According to Government of Mongolia (open-government.mn) on 09/21/2010 Cabinet Meeting has discussed regarding introducing to OT IA investors the direction given by 2nd resolution of Parliament’s Security and Foreign Policy committee and negotiations.

• Cabinet meeting instructed Chief of Staff Ch.Khurelbaatar to send an official letter to Ivanhoe Mines and Rio Tinto and invite to negotiations regarding increasing stake of Mongolian side and reach 50% percent and additional payment for using reserves
• OT project is advancing well, 50% of OT’s construction is to be finished on 09/25/2011, over 9 thousand Mongolian citizens are working at OT and 3 thousand people are studying in project program

Finance Minister , who co-signed the OT IA, has briefed media yesterday that the decision is not related to recent demand by MP-s to change OT IA but to regular semi-annual briefing on OT to Economic Standing Committee of Parliament

After defending OT IA as being done as best as possible according to all relevant law of Mongolia including Law on Minerals provisions on state’s stakes, regarding 30 years period after which Mongolia can increase its stake to 50% he said

• President has submitted bill on amendments on Law on Minerals. We will talk about after seeing what kind of changes there will be there. Duration of recouping initial investment will be determined by Technical and Economic Justification Study. All information is open on what amount of investment is done, when production is to be started, what results there will be. If there are problems, it is possible to resolve them.
• We will start negotiations to amend OT IA. Both parties must if possible not to touch the stabilization agreement. However, situation has turned like this. I think there is opportunity to say to investors – people of Mongolian don’t want to change OT IA in whole but to discuss two issues of Mongolian stake and additional payment for using reserves and negotiate with them. We have time.
• Amendments cannot be done before the elections. I am saying this as there is time to amend because it is stipulated that Mongolia can increase its stake to 50% after recouping initial investment. People say differently period to recoup initial investment – five, seven, ten years. It will be clear when the initial investment will be recouped after looking at financial report and conclusion. We will propose this to investors. Only by mutual agreement amendment will be done to OT IA.
• I understand that door is open for negotiations to bring up closer 30 year duration after which Mongolia can increase its stake to 50%
• Desire and efforts of Mongolian people to increase benefit from OT development cannot be wronged

Oyu Tolgoi LLC said on 09/21/2011 that the Investment Agreement (IA) is beneficial to Mongolia and the shareholders would not contemplate changing the terms of the Agreement that governs the shareholding and profit share of the Oyu Tolgoi mine.

• “The IA is a great deal for Mongolia – the government gets more than 50 per cent of pre-tax profits when you include equity, dividends, taxes, royalties and VAT. That’s more than fivetugrugs out of every 10 going direct to Mongolia, before you even think about what the mine will do for jobs, local suppliers and technology improvements.”

• “The Investment Agreement gives Mongolia the benefits of ownership, while not requiring the government from having to put up any money up front.It is a robust agreement enshrined in Mongolian law and was signed by all parties in good faith on the understanding it would not be changed.

• “We will have invested more than US$6 billion before the mine becomes operational, we will have paid $700m in taxes by the time the first product is sold, and of course the Government of Mongolia does not have to pay any money up front for its share. This is a partnership that is the equal of any in the world.”

• In response to media reports that the IA may be reconsidered, Mr McRae confirmed that there had not been any talks with the Government about renegotiating the IA.

• “Both sides agree that the IA is a cornerstone agreement that is clearly attracting foreign direct investment to Mongolia, and the stability this framework represents is key to investor confidence.

• “OT continues to honour its commitments to the IA. We are employing and training 10,000 Mongolians and running the biggest vocational training program ever seen in Mongolia. In addition to the mine, Oyu Tolgoi is building key infrastructure, includingan airport, three vocational schools, a 100km paved road, and two sports complexes.Under our “Mongolia First” programme, we have more than 1,000 Mongolian suppliers listed on our books, with more than US$1 billion already committed to local suppliers.

• “We understand that OT is vital for Mongolia’s future and we are committed to ensuring Mongolia’s future growth and prosperity.”

Ivanhoe Mines founder and Chief Executive Officer Robert Friedland said on 09/21/2011 that
• the company has been made aware of the dissemination of what it considers to be unauthorized and incomplete information concerning the Oyu Tolgoi Project by members of Rio Tinto’s senior management during a briefing for investors this week.
• Ivanhoe Mines will provide further details in a future statement following communication directly with Rio Tinto on the specifics of its concerns

Frontier Securities conclusion

• We view that this unfortunate caving by Government of Mongolia to anti-OT pressures of anti-Coalition Government MP-s after revision of OT Shareholders agreement not so long time ago, on the other hand, presents investors with BUY opportunity at current market close of 16.84USD for long term call option such as two years as we do not believe that situation will escalate out of control and Mongolia will derail the project
• Due to resulting uncertainty and global macro-weakening, we expect IVN to enter a period of short- and medium term volatility but we expect the stock to rebound to analyst consensus in the long term especially as beginning of production will get closer
• Based on trackrecord of multitude of years of Ivanhoe and Rio Tinto’s deal hammering with Government of Mongolia we believe that there is high likelihood of some kind of agreement before the elections to appease the public and we also view that after initial investment is recouped Mongolia will pressure in some way or another OT investors regarding 30 years and some kind of agreement reached on 30 years issue

Frontier Securities welcomes inquiries from Mongolian and international investors regarding long term call options on Ivanhoe Mines.


Dale Choi

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Frontier Securities
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