1.Furious expansion of the Mongolian economy (over 20% yoy in Q3 of 2011) on the background of worldwide economic stagnation and uncertainty over recovery. Mongolia is on course for 16.9 percent growth this year, according to the IMF.

According to World Bank, overall growth is being driven by infrastructure spending related to the mining sector boom, as the economy gears up for the Oyu Tolgoi mine to become operational. Expansionary fiscal policies of the government are adding additional pressure to domestic demand. According to IMF, this vigorous recovery has also been fueled by strong global commodity prices. Mining output, moreover, is set to increase substantially as two huge projects underway will soon start production. Growth has accelerated sharply this year, reflecting booming mineral exports driven by global prices and rising coal production, ongoing development of large mining projects, surging credit growth, improved agricultural output (primarily a base effect from last year’s severe winter), and, again, expansionary macroeconomic policies.


Standard & Poor’s credit-rating company on Dec. 19 revised its outlook on Mongolia to positive, saying it may raise the BB- long-term sovereign rating should the country’s fiscal, monetary and banking rules reduce “vulnerabilities in these areas.”


1.Double digit inflation/MNT depreciation/Dutch Disease/wage price spiral/still highly expansionary 2012 budget.


According to Bank of Mongolia on December 27,2011 inflation in UB is 12.3% yoy and 9.6% YTD, nationwide inflation is 10.8% yoy and 8.1% YTD. Government spending is on course to accelerate inflation to an average 18.7 percent in 2012 from 10.2 percent this year, according to IMF. IMF strips out food and administered prices from inflation metrics to focus on “aggregate demand”.


According to IMF in November 2011, macroeconomic policies are too expansionary. This has created inflationary pressures and made the economy vulnerable to external shocks. This is especially dangerous at this juncture given the heightened downside risks to the global economy. The large mining projects under development, moreover, are still some time away from full production. If global mineral prices drop precipitously, exports and fiscal revenue would fall sharply and pressure would come on international reserves. This would necessitate a potentially painful and disorderly reduction in fiscal spending that would exact a heavy toll on the economy, particularly on the poor. Top priority, therefore, should be to restrain fiscal spending and tighten monetary conditions to cool the overheated economy and provide insurance in the event of future commodity price shocks.According to World Bank in October 2011,inflation continues its upward trend. Headline inflation in Ulaanbaatar accelerated to 11.9 percent yoy in September from 9.9 percent in August. Note that core inflation, which excludes all food and energy, has now continuously kept rising throughout the year, reflecting generalized wage and price pressures from a booming economy and large government cash handouts. With food prices rising and the government expected to ramp up spending sharply, inflation will likely rise further.


Government spending jumped 50 percent in real terms to 6.3 trillion tugrik ($4.6 billion) this year, pushing inflation in the $8.4-billion-economy to 14 percent,according to IMF.


The tugrik, the second-biggest gainer against the dollar in the April 1,2011 yoy has lost 13.6 percent since then, ranking at 158 in terms of global currency returns.


2.OT construction and panic surrounding revision of OT IA


According to Ivanhoe Mines in November 2011, overall construction at Oyu Tolgoi continues to advance on budget and reached a 54.4% level of completion at the end of Q3’11. Key elements of the project, including the concentrator complex, primary crusher and tailings-thickening ponds, remain ahead of schedule. Total capital invested in the project to the end of Q3’11 was approximately $3.2 billion. Facilities required for first ore production in mid-2012 remain on schedule and commercial production is expected to commence in the first half of 2013. During Q3'11, 20 members of Mongolia's 76-seat national parliament petitioned the government to pursue changes to the Oyu Tolgoi Investment Agreement ahead of Mongolia's general election set for June 2012. The MPs wanted to accelerate the timing of the government's option to increase its current 34% interest in Oyu Tolgoi to 50%, which is permitted after 30 years under provisions of the 2009 Investment Agreement. After being invited by the government to discuss potential changes to the Investment Agreement, Ivanhoe Mines and Rio Tinto advised the government that they were not prepared to renegotiate terms of the agreement. Any change would require written consent of all three parties. Following discussions, the government, Ivanhoe Mines and Rio Tinto issued a joint statement on October 6, 2011, reaffirming their continued support for the Investment Agreement. The statement said, in part: "All stakeholders, investors, lenders, employees, contractors, civil society and local communities can have full confidence in the future of Oyu Tolgoi."


3.TT started exporting. ETT to expand MMC highway by 2 lanes .TT south railroad to be started at the same time as the one to the east.


Erdenes TT had a ceremony of trucking its first TT coal to on 08/05/2011. Coal is from eastern Tsankhi mine. East Tsankhi mine has over 50 years of mine-life at 20Mtpa.  Better infrastructure is needed to achieve this level of production. ETT with 160 employees has shipped over 600K tns of export-ready coal. ETT anticipates mining just under 1Mt this year, and planning to export 3Mt next year and progress to 15mtpa by 2015. Authorities happy with ETT progress.  All mine employees are Mongolians, and all work to date has been done with Mongolian skilled labor, no expats. Chalco is off-taker responsible for sales to PRC, Korea and Japan.  TT road is 240km till Tsagaan Khad bonded stockyard about 26km from Gashuun Sukhait  border crossing point, one roundtrip takes 3 days.  Exporting from Tsagaan Khad through Gashuun Sukhait (Chalco responsibility), sometimes has trucks waiting 8-10 hours in line, sometimes there are lines of 100-200 trucks.  MMC road is finished and operational.  ETT will also use MMC road on a toll basis. TT coal is to be supplied to PRC steel plants through Chalco. Chalco is buying TT coal for 70USD per ton for the first 1Mt, and after this prices are adjusted according to an agreed index.  At the time the agreement was signed this price was comparable to MMC and TTL.  


According to Government of Mongolia on 11/2/2011, cabinet meeting has issued a resolution on resolving pressing issues of development in South Gobi. Within the framework of this resolution following measures are to be taken regarding roads - Capacity of 245 km paved road TT- Gashuun Sukhait border crossing is to be increased. ETT is assigned responsibility to make the road with 4 traffic lanes, secure funding source for the new 2 lanes on the condition that the road is transferred to the State after a certain period.


According to Government of Mongolia on 08/24/2011 Cabinet meeting discussed new railroads project and supported feasibility study done by McKinsey & Co for First and Second Stages of New Railroads instructed by State Railroad Policy. It is being estimated that 1 km of rail road base structure will be built for 2.5-2.8M USD. As a result of new railroads project implementation, Mongolia will have capability to export 66Mtpa by 2020. Earlier, McKinsey and Co introduced to First Deputy Premier that direct rail from TT –Gashuun Sukhait (PRC border) should be built at the same time as the new railroad from TT to Russian border which will cost 5.5B USD


4.Coal exports hit 2 billion USD. MMC highway and washing plant operational.TT road closure. Fuel crisis.


According to National Statistics  Office of Mongolia, coal exports YTD as of November 2011 has reached 18 467 400 tons worth 1 950 039 700 USD in line with Frontier Securities forecast of volume of 20 million tons and value of 2 billion USD for the whole 2011.


According to Mongolian Mining Corporation on 6 October 2011, the Company has completed and successfully commissioned paved road construction between the Company’s Ukhaa Khudag coking coal mine and Gashuun Sukhait border of Mongolia for its coal transport operation. The Road has been built under license awarded by the Government of Mongolia under Government Resolution No. 83 of 2010 dated 31 March 2010 and subsequent Build-Operate-Transfer Agreement executed by and between Gobi Road LLC and the Ministry of Road, Transportation and Urban Development of Mongolia on 9 June 2010, whereby Gobi Road LLC was granted a right to build, operate and use the Road for a period of ten (10) years after the date on which it is commissioned for service. Upon the expiration of the BOT Agreement, the Company will fully transfer all its rights and responsibilities in regard to the operation and maintenance of the Road under the BOT Agreement to the Government of Mongolia.This two lane heavy haul coal transport road was designed to bear an axle load of 18-20 tonnes and planned to accommodate up to 2,000 trucks of daily traffic density for annual throughput capacity of 18 million tonnes of coal transportation from UHG coal mine to GS.


   MMC successfully commissioned first module of CHPP on 10 June 2011 as scheduled indicating strong execution capacity of the management.


Temporary Suspension on TT gravel road used by coal miner MMC has since been lifted on 14 May 2011 after the road was suspended on April 19,2011. TT road closure indicated a trend in Government of Mongolia’s policy  to target all gravel roads heavily used for mining products exports in favor of construction of paved ones.


There was a fuel crisis in Mongolia in summer of 2011 and miners were impacted by irregular supply of imported from Russia fuel and fluctuating prices. Eventually situation stabilized and fuel crisis was resolved  however it appears that  over reported Russian fuel pressure, Mongolia is determined not to repeat the situation and diversify fuel sources as well as accelerate domestic processing and production


5.Record iron ore exports and general favorable commodity prices.


According to National Statistics  Office of Mongolia, iron ore exports YTD as of November 2011 has reached 5 million tons worth 374 million USD, 63% increase yoy in volume and 73% increase yoy in value.


Value of copper exports increased 30% yoy while volume remained virtually the same.


6.Banking super profitable. Agriculture- strong progress.


2011Q3 major banks results in overheating economy with very rapid credit growth: Khan’s after tax net profit 44.7B MNT(36M USD),up 119% yoy and more than total net profit for 2010 of 30B MNT,TDB -34B MNT(27M USD) and already more than for the whole 2010 net profit of 20B MNT , Golomt -22B MNT(17M USD)up 82% yoy and already more than the whole 2010 net profit of 20B MNT.


There was strongly improved agricultural output (primarily a base effect from last year’s severe winter) and Mongolia has become self-sufficient in some food products, even exported some.


7.Absence of major Mongolian IPO-s in 2011 except activity on ASX. FeOre IPO on ASX, Kincora Copper reverse listing on TSX, Undur Tolgoi reverse listing on TSX, Mongolia Growth Group reverse listing.Coal M&A on ASX.


This year there was no major Mongolian IPO-s on a comparison with MMC’s IPO in 2010.


However,2011 witnessed vibrant activity of Mongolian miners mostly juniors on Australian Stock Exchange with the biggest deal being notably takeover of Hunnu Coal by Thai coal miner Banpu.


8.Debt markets: DBM to issue 600M USD Eurobonds. Xacbank 300M Euro Medium Term Note Program. Government bonds. Corporate Just meat bonds.


Development Bank of Mongolia had announced in December 2011 that it would issue USD 600 million equivalent of medium-term Euro bonds with the assistance of ING, Deutsche Bank, and HSBC. The bonds were planned to be sold in several stages through the Singapore Exchange (SGX) this December and into 2012.


XacBank announced in August it has established a US$300M Euro Medium Term Note Programme . ING and UBS have been appointed to act as the joint arrangers and dealers of the Programme.


As of December 6,2011 2.4 billion issues of Government bonds have been sold through MSE raising 236 billion MNT(175 millions USD)


Also, 435.6 thousand issues of corporate bonds have been sold raising 4.4 billion MNT(3.2 million USD)



9.MSE 32% YTD. Silikat, SHG and RMC offerings.Acquisition of Berkh Uul by Firebird. RTO of Sudut shell company and restructuring into Asia Pacific Properties.


From being the world’s best performer in the 12-months to April of 2011, the MSE Top 20 Index of Mongolia has since plunged 18 percent, but still managed over 30% YTD.


As of December 6,2011 total volume of stocks YTD has been 119 million shares resulting in total turnover YTD of 100 billion MNT(74 million USD)


On 10/17/2011 by issuance of additional shares Sharyn Gol ( SHG) has raised successfully 18.3 B MNT (14.2M USD) on MSE.


On August 10,2011 construction material producer Silikat successfully completed MNT3.6 billion Follow-on Public Offering on Mongolian Stock Exchange. 80% of the total offering was allocated to institutional and strategic investors, and 20% to the public.


According to Remicon LLC on December 3, 2011, the Company is pleased to announce that it has received approval from Financial Regulatory Committee of Mongolia to issue 39,460,000 common shares of the company at a price between 190 and 238 tuguks per Share for aggregate gross proceeds between 7,497,400,000 and 9,391,480,000 tugruks. The proceeds of the Offering will be used for the purchase of Korean equipment for the construction of a cement factory of a 300,000 tons per year capacity, which will be constructed 350 km away from company head plant. The balance of funds necessary to construct the facility will be provided by Remicon’s financial capabilities. Frontier Securities is the sole underwriter, global coordinator and lead bookrunner in the “Offering”. According to Frontier ,the book building began on Dec 12,2011.


In August 2011, Firebird acquired Berkh Uul JSC (BEU), a junior limestone miner, with it owning 99.88% of total shares in the company already. BEU’s market capitalization was 11 billion MNT as of August 2,2011 .


Pursuant to a shareholder meeting convened on December 10, 2011; Sudut JSC, a company listed on the Mongolian Stock Exchange, has passed a shareholder resolution to change the company’s name to Asia Pacific Properties JSC. The shareholders also unanimously approved the injection of a 100% interest in the Rural Development Corporation LLC and the Oasis luxury residential development project into the newly named company, both of which were acquired from Asia Pacific Investment Partners. Asia Pacific Properties will remain majority owned by Asia Pacific Investment Partners. It was reported that APP is working towards a US$50 million market cap.


10.Political stability and consensus decision making continues. Election reform law approved. Run off to elections in 2012. MPP(ex-MPRP) vs. MPRP(alternative MPRP)vs. DP


All of the above would not happen if there would not be have been continued political stability. Consensus decision making in politics is functioning as illustrated by recent approval by Parliament of the new election law. On top of the election already being delicate by partners in ruling Coalition, Mongolian People’s Party and Democratic Party, becoming again competitors, MPP(Ex-MPRP) is to be challenged by anti-Coalition, alternative MPRP .


Happy New Year to all of our subscribers and we you all prosperous and bullish 2012. Thanks for subscribing  and have a great holiday, all!

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Dale Choi

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