13.12.2010, Mongolia Investment Needs and Opportunities, Mr. Randolph Koppa

Mongolia’s Investment Needs

and Opportunities

Mr. Randolph S. KoppaPresident

Trade and Development Bank of Mongolia

Business Council of Mongolia

13 December 2010

Oyu Tolgoi agreement Oct ‘09

• Signaled of a new era for Mongolia

• Great psychological and economic stimulus

• $752 million to be spent in 2010

(Now: $1.4 billion)

• $4.6 billion to be invested by end of 2013

(Now: $6 billion)

• Dramatic impact on Mongolian GDP

growthPage 1

OT mine development progressing rapidly

Page 2

• China stopped exporting coking coal 2007

• China increasing imports of coking coal from 8.5

million tons in 2008 to 50 million tons in 2010, or

over 8% of consumption

• Mongolia moving to leading position as provider

among Australia and Russia

• In addition, China is increasing imports of thermal

coal

Meanwhile, while we were watching

OT agreement progress

Page 3

Activity at South Gobi Energy

Page 4

Mongolian Mining CorporationThe first Mongolian owned company listed abroad

Page 5

• Average price in 2010

$50 per ton

• Coal now Mongolia’s

#1 export!

• Sources: NSO and

TDB estimates

Mongolian coking coal

exports to China

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012

Actual Estimate

Page 6

Growing steel production in China

drives iron ore imports

Page 7

0

100

200

300

400

500

600

700

800

2006 2007 2008 2009 2010F 2011F

CHINESE IRON ORE IMPORTS

Actual Forecast

mln.t

Launching Mongolia’s

mining of iron ore

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

2.8

2007 2008 2009 2010 /1-10/

PRODUCTIONmln.t

Page 8

Iron ore now accounts for

8.5% of Mongolia’s exports

0

50

100

150

200

250

300

350

400

2008 2009 2010 /1-10/ 2011F 2012F

USD mln

Page 9

And China’s thirst for petroleum grows

• China now #2 oil importer in world in 2009

• Consumption now 8.3 million barrels per day

• Imports 4.3 million barrels per day

• USA 9.6, Japan 4.2, Germany 2.3

• Demand will grow to 9.6 million barrels per day by

end 2011, representing 37% of world’s increase in

demand

• Source: US Energy Information Administration

Page 10

Spurring Mongolia into OPEC

contention?

0

0.5

1

1.5

2

2.5

2008 2009 2010

Crude oil exports to Chinamm bbl• Still small, but vast

reserves expected in

Mongolia

• More exploration

continuing

• Example: Petro

Matad, LSE AIM listed

recoverable reserves

approaching 1 bn bbl

Page 11

Mongolia’ economy has strong 2010

• Exports up 50 % from 2009 based on strong

prices for major commodities and China’s

demands.

• $2.55 billion for 11 months, 84% to China

• FX reserves reach $1.8 billion after nadir of $.5

billion beginning 2009

• GDP growth projected at 8% for full year

• Inflation year to date 8%! Year on Year 11%!

Page 12

GDP growth to accelerate

• Result: GDP doubling from five years from end 2009 to end 2014

• More than doubling from to end of 2010

Source: IMF estimates; TDB estimate

6.1

10.6

7.38.6

10.28.9

-1.6

8

10

15

20 20

10 10.111.3

12.7

14.2

9.6 9.1

11

9 9 9 9

-5

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Mongolia China

Page 13

What a storyline!

• Export revenues grow from $ 2 billion to over

$10 billion a year

• Growing mining investment and exports to

China lift Mongolia out of poverty and

eventually create a wealthy country of 3

million people a la Qatar or Norway

Page 14

How to get there?

• Challenges and opportunities

• Infrastructure:

Power

Railroads

Roads

Urban Development

Water

• Social

• Agriculture

• Industry

• Environment

Page 15

Power

Source: World Bank

Page 16

• Need to double capacity in next five years

• $2.2 billion investment needed

• Tariffs need to increase 30%-60%

• Mine site plants can be project financed

• Financing of UB plants?

• IFIs can help

Power

Page 17

Present Transportation Network

Page 18

Railroad

Size 1,040 km

Investment US$ 3.0 bn

Time frame 2010-2014Page 19

Railroad connection to the Pacific

Page 20

ULAANBAATAR

MRTCUD Highway Plan

Size 5,571.9km



Plus, a real Motorway!

Size 990.4 km



Urban Development

• Ulaanbaatar has 1.25 million inhabitants, 45% of

Mongolia’s population

• 60% live in substandard housing

• Heat by coal and wood stoves

• Existing district heating also highly polluting

• Ulaanbaatar world’s most polluted city in winter

Page 23

• Goal is to reduce air pollution by 50% in

5 years.

• Estimated cost: $14 billion, includes:

• Heating plants

• Clean energy projects

• New housing

• New infrastructure

Prime Minister declared Smokeless

Ulaanbaatar in March 2010

Page 24

Ministry of RTCUD 5 yr. Housing Plan

УЛААНБАÀТАР

ДАРХАН

ДАЛАНЗАДГАД

DORNOGOBI

ТӨВ

DUNDGOBI

МАНДАЛГОВЬ

SUKHBAATAR

DORNOD

KHOVD

ӨЛГИЙ

UMNUGOBI

ZAVKHA

N

GOBI-ALTAI

ЧОЙР

МӨРӨ

Н

БАЯНХОНГОР

UVURKHANGAI

BAYANKHONGOR

ЭРДЭНЭТ

ЦЭЦЭРЛЭГ

АРВАЙХЭЭР

ARKHANGAI

KHUVSGUL

BAYAN-ULGII

ULAANGOM

УЛИАСТА

Й

ХОВД

UVS

САЙНШАНД

GOBISUMBER

ЧОЙБАЛСАН

БАРУУН-УРТ

ӨНДӨРХААН

ЗУУНМОД

KHENTII

SELENGE

АЛТАЙ

75 000 household housing

in Ulaanbaatar city

10 000 household housing in

the Central region

5 000 household housing

in the Eastern region

5 000 household

housing in the western

region

5 000 household

housing in the

Khangai region Size •75,000 in Ulaanbaatar•25,000 in Provinces



Water

• The key scarce resource in Mongolia

• UB under strain

• Desert mining areas have fossil aquifers

• OT discovers Gunii Hooloi aquifer with 40

year supply for mine and surrounding towns

• Estimates vary, but aquifer supplies are finite

and may not sustain total mining and urban

development expected in next several years

Page 26

Water

Page 27

• Water resources for Gobi: $300 million for ground

resources

• Diverting waters fro northern rivers: $400 million

• Solving Ulaanbaatar’s needs: $300 million?

• Total: $1 billion

Source: World Bank study

Water

Page 28

Social

• Education

• Migration

• Foreign labor

• Community involvement

• Wealth distribution

• Health

• Estimated costs: $1-$2 billion

Page 29

Agriculture

• Grain, dairy and main vegetables self sufficiency

• Wheat and potatoes close in 2010

• Development of further processing for domestic

markets

• Exploiting potential for export through value

added animal husbandry and meat processing.

• Estimated investment cost: $1-$2 billion

Page 30

Industry

• Expansion and development of existing export

industries

• Further development of import substitution

industries for building materials, mining supply

products and other consumer goods

• Estimated investment need: $5-$7 billion

Page 31

Transportation economics

Page 32

Industrial Park in Sainshand

Page 33

Value added proposition

• Reducing bulk and further processing can add value to basic

ores and create jobs and other sustainable development.

• About 50,000 more jobs created than through simple extract

and export approach

• GDP in 2020 could have further 45% value and exceed $40

billion

• However, all projects need to meet market tests and attract

private investment!

• Water again!

• Total investment cost: $10 to $13 billion

Page 34

Environment

• Land degradation

• Mine Reclamation

• Pollution

• Grazing access

• Overgrazing

• Deforestation

• Water quality

• Costs to address: $1-$2 billion

Page 35

Total Investment needs and opportunities

2010-2014

• Mine Development $ 9 bn. to $ 11 bn.

• Infrastructure $ 8 bn. to $ 10 bn.

• Urban development $ 6 bn. to $ 7 bn.

• Agriculture $ 1 bn. to $ 2 bn.

• Industry $ 5 bn. to $ 7 bn.

• Environment $ 1 bn. to $ 2 bn.

• Social $ 1 bn. to $ 2 bn.

• Industrial park $ 10 bn. to $ 13 bn.

Total: $ 41 bn. to $ 54 bn.

Page 36

How to fund the need? Opportunities for investors

• Foreign Direct Investment

• Domestic banking sector

• Domestic stock exchange

• Domestic debt market

• Sovereign borrowing

• International capital markets

• Foreign borrowing

• Grants and other

Page 37

Foreign Investment

Most of development of

new major mining projects

will be funded through

foreign investors.

Mongolia’s FDI has been

growing 30% annually.

This rate would mean $11

billion in new FDI in next

five years.

USD bln

0

0.5

1

1.5

2

2.5

3

3.5

4

2007 2008 2009 2010F 2011 2012 2013 2014

Actual

Forecast based on 12 month rolling average

Projected based on 30% annual CGR

Source: FIFTA, World Bank

Page 38

Budget

• Current Budget expenditures approx $1.5

billion, with small deficit

• Increased revenues from mining can enable

increased budget to meet many social and

infrastructural needs

• Establishment of Homeland Development Fund

aims to use surplus mining revenues to meet

such needs

• Estimate: $2 billion or more

Page 39

Banking sector

• Banking sector is small compared to other emerging

countries

• Mongolia bank loans to GDP only 34% at end 2009

• Central and Eastern Europe over 50%

• USA, Korea, China over 100%

• To reach CEE level in 5 years will require $250 million

of outside equity capital as GDP doubles

• Banks could provide $1.5 billion in investment

financing, apart from working capital funding.

Page 40

Loan growth has resumedMNT billion

0

500

1000

1500

2000

2500

3000

3500

2005 2006 2007 2008 2009 2010.09.30

Banking Sector

41.5%

66.3%

25.8%

-12.0%

44.0%*

* annualized

Page 41

Lending will need to grow, as will capital

Page 42

Investment by businesses

• Spending by business on fixed assets will increase

from current estimated 5% of GDP

• General level of developing countries is 25% with

US at 14% and China at 40%

• Moving to 25% of GDP will generate over $6

billion in investment, of which $1.5 billion could be

provided by domestic banks. The balance requires

funding from profits or capital markets and

foreign sources.

Page 43

Stock Market

• Mongolia stock market very small: approx. $800 million

market cap which is 30% of domestic bank credit and

$300 per capita

• Developing countries ratios around 50% or $3000 to

$5,000 per capita

• Developed countries market cap equals bank credit, with

$40,000 or more per capita

• Potentially, $2 billion or more could be raised under

properly organized stock exchange as market cap reaches

40% of domestic bank credit

Page 44

Public debt

• Mongolia has virtually no public or publicly traded

debt

• Mongolia needs to establish a domestic capital market

• This will enable a forward rate which will attract

foreign investors

• Up to 20% of GDP should be possible based on other

emerging countries

• This would mean up to $2 billion could be raised

Page 45

Foreign Sovereign Debt

• Mongolia has less than $2 billion in foreign

debt, much on concessionary terms, or

about 40% of GDP.

• There is capacity to raise sovereign

commercial debt

• Within 5 years, additional $3 billion could

be raised and keep debt ratio below 50% of

GDP

Page 46

Foreign Equity Markets

• Several successful overseas listings already:

SQX, MEC, Hunnu, North Asia

Resources, Prophecy, Petro Matad, Mongolian

Mining Corporation, Haranga

• Hong Kong, London AIM, Australia, Toronto

• Government plans to list key assets

• Potentially, $6 bn. to $10 bn. to be raised

• $1.4 billion raised since February 2010

Page 47

Foreign Debt Markets

• Already one issuer: TDB in 2007 for $75 million

• TDB issued again $150 million senior notes in

October 2010 and $25 million subordinated notes

in November 2010

• Sovereign Issue planned late 2010 will establish

benchmark

• As credit ratings improve, more access possible.

• Potential of $3 billion or more

Page 48

Project and structured finance

• IFIs and international banks already active

as direct lenders.

• PPP and export finance structures expected

• Syndication market small but growing

• Potential need of $5 billion or more

Page 49

Summary

• FDI $ 11 bn. to $ 14 bn.

• Domestic sources $ 12 bn. to $ 13 bn.

• Sovereign Borrowing $ 3 bn. to $ 5 bn.

• Foreign Capital Markets $ 9 bn. to $ 12 bn.

• IFI & Foreign bank Loans $ 5 bn. to $ 8 bn.

• Donors and NGOs $ 1 bn. to $ 2 bn.

Total $ 41 bn. to $ 54 bn.

Page 50

A Reachable Goal?

• Consider: OT, TT and other major strategic

mines will generate $4 bn. to $7 bn. of exports

per year, with $2bn. to $3 bn. in net income per

year, providing significant revenues to the State

in taxes, royalties and dividends.

• Significant increases in profits and tax revenues

from other economic sectors

• Continuing growth in GDP and increasing

personal incomes.

Page 51

Preconditions

• Political Stability

• Strong legal and regulatory environment

• Governance

• Fiscal discipline (9.9% deficit for 2011?)

• Stabilization fund

Page 52

Risks and concerns

• Inflation

• Populism

• Dutch Disease

• Boom Bust cycles

• International financial markets

• China growth trend

Page 53

Conclusions

• New era is beginning

• Mongolia is on the RADAR SCOPE and warrants the attention of international investors

• Many opportunities for investors in mining and all other sectors

• Steady growth path is possible

• Potential for a healthy wealthy state

Page 54

If interested,

please contact us

Page 55

Mongolia’s leading bank

• Mongolia’s leading corporate bank

TDB is the largest corporate lender in Mongolia with 25% corporate

lending market shares. It serves approximately 360 major Mongolian

corporates in all major business sectors.

• Leader in international banking

Having established over 110 correspondent relationships with

international financial institutions and correspondent accounts with

major clearing banks around the world TDB offers a wide range of

international banking services designed to appeal to both domestic

and international clients. Currently, TDB maintains 31 nostro

accounts in 14 currencies with 23 top rated foreign banks of 15

countries. Total amount of trade finance lines reached $115 million.

Page 56

Financial Results

(mln.USD) 2007 2008 2009 2010.10.31

Total Asset 444.5 520.3 567.0 861.07

Total Loans 307.2 347.4 281.2 369.05

Total Deposits 362.6* 404.6* 408.0** 698.73***

Total Equity 47.5 54.0 47.3 64.43

Net Profit 11.5 11.5 10.6 12.11

Capital Adequacy Ratio 13.8% 14.7% 12.9% 12.04%****

ROA 3.5% 2.8% 1.9% 1.82%

ROE 32% 24.9% 19.5% 22.56%

MNT/USD = 1283.38

10/31/2010

* includes USD 75.0 million bonds

** includes USD 41.0 million bonds

*** includes USD 150.0 million bonds

**** USD 25.0 million sub debt received Nov 16 increased CAR to over 16%

Page 57

Bank Ratings by Moody’s

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/NP

Subordinated Obligations B1

Bank Financial Strength D-

Page 58

THANK YOU

Trade and Development Bank of Mongolia

Juulchin Street - 7

Baga Toiruu - 12

Ulaanbaatar, Mongolia

Tel: +976 11 319943

Fax: +976 11 312418

Email: [email protected]

http://www.tdbm.mn

http://www.bankcard.mn

http://www.mongolianbusinessguide.com

Page 59

http://www.tdbm.mn/

http://www.bankcard.mn/

http://www.mongolianbusinessguide.com/

13.12.2010, Mongolia Investment Needs and Opportunities, Mr. Randolph Koppa

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Transcript of 13.12.2010, Mongolia Investment Needs and Opportunities, Mr. Randolph Koppa