Mongolia asset management

Mongolia Emerging Wealth in the Final Frontier

Feb 2013

§  Key Highlights of Mongolian Economy §  Mongolia Overview & History §  GDP §  Mining

§  Infla>on and Interest Rates §  Currency §  Stock Market §  Key Economic Date & Commodity Output in 2010 vs. 2020 §  Credit Ra>ng §  China : Mongolia’s largest export market §  Mongolia Asset Management §  Mongolia Fron>er Fund

Summary

Mongolia Asset Management

§  Mongolia with its vast mineral resources is expected to be the next Qatar of the global economy

§  Mongolia’s GDP grew by 17.3% in 2011 in real terms. IMF forecasts Mongolia’s economy to grow at a double digit rate over the period from 2013 to 2017

§  The world’s largest untapped copper and gold mine -‐ Oyu Tolgoi is schedule to go into produc>on in 2013 and is expected to account over 30% of Mongolia’s GDP

§  As China’s growth con>nues, its demand for raw material is powering Mongolia’s economy. China has been the largest export market for Mongolia’s raw material

Key Highlights of Mongolian Economy


Mongolia : World’s fastest growing economy


0 2 4 6 8 10 12 14 16 18 20

Ghana

Rwanda

Mozambique

Iraq

Timor-‐Leste

Bhutan

China

Libya

Macau

Mongolia

Top GDP Growers in 2013 (%)

* Source: Economist Intelligence Unit

Mongolia Overview

§  Land 1.56m km2 : The 19th largest & the most sparsely populated country in the world

§  Loca9on Bordered by Russia to the north, China to the south, east & west §  Demographics 2.75m

: 59% of the popula>on is under the age 30 and 27% is under the age 14 §  Capital city Ulan Bator (45% of popula>on) §  Ethnic group Mongol (95%), Kazak, Russian,

Chinese, Korean §  Language Mongolian, Cyrillic alphabet §  Religion Buddhists (53%),

Non-‐religious (39%), Shamanism §  Poli9cs Democracy, Parliamentary republic

: Mongolia’s cons>tu>on guarantees several freedoms including full freedom of expression and religion


§  1206 Mongol empire was founded by Genghis Kahn

§  1700 Incorporated by Qing dynasty

§  1911 Gained independence with the collapse of Qing dynasty

§  1921 Gained de facto independence from China

§  1945 Gained interna>onal recogni>on but soon colonized by Soviet Union

§  1989 The collapse of USSR

§  1990 Democra>c revolu>on

§  1991 MSE (Mongolia Stock Exchange) was founded

§  1992 New cons>tu>on

§  1993 The first elec>on wins for non-‐communist party

§  2003 Ivnhoe Mines gains license for mining explora>on in Mongolia

§  2009 Oyu Tolgoi contract ü  The biggest foreign investment project in Mongolia’s history ü  Expected to account a thirds of Mongolia’s GDP by 2020

History of Mongolia


Mongolia : GDP


0

10

20

30

40

50

60

70

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2015 2025

GDP Output by World Bank (USD, bn)

*2013~2015 are forecasted

§  In 2006-‐2010, average GDP growth was +6.4% §  In 2011, +17.3% growth in real terms, and in 2012, +12.7% growth is es>mated §  In 2013, +15.7% growth is forecasted by IMF §  GDP forecast to triple by 2015 to US$19bn by IMF

Mongolia : GDP


-‐5

0

5

10

15

20

2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013* 2017*

GDP Growth (%) by IMF in real terms

*2012 is es=mated, 2013 & 2017 are forecasted

§  Mongolia is know as two world’s largest mining projects : Tavan Tolgoi and Oyu Tolgoi §  Tavan Tolgoi

ü  TT mine is considered to be the world’s largest untapped coal deposits ü  Total es>mated resource of 6.4 billion tonnes, one quarter which is high quality coking coal ü  Owned by Erdenes MGL (a government owned company) and the Mongolian Mining

Corpora>on ü  Mongolian government plans to float 20% of Erdenes TT in an IPO on the Hong Kong,

London and MSE (Mongolia Stock Exchange) ü  China is the closest and the largest market and a new railroad will connect the deposit to

Japanese and South Korean markets via Russian ports in 2013

Mongolia : Mining


§  Oyu Tolgoi

ü  OT is considered to be the world’s largest untapped gold and copper deposits

ü  OT deposits contain (as of 2010) an es>mated 79 billion pounds (36m tonnes) of copper, and 45m ounces (1.3bn grams) of gold

ü  Produc>on is scheduled to begin in 2013 and to reach full capacity in 2018

ü  Over the an>cipated lifespan of the mine (45 years), OT is scheduled to produce 450,000 tonnes of copper per year, 3% of global produc>on.

ü  OT is expected to produce 330,000 ounces of gold pa ü  The OT mining project is the largest financial undertaking

in Mongolia's history and is expected to account for more than 30% of the country's GDP

ü  Financing for the project has come in part from the Turquoise Hill Resources (former Rio Tinto Group) and an investment agreement between TRQ and the government of Mongolia

Mongolia : Mining


§  Current BoM (Bank of Mongolia) policy rate is 12.5%

§  Major commercial banks in Mongolia currently pays over 15% annually for MNT term deposits

§  CPI by BoM is 14% as of Dec 2012

§  IMF forecasts that infla>on will decline to 7% by 2017 from current 14%

§  Drop in infla>on is expected to be posi>ve for both MNT as well as local equi>es

Mongolia : Interest Rates & Inflation


5

7

9

11

13

15

Mongolia Average CPI (%)

* Source IMF (2013-‐2017 are forecasted)

§  MNT(Mongolian Tugrik) is the official currency

§  MNT is resource and commodity currency similar to the Australian dollar but with much higher yield and real interest rate

§  MNT was the second best performing currency in the world in 2011 apprecia>ng +13% against USD

§  In 2012, MNT depreciated by 11.4% against USD. It is due to mining opera>ons were under heavy development and the demand for USD increased rapidly both from the public and the government

§  Aler the massive increase in exports due to the produc>on at OT comes to an end in 2014, MNT is expected to appreciate against USD.

Mongolia : Currency


Mongolia : Currency


800 900 1000 1100 1200 1300 1400 1500

USD/MNT

100 110 120 130 140 150 160

USD/KZT §  From 2000 to 2007, Kazakhstan’s GDP grew

between 8.9% and 13.5% buoyed by high crude oil prices. KZT appreciated by +20% un>l 2009 global crisis

§  Many Economists predict that Mongolia could follow the development of Kazakhstan

+20%

* Mongolian Tugrik * Source: Bloomberg, 2015 is forecast

Source: Bloomberg

Mongolia : Stock Market


§  MSE (Mongolia Stock Exchange) was the best performing market in 2010 up by 121% and the second best performing market in 2011 up by 52%.

§  Market capitaliza>on grew to USD 406m by 2008 from 2006 and then quadrupled to USD 2bn by 2011

§  Master Service Agreement between MSE and LSE (London Stock Exchange) was signed in April 2011 §  MSE to appoint MillenniumIT, same technology that powers the LSE, BorsaItaliana, JSE (Johannesburg Stock Exchange) and many others around the world §  MSE Top-‐20 had outperformed MSCI Fron>er Emerging Market Index by wide margin, and we expect this to con>nue

0 200 400 600 800

1000 1200 1400 1600 1800

2006 2007 2008 2009 2010 2011 2012

MSE Total Market Cap (USD, m)

Source: Mongolia Stock Exchange

0

5000

10000

15000

20000

25000

MSE Top-‐20 Index

+3700%

Mongolia : Stock Market


0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

MSCI Fron9er EM Index

+180%

+67%

+1450%

Source: Bloomberg Source: Bloomberg

2010 Es9mated Increase 2020

§  GDP nominal 5 billion +600%, +19% pa 30 billion

§  GDP per capita 2,000 +500% 10,000

§  MSE mkt cap 1 billion +2,000% 20 billion

§  Bank Assets 2.8 billion +900% 25 billion

§  USD/MNT rate 1,300 +30% 900

Mongolia 2010 vs. 2020

Key Economic Data in 2010 vs. 2020 (USD)

*Source : Eurasia Capital Report – Mongolia : 2010 – 2020 outlook, 2020 is forecast by Eurasia Capital


Mongolia 2010 vs. 2020

2010 Es9mated Increase 2020

§  Coal 7mn t +1,400% 100mn t

§  Iron ore 2mn t +500% 10mn t

§  Copper 600,000 t +250% 1.5mn t

§  Gold 10 t +500% 50 t

§  Crude Oil 0.3mn t +1,300% 4mn t

Commodity Output in 2010 vs. 2020

* Source : Eurasia Capital Report – Mongolia : 2010 – 2020 outlook


S&P’s Moody’s Fitch Ra>ng

BB-‐ Stable B1 Stable B+ Stable

§  Countries in the same category by S&P’s : Vietnam, Bangladesh, El Salvador, Angola, Nigeria, Serbia, Montenegro, Gerogia

§  Countries in lower ra9ngs by S&P’s : Argen>na(B-‐), Belarus(B-‐), Cambodia(B), Egypt(B-‐), Fiji(B), Ghana(B), Greece(B-‐), Lebanon(B), Ukraine(B) §  Countries just above BB-‐ by S&P’s : Costa Rica, Hungary, Jordan, Portugal, Turkey

Mongolia : Credit Rating


China : Mongolia’s largest export market


§  China will remain the world’s fastest growing major economy and s>mulus spending will accelerate the pace

§  China to add $1.3 trillion in wealth to the global economy in 2013. This is more than

twice the US contribu>on, 3 >mes India’s and 10 >mes Brazil’s – Economist Intelligence Unit

§  China to overtake the US to become the largest economy in the world by 2020, to be in turn overtaken by India by 2050 – Ci=group: Global Growth Generators: Moving beyond ‘Emerging Markets’ and ‘BRIC’, Feb 2011

§  China with 1 billion popula>on and high GDP growth, is desperate for raw materials

§  China is the largest consumer of Mongolian resources : 92% of Mongolia’s exports in 2011, largest trading partner and largest investor in Mongolia – NSOM (Na=onal Sta=s=cal Office of Mongolia)

§  75% of China’s imports are resources: nearly 100% of Mongolia’s copper concentrate and coal exports go to China – NSOM (Na=onal Sta=s=cal Office of Mongolia)

§  MAM (Mongolia Asset Management) is a Mongolia dedicated investment specialist

§  Founded in 2012, Mongolia Asset Management operates MFF (Mongolia Fron9er Fund), a Bermuda registered Hedge Fund

§  Mongolia Asset Management is the investment advisor to MFF

Mongolia : World’s fastest growing economy MAM : Mongolia Asset Management


§  Fund manager Mongolia Asset Management §  Fund administrator APEX Fund Services §  Cash custodian HSBC Bermuda §  Securi>es custodian Mongolian Securi>es Clearing House and Central Depositary

§  ISIN Number BMG3032V4806 §  CUSIP Number G3032V480 §  Bloomberg Ticker MONGMFF

MFF : Mongolia Frontier Fund


MFF : Investment Strategy


§  Mongolian public listed equi>es

§  Mongolian non-‐listed equi>es

§  Mongolian public listed fixed income securi>es both government bonds and corporate bonds

§  Bank deposits and Cer>ficates of deposit issued by Mongolian Banks

§  Mongolian “theme” stocks that are listed in overseas markets and which derive most if not all of their economic ac>vity from Mongolia

§  Ini>al Public Offerings of Mongolian companies §  Derivate contracts and futures on Mongolian commodity exports such as Oil, Copper, Iron Ore and Gold

§  E-‐mail [email protected] §  Website www.mongoliaassetmanagement.com

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Mongolia asset management