are interested in providing money for the power plant. Monnis has invested in Prophecy supporting its operations in Mongolia. Prophecy is looking for Asian listing to capture further gains.
Newcom Group, by Mr. Byambasaikhan, Managing Director of Newcom Group
Newcom Group is a diversified holding company engaged in air transport, energy, real estate, financial services, telecom and other sectors. The iconic business of the group is Mobicom, the first GSM standard mobile operator in the country. According to Mr. Byambasaikhan, the Group is focusing on infrastructure related investment opportunities as one of the most attractive options. Although, Mongolia is very advantaged in terms of location (next to world's second largest economy) and possesses vast potential, infrastructure remains to be the main bottleneck that is undermining country's development. The need for adequate infrastructure across various sectors creates investment opportunities. The company is building wind power plant with a capacity of 50MW, which will be the first plant to be connected to the electricity grid in Mongolia since 1985. The success story of wind farms in Inner Mongolian region of China proves that Mongolia possesses significant wind resources. Also, project is supported by the favorable investment environment in the sector, as Government emphasizes clean energy generation.
Company signed strategic partnership agreement with General Electric, focusing in various sectors of the Mongolian economy. Recently General Electric established representative office in Ulaanbaatar. 2 weeks ago, Newcom's other subsidiary Eznis airlines, signed partnership agreement with ANA one of global airline companies. Eznis will soon start flights to Japan. Newcom believes that after the legislative reforms, PPP projects offer attractive investment potential.
Mongolia Development Resources, by Mr. Marat Utegenov, Executive Director
Mongolia Development Resources (MDR) is MSE listed property and infrastructure developer with the mandate to provide broad possibilities for investors to have exposure to real estate sector of Mongolia. The property would be the next investment attractive sector after mining in Mongolia, Mr. Utegenov stated.
MDR made an IPO on MSE in December 2007, raising MNT 13.2bn and currently it is one of the few listed companies which provides non-resource exposure to investors. Growing income per capita plus good conditional mortgages will make property sector growing. Businesses are expanding and therefore more offices will be needed. MDR is focusing on Ulaanbaatar; second tier cities, i.e. Erdenet, Darkhan, and Dalanzadgad (DZ); and other mining towns
Current real estate market of DZ is insufficient to meet the demand of adequate office buildings, hospitality and industrial spaces. At least there is no proper B Class office in DZ. So that MDR acquired a land to develop a six story building with conference hall, office space and full serviced apartments. The project is to be completed by 2012Q1 for sale and rent.
Also, MDR is running full serviced apartments' project on BayanMongol Residences in central Ulaanbaatar. One entire block containing 60 units are being served to meet corporate clients offering full serviced apartments.
Mongolian Star Melchers (MSM), by Laurenz Melchers, CEO
At the beginning of his speech, Mr. Melchers mentioned several non-resource sectors such as logistics, healthcare, education, agriculture and leisure are also attractive for investment. MSM which is mainly an importing company that brings the global brands to Mongolia has an effective distribution system. It has 3 distinctive departments: industrial, automotive and distribution. MSM is the largest supplier of the exploration equipment, according to the CEO of the company. The company believes that the country will need large number of trucks for mining companies as road and rail infrastructure is inadequate. Other equipments offered are in such sectors as air and power, water treatment, personal safety, washing plants. The company is major importer of consumer goods and automobile brands as Mercedes, Chrysler, Jeep, Dodge and Fuso.
Oyunu Undra Group, by Alex Horbazs, COO
The company is established in 1992 and currently employs 1,100 people. Initial operations of the company were related to the petroleum products' import from Russia. Currently, the company is a diversified entity focused on mining, banking, property, tourism, health care and others. It was the first private company in Mongolia that built molybdenum plant. Arbayan tungsten-lithium deposit is advanced stage project valued at US$150mn. The group owns Mongolian Financial Group and is majority shareholder in Transbank, fully licensed commercial bank. It is the exclusive distributor of Grundig brand. It also owns license for mobile satellite operations and operates tv channel. One of the significant exposure of the company is related to property development. Oyunu Undra owns significant land properties around Zaisan Area and is working in several developments the value of which is estimated at US$225mn. These include high end residential, luxury hotel and office properties. The company is interested its subsidiary companies within next 2-3 years.
Just Group, by Mr. B. Enkhbat, Director, Business Development
Just Group is a diversified investment group. Initial operations of the company were related to petroleum products' import from Russia, which remains to be major business line. It owns 41 petrol stations and 4 oil products tank farms. Other activities of the company are related to agriculture, international trade, construction, banking (owns Savings Bank), mining and others. It currently employs 3000 people. During 2010, the Groups consolidated sales exceeded MNT 248bn. Ollon Ovoot Gold LLC (subsidiary) owns a gold mine located in South Gobi region. Mr. B. Enkhbat, introduced upcoming bond offering by Just Agro LLC, also subsidiary of the group. Just Agro owns 11 slaughter/meat processing plants which produce carcass meat and semi finished meat products. Production is currently exported to Russia, company plans to export meat to Arabian companies starting from this year. Just Agros' market share is 32% in total livestock procurement; 26% in slaughter capacity and 30% in meat and semi-finished meat storage.
Just Agro is planning to offer bonds, so called "Meat-Bond". The proceeds from the offering will be used for OPEX, procurement of livestock and increasing production capacity. It will be the first bond to be issued to purchase livestock.
Bond issue details are: offer date: 1st half 2011; amount: MNT30bn; maturity: 1 year; Interest rate: 16.2% (to be approved by the Financial Regulatory Commission of Mongolia)
Guarantee terms: assets of the company (company is valued at MNT45bn); sales agreements; meat stock of 16,000 tons.
The company plans to export 12,600 tons of beef and horse meat to Russia, 4,500 tons of mutton to Arab countries, 6,000 tons of meat to state reserve and supply meat to domestic market.
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