Mongolia: building a sustainable economic growth

through downstream industries and infrastructure

Presentation • August 2010

National
at o a Development
e e op e t and
a d Innovation
o at o Committee
Co ttee
Sainshand Industrial Complex Task Force Team
Agenda

Executive summary 3

Macro-economic goals of Mongolia 4

Industrial park development in Sainshand city, Mongolia 8

Mongolia railway strategy 9

I l
Implementation
i plan
l ffor llarge iindustrial
d i l and
d iinfrastructure
f projects
j 13

Integration of large mines with industrial developments 19

Fi
Financing
i structure
t t off railway
il construction
t ti 20

Economic impact of infrastructure and industrial projects 24

Action timetable for 2010

2010-2011
2011 26

2
Executive summary

• Mongolia has huge, untapped resource reserves

• It is a back-door to #1 commodity consumer nation in the world

• Miniscule GDP compared to market valuation of reserves

• Th Government
The G t off Mongolia
M li streamlined
t li d new laws
l and
d policies
li i aimed
i d att massive
i growth
th

• A flood of foreign liquidity waiting to pour in

3
Millennium Development Goals based Comprehensive National
Development Strategy of Mongolia

National
Development
Development
Strategy
Strategy
(NDS)
of Mongolia
of Mongolia*

We, Mongols, shall respect our

history and culture, have our national Mongolia’s development is a
Mongolia is a country of contentment
dignity, be highly educated and guarantee of its security and
Vision

with vast lands, abundant natural

confident in ourselves so as to independence. The root source of its
resources, admirable history, and
realize our desires and aspirations, development lies in the national
glorious future.
live comfortable, prosperous and unity.
contented lives in our homeland.

2007
2007
- 2015
- 2015
period 2016 – 2021 period

• Synchronize EGSPR with NDS

Strattegy

• Enhance coordination for poverty reduction

• Increase jjobs ((unemployment
p y rate at max 3%))
• Create a so
sovereign
ereign wealth
ealth ffund
nd
• Create a nation-wide database
• Reduce poverty
• Provide economic incentives for new jobs
als

GDP growth: 14% GDP growth: 12%

Goa

GDP per capita: $5,000 GDP per capita: $12,000

Mongolia
g successfully
y developed
p its economic growth
g vision and
now it is working on the process on how to achieve these targets
* Parliament of Mongolia resolution 12 dated Jan. 31, 2008 endorsing National Development Strategy of Mongolia 4
Mongolia’s National Development Strategy objectives in perspective
with other Asian advanced and developing countries
$40,000

35,000

30,000

25,000

20,000

15,000
2021 Objectives: GDP per capita $12,000

10,000

2015 Objectives: GDP per capita $5

$5,000
000
5,000

0
n Isd
Myanmar
stan

este
desh
odia

ndia
stan

uatu
nam

anka
golia
utan

onga

Thailland
Malaysia
wan

apan
pore
Laos

Papua NG

Fiji

unei
Maldives
esia

moa
hina

orea
Kong
epal

Kiriibati
Philippiines

Taiw
Sam
Indone
Timor-Le

Cambo

In

Bru
Ne

Ch
Vietn

Bhu
Pakis

Vanu
Afghanis

Ko

Singap
Mong
L

Sri La
Banglad

Solomon

To

Ja
Hong K
Achievement of the National Development
p Strategy
gy would catapult
p Mongolia
g into
one of the top economies in the regions
* International Monetary Fund, World Economic Outlook Database, October 2009 5
 A new railway infrastructure planning should consider linking all
mineral deposits of Mongolia(1)
Coal Deposits Iron Ore Deposits

Uranium Deposits Oil Deposits

6
1) The minerals study prepared by Mr. Odkhuu, D., a Member of Parliament, lead group of geologists from Geosan LLC, Mongolia.
 The Government of Mongolia retained the Boston Consulting Group to
assist in development of an integrated mining and railway strategy(1)

7
1) Boston Consulting Group, Railway Infrastructure Development Strategy for Mongolia, October 2009
 Creation of downstream industries would enable to achieve a
sustainable economic growth for Mongolia

Mining Railways Processing in Sainshand industrial cluster Railways Diversified Exports1

Coal imports into Asian countries will grow ~9%

Tavan
Coal / Iron

a year between 2009-2015

Tolgoi
Coke Iron HBI / DRI Coal Coking coalconsumption (M t)

Plant Pellets Plant Plant Gasification

~2500

Tomortei 55
68

& others
~435
* 11 30 2009 2015
Japan
2009 2015
China 6 9
Copper

2009 2015
56
Oyu Copper Copper 35 Taiwan
2009 2015
Republic of Korea
Tolgoi Treament Smelter 2009 2015
C

India

Domestic consumption supplied by domestic production

Coking coal imports
de Oil

Tamsag Oil
Crud

& others Refinery China is the biggest Asian market for copper
,
concentrate makes the bulk of imports
Copper consumption (M t)

Mine Power Plants Cluster Power Plant 1,317 1,337

Utilities 3,812
~650 MW ~800 MW ~1,151
2009 2015
* 1,558
Japan

Offsites Water Facilities, Housing and Other Offsites 1,504

2,178

585 766
2009 2015 618
China
2009 2015 446
Companies that send letters of interest for participation: 593 669
Taiwan 406 492

• Coke plant – ThyssenKrupp Uhde GmbH 2009 2015

Republic
2009 2015
• Metallurgical facilities – Midrex Inc., a company of Kobe Steel ????? of Korea

• Coal chemical facility – ThyssenKrupp Uhde GmbH

• Power plant – RWE GmbH
• Crushing and concentration – Outotec Oy Copper concentrate imports
• Copper smelting – Outotec Oy Copper cathode imports
Domestic consumption supplied by domestic production
8
1) Source: Boston Consulting Group
 Illustration of the railway infrastructure development of Mongolia(1)

1) Ministry of Road, Transportation, Construction and Urban Development of Mongolia, Railway Policy for Mongolia, April 2010 9
 New railway infrastructure would enable Mongolia to export resources
and processed goods to multiple export markets(1)

1) Ministry of Road, Transportation, Construction and Urban Development of Mongolia, Railway Policy for Mongolia, April 2010 10
 Industrialization foot-print of Mongolia is based on processing of
mineral resources(1)

11
1) Boston Consulting Group, Railway Infrastructure Development Strategy for Mongolia, October 2009
 Experiences of building industrial clusters show that development
through cluster concepts increase economy competitiveness1
JUBAIL INDUSTRIAL CITY MIDAMERICA INDUSTRIAL PARK SHANGHAI FENGPU INDUSTRIAL PARK

Country: Saudi Arabia Country: Oklahoma USA

Oklahoma, Country: China
Project Developer: Project Developer: Project Developer:
Royal Commission for Public Trust Government of China
Jubail and Yanbu Municipal Governments
Year: 1975 Year: 1960 Year: 2003
Process Units: Process Units: Process Units:
• Petrochemical Facilities • Construction • Electronics Factories
• Steel Works Facilities • Oil and Gas Piping • Communication Plants
• Fertilizer Facilities • Fertilizer Facilities • Biotechnology Facilities
• Railways • Pulp Paper Plants • Healthcare Facilities
• Highways • Petrochemical Facilities • High Technology Facilities
• Airport • Railways • Construction Facilities
• Ports • Highways • Leather and Textile Plants
• Power Plants • Aiport • Power Plants
• Ports • Highways
• Power Plants • Railways
• Aiports
Project Amount: Project Amount: Project Amount:
US$ 30 billion US$ 19 billion US$ 15 billion

Concentration of infrastructure (railways, electricity, gas, communication)

p
decrease operating g costs of the industrial users

Governments,, aiming
g to create a sustainable economic development,
p ,
attracted investments by the development of industrial clusters.

12
1) Michael E. Porter, Council on Competitiveness. See also “The Development of the cluster concept – present experiences and further developments”, Christian Ketels,
Harvard Business School, 11/26/2003.
 The Government established to implementation units to create an
environment to attract local and international investments
“Sainshand” industrial complex (“Projects”)
Government
NDS Relevant Institutions Resolution 118 Planned Projects
Resolutions

Steering Committee: Prime Cement Plant

cess Units
Steering Committee
Minister, Ministers, MPs

Coke Plant
Resolution
Resol tion 299

Proc
Resolution 320 Implementation Task Force: Task Force
Meeting Note 52 Iron Pellets Plant
Chairman of Cabinet
Resolution 118 Secretariat of the GOM
HBI/DRI Plant

Infrastructurre1
NDIC
MOF, MFALI, MRTCUD,
MMRE, MOE & others Coal Gasification Plant

Advisors:
• Program Manager Oil Refinery
Plus (PMC+)
Agencies: SPC, MRAM, • International Counsel
RAM, PAM, WAM others together with Local Copper Smelter

Facilities2
Advisor
• Financial Advisor
• Environmental Power Plants

Civil F
Consultant
Implementation Agency:
NDIC Railways (Phase 1)

The Government will implement

p these projects
p j through
g Public-Private-Partnerships
p (“PPP”)
( )
by providing concession rights to local and international investors.

13
1) The Steering Committee shall include Parliament members, Government and non-government organizations.
2) NDIC shall be the contracting party to all local and international advisors. MOF is to fund necessary operating capital.
 Sainshand Industrial Complex implementation phases

Phase 1 Phase 2

Tender for Advisors Master Planning

• The Task Force team will • NDIC (with Advisors)

announce international
tender for following
advisors to work together
NDIC:
– PMC+1 Execution of Sainshand Industrial Complex
Implementation (Construction period: 5+ years. Below steps to be repeated for each Process Unit)
– International counsel decision
together with the Local Steering
Advisor Committee
Phase 3 Phase 4 Phase 5
Decision to stop
the Project Tender on Process Units Documentation / Closing Construction

Task Force is • NDIC • NDIC • NDIC

dissolved – EIA consultant • State Property Committee • State Property Committee
– Provisioning of local • Advisors (Commissioning)
labor for construction • Advisors
• State Property Committee
• Advisors

6/2010 – 3/2011 2011 – 2017

Process Unit 1
Process Unit 2
Process Unit 3 ... etc.
etc

1) The advertisement is envisioned to be 1/8 of the newspaper page. The cost for a global ad on Wall Street Journal is $32,301.44, Financial Times - $13,608.00. 14
 Visualization of Sainshand Industrial Complex

Following Process Units are

envisioned to be built
in the complex:

1. Cement Plant
2. Coke Plant
3. Iron Pellets Plant
4. HBI / DRI Plant
5. Coal Gasification Plant
6. Oil Refinery
7. Copper Smelter
8. Power Plant

15
1) Government of Mongolia resolution 140 dated June 2, 2010.
 Implementation of the industrial complex shall start with PMC+
developing a Master Plan together with NDIC1

The NDIC team will work

together
g with the International
NDIC
Counsel and the Local
Advisor

Program Manager Plus

(PMC+)2

Oversight on selective projects

(If required)
Railway EPC Process Units EPC
Contractors Contractors

Coke Iron Pellets HBI/DRI Coal Oil Copper

Process Units3
Plant Plant Plant Gasification Refinery Smelter

Power Plants
Offsites Water Facilities
& Utiliti
Utilities
Civil Facilities

1) Program Manager Plus Terms of Reference is described in Attachment 1.

2) Bechtel and Fluor have expressed interest in the Global Project Manager’s role. US Eximbank formally issued a letter of interest to support project development activities of
these companies. 16
3) Ministry of Mineral Resources and Energy conducted preliminary study on multiple industrial zones.
 Main contractor or responsible
Preferred delivery model is EPCM or EPC Subcontractor or support

Supervision

Contractual relationship
Project value chain*
Managerial relationship
CM & I
Delivery
y FEED DE SU O&
S BD C
model Basic description Agent P S.E&F &C M Contractual relationship model

Owner contracts with all Owner

suppliers necessary to • Owner
Multiple lot perform project
completion and is fully • Contractors
(owner
integrated) responsible for all
integration tasks Contr. A Contr. B Contr. C
(Engin.) (Equip.) (Constr.)

EPCM is responsible for Owner

managing all aspects of • Owner
Engineering, Procure-
• EPCM EPCM
EPCM ment, Construction,
including management
of all contractors • Contractors
contracted by the owner Contr. A Contr. B Contr. C

Contractor assumes Owner

• Owner
Engineering, Procure-
Procure
ment, Construction
• EPC EPC
EPC activities for a defined
project scope and is
• Sub-
responsible for all its
contractors Subctr A Subctr B Subctr C
sub-contractors

*S – scoping, BD – basic design, FEED – front-end engineering and design, P – procurement, DE – detailed engineering 17
S.E&F – supplier engineering & fabrication, SU&C – start-up and commissioning, O&M – operations and maintenance
 Authorized Entity announces a tender as per the engineering design
specification of the Regulatory Authority

Parliament of Mongolia
C
Concession Approval

Government of Mongolia
Concession Decision1
Tender Participants5

Related Line Ministry

y
Regulatory Authority ²

Bidding4
State Property
p y Committee

Tender B
Authorized Entity³ Concession Agreement

1) Law of Mongolia on Concession 2010.01.28

2010 01 28 – Article 6.1.2
612
2) Law of Mongolia on Concession 2010.01.28 - Article 3.1.6
3) Law of Mongolia on Concession 2010.01.28 - Article 3.1.7
4) Law of Mongolia on Concession 2010.01.28 - Article 11, 12, 13
5) Law of Mongolia on Concession 2010.01.28 - Article 11.3.3 18
5-a) Chinese, German, Korean, Russian and US companies expressed interests to participate
 The private sector is the driving force for building of Processing Units
on international project financing basis

State Property Mongolia Commodity

Committee E h
Exchange

• Linking with NYMEX and

Concession Agreement
other commodity
exchanges
PROCESS UNITS1 • Provides price discovery
F i ht Agreement
Freight A t
• Transparency
Tavan

TY: 30-40%
Tolgoi LLC
Companies that
Supply Local International Products: expressed interest:
Agreement EQUIT Sponsors Sponsors Freight Agreement
Oyu Tolgoi
O T l i
• Coke • ThyssenKrupp
LLC
• Iron pellets • Noble Group
• HBI/DRI Offtake • Hopu Investments
Other • Copper cathodes Agreement • and others
mineral ECA Guaranteed • Synthetic gas
deposit EPC Tranche • Oil refinery
fi
Agreement (industrial diesel
BT: 60-70%

and other oil

products)
Multilateral Tranche
DEB

Operations
& Maint.
Commercial Tranche International Banks
Agreement

19
Ministry of Mineral Resources and Energy conducted a preliminary study on other possible industrial zones in Mongolia.
 The Law of Mongolia on Concession will provide a legal framework for
building a new railway infrastructure

MRTCUD Central train control system

Railway Authority att Railway
R il A
Authority
th it 2
Regulatory Authority1 (PTC , GPS2-b)
2-a

Operator Owner of the railway

infrastructure

State Property
JSC UBTZ Committee
Authorized Entity3
Terms of Concession

100% government ownership5

Railway building on a
Wid gauge (1
Wide (1,520
520 мм)) 8
BOT basis4

Engineering design standards

Payments Land lease payment6

paid
id by
b an
Freight payment
Operator Number of wagons
1) Law of Mongolia on Concession 2010.01.28 – Article 3.1.6 (greater of)7
2) Law of Mongolia on Railway Transportation 2007.07.05 – Article 14
2-a) Positive Train Control System
Freight (ton/km)
2-b) Global Positioning System
3 Law of Mongolia
g on Concession 2010.01.28 - Article 3.1.7 CASH FLOW STREAM FOR FINANCING
4 Law of Mongolia on Concession 2010.01.28 - Article 4
5) Law of Mongolia on Railway Transportation 2007.07.05 - Article 6.1
6) Law of Mongolia on Railway Transportation 2007.07.05 - Article 19.1.1
7) Law of Mongolia on Railway Transportation 2007.07.05 - Article 20.1.3
8) Mongolian Railway Strategy, MRTCUD 20
 The Government of Mongolia resolved to build new railways on a Build-Operate-
Transfer concession basis

Parliament of Mongolia • Interested parties to fill out a Solicitation

Concession Approval Terms Sheet for railway construction
• Based on the market interest the railway
construction is to be bundled
• Depending on the interests, a select
group
g p is to form a Railway y Project
j
G
Government
t off Mongolia
M li Company
Concession Decision1

Korea Rail Network Authority5

MRTCUD,, MRA

er
JSC Russian Railways /

Railway interrnational tende

Regulatory Authority2 Infrastructure Development LLC

China Ministry of Transport

State Property Committee
Authorized Entity³ International tender
bidding4 Hopu Investments LLC

Deutsche Bahn GmbH

Others

1) Law of Mongolia on Concession 2010.01.28 – Article 6.1.2

2) Law of Mongolia on Concession 2010.01.28 – Article 3.1.6
3) Law of Mongolia on Concession 2010.01.28 – Article 3.1.7
4) Law of Mongolia on Concession 2010.01.28 – Articles 11, 12, 13
5) Korea Rail Network Authority is fronting for Hyundai E&C, Posco E&C, GS E&C, Byucksan Engineering Co., Ltd., Daerim E&C, Soosung E&C, Sejong Engineering 21
 A financing structure envisaged for the railway construction in
Mongolia
Options for Mongolian state
equity contributions:
1. Development Bank gtee3
2. Sovereign bond issue4
3. Concession Agreement

Railway Project Company2

QUITY1: 30-40%
%
Tavan Int’l EPC or
EPC contract
Tolgoi JSC UBTZ Infrastructure EPCM
Mongolian Fund
Project Co. Rail Contractor
Utilization Railway
Agreement SPV
Multilaterals EPC
C t t
Contract

EQ
Oyu Tolgoi
O T l i
LLC Payments

Other ECA Tranche Excess Funds

mineral Freight Int’l Banks
A
Agreement
t
deposits
DEBT: 60-70%

Multilaterals Tranche
Offtake Loan Loan
Debt
Agreements Agreements Guarantees
Service
D

Payments

Int’l Commercial Tranche

ECAs
Offtakers

S l P
Sales Proceeds
d

1) Envisioned capital structure of the Railway Project Company

2) Such type of a railway project SPV could be established on each route depending on the market appetite.
3) A possible financial guarantee from newly established state Development Bank. The structure for capitalization of the Development Bank is under discussions. 22
4) Potential issue of a debut sovereign bond for Mongolia.
 Equipment suppliers and engineering companies could serve as
alternative equity investments with no deposit ownership claim

Financing Mix Objectives / Motivation Pros Cons

ECA Guaranteed Tranche OECD country’s exports increase • Long tenor, low cost • ECA processing length
• Assets / liability match
• Credit history creation
Multilateral Tranche Local economy development • Long tenor, low cost • Processing length could be long
60 – 70 %

• Increase p
project
j p
profile compared
p to commercial
Debt

Commercial Tranche Commercial tranches • Some structures could be self- • Market interest rates
liquidating structure
• Track record creation
C it l market
Capital k t ttransaction
ti Take-out
T k t financing
fi i ffor commercial
i l • Economy
E off scale
l • M
Market
k t condition
diti andd pricing
i i
tranche, given favorable market • Special features • Mismatched assets / liability
conditions • Rating requirement

Strategic Investors Supply chain and/or geographic New technology

market share interest Corporate governance

Financial Sponsors Maximize investment return Economic development Giving up upside potential
30 – 40 %

(IRR > 25%) Possible loss of management

quity

control
Eq

Equipment and technology • Sales technology and • No deposit ownership

suppliers equipment • New technology introduction

Engineering and • EPC or EPCM contract • No deposit ownership

construction companies
p • New technology
gy introduction

23
 According to BCG’s socioeconomic impact for building railways and
Sainshand industrial park…
park
1 3

2 4

24
Source: The Boston Consulting Group, Railway infrastructure development strategy for Mongolia, October 16, 2009
 Industrialization could increase Mongolian GDP to $41 bln over 11 years
compared to current approximately $5 bln

25
Source: The Boston Consulting Group, Railway infrastructure development strategy for Mongolia, October 16, 2009
Action timetable for 2010-2011

26