BUSINESS COUNCIL of MONGOLIA NewsWire

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Issue 121, June 4, 2010

NEWS HIGHLIGHTS:

Business:

Not enough qualified locals, Minister wants to import Chinese labor for OT;

Shenhua reiterates interest in Tavan Tolgoi;

MEC offers fresh contract to Leighton in western Mongolia;

Hunnu buys 60% stake in coal project;

Petro Matad suspends operations after animal disease hits drill location;

MPs say OT has employed fewer Mongolians than agreed;

Zuun Mod exploration license extended;

Khan Bank receives President’s award;

Taxmen vs. miners;

Rio Tinto shows it paid 35% in Australian taxes; Rio on edge of new world of robotic mining.

Economy:

PM stresses need for better corporate governance;

Labor leader rejects criticism of salary increase;

Some MPs not happy with bid to revise inspection procedures;

Demand for iron ore, copper to double in 15 years: Rio Tinto;

Government to sell MNT16 billion bonds to fund Development Bank;

Chinese envoy sets cooperation parameters;

City officials detail the money Ulaanbaatar needs;

China bites into commodities reserves;

China scales back growth in factory production;

China levies energy tax in Xinjiang;

WTO criticizes China’s export restraints;

Opaque sovereign funds strike root in frontier markets.

Politics: Wen ends visit after pledging USD500 million;

No media conference for Chinese visitors;

MPRP MPs favor broad-gauge, east-west railway;

MPs cool to proposal allocating money to district governors;

Scholars determine Chinggis Khaan’s birthday;

“Nature is taking revenge, it's all our fault,” laments herder;

MIAT mutiny quelled, but for how long?

Countries with broad gauge railway hold annual meeting;

Rio Tinto fears Australia’s mining tax may spread;

Russia and EU sign modernization pact. *Click on titles above to link to articles.

BUSINESS NOT ENOUGH QUALIFIED LOCALS, MINISTER WANTS TO IMPORT CHINESE LABOR FOR OT The Standing Committee on Foreign Policy and Security held a closed-door meeting last week as the subject under discussion – employment of Mongolians in the Oyu Tolgoi project – was considered too

sensitive for a public hearing. Minister of Finance S. Bayartsogt reported to the committee that not enough skilled Mongolians have been found to work during the construction phase, due to begin soon, and sought permission to import 2,600 Chinese workers. The investing companies are ready to employ Mongolians as not less than 60% of their total employees, which works out to 3,900. The problem is that the Investment Agreement also ensures that only qualified people will be employed. The Minister‘s report that just about 1,000 adequately qualified Mongolians have been identified to pave roads and build power lines did not please members of the Standing Committee. They suggested tagging under-qualified Mongolians to the work force so that they could be trained on the job. So far Oyu Tolgoi LLC has given work to around 1,500 Mongolians and will offer temporary employment in Ulaanbaatar to 3,000 people at MNT180,000 a month. Both Minister of Minerals and Energy D. Zorigt and Minister of Social Welfare and Labor T. Gandhi have clarified that this program is not under the terms of the Investment Agreement. Members of the Standing Committee wanted to know why 14,000 young Mongolians have registered for 3,100 jobs in South Korea as industrial workers when mining activity is on the rise in the country. Source: Onoodor

SHENHUA REITERATES INTEREST IN TAVAN TOLGOI China Shenhua Energy Co. Ltd. is competing with other major energy groups for the rights to develop the Tavan Tolgoi coal mine, which is often referred to as the world's biggest untapped coking coal deposit. The deposit, which has coal reserves of 6.5 billion tons, has attracted the attention of BHP Billiton Ltd., India‘s Jindal Steel & Power Ltd., Brazil‘s Vale, U.S. coal miner Peabody Energy Corp., Russian and South Korean consortiums, and others. Shenhua, China‘s leading coal miner, has been interested in Tavan Tolgoi since 2003. The company‘s president Ling Wen recently said Shenhua had submitted its bid for a second time, adding that it ―has the greatest competitive advantage over other bidders‖. Located in southern Mongolia, the mine is one of the most valuable natural resources for the landlocked country, whose geographical proximity to China makes it an attractive target for miners. The Mongolian government said previously that successful bidders must also invest in infrastructure construction in the country as part of the deal. Since the start of 2009 Shenhua has been building the Gan Quan Railway to transport coking coal from Tavan Tolgoi. The CNY4.7 billion railway will be completed and put into operation in 2011. ―Compared with their foreign counterparts, Chinese enterprises are not necessarily well positioned to win the auction,‖ said the analyst, citing the example of Australian and Japanese enterprises, which have offered training programs to their Mongolian employees. ―But Chinese enterprises could make good use of the deepening Sino-Mongolia economic cooperation, echoed by Premier Wen Jiabao‘s upcoming visit to Mongolia, during which Wen is expected to discuss with his Mongolian counterpart the issue of financing Mongolia‘s mineral resources projects,‖ he added.

Source: 21st Century Business Herald

MEC OFFERS FRESH CONTRACT TO LEIGHTON IN WESTERN MONGOLIA Mongolia Energy Corporation has awarded Leighton Asia an AUD273-million, 6-year contract to develop and operate the Khushuut coal mine project in western Mongolia. This is the second contract that MEC has awarded to Leighton Asia in western Mongolia. The contract is based on a mine plan which ramps up to an initial 3 million tons of coking coal per year and includes 48.5 million cubic meters of material movement and anticipated ramp up to 5 to 6 million tons or more of coking coal per year. Leighton Asia is responsible for all mining activities including load and haul of waste, load and haul of coal, drill and blast, mine planning, technical support, site camp management and catering services. In November 2009, Leighton Asia was awarded the contract to provide an initial 3 million tons per annum mine plan study. Leighton Asia Managing Director Mr. Hamish Tyrwhitt said, "This award represents an important milestone to our business in Mongolia bringing our total number of mines to 3. Our work in hand at Leighton Asia has now reached a record level of AUD6 billion." MEC Chief Executive Officer James Schaeffer Jr. said, "This award represents completion of a major step forward in the implementation of our business model as an energy and resources developer. Our selection of Leighton as mining contractor will assist in the efficient and professional development of our initial project at Khushuut and demonstrates MEC's commitment to building professional and local relationships for further projects."

Source: Mongolia Energy Corporation

HUNNU BUYS 60% STAKE IN COAL PROJECT Hunnu Coal has acquired a 60% interest in the Tsohio coal project, about 40 km from its existing Khuree 2 project. The Tsohio project has an exploration target of between 50 million tons and 75 million tons, and the company said it would embark on an ―aggressive exploration‖ program. Meanwhile, a mapping and geophysics program was in progress at the Khuree 2 coal project, with the aim of identifying coal seams, which would be followed by a drilling program, starting in July. Hunnu was conducting a mapping and geophysics program also at the Tenuun 2 coal project, about 80 km from the Tsohio project. A single vertical drill hole has intersected three coal seams, with a combined true thickness of 12 meters. The company would be undertaking detailed exploration on the three projects over the coming months, as part of its coking and thermal coal exploration strategy aimed at making it a ―major force‖ in the exploration and development of coking and thermal coal deposits in the South Gobi project.

Source: www.miningweekly.com

PETRO MATAD SUSPENDS OPERATIONS AFTER ANIMAL DISEASE HITS DRILL LOCATION Petro Matad has said that an outbreak of foot and mouth disease has forced it to temporarily suspend operations at its Davsan Tolgoi project in Block XX in Mongolia. The company has been preparing for the commencement of drilling of the DT-1 well when the disease hit the Dornod province, which hosts Davsan Tolgoi. Last month, the company announced that the 2009/2010 three-hole drilling program on the Davsan Tolgoi prospect on the company's Block XX was due to restart shortly following the winter shutdown. The governor of the province has imposed blanket vehicle and personnel movement restrictions in and out of the area, preventing supply trucks from reaching DT-1, while no personnel currently on site is permitted to leave. The order will stay in place until June 9, 2010. The spudding of DT-1 is imminent, but the company has decided that it would not be practical to commence drilling with the aforementioned restrictions in place from the engineering, logistical and safety standpoints. ―While this delay is inopportune and mildly frustrating to the management and shareholders, we are fully cooperating with the local authorities to ensure the limitation and elimination of this potentially disastrous disease from our area of operation…we will be monitoring and assisting over the next 10 days and hope for a speedy resolution and re-commencement of operations,‖ said Chief Executive of Petro Matad Douglas McGay. Source: Petro Matad Limited

MPs SAY OT HAS EMPLOYED FEWER MONGOLIANS THAN AGREED With Labor and Social Welfare Minister T.Gandhi not present, it fell to Finance Minister S.Bayartsogt to answer questions from members of the Standing Committee on National Security and Foreign Policy last week on the progress of employment creation in the Oyu Tolgoi project. Some MPs said the ―original Investment Agreement‖ called for employment of 1,009 Mongolians in 2009 and of 4,331 more in 2010. Neither of the two figures has been reached. Labor Ministry officials later said they had discovered this clause only recently. The Ministry was asked to post on the Internet all information related to employment in the project. Source: News.mn

ZUUN MOD EXPLORATION LICENSE EXTENDED Erdene Resource Development Corp. has said its Zuun Mod exploration license was recently renewed until May 28, 2011. Erdene has been carrying out work over the past year in preparation for conversion of the Zuun Mod exploration license to a mining license. This included work by Mongolian consulting companies that prepared technical reports in support of the mining license application. These reports have been finalized and submitted to the Mongolian Mineral Resource Council, for registration of the mineral resource at Zuun Mod, a prerequisite to the granting of a mining license. Upon registration of the Zuun Mod resource by the Minerals Resource Council, the Corporation will have all necessary documentation to apply for a mining license for the Zuun Mod Molybdenum Project covering approximately 10,000 hectares. Under the Minerals Law of Mongolia, the initial term for a mining license is 30 years with an option for two 20-year extensions. Minarco-MineConsult of Australia, the Corporation's independent technical consultants, are in the process of conducting pit optimization and scheduling studies on the Zuun Mod deposit to combine with the previously completed preliminary assessment level work initiated in 2008. Zuun Mod is one of the largest undeveloped molybdenum-copper deposits in the Asia region. Erdene has also appointed Mr. Malcolm F. Cox to its Board of Directors. "We are excited by the

appointment of Mr. Cox to the Board as Malcolm has been involved with the joint Xstrata-Erdene projects in eastern Canada and Mongolia since they began and has a very good understanding of what is involved in advancing both opportunities," said Mr. Peter Akerley, President and CEO of Erdene. Source: Erdene Resource Development Corp.

KHAN BANK RECEIVES PRESIDENT‟S AWARD Khan Bank was one of 5 companies to receive the President‘s award for national productivity for 2009 at a ceremony last week. The citation accompanying the award reads, ―In grateful appreciation to Khan Bank for its success in improving its reputation, competitiveness and commitment to the development of Mongolia, implementing innovative ideas in service productivity and ensuring grounds for prosperity, the President of Mongolia hereby awards the National Productivity Award 2009 with a Golden Cup.‖ Receiving the award on behalf of the bank, Mrs. U.Narantsetseg said for over a year now, Khan Bank has been following a special program to improve cooperation between employees and management and to enhance customer satisfaction. The award recognizes the success of the program.

Source: Montsame TAXMEN vs. MINERS Miners, like oil men, are a tough lot. They are fighting tooth and nail to derail the Australian government‘s plan for a ―super profit tax‖. But just as oil and gas companies survived when a similar tax was imposed on them, the mining industry has broad enough shoulders to bear the new burden. Natural resource profits are not like other types of income. Because of supply constraints, resource extraction follows the economics of treasure-hunting: once out of the ground, a treasure‘s value bears no relation to the cost it took to dig it up. That potentially huge extra value should belong to the nation in which it is found. Governments are right to tax resource extraction more than other activities. Australia has for years levied a ―petroleum rent tax‖ of 40 per cent on oil and gas profits before applying the normal corporation tax of 30 per cent to the remainder. Canberra now wants to do the same in mining. Good. It will be a long-overdue update of the medieval practice of levying royalties on gross production. Being regressive, royalties squeeze marginal producers while letting those with the most abundant mines keep the largest share of their loot. A profit tax is much more efficient, and will, Canberra promises, finance lowering corporation taxes to 28 per cent. That will benefit Australia‘s non-resource sectors, while mining companies will face a combined tax of 56.8 per cent – perfectly bearable for large miners that routinely enjoy earnings well above 20 per cent of equity. This is all the more true as market power is concentrated through consolidation such as Rio Tinto and BHP Billiton‘s joint venture in Pilbara. Read more… Miners predictably insist that they are not just talking their own book in opposing the tax. They warn it will hurt jobs by making Australia less competitive for mining investment. But the fact is that companies must invest where the ore is. And a reasonable tax reform does not destroy Canberra‘s reputation for solid and predictable mining governance. The charge that it turns Australia into the ―number one sovereign risk issue‖, made by Tom Albanese, chief executive of Rio Tinto, is absurd. The plan is not perfect. It wastes an opportunity to reform royalties at the state level. It does not allow for enough cost deduction in viable projects while it exposes the government too much in unprofitable ones. But these are minor snags. The industry‘s greatest fear is that other countries follow Canberra‘s lead. As the benefits of the tax reform become visible, there is no reason why they should not. Source: The Financial Times

RIO TINTO SHOWS IT PAID 35% IN AUSTRALIAN TAXES Rio Tinto on Tuesday released independently audited figures to back its claims that it had been paying its fair share of Australian mining taxes, contradicting estimates by the federal government. The mining giant said that it had paid more than AUD20 billion in corporate taxes and royalties in the last ten years, and that its effective tax rate averaged more than 35%. The Australian government recently said that the mining sector paid an average tax rate of 17%, which was below the statutory company tax rate of 30%. The data released by Rio Tinto showed that it had paid AUD11.2 billion in company tax, and a further AUD4.1 billion in royalties in the past

five years and that the effective rate of taxation during that period averaged 34.7%. Corporate taxes between 2000 and 2009 amounted to AUD14.6 billion, while royalties were AUD5.7 billion. ―Misleading information propagated by other parties has not facilitated a proper dialogue about the importance of the minerals sector to all Australians. It should also be emphasized that the data shows Rio Tinto has effectively invested all of its Australian profits, and more, back into Australia in the past decade,‖ stated Rio CFO Guy Elliot. Source: www.miningweekly.com

RIO ON EDGE OF NEW WORLD OF ROBOTIC MINING When Rio Tinto announced in 2007 it would be pouring USD21 million into the University of Sydney to fund a Center for Field Robotics, there were many raised eyebrows in the mining industry. Miners had always used the latest technologies to extract minerals from the ground and treat them, but Rio was the first company to put significant sums into the realm of mechanized and robotic mining. There was doubt as to whether progress would be made, even with 28 full-time staff and 10 research students at the center. The center‘s aims were ―to provide a substantial improvement in safety, predictability, precision and efficiency of mining through the development of automation and remote operation across mining systems‖. Three years later, Rio believes it is standing on the edge of a brave new world for mining, including innovations that could change the industry forever. As mining fatalities have continued, with serious accidents in China and the US recently, the industry is increasingly looking to automation to reduce risk for mine workers. But labor groups argue that the move to mechanized mining could put much needed jobs in the developing world at risk. Read more… Rio‘s mine of the future in West Angelas, Western Australia, is its flagship mechanized operation. It includes automated trains and robotic drill rigs, all directed from an operations center hundreds of miles away in Perth where employees ―work like air traffic controllers‖, according to the company. At its Diavik diamond mine in the remote far north of Canada, Rio is building a robotic underground mining system that will be operated remotely; workers are being trained using controls from the Xbox video game console. Platinum producers are particularly interested in the new technology as the metal is found deep underground, making accidents more likely. Analysts say several factors will limit the appeal of robotic mining, and do not see Rio rolling out the technology to all of its operations in the near future. ―In Africa you don‘t want to automate mines in a poor town where people need jobs, you probably won‘t be able to get away with it,‖ said an analyst. Source: The Financial Times

ECONOMY PM STRESSES NEED FOR BETTER CORPORATE GOVERNANCE Pledging to steer Mongolia into the path of sustainable development during its present period of transition, Prime Minister S.Batbold said in his inaugural speech at the third annual Mongolia Corporate Governance Forum, "There is no reason why we should not succeed if we introduce new methods of production and standards of service, and simultaneously develop the stock and capital markets." Mongolia has the resources and the skills and is receiving support from foreign countries. Thus there is no reason why sectors such as mineral resources, education, agriculture, production, service and tourism will not grow, but the key to real and sustainable growth, he asserted, was good governance. That is what separates resource-rich countries that have been successful from those which have faltered, and Mongolia must, the Prime Minister said, strive to ―improve our governance regimen, making it more sustainable and open‖. The recent situation in the national airline MIAT clearly showed the imperative need to adopt improved practices of corporate governance, culture and ethics. The private sector has to realize this, and the sooner the better. On its part, the government was determined that state-owned companies changed their mindset. To this end, he has recently instructed the State Property Committee to induct representatives of the civil society, like professional bodies and NGOs, in the boards of State-owned entities. Only fresh air can blow away the cobwebs of outdated tradition. He also felt the state should leave business to companies, which would work together with professional unions and NGOs. These, on their part, must pool their resources and expertise to offer strong support to national development. He urged all big national companies to aim at penetrating

the capital market by issuing stocks. He also hoped these companies would incorporate the recommendations of the conference in their management and governance.

Source: Ardiin Erkh, Montsame

LABOR LEADER REJECTS CRITICISM OF SALARY INCREASE Mr. S.Ganbaatar, President of the Confederation of Trade Unions, thinks the regular criticism by certain people ―at the decision making level in government‖ that the 30% salary rise for public servants will lead to price increase is ―more politically motivated than economically valid‖. Inflation and price rise can be kept in check ―by following correct monetary and fiscal policies and by implementing proper administrative measures, and not by denying hard working citizens basic remuneration‖. A lethargic government does not react to what is very clear. The general mass of salaried people are ―kept alive by drips‖, while the law prohibiting unfair competition is still not passed. People expect the government and the people they have sent to Parliament to help them find employment, and live at a level somewhat above mere subsistence, but all they find is opposition to any means to resolve their problems. Mr. Ganbaatar said independent studies reject the claim that increased wages would raise prices, and referred to a proposal mooted two years ago to set up a mechanism to monitor the movement of price bubble in various sectors, and demanded to know why this has not been set up. He was sure the amount needed to pay increased salaries could be found if those who made substantial and often huge profits by manipulating prices were heavily fined. Since this money was already in the market, there would be no inflation. He wondered if it was fair to allow some people to jack up prices at will, and at the same time not allow ordinary purchasers access to the extra money needed to buy goods and services at that higher rates.

Source: Zuunii Medee

SOME MPs NOT HAPPY WITH BID TO REVISE INSPECTION PROCEDURES The proposed revisions to the laws on inspection have run into heavy weather. During discussion on them, several members of the Standing Committee on the State Structure complained that they went against established principles of state inspection and would create confusion. Mr. Ya.Sodbaatar, head of the State Inspection Agency, explained that the idea was to instill some method in all inspection work, so that different sorts of inspection could use different approaches, and Deputy Prime Minister M.Enkhbold clarified that they were seeking to reduce overlapping among inspections, following citizens‘ complaints. Source: English.news.mn

DEMAND FOR IRON ORE, COPPER TO DOUBLE IN 15 YEARS Rio Tinto expects demand for iron ore, aluminum and copper to double over the next 15 years, driven by industrialization and urbanization. CEO Tom Albanese has said the group also expected a ―substantial‖ increase in the demand for energy products. ―These trends will require a significant response from producers,‖ Mr. Albanese said, adding that Rio Tinto was ―well placed to benefit from what is an attractive business‖. He added that during that second half of last year, the company flagged that its capital budget for 2010 would be between USD5-6 billion. However, over the past few months, as the company has seen the demand outlook improve significantly, it has started to approve new capital expenditure for growth projects on a case-by-case basis.

Source: www.miningweekly.com

GOVERNMENT TO SELL MNT16 BILLION BONDS TO FUND DEVELOPMENT BANK The Government has decided to issue bonds worth MNT16 billion to raise capital for the new National Development Bank. The MNT19 trillion needed to implement the government‘s Industrialization program has not yet been found. A study has concluded that in 2010-2012 the government‘s own income and aid from donors will total MNT10 trillion.

Source: Ardiin Erkh

CHINESE ENVOY SETS COOPERATION PARAMETERS Chinese Ambassador to Mongolia Yu Hongyao has stressed his country‘s support to Mongolia in developing a structure where industrial goods will be manufactured and agricultural and livestock products processed, so that value-added exports can earn more money. However, China believes ―a government and private companies must operate independently and follow the market principle‖

and will cooperate with Mongolia on the principle of ―joint development with mutually benefits‖. Source: Udriin Sonin

CITY OFFICIALS DETAIL THE MONEY ULAANBAATAR NEEDS

Prime Minister S.Batbold told donors and international financial organizations at a meeting organized last week by the Mayor‘s office that years ago foreigners used to call Ulaanbaatar Asia‘s White Diva. Admitting that this would be very much a misnomer today, Mr. Batbold called for hard work to make the capital a better city to live in. The first step would be to ―identify the image that modern Ulaanbaatar wants to present,‖ he said. City officials revealed some data about the Capital City, which is home to 1.114 million Mongolians, or 40.5 percent of the total population. Of this number, 70 percent are under 35. Half of the 210 secondary school buildings do not meet standards. Not one new kindergarten has been built in the last 20 years. Of the 274 now in use, 65 do not have any open area where children can play, 37 have no water supply. The number of children born every year in Ulaanbaatar is between 27,000 and 30,000 on an average, but only 40 percent of them attend kindergarten, and the rest are cared for by grandparents. Deputy Mayor Ts.Tsogzolmaa said USD20-25 million will be needed to set up kitchens to prepare the midday meal for schools pupils, USD 17-20 million for new maternity centers, USD20-25 million for a diagnostic center, and USD1-2 million for training of nurses and doctors. The City General Manager Ts.Gankhuu said the population of Ulaanbaatar has been annually increasing by 30 percent for the last 9 years. The city‘s infrastructure was built for a maximum of 500,000 residents and is bursting at the seams. MNT 120 billion received last year from the Development Fund was spent on building new sewage and drainage. The main road in the city is planned to be extended to a length of 27 km. USD185.5 million will be needed to build this and the expense for other roads has been estimated as USD458.1 million. There would be special roads for cyclists and disabled people. Source: English.News.mn

CHINA BITES INTO COMMODITIES RESERVES China appears to be eating into some of its commodities reserves, a potentially worrying near-term trend for commodities producers and investors, analysts say. The phenomenon could help explain why imports from China in markets such as refined copper, iron ore and lead have declined in the last few months. It also could be a factor behind the recent drop in prices for those commodities. In April, China posted a significant drop in imports for some commodities, leaving many analysts wondering whether China's appetite for commodities has abated. That might be the case. And demand could falter if China further tightens monetary policies to slow growth, particularly in heated property markets. But several analysts who through field visits and data mining try to gauge China's actual demand lately have concluded that domestic demand still is strong. In fact, they surmise, commodity imports are declining at least partly because the country and its industrial companies are tapping reserves, possibly because they expect prices to fall further. Longer term, the Chinese government and industrial companies there are likely to return to the market when reserves are running down or prices get low enough, the analysts said. Some are concerned that manufacturers are responding to fewer orders from customers, preferring to use the materials they already have rather than add to their commodities stocks. Others said Chinese commodities users are being savvy, waiting for market prices to decline further before stepping up buying. China imported record levels of copper in 2009. In April, the International Copper Study Group cited "the potential release" of inventories in China as one of the biggest risks copper prices face this year. Source: The Wall Street Journal Asia

CHINA SCALES BACK GROWTH IN FACTORY PRODUCTION Asia‘s soaring factory output appeared to have slowed on Tuesday as production data from China, Taiwan, South Korea and Australia showed a decrease in the pace of growth in output in May. Output remained positive in all four countries, however, and separate figures from India and Japan both showed an increase in the pace of growth, suggesting that the dramatic improvement in Asian business conditions since the global financial crisis is generally being sustained. In China, both official and unofficial surveys of purchasing managers‘ index data showed that the acceleration in factory production slowed last month, along with the pace of hiring, in response to

a slowdown in new orders from both home and abroad. The official purchasing managers‘ index, compiled by the China Federation of Logistics and Purchasing, fell to 53.9 in May from 55.7 in April. Meanwhile, the unofficial but closely watched HSBC China Manufacturing PMI fell to 52.7 from 55.2. An index reading above 50 indicates an increase in output. The HSBC reading was the lowest in 12 months, reflecting relatively lackluster demand in both domestic and overseas markets. However, economists said the slowdown in the pace of growth was unlikely to mark a serious setback for the Chinese economy, which is still benefiting from extraordinary fiscal and monetary stimuli introduced during the crisis. Some economists pointed out that the official PMI measure has fallen in May compared to April in every year since the statistical series was launched in 2005, suggesting that the decline should be viewed as a seasonal phenomenon. Source: The Financial Times

CHINA LEVIES ENERGY TAX IN XINJIANG China is introducing a 5% tax that the country's energy companies must pay on oil and natural gas produced in Xinjiang, part of Beijing's efforts to improve the economic prospects in the poor western region, where local ethnic Muslims have rioted against Han Chinese and where the windfall from the development of rich resources has been scant. The new natural resource tax, which will eventually be rolled out nationwide, will increase the local government's coffers, but it will hurt the profits of China's two biggest oil and natural-gas companies—PetroChina Co. and China Petroleum & Chemical Corp., also known as Sinopec. Xinjiang is important for China's energy needs: It is the source of 13% of its crude-oil production and 29% of its natural-gas output. Oil and natural-gas production accounted for nearly 30% of the economic output of Xinjiang last year, a vast area ringed by high mountains and deserts that has seen increasing migration of China's majority ethnic group, the Han, since the 1950s as part of Beijing's push to solidify control of the region. The new tax will be based on value and is estimated to increase Xinjiang's revenue from natural resources to USD5.2 billion a year from around USD800 million annually now. The boost for local governments likely comes at the expense of the oil companies. Unless Beijing offsets the new tax by reducing other taxes they pay, some analysts estimate that PetroChina could see its per share earnings cut by 4.2%, while Sinopec will lose 1.3%. PetroChina chief executive Jiang Jiemin said he welcomed the new tax, but felt it should be linked to a reduction in the windfall profit tax that is levied on energy companies' income as oil prices go above a certain level.

Source: The Wall Street Journal Asia

WTO CRITICIZES CHINA‟S EXPORT RESTRAINTS China‘s extensive restrictions on its own exports are doing more to distort global commerce than their supposed goals of protecting the environment and balancing the country‘s trade, according to the World Trade Organization. In its two-yearly review of Beijing‘s trade policy, the WTO‘s criticism ventured on to the politically sensitive area of export curbs, the subject of ongoing trade disputes with China‘s largest trading partners. ―China‘s export barriers have not been falling at the same pace as its import barriers,‖ the WTO secretariat‘s report said. ―It still uses various export restrictions, including prohibitions, licensing, quotas, taxes, and less-than-full VAT rebates.‖ The report said Beijing claimed these restrictions were aimed at environmental goals by reducing the export of energy-intensive and other environmentally destructive goods, and at reducing China‘s huge trade surplus. But it said the effect of the restrictions was merely to help other Chinese companies by driving down the price of raw materials used as industrial inputs. ―Export restraints for whatever reason tend to reduce export volumes of the targeted products and divert supplies to the domestic market, leading to a downward pressure on the domestic prices of these products,‖ the WTO said. ―The resulting gap between domestic prices and world prices constitutes implicit assistance to domestic downstream processors of the targeted products.‖

Source: The Financial Times

OPAQUE SOVEREIGN MARKETS STRIKE ROOT IN FRONTIER MARKETS Sovereign wealth funds -- national vehicles created to grow state wealth for the future -- have long experience investing in exotic and lesser-known lands. To these funds, many of which originate in what the West calls the "frontier" region, it's a local market. This year alone, countries including China, Singapore, South Korea, Kazakhstan, Azerbaijan and Abu Dhabi have invested easily more than USD1 billion in frontier markets, in such projects as mines in Mongolia and companies in Africa,

the Caribbean and Latin America. The often secretive heavyweights of the financial world, sovereign funds control around USD3-4 trillion in assets and include some established players on tricky terrain. Because their investments are so influential, their presence can be manipulated to wrong-foot other investors. So the sovereign wealth funds' tendency to be opaque adds to the challenge for investors in frontier markets. But beyond this, they are also having a broader influence, bringing a "frontier factor" to the rest of the world. Backed by leverage-free reserves beyond the dreams of most indebted rich-world countries, the funds' "south-south" investment is more than a sideshow: it's reinforcing their role as powerbrokers of global markets. Sovereign funds have been actively investing on the frontiers for at least 400 years. Read more… The East India Company -- an English trading company in the 17-19th centuries backed by the state -- functioned loosely like a modern sovereign wealth fund. It pursued trade in commodities including spice, cotton, tea and opium in the then-frontier markets of China and India, creating regional markets and helping develop local economies. Other European corporations including the 17th-century Dutch East India Company, VOC, served as tools of colonial power -- an extension of states -- just as do some sovereign funds today. The difference between the pioneers of the past and the present is that today, much of the wealth and influence come not from the modern rich world, but from resource-rich countries with very different values. The funds and their targets in poor countries often have shared experience on the economic margins, which fosters a cultural affinity. Sovereign funds are keen to diversify into illiquid but higher-yielding assets in frontier economies in the hope of providing returns for future generations. And unlike the quarter-to-quarter reporting required from companies in the West, these funds can wait a long time before showing returns. Only a few years ago, Western politicians were making headlines with attacks on sovereign funds for their secretive ways: behind this were fears their motives were political, rather than commercial. Keen to be accepted, many did make an effort to open up. But since the credit crisis, political calls for greater transparency from the funds have quieted. Once regarded as subversive agents of state capitalism, they are now sought-after providers of capital. South-south investing would not necessarily improve transparency much more due to the nature of the parties involved. Some south-south investing is driven by strategic alliances, which again raises the concern of combining politics and commerce -- how much of these investments are driven by politics and other non-commercial motives?

Source: Reuters.com

POLITICS WEN ENDS VISIT AFTER PLEDGING USD500 MILLION Chinese Premier Wen Jiabao left Ulaanbaatar at 11 on Wednesday morning after spending a program-packed 30 hours here. He held wide ranging talks with Mongolian Prime Minister S. Batbold, called on President Ts. Elbegdorj, and met with other national leaders. The highlights of the visit were the signing of several agreements and Mr. Wen‘s announcement of a fresh USD500 million soft loan, in addition to the one for USD300 million pledged earlier. The present loan will likely be used to set up some processing plants, mainly in the agriculture sector. The road in front of the Chinese Embassy will be called Beijing Street. It will be repaired and rebuilt with money China pledged in April, 2008. Mongolia will buy new locomotives with some of the USD300 million earlier promised. The Nuclear Energy Agency of Mongolia and the National Nuclear Corporation of China will explore areas of cooperation in the uranium sector. During their one-to-one talks Mr. Batbold asked China to reduce transit transport fees to facilitate use of Chinese ports by Mongolian goods. The Chinese premier suggested that the two sides launch a feasibility study at an early date on a China-Mongolia free trade area (FTA). Expressing support for an FTA, Mr. Batbold said Chinese enterprises are welcome to expand investments in Mongolia and participate in the country's infrastructure construction and the development of mineral and energy resources. Speaking at the opening of the Sino-Mongolian Economic and Trade Cooperation Forum, the Chinese premier said, "We are sincerely willing to be Mongolia's good neighbor, good friend and good partner forever." Among the specific proposals he made on further boosting bilateral economic and trade cooperation were a program to boost investment cooperation in mineral resources development and infrastructure construction, and China‘s support to its enterprises to import more farm and animal

husbandry products from Mongolia and encourage them to invest in projects that create more jobs and improve the livelihood of local residents. Source: Ardiin Erkh, Xinhua

NO MEDIA CONFERENCE FOR CHINESE VISITORS It was mutually agreed before the visit of Chinese Premier Wen Jiabao that neither he nor Mongolian Prime Minister S. Batbold would meet journalists or make any statement to the media. The local press corps had to be content with information doled out by the Mongolian Foreign Minister after Mr. Wen had left.

Source: Udriin Sonin

MPRP MPs FAVOR BROAD-GAUGE, EAST-WEST RAILWAY Mr. D. Lundeejantsan, head of the MPRP group of Members of Parliament, has told journalists that the group has unanimously decided to support a proposal to build a broad-gauge railway. It will run east to west and link Tavan Tolgoi with Choibalsan via Sainshand. Since these MPs have a majority in Parliament, their decision clearly indicates the contours of the railway policy almost certain to be adopted.

Source: Udriin Sonin

MPs COOL TO PROPOSAL ALLOCATING MONEY TO DISTRICT GOVERNORS The Standing Committee on the Economy last week discussed a working group‘s proposals on revising the present year‘s budget. These include a provision to allot between MNT60 million and MNT100 million to governors and the citizens‘ representatives‘ assemblies to each of the 329 districts in the country. Mr. D.Terbishdagva (MPRP) and Mr. Ya.Batsuuri (DP) felt this would serve little purpose, and Mr. Z.Altai (Ind) wondered if the committee was the place to discuss and determine such little things as an individual district‘s likely expanses on petrol and fodder. In recent days, there have been suggestions from many quarters to give local authorities more financial power.

Source: Zuunii Medee

SCHOLARS DETERMINE CHINGGIS KHAAN‟S BIRTHDAY The working group comprising scholars and historians and set up by President Ts.Elbegdorj in March to determine the exact date and place of the birth of Chinggis Khaan submitted its report last week. Its decision is that Chinggis Khaan was born on the first day of the first month of winter according to the lunar calendar in Dadal district of Khentii province. The date on the Gregorian calendar would fall between the middle and end of October.

Source: Ardiin Erkh

“NATURE IS TAKING REVENGE, IT‟S ALL OUR FAULT”, LAMENTS HERDER The loss of so much livestock is devastating Mongolia. A third of its 2.7 million people are herders, wealth is measured by the hoof and livestock outnumber people 15-to-1. "For many herders, livestock is their main source of income. It's their business. It's what they do. That's why the loss the herders are experiencing is the same as when a company or a bank goes bankrupt," said Mr. Purev Zagarzusem, governor of Uyanga, an administrative district and one of the worst-hit areas. "Other countries have tsunamis or earthquakes, for example, and people lose their lives and possessions. In Mongolia a dzud is a disaster on a similar scale." At a time when green shoots of grass sprout from the brown earth and herds should be migrating from winter camps to summer pastures, the animals are too weak to feed and travel. More are dying in sporadic snow squalls and high winds. Herders do not dare comb their remaining goats for the fine hairs used to make cashmere, a main source of income, because the already unnerved animals might catch cold and die. This dzud is raising uncomfortable questions about the herders' way of life, as integral to the Mongolian identity as Chinggis Khaan, whose image graces currency notes and vodka bottles. The constitution enshrines livestock as protected national wealth. Herders form a powerful constituency; parliament rescinded a head tax on livestock to curry favor with them. The government, in a report last year, identified the unfenced grasslands and the herds that roam there as acutely vulnerable to climate change, citing more frequent droughts and harsh dzud winters. "We Mongolians did not treat nature properly. Nature is taking revenge. It's all our fault," said a 34-year-old herder who drove his herd of 1,000 through three different counties in the winter trying to

find pasture not buried under snow. Only 100 of his herd remain. Read more… Government officials and development experts say herders are contributing to the problem. Since Mongolia dumped the planned economy and its Soviet client-state status for free markets 20 years ago, livestock numbers have more than doubled, to 42 million head. Much of the increase is in goats valued for cashmere, which eat voraciously, damaging the roots of grasses and other plants that anchor the soil and prevent the pasture from turning to desert. While the government wants to move herders into other lines of work and decrease herds, an uncontrolled exodus from the steppe is already under way. After three harsh winters a decade ago, more than 70,000 herders ended up in Ulaanbaatar, swelling the shanty town fringes of the capital and mainly living on government handouts. The flow is expected to accelerate if the aftermath of the latest dzud is not controlled. Clearing away the dead animals is the top priority. Carcasses litter the pastures, where they are picked at by dogs and eagles. Some of the goats and cows have been skinned to sell the hides, exposing the rotting flesh beneath. Sickness and depression are running through the herders' camps, compounding their economic woes. "There's a restlessness among the herd. They suddenly get scared by the carcasses, and when they're hungry they bite the wool of the dead sheep. It affects their behavior very much," said a herder, once a member of the local legislature. As the weather warms, the pneumonia and other viruses in the rotting carcasses could be transmitted to live animals and then on to the herders. If rotting carcasses "get into the water supply, that would be a huge catastrophe," said Mr. Akbar Usmani, the UNDP's representative in Mongolia. Burying the carcasses is the only option, U.N. experts said, because Mongolia's dry climate makes burning them too dangerous. Reminders of the dzud will remain. There's not enough manpower to pick up all the carcasses. And in Mongolia's cold, dry climate, animal hides take 6 months to rot, their flesh and sinews 7 months, and their bones 10 years. Source: AP (The Associated Press)

MIAT MUTINY QUELLED, BUT FOR HOW LONG? Swift measures taken by the party and the government have quelled the mutiny at MIAT, which had disgusted the people. All people in senior positions have been replaced. A time of peace and tranquility has come, allowing MIAT to meet the special demands of the tourist season in Mongolia‘s brief summer. The Government deserves congratulations on its firm handling of indiscipline in an enterprise of national importance. However, how long will the improvements last? How long will the workers accept a situation where they cannot steal? The whole point is that MIAT is state property where work ethics can be easily replaced with patriotic slogans, where responsibility takes second place to emotional words of concern for the country. MIAT is not an isolated pimple. Anyone looking closely will find festering sores on the face of state owned enterprises. Source: baabar.niitlelch.mn

The complete article on the MIAT episode by former Finance Minister, noted historian and social commentator Baabar can be found at both BCM‘s websites (English and Mongolian), Mongolian Business News. COUNTRIES WITH BROAD GAUGE RAILWAY HOLD ANNUAL MEETING Participants at the fifth business forum called ―1520-Strategic Partnership‖, held recently in Sochi in the Russian Federation, were drawn from representatives of governments, the private sector, railway authorities, international transportation companies, and the banking sector. They discussed important issues of cooperation, transportation system, and tariff. What is special to this annual conference, first held in 2006, is that those who attend are all from countries with a 1520-mm railway gauge. Currently their number is limited to countries of the Commonwealth of Independent States, the Baltic republics, Finland and Mongolia. The total length of railway tracks in these places is around 150,000 km. Their difference from the rest of the world poses some unique problems of logistics for these countries and the forum explores ways of surmounting these. Source: Onoodor RIO TINTO FEARS AUSTRALIA‟S MINING TAX MAY SPREAD Rio Tinto Ltd. is concerned that other nations could follow Australia's lead by introducing a windfall

tax on mining profits. Australia's new super profits tax, due to come into effect in mid 2012, has angered the mining industry, which has warned it puts mine expansions at risk and could push investment overseas. "We are concerned that other countries may see this as something they want to try out, too," Rio CEO Tom Albanese told shareholders, later adding the government should reconsider what he called a "seriously flawed" tax. Analysts have said another resource-rich nation, Brazil, could consider Australia's tax as a precedent and also raise taxes on iron ore. Mongolia, Zambia, Peru and Ecuador have also considered and in some cases implemented a similar mining windfall profits tax. Some later repealed it. Chile, the world's biggest copper exporter, has already announced temporary higher royalties to help pay to rebuild towns destroyed by a major earthquake earlier this year. A senior Australian Treasury official, who is leading government consultations with miners over the new tax, said resource-rich nations were increasingly moving towards mining rent taxes and away from royalty systems. He said some provinces in Canada and some U.S. states also had resource rent taxes. Mr. Albanese, who has labeled the new tax as his company's top global sovereign risk issue, said he was confused by the government's messages on the tax, in reference to suggestions the booming mining sector needs to be slowed to help other parts of the economy and bring down the Aussie dollar. Read more… Rio has also strongly criticized the consultations over the new tax, saying the talks are too narrow and do not address issues around the competitiveness of Australia's industry. Treasurer Wayne Swan, however, said more than 80 mining companies were now involved in consultations over the new tax, although he declined to comment on areas of possible compromise, including the starting threshold for the new tax, set at around 6 percent and based on the 10-year government bond rate. The government won backing for its tax plan from a group of leading economists, who said the new super profits tax would not harm Australia's current resources boom. The group of 20 mainly academic and policy economists issued an open letter in which they said the replacement of state-based royalties with a resource rent tax offered a "superior" tax that would benefit Australians.

Source: Reuters.com

RUSSIA AND EU SIGN MODERNIZATION PACT Russia and the European Union signed off on a new partnership for modernization on Tuesday as the two sides sought to progress on economic fundamentals as the crisis in the Eurozone took the bite out of previous conflicts. Mr. Dmitry Medvedev emerged from talks with the EU leadership on Tuesday saying the 25th EU-Russia summit in the southern Russian city of Rostov-on-Don had taken place in a ―friendly and businesslike tone‖. The Russian president hailed the new modernization agreement as allowing the two sides to pursue co-operation in high technology, innovation and energy efficiency, while Mr. Herman Van Rompuy, the EU president, threw his backing behind the new pact. ―We want to be Russia‘s partner in modernization,‖ he said. ―With Russia we do not need a reset, we need a fast forward,‖ he said, in a reference to the US vice-president‘s comments on US-Russia relations last year. The acrimony of previous summits over Russia‘s relations with eastern Europe and its role as dominant energy supplier to the EU was conspicuously muted as Russia sought to present a more business-friendly face and the EU sought assurances from Moscow over the euro. Russia keeps a large part of its USD460.7 billion in hard currency reserves in Euros. The new agreement is so far vague on specifics, mapping out only areas in which the two sides will co-operate such ―as innovation, research and development and space‖ as well as ―the effective functioning of the legal system and the strengthening of the fight against corruption.‖ An action plan on the new co-operation agreement is expected only at the next summit in the autumn. Source: The Financial Times

NEW MONGOLIAN REGULATIONS

The following new regulations were published in a recent weekly Government bulletin. Unless otherwise decided by Parliament, they will take effect (10) days after publication.

Date Laws 26.05.2010 Law on Asset-Backed Securities Amendments to Civil Law Addendum to Law on Company Amendments to Law on Financial Regulatory Commission's legal status Addendum to Law on Bankruptcy Addendum to Law on Special permits for corporate activities Addendum to Law on Money saving, transaction, loan activities of bank, competent

legal body Addendum to Law on Securities market Addendum to Law on Corporate income tax Addendum to Law on Value added tax

Please visit BCM‘s website, Legislative Working Group, for a summary of new Mongolian laws. BCM members who wish complete versions of the laws and regulations in Mongolian language are welcome to call or email the BCM office: 332345 or info@bcmongolia.org

ANNOUNCEMENTS MONGOLIA MINING INVESTMENT 2010 ON JUNE 21-22 IN SYDNEY

"Mongolia Mining Investment 2010", the first-ever Mongolian investment conference in Australia, will be held on June 21-22 in Sydney. Organized by Informa, the conference is being supported by Austrade, the Mongolian Embassy in Australia and BCM. The event will assist potential investors, Mongolian mining companies and all other related parties in developing strategic plans for further business openings in Mongolia.

Delegates will meet with influential government officials, mining and exploration companies, investors, traders, analysts, equipment producers and suppliers. The registration fee for Mongolia-based mining companies and Government officials is USD320. More information is available at www.informa.com.au/mongolia-investment

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“BSPOT" on B-TV

BTV (Business TV) now telecasts a 10-minute English-language news program called BSPOT every evening from Monday to Friday at 21:30, taking most of the stories from the BCM NewsWire.

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“MM TODAY” on MNB-TV BCM is pleased to announce that Mongolian National Broadcasting continues its cooperation with BCM on ―MM Today‖. This English news program is aired every Friday for 10 minutes and is scheduled for 21:15 tonight. Tune in to watch this program that reports stories from today‘s BCM NewsWire.

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NEW POSTINGS ON BCM WEBSITE‟S „MONGOLIAN BUSINESS NEWS‟

The draft Tavan Tolgoi Investment Agreement which was submitted by the Government to Parliament on Thursday of last week is posted to BCM‘s Mongolian website (www.bcm.mn), ‗Mongolian Business News‘ for your review.

As some of you might have noticed, we are now posting some news stories and analyses relevant to Mongolia on the BCM website's ‗Mongolian Business News‘ as they come, instead of waiting until Friday to put them all together in the weekly NewsWire. The NewsWire will, however, continue to be issued on Friday, and will incorporate items that are already on the home page, so that it presents a consolidated account of the week‘s events.

SPONSORS

ECONOMIC INDICATORS

INFLATION

Year 2006 6.0% [source: National Statistical Office of Mongolia (NSOM)]

Year 2007 *15.1% [source: NSOM]

Year 2008 *22.1% [source: NSOM]

Year 2009 *4.2% [source: NSOM]

April 30, 2010 *8.3% [source:NSOM]

*Year-over-year (y-o-y)

CENTRAL BANK POLICY LOAN RATE

December 31, 2008 9.75% [source: IMF]

March 11, 2009 14.00% [source: IMF]

May 12, 2009 12.75% [source: IMF]

June 12, 2009 11.50% [source: IMF]

September 30, 2009 10.00% [source: IMF]

May 12, 2010 11.00% [source: IMF]

CURRENCY RATES – June 3, 2010

Currency name Currency Rate

US dollars USD 1,383.40

Euro EUR 1,690.58

Japanese yen JPY 15.09

British pound GBP 2,032.15

Hong Kong dollar HKD 177.47

Chinese yuan CNY 202.52

Russian ruble RUB 44.40

South Korean won KRW 1.14

Disclaimer: Except for reporting on BCM‘s activities, all information in the BCM NewsWire is selected from various news sources. Opinions are those of the respective news sources.