BUSINESS COUNCIL of MONGOLIA NewsWire

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Issue 132, August 20 2010

NEWS HIGHLIGHTS:

Business:

SouthGobi Resources aims to secure second coal mining license;

Erdene Resource to apply for molybdenum-copper mining license;

Ivanhoe's Q2 loss widens even as revenue increases 65%;

Leighton full-year net profit rises 39%;

Prophecy Resource reports Chandgana Khavtgai contains 1 billion tons of coal;

Ivanhoe sticks to shareholders' plan as arbitration continues;

Canadian firms face challenge, enjoy success in on-the-move Mongolia;

Now Leighton warns Australia that Mongolia can undercut its coal export;

Gold extraction in Orkhon basin suspended;

Inspection lists 474 violations by 190 mining companies;

All quiet near Tuvkhun monastery since mining halt;

TDB set to introduce new remittance service from Korea;

Anod Bank shareholders’ meeting postponed to November 30;

New store embodies Armani’s lifestyle vision;

China’s AgBank sets global IPO record.

Economy:

Analyst deplores lack of data on the economic aspect of Tavan Tolgoi;

No word yet on where money for new railway will come from;

Flour producer says prices “will rise, despite false promises by Government”;

Work on Asgat deposit can begin once investment issues are resolved;

Coal extraction up 83% y-o-y;

USAID sponsors seminar for financial analysts in mining sector;

Erdenes Tavan Tolgoi will be a model company, Zorigt asserts;

Deputy PM meets SME businesses to assess situation in provinces;

Copper market tightening as output cuts make their effect felt,

E&Y mining index drops 16% in Q2, despite asserting appetite for M&A;

Asia back on deal binge;

China dangles rare-earth resources to lure investment;

Rare opportunity for China;

Beijing looks to broaden renminbi use;

China sold more Treasurys, but market rallies on;

Rebalancing the world economy: easier said than done;

China's economy is set to top Japan's;

China needs do more than shut factories to meet energy use targets.

Politics: One dies as herders and ninjas clash in Gobi-Altai;

Hand-mining impossible to stop, says official;

PM back in Ulaanbaatar after 3-week tour of 9 provinces;

Mongolian MPs in Botswana to study mineral revenue use;

Russia places agreement on uranium JV before its Parliament;

PM and senior Chinese official vow to strengthen ties;

High regulatory official under scanner;

Charges of illegal deals against nuclear agency;

Smokeless UB program gets new name and wider scope;

Umnugobi Development Council holds first meeting;

Alternative heating arrangements to be made for 25,851 ger district households;

“We cannot allow another Ulaanbaatar in the Gobi,” says Environment Minister;

Criminal law to be published in Braille;

Impact of mining on health to be assessed;

Chinese have more money than official data show.

*Click on titles above to link to articles.

BCM MONTHLY MEETING NOTICE

BCM‘s next monthly meeting for members will be Monday, August 23, 2010 at 5 PM at the

KEMPINSKI HOTEL KHAN PALACE, 2ND FLOOR, Altai Ballroom. The bilingual meeting will

feature the following presentations:

- Ms. E.Sodontogos, General Manager, Discover Mongolia 2010 Organizing Committee, will update on the Discover Mongolia Investors' Forum on September 8-10, 201

- Mr.James Polson, Executive Director, Australasian Independent Diamond Drilling (A.I.D.D.), will discuss ―Where to know for the Mongolian Mining Services Sector‖.

- Dr. Ch.Khashchuluun, Chairman, National Development and Innovation Council (NDIC), will provide an ―Update on the Development Bank of Mongolia and on the planning of the Sainshand Industrial Complex‖.

- Mr.Larry Marchese, e-Signature Consultant, USAID Economic Policy Reform and Competitiveness Project, will present ―Executive Briefing: Mongolian Digital Signature Law-Gateway to the Global Digital Economy‖.

We shall conclude the business portion of the meeting by asking BCM members in the audience to briefly comment on specific problems, solutions, risks, opportunities and/or strategies affecting their businesses. BCM members can learn from one another sharing good news and bad.

A networking reception will be held for all attendees immediately following the business portion of the meeting in rooms ―Khusvgul‖ and ―Hustai‖, also on the 2nd floor, Kempinski Hotel Khan Palace.

BUSINESS SOUTHGOBI RESOURCES AIMS TO SECURE SECOND COAL MINING LICENSE SouthGobi Resources Ltd., backed by China‘s sovereign wealth fund, aims to get a mining license for a second coal pit in Mongolia by the year-end. The company will apply for a permit for the Soumber deposit in the coming months, Chief Executive Officer Alexander Molyneux has said. About USD205 million is needed to develop the mine. The Toronto and Hong Kong-listed coal producer already operates a pit at Ovoot Tolgoi, also in the deserts of southern Mongolia. SouthGobi hopes to start production at Soumber by 2012, Mr. Molyneux said. Additional survey work at the site this summer indicates the pit‘s reserves of coking coal are ―radically higher‖ than previously thought, he said, without giving a new estimate. The deposit was previously estimated to hold about 77 million metric tons of coal. Ovoot Tolgoi has about 283 million tons, Mr. Molyneux told reporters. The company has USD744 million in cash to fund expansion plans and doesn‘t need extra financing to develop Soumber. It posted a second-quarter operating loss, partly because of upgrading work at Ovoot Tolgoi. China Investment Corp. owns about 13 percent of SouthGobi‘s shares. The company

plans to produce about 14 million tons of unprocessed coal in 2013, compared with 1.3 million tons last year.

Source: Bloomberg ERDENE RESOURCE TO APPLY FOR MOLYBDENUM-COPPER MINING LICENSE Erdene Resource Development Corp. has announced that its Zuun Mod molybdenum-copper deposit has recently been registered by the Mongolian Minerals Resource Council, a prerequisite for applying for a mining license. The application for the license will cover approximately 10,000 hectares, a reduction from the current 49,538 hectare exploration license. A report interpreting geological, geochemical and geophysical data from the Zuun Mod project with a focus on identifying additional exploration targets in the vicinity of the Zuun Mod Mo-Cu deposit was received during the second quarter. The company is now evaluating the results, at the same time preparing for a specialized geophysical induced polarization survey of certain areas of the deposit to test for possible extension of mineralization. During the second quarter, field work was started for both the coal and metals exploration programs in Mongolia. The coal exploration program is focused on evaluating the potential of several large basins (Zarman and Nomin) in southwestern Mongolia, and a drilling program is expected to commence by early September. The company has also been carrying out a detailed regional evaluation of a large area in south-western Mongolia evaluating the potential to host porphyry related copper-gold-molybdenum mineralization. The 2010 metals exploration program is focused on evaluating newly acquired exploration licenses, follow-up of anomalous results from the 2009 regional exploration program and field evaluation of the expanded regional porphyry evaluation program. Multiple new targets have been generated to date and are receiving further work. As part of the 2010 metals exploration program, 211 rock-chip geochemical samples have been collected and sent for analysis. Finals results are pending. Erdene recorded a net loss of USD1.5 million in the second quarter of 2010. As of June 30, 2010, Erdene had USD11.1 million of cash and cash equivalents on hand, on a consolidated basis, compared with approximately USD13.8 million on December 31, 2009.

Source: Erdene Resource Development Corp IVANHOE‟S Q2 LOSS WIDENS EVEN AS REVENUE INCREASES 65% As the company's revenue increased from USD10.7 million during the second quarter of 2009 to USD17.7 million during the second quarter of this year, Ivanhoe Mines reported a net loss of USD30 million during the second-quarter 2010. Exploration expenses, which often represent the majority of Ivanhoe's operating losses, increased USD4.3 million during the second quarter to USD39.5 million. These included USD23.2 million spent on the Oyu Tolgoi and Ovoot Tolgoi projects. During the second quarter of this year Ivanhoe's net loss increased USD5.1 million more than the net loss of USD24.9 million in the same period last year. Ivanhoe's cash position was reported at USD1.4 billion as of August 16.

Source: Mineweb.com LEIGHTON FULL-YEAR NET PROFIT RISES 39% Leighton Holdings Ltd. has said its net profit and work-in-hand both hit record levels in fiscal 2010, with growth set to continue in the current financial year. Net profit for the 12 months to June 30 rose 39% to AUD612 million, up from AUD440 million a year earlier. Chief Executive Wal King also said work-in-hand was AUD41.5 billion at the end of the financial year and has since increased to more than AUD42 million. The company is majority-owned by Germany's Hochtief AG. "The outlook for the group remains positive based on a record level of work-in-hand, a strong competitive position and continuing economic recovery in our major markets," Mr. King said. "We remain positive for the 2011 financial year and expect to report increased revenue and operating profit." Mr. King said Leighton has a five-year target to lift work-in-hand to AUD50 billion, revenue to AUD30 billion and net profit after tax to AUD900 million.

Source: The Wall Street Journal Asia PROPHECY RESOURCE REPORTS CHANDGANA KHAVTGAI CONTAINS 1 BILLION TONS OF COAL Prophecy Resource Corp. reports that the Measured and Indicated resources within its Chandgana Khavtgai coal project located in east central Mongolia exceed one billion tons of coal. The resource estimate is based on information from exploration programs completed in 2007 and this year. This year's program included 13 drill holes totaling 2,250 meters of infill drilling, 8 seismic geophysical lines totaling 11.3 km, and total magnetic field mapping of 5.1 sq km. A total of 274 core samples

were obtained for analysis. The Khavtgai and the Chandgana Tal coal projects, both 100% owned by Prophecy, are approximately 9 km apart. The combined resource estimates for the projects total 1.2 billion tons of Measured and Indicated mineral resources of thermal coal. The company intends to commission a mine feasibility study on Chandgana Tal and is conducting multiple site visits with power plant engineers from multinational companies.

Source: Prophecy Resource Corp IVANHOE STICKS TO SHAREHOLDERS‟ PLAN AS ARBITRATION CONTINUES Ivanhoe Mines said Tuesday its battle with Rio Tinto for control of Mongolia's Oyu Tolgoi mine is continuing, and it is sticking to a shareholders' rights plan that has led its project partner to go to arbitration. The plan, adopted by Ivanhoe's board in April, could make it difficult for Rio to ever take a majority stake in Ivanhoe, which is developing Oyu Tolgoi, a huge deposit of copper and gold slated to start production in 2013. Rio Tinto, which currently owns 29.6% in Ivanhoe, claimed in an arbitration filing on July 9 that the plan breached its rights under a previous private placement agreement between the two companies dated October 2006. "It is Ivanhoe Mines' view that nothing in the private placement agreement prohibits Ivanhoe Mines from implementing a shareholders' rights plan and that nothing in the shareholders' rights plan breaches any of Rio Tinto's existing contractual rights under the private placement agreement, as amended," Ivanhoe Mines said, adding the company ―will continue to support its shareholders' rights plan in the arbitration proceeding". Relations between the two miners have cooled since Ivanhoe adopted the shareholders' rights plan and terminated a covenant that governs Rio Tinto's investment in Ivanhoe. This will allow the Canadian miner to issue more than 5% of its shares to strategic investors, which could include major mining companies. It isn't known who the strategic investors might be. If any party wants to sell a stake in the mine, then Rio Tinto, Ivanhoe and the Mongolian government have right of first refusal. If Rio Tinto exercises that right and ups its Ivanhoe stake beyond 46.65%, then a standstill agreement with Ivanhoe that limits how much Rio can buy in Ivanhoe would become void.

Source: Dow Jones Newswires CANADIAN FIRMS FACE CHALLENGE, ENJOY SUCCESS IN ON-THE-MOVE MONGOLIA As Mongolia‘s second-highest export partner after China, Canada is also the largest foreign investor in Mongolia‘s resource sector, with about 25 firms active in the country. Canadian companies spent an estimated USD500 million in 2008 on drilling and improvements to their properties, a figure that will grow rapidly as the industry expands. Significant deposits include uranium, molybdenum, iron ore, copper and gold. Oil reserves have yet to be fully exploited, and Mongolia has more than 300 coal deposits that can provide China with fuel for power generation and steelmaking. In Mongolia‘s emerging economy, Canadian subsidiaries and joint-venture projects are enjoying both pop-the-cork success as well as the challenge of operating in a young democracy. At the same time, Mongolian leaders are under pressure to ensure the resource bonanza provides enough tax revenue to underwrite an economic and social revolution for the country of 2.7 million. Billed as the largest undeveloped copper-gold mine in the world, Oyu Tolgoi LLC will be the project that changes everything for Mongolia. The capital cost to bring the mine into production in 2013 is estimated at USD7.3 billion, in a country where the GDP is only USD4.2 billion. It took the project‘s majority owner, Vancouver-based Ivanhoe Mines Ltd., years of negotiating to reach the landmark 2009 agreement with the Mongolian government. Ensuring tax stability for Ivanhoe and partner Rio Tinto, and a 34 per cent stake for Mongolia, the agreement was enough to boost the country‘s international investment rating. Even without using the cautious lingo of mineral estimates, and the fevered superlatives of stock promoters, the project returns are expected to be huge: production of 1.2 billion pounds of copper and 650,000 ounces of gold every year for the first decade beginning in 2013, and a mine life estimated at 45 years or more. ―It is a phenomenal ore body,‖ said CEO Keith Marshall. ―It has to be exceptional to be developed in such a remote location.‖ Read more… Remote is a relative term, of course. Sure, the nearest paved road is 500 km from the mine and the project will have to get its electricity from China for the first nine years. Many vocational schools closed after the Soviet regime collapsed in 1990, so the company plans to build its own colleges to train the huge labor force required. But approval for Oyu Tolgoi indicated that the country may be

ideally situated, adjacent to the roaring Chinese economic engine. ―It‘s a great opportunity,‖ says Mr. John Ross Davies, country manager for Major Drilling Mongol LLC, part of a New Brunswick-based company that is one of the top three contract drillers in the world. ―The hype on (Oyu Tolgoi) is sending the message to the rest of the world that this is the place to be.‖ Other corporate heavyweights have come looking for prospects as the government improves the regulatory climate to attract mining firms. Citing potential corruption, the Mongolian president halted the issuance of mineral exploration licenses until procedures can be improved. The sector needs a conflict of interest law and more transparency to keep officials from profiting, says the mining association. Still, Mongolia is considered a risky place to invest, as some Canadian companies are discovering. The Fraser Institute‘s 2009-10 survey of mining companies measures the effects of government policy in 72 jurisdictions around the world. Mongolia ranked in the bottom 10, along with Zimbabwe and Venezuela. Mining is set to transform the country‘s economy, but building the infrastructure to get that mineral wealth to market is the major challenge. What‘s needed is a transportation necklace across the country, including 2,000 kilometers of railway tracks, 7,800 km of roads and 100,000 new housing units, says the transportation ministry. Mongolians want jobs as well as taxes and royalties, in a country where unskilled laborers in the city make as little as USD3 a day. By comparison, a driller with two years training can earn USD4,000 a month in Mongolia – even more on the international job market. ―The vision is to grow the GDP by processing natural resources rather than extracting and exporting,‖ says Mr. C.Ganbat, who returned after six years as a Wall Street investment banker to become team leader of a government investment task force. ―Industrialization could create that middle class for Mongolia.‖ Chile is viewed as a role model for fiscal success through a strategy that helped local suppliers prepare to meet international standards. ―We‘re now seeing Chilean suppliers exporting mining supplies to the rest of the world. Until a few years ago they were net importers of things like drill bits,‖ said Mr. Hancock. ―I see opportunities for that in Mongolia as well.‖ Until the revenues begin filling government coffers in a big way, mining companies are providing their own largesse. A rural development project financed by CIDA and local companies such as Boroo Gold Co. Ltd., a subsidiary of Canadian firm Centerra Gold Inc., trained poor families in vegetable farming and marketing in Mongolia‘s fertile northern region. Junior mining company Entree Gold Inc., currently exploring on its South Gobi properties, consults the local governor every year to see what projects are most urgent. The company has spent millions on improvements from a new activity centre and pharmacy to a herd of goats and fodder for a region hard hit last year by the exceptionally cold winter. ―We could give nothing and still get our permits,‖ said Entree operations manager Kelly Patterson. ―Or you can do it the right way.‖

Source: The Toronto Star NOW LEIGHTON WARNS AUSTRALIA THAT MONGOLIA CAN UNDERCUT ITS COAL EXPORT Mining contractor giant Leighton Holdings has now joined others in asserting that Mongolia is emerging as a major competitor to Australian coal exports due to its vast untapped reserves, cost efficiency and close proximity to China. Mongolia has at least 10 to 15 billion tons of extractable coal that could be supplied to China for less than USD100 per ton, according to Leighton chief executive Wal King. Leighton Asia is the only international miner in Mongolia, where it operates three coal mines, including the Ukhaakhudag Coal Mine in the South Gobi region, 200 km from the Chinese border. "There is no doubt the coal mining market in Mongolia is going to give Australia a lot of competition," Mr. King said, adding, "It is very close to the Chinese border, it has huge reserves of coking coal and thermal coal and it is very cost efficient." He estimated the state-owned Tavan Tolgoi deposit, near Ukhaakhudag, could supply coal to China for less than USD100 a ton. "That is competing with coal from Australia at USD220 a ton," he said. Mr. King said Leighton would increase output from Ukhaakhudag to 15 million tons a year by January 2013. The company also operates the Khushuut coal mine in Western Mongolia and a third mine close to the Russian border. "We are in the process of building a railway line to the Chinese border and I dare say the Ukhaakhudag mine will expand even further. Within two years our coal output in Mongolia will be 30 to 40 million tons a year," he said, adding that its remote location, undeveloped infrastructure and transportation of imports and exports remained important issues in Mongolia.

Source: The Sydney Morning Herald

GOLD EXTRACTION IN ORKHON BASIN SUSPENDED All gold mining companies in the Orkhon river basin have been asked to temporarily suspend extraction work, following a 15-day visit to the area by a working group jointly constituted by the State Professional Inspection Agency and the Ministry of Nature, Environment, and Tourism that found the river to be heavily polluted. Many of the companies active near several streams and rivers that flow into the Orkhon have been operating without proper permission and are now being blamed for substantial surface water pollution. Among the major offenders are companies like Mongol Gazar, Keonarda, Altan Yondoo, Etots, Domogt Sudar, Urnult Sudar and Kenalkhap. The violations by Mongol Gazar have been found to be so widespread that the local government has been asked to review these to see if the company‘s license should not be altogether canceled. Ecologists are seeing red at the Orkhon turning red, and are certain to make strong demands to impose heavy penalties on the deliberately careless companies.

Source: Onoodor INSPECTION LISTS 474 VIOLATIONS BY 190 MINING COMPANIES The State Special Inspection Agency made a detailed study from June 15 through August 1 of how mining license holding companies complied with rules and regulations, especially as related to environmental protection and reclamation, the land law, and the water law. The exercise was undertaken on a special request from the Minister of Nature, Environment, and Tourism, who had also demarcated the parameters of the enquiry. Dornod, Sukhbaatar, and Khentii provinces were kept outside the purview of the inspection. Around 190 companies in other provinces were detected as having committed 474 violations ranging from operating without a license, to operating in areas where no archeological survey has been made, to operating without any water utilization agreement, and making no rehabilitation work.

Source: Onoodor ALL QUIET NEAR TUVKHUN MONASTERY SINCE MINING HALT An official in Uvurkhangai province has said the situation in areas around Tuvkhun monastery, established by Zanabazar and used by him for mediation, is quiet after reports of clashes between citizens and gold mining companies. The people‘s protests began last year when the Gatsuurt Company planned to start work on 800 acres in Biluut where it held a license. Protesters lay under machines to stop them from operating. The company halted all work after Parliament had passed a law banning mining in forest and water areas, and everything has been quiet since then.

Source: English.News.mn TDB SET TO INTRODUCE NEW REMITTANCE SERVICE FROM KOREA Trade and Development Bank and Korean Exchange Bank have signed a Memorandum of Understanding to introduce a service to allow Mongolians studying, working, and living in Korea to transfer money from there to Mongolia easier and faster. The money thus remitted will have insurance cover and the service will be available all seven days of the week.

Source: Undesnii Shuudan ANOD BANK SHAREHOLDERS‟ MEETING POSTPONED TO NOVEMBER 30 The Central Bank‘s special representative at Anod Bank, which has gone into liquidation, has said that a general meeting of its shareholders will be held on November 30. He gave no reason why the meeting could not be held on the earlier scheduled August 15. The representative is legally obliged to hold the meeting within two years from assuming power. About 1,000 Mongolians own shares with face value of over MNT10 billion in the bank, as against some Korean nationals who invested up to USD5 million. The Mongolian shareholders have been demanding a meeting for long. They have also formed a committee to protect their rights. Many of them remain convinced that Anod Bank could operate normally if its resources and capacity were properly used.

Source: business-mongolia.com NEW STORE EMBODIES ARMANI‟S LIFESTYLE VISION The Emporio Armani store at Sukhbaatar Square in the Central Tower Building occupies over 210 square meters on the first floor. It is much more than a fashion boutique: its design embodies Mr. Giorgio Armani‘s vision of the modern, casual lifestyle that Emporio Armani represents. Here one finds the complete Emporio Armani lifestyle collections for men and women, including formal and

casual wear, sportswear, leather accessories, watches, eyewear, and jewelry collections. The flooring is made of bright, glossy stone, while the dark ceiling features recessed lights that create a relaxed mood. A large screen showing imagery of the current collections dominates the entrance to the men‘s area of the store, while three backlit advertising images characterize the men‘s and the women‘s areas. The external façade is in black, shiny glass and features two big advertising images. Mr. Armani has said, ―This store is a wonderful development for Armani, because Mongolia is such an exciting, energetic, vibrant country, with a fascinating culture and history. Whenever I open a new store in a new country I am always pleasantly surprised to find that there is a customer there waiting for the opportunity to experience my designs. I am sure that Mongolia is ready to welcome Italian fashion and design.‖

Source: Fashion & Runway CHINA‟S AgBank SETS GLOBAL IPO RECORD Agricultural Bank of China Ltd has raised more money in an initial public offering than any other company in history after fully exercising an option to allot additional shares to investors on the Shanghai Stock Exchange, despite lackluster interest in the shares from investors since they started trading in mid-July. In a statement on the Shanghai Stock Exchange, the rural lender said it raised an additional 9.11 billion yuan (USD1.34 billion) from the Shanghai portion of the IPO by selling an additional 3.4 billion shares at the IPO price of 2.68 yuan each. By exercising the overallotment option—also known as a greenshoe—AgBank brings the total amount raised from its dual listing in Hong Kong and Shanghai to USD22.1 billion, eclipsing the record held by Industrial & Commercial Bank of China Ltd. for its USD21.93 billion IPO in 2006. AgBank's shares have struggled to stir interest among investors even as China's A-share market has rallied. One of the worst-performing stock indexes globally in the first half of the year, the benchmark Shanghai Composite Index has risen more than 10% since bottoming out in early July. AgBank's IPO has been under a lot of pressure politically to succeed. The last of China's major banks to publicly list shares, it originally hoped to raise as much as USD30 billion. By the time AgBank started tapping investors, markets had soured globally. Furthermore, doubt over the quality of the bank itself, long regarded as the weakest of China's four major banks, and its exposure to the country's less-developed rural areas, also took a toll on investor confidence. A roster of cornerstone investors, dominated by state-owned firms, rallied to support the IPO, taking 40% of the Shanghai issue.

Source: The Wall Street Journal Asia

ECONOMY ANALYST DEPLORES LACK OF DATA ON THE ECONOMIC ASPECT OF TAVAN TOLGOI Economic analyst D.Jargalsaikhan feels that there is so little accurate and certified information about the Tavan Tolgoi deposit that no proper estimate can be made of its international competitiveness and, therefore, of the real worth of its promised free shares to Mongolians. ―We actually know very little about everything concerning Tavan Tolgoi. Take the basic information of the size of the deposit. We are told time and again that it has 6.5 billion tons of coal but there is no independent confirmation of this, nor are we sure how the Government hit upon this figure,‖ he says. An international exchange will insist on independent confirmation of the size of the coal reserve before it agrees to handle any IPO. The feasibility study giving this will also have to give clear ideas on what the costs of mining are likely to be. An investor will assess his chances of profitable returns on the basis of this preliminary information. The worth of an investment will also depend on the taxes the operating company has to pay before declaring dividends and also on the projected life span of the mine. All this will determine the value of an investor‘s share. Nobody will take his physical share of the coal under the ground like a loaf of bread. ―I would say that the economic aspect of the investment agreement is not clear and that the Government is deliberately distorting the picture when it talks of the value of the shares it will distribute free to Mongolians, to be adjusted against cash already promised,‖ Mr. Jargalsaikhan says. The worth of a share lies in the net income it yields, and it is pointless to speculate on its amount without knowing much more about the size of the reserves and operation costs. These will include the costs of building a power station, roads, coal washing plants, processing plants and such. The roads here include railways as also dust roads and paved roads, but their costs should be calculated separately. The category and the quality of the coal on offer will be important but on this, too,

there has been little dependable information from the Minister. Source: The Mongolian Mining Journal

NO WORD YET ON WHERE MONEY FOR NEW RAILWAY WILL COME FROM The recently adopted railway transportation policy raises visions of Mongolia breaking the shackles of being landlocked and of its trade options being limited to its two great neighbors. The prospect of more entry points to China and access to sea ports there and in Russia makes it certain that the country will be exporting its apparently boundless natural resources to new markets. Many other countries are also happy that they will now be able to forge trade and economic relations with Mongolia. There are reports that Russia will agree to provide preferential tariff for transit transportation, and Japan, South Korea, and Germany all have indicated their willingness to invest in building the new railway. Incidentally, Korean investors have stated that they will divert the money planned to be invested in Kenya to ―the forthcoming substantial projects in Mongolia‖. However, the proof of the pudding is in the eating. There is no knowing who will finally invest how much even though serious negotiations are said to have begun. The Government‘s public stand still is: ―The project will be financed through acquiring advance payment for marketing minerals products, raising money from selling government bonds, public private partnership, and taking advance payment from investors who will jointly utilize substantial deposits owned by the State.‖

Source: Onoodor FLOUR PRODUCER SAYS “PRICES WILL RISE, DESPITE FALSE PROMISES BY GOVERNMENT” Mr. P.Tsenguun, Director of Altan Taria, one of the three biggest flour producers and importers in the country, has asked people to ignore Government reassurances based on fictitious data and instead to prepare for higher prices in the coming months. ―The reality is that there is a shortage of flour in Mongolia. Unfortunately, the Government does not accept the fact and, instead, spreads disinformation,‖ he has said. He has charged the Ministry for Food and Agriculture with deliberately fudging figures at all stages. ―They exaggerate the harvest figures to show that higher amounts are bought with State money,‖ he said, adding last year‘s actual wheat production was at least 100,000 tons less than ―the official boast‖ of 400,000 tons. This year, too, his company‘s projection is that total output will be less than the Government estimate of 350,000 tons by a similar amount. ―They always say – before, during and after harvest – that production has been in excess of domestic needs but never explain why, then, we regularly import flour?‖ he said. ―Such lying to the people, and such meaningless reassurances are all features of socialist era that refuse to go away.‖ Right now, he said, there is shortage of wheat in Ulaanbaatar, ―so there is no way flour prices will fall, no matter what the Government says to mislead people‖. He was also against the Government setting a price for the wheat when it is harvested. ―When wheat prices are rising sharply in the global market, why should our cultivators be denied the opportunity to make some money?‖ he asked, adding that policy makers should leave prices to be determined by free market forces. Mr. Tsenguun was not sure how much wheat the Government had in stock, but said bringing it to Ulaanbaatar and distributing it to the flour mills ―will take time, cost money and take a lot of arrangement. Government work is slow and bureaucratic and it will not change into military speed in the present case.‖ He said when ―the Russian companies we import from started indicating that they will stop supplies, even after raising prices by 20-30 percent‖, flour producers here approached the Ministry many times to buy the wheat in stock, but government employees were not ―interested in bringing the wheat to Ulaanbaatar and rejected our pleas on various grounds. It may all very well be a lie. When we ask where the wheat is, they say it is in storage. When we propose to go there and buy wheat, they become silent.‖ Read more… It also must be remembered that the amount of wheat in stock does not indicate how much of it will be available to be turned into flour. A considerable quantity goes into producing alcohol and into feed for livestock. Claiming that Mongolia will have to import 150,000 tons of good wheat or 100,000 tons of flour before October, Mr. Tsenguun warned consumers that prices were bound to go up, and the Government‘s ―unrealistic decisions‖ about fixing prices cannot succeed. He also scoffed at suggestions that flour producers had colluded among themselves to raise prices and dared the Unfair Competition Regulatory Authority to produce any evidence in support of its statement to that effect, which ―has harmed our reputation unjustly‖.

Source: English.News.mn

WORK ON ASGAT DEPOSIT CAN BEGIN ONCE INVESTMENT ISSUES ARE RESOLVED Mr. Khurelbaatar, State Secretary of the Ministry of Mineral Resources and Energy, has said that work on the Asgat silver deposit can begin if investment issues are resolved. Over 50% of the total territory of Bayan-Ulgii province is covered by exploration licenses, but this large and strategic deposit still lies idle even though a feasibility study was made as early as 1976. The issue was discussed by the 2004-2008 Parliament but no decision was taken, as many MPs were wary about Russian interests. At present, a working group is assessing the possibilities of beginning work. Mr. Khurelbaatar made the comment when he was in Bayan-Ulgii, also known as the homeland of the Kazakh people, with Prime Minister S.Batbold on his tour of the countryside. Apart from this assurance, the Prime Minister also announced some projects for the western province. A 65-km paved road toward Ulgii-Khashaat will be built, the Ulgii airport will have a sturdier runway costing MNT11.1 billion, and MNT1.7 billion will be spent on a sports complex. Mr. Batbold told the local people that better and stronger economic ties with Russia and Kazakhstan will be beneficial.

Source: Onoodor COAL EXTRACTION UP 83% Y-O-Y The National Statistical Office has reported that coal extraction in the first seven months of 2010 was 83% more than in the same period last year. Extraction of crude oil and gas increased by 64.8%, whereas that of other minerals rose by 24.2%. Altogether 84.5% of all Mongolian export was to China and most of it was unprocessed minerals.

Source: Onoodor USAID SPONSORS SEMINAR FOR FINANCIAL ANALYSTS IN MINING SECTOR Altogether 21 Mongolian financial analysts participated in a seminar from August 9-13 on Economic and Financial Analysis of Mining Developments and Fiscal Regimes sponsored by USAID/Mongolia‘s Economic Policy Reform and Competitiveness (EPRC) project. Facilitated by Dr. Robert Conrad, Associate Professor from Duke University, the seminar aimed to strengthen the skills of analysts to build the most beneficial financial and economic models for mineral projects in Mongolia. The participants received hands-on experience of analyzing and modeling various exploration and mineral extraction investment agreements, in addition to discussing how to manage the revenue that will accrue from the government‘s participation in these. The participants included analysts from the Ministry of Mineral Resources and Energy, the Ministry of Finance, MON-ATOM LLC, Erdenes-MGL, the Parliament Research Center, the National Development and Innovation Committee, and the Parliament Research Center. Professionals skilled in the analysis, negotiation, and implementation of investment agreements and mineral revenue management will be increasingly in demand as Mongolia moves forward with several large mining projects.

Source: Economic Policy Reform and Competitiveness Project ERDENES TAVAN TOLGOI WILL BE A MODEL COMPANY, ZORIGT ASSERTS Minister of Mineral Resources and Energy D.Zorigt has said that his first priority is to set up Erdenes Tavan Tolgoi and to see that it works as an internationally competitive company, belying ―not unjust‖ popular fears that a State-owned entity will not deliver the goods. Asked how he will do this, Mr. Zorigt said, ―There should be transparency in selecting the management team, and professionals with international experience should be chosen. Only then shall we have a company drawing international attention and respect for its model corporate management, efficiency, and profitability.‖ The Minister said work has begun on many fronts. He ―does not see much merit in deciding everything beforehand‖ and prefers crossing bridges only when he comes to them. ―We shall certainly have a general long-term vision and goal, but once we begin, there must be freedom to improvise, to respond to situations as they emerge. Deciding everything in advance is a sure prescription to failure. Personally, I‘m happy to have an open mind,‖ he said. He indicated that the Tavan Tolgoi reserves will be updated and the final figure could well be higher than the presently accepted 6.4 billion tons, of which some 3 billion tons were coking coal. More exploration will be done, especially in the eastern areas of Shar Tolgoi and Bor Tolgoi, before arriving at the final figures to be incorporated in the feasibility study.

Source: The Mongolian Mining Journal DEPUTY PM MEETS SME BUSINESSES TO ASSESS SITUATION IN PROVINCES First Deputy Prime Minister N.Altankhuyag spent the weekend in Arkhangai province, assessing the

status of small and medium enterprises in the countryside. Last year 70 projects in Arkhangai got MNT845 million in loans and created 100 jobs. This year, 47 organizations have taken loans worth MNT433 million. Mr. Altankhuyag met those who have taken loans, and also those whose proposals were not accepted. He heard their complaints and problems. Most companies and individuals said they did not get the full amount they had applied for, forcing them to trim their operation. Many also asked for softer conditions for a second loans and easier repayment terms. Mr. Altankhuyag promised to consider the matter. He also announced that a project worth 4 million euro will be implemented in the countryside to impart entrepreneurship training.

Source: English.News.mn COPPER MARKET TIGHTENING AS OUTPUT CUTS MAKE THEIR EFFECT FELT Global copper output fell sharply in the first half of this year, with one tenth of the world's mine production off more than 6 percent from year-ago levels, underscoring an underperforming industry and signaling a tighter supply/demand balance in the months ahead. Some of the world's top copper producers, including Rio Tinto, Freeport McMoRan Copper & Gold, and BHP Billiton, all saw their output drop in the first six months of the year. Operational constraints, declining ore grades, and a slower response to ramp up idled capacity from the 2008's economic crisis hammered production rates. According to the International Copper Study Group (ICSG), world refined copper production is projected to be 18.5 million tons in 2010. Deferrals and delays in projects due to the 2008 economic crisis are expected to result in a lower growth rate for mine production next year, up 2.9 percent. Inventory levels in London have already begun to reflect that tighter balance. Copper stockpiles in warehouses monitored by the London Metal Exchange (LME) stand at 409,000 tons, down more than 26 percent since mid-February levels above 555,000 tons. At the depths of the global economic recession, copper prices collapsed to an almost four-year low near USD1.25 per lb HGc1 in the fourth quarter of 2008. The precipitous decline forced some producers to shut in their high-end capacity as futures prices dipped below marginal costs of production. Now they are slow to bring their capacity back on line. Prices have rallied sharply, to back above USD3 per lb amid signs of economic improvement around the world and healthier consumption, led by top-consumer China. The reason why the prices are holding up so very high is that there has been only marginal increases in new copper mine development over the past five years. That tighter outlook should help to keep copper prices buoyant in the near-term.

Source: Reuters.com E&Y MINING INDEX DROPS 16% IN Q2, DESPITE ASSERTING APPETITE FOR M&A Market volatility and risk aversion in the mining sector resurfaced during the second quarter of the year, but an appetite for mergers and acquisitions (M&A) remained evident, consulting firm Ernst & Young (E&Y) has found. The latest ‗Ernst & Young Mining Eye' index, which monitors the performance of mining companies listed on the Aim, experienced its first quarterly decline of 16% since the economic crisis first struck in the last quarter of 2008. E&Y director of mining and metals Tim Williams said that an appetite for doing deals remained strong in the quarter, with a handful of acquisitions at the smaller end of the market, and strategic disposals at the larger end. "Market volatility and the conflicting outlook for metals prices though made pricing and valuation difficult, leading to a number of abandoned bids and merger discussions. Companies are finding it challenging to demonstrate their current and future value in the present market conditions," he explained. Nevertheless, Mr. Williams said that the strategic and financial drivers for M&A activity remained, and that the company expected consolidation and growth through acquisition to continue in the junior mining sector. "However, with deals difficult to complete in the volatile environment and equity markets seemingly undervaluing elements of the sector we may see further stalled bids in the months ahead," he added. "The process of due diligence and the importance of management's ability to communicate the value of the company and its future prospects remain paramount in such uncertain times," he concluded.

Source: www.miningweekly.com ASIA BACK ON DEAL BINGE Asian deal making is nearing the pace of two years ago, as healthy economies at home and stronger currencies in some cases give its champions buying power outside their home markets. In the past couple of weeks, a Hong Kong infrastructure company owned by tycoon Li Ka-shing, a Thai tuna

maker and a South Korean oil company have announced plans to buy assets outside Asia. That's on top of interregional transactions, with India's Mahindra & Mahindra Ltd. chosen as the preferred bidder for South Korea's cash-strapped Ssangyong Motor Co, Japan's Kirin Holdings Co. buying a stake in the maker of Tiger beer, and resurgence in acquisitions by Chinese and Indian companies, after the European debt crisis and weak valuations put a damper on activity. According to data tracker Dealogic, Asia Pacific companies have made USD132.7 billion worth of offers for companies outside their home country so far this year, compared with USD142.7 billion in the same period of 2008 and more than double last year's level, when the global financial crisis was making its presence felt. Those numbers bring it close to the 2008, a year when cross-border mergers and acquisitions involving buyers from the region hit a record USD197.0 billion. Soaring Asian currencies and economies that are among the fastest growing in the world explain some of this deal frenzy. Currencies such as the yen, the Thai baht and the Indonesian rupiah have been rising against the U.S. dollar, the euro and sterling, which makes their purchases cheaper in local currency terms. The pace of deals could slow if Asian currencies pull back. Still, this year's deals are bring back memories of 2008's headier times, when Aluminum Corp. of China, known as Chinalco, and Alcoa bought a USD14.3 billion stake in miner Rio Tinto Ltd. in what was China's first successful major overseas deal.

Source: The Wall Street Journal Asia CHINA DANGLES RARE-EARTH RESOURCES TO LURE INVESTORS China is cautiously using rare-earth resources as bait for foreign investment that could bring in sophisticated technologies that it needs. Industry and government officials have begun talking about a Chinese government plan to offer access to its rare-earth resources—which are used in products such as hybrid-car batteries and missiles and are under strict export restrictions—to get companies including electronics manufacturers and auto makers to set up rare-earth-processing plants in China. The government hasn't announced such a plan, but when asked about it, a senior official with China's Ministry of Industry and Information Technology recently said that while China has used a "technology for market" strategy before—offering foreign companies low labor costs and access to its fast-growing market—"now we have the expression 'technology for resources' ". The official cited the rare-earth market as workable for this strategy, but warned: "Difficulties remain if we don't handle it well." He declined to elaborate, citing the sensitivity and complicated nature of the issue. China controls around 95% of the world's rare-earth output, a near-monopoly it has slowly built with the help of its export quotas to achieve higher prices for the ores, which include obscure elements such as dysprosium and neodymium. It has accelerated the speed and intensity of consolidating the fragmented industry and has been cutting down the export quota for rare earth since 2005 to gain more clout on pricing the rare metals. The official's comments follow China's move in July to decrease its rare-earth shipment by 72% for the second half of this year to 7,976 metric tons. The latest move to restrict exports of the metals caused uproar in the global market. Read more… In addition to the July price increase, China has also indicated that the export quota for the coming years will be below 35,000 tons a year, which will further hurt rare-earth supply, just as demand surges for the kind of environment-friendly products that use rare earth. The sharp decline of the export quota will cause a shortage of around 20,000 tons of rare earth for international users this year, said Mr. Zhang Zhong, president of China's largest rare-earth producer, Inner Mongolia Baotou Steel Rare-Earth (Group) Hi-Tech Co. Against the backdrop of the shortage, Mr. Zhang expects that plenty of foreign companies will start moving their rare-earth-processing plants to China as early as this year. Foreign involvement offers regions rich in rare earth a chance to turn into high-technology centers rather than having just heavy industry. Resource-rich regions all want to expand into the more-profitable downstream processing sectors instead of just supplying the raw materials, said a government official with Baotou city in the Inner Mongolia Autonomous Region, one of China's major mining centers. "We are not willing to be the world factory all the time." Around 50 foreign companies are already operating in the Baotou Rare Earth Hi-Tech Zone, including France's Rhodia SA, and Korea Development Bank recently signed a cooperation agreement with Baotou Hi-tech Zone to encourage Korean electronics companies and auto makers to establish processing plants alone or with Chinese partners in Baotou. "The local government is going to offer exemptions on local taxes, and we have negotiated for a 15% discount for Korean firms bidding for a supply of raw materials in cases of long-term contracts," a KDB official said.

China bans foreign companies from investing in rare-earth mining, but has allowed foreigners to enter processing joint ventures with Chinese businesses. Mr. Zhang, the Baotou rare-earth executive, also said Beijing's restriction will prompt miners to step up the search or exploration of the ores around the world, a trend he called inevitable as the reserve of rare earth in China accounts for only 30% of the world's total volume now. It's unreasonable for China to support 95% of the global demand, he said.

Source: The Wall Street Journal Asia RARE OPPORTUNITY FOR CHINA China loves its rare earth. But its jealous guarding of these minerals could disrupt the market in ways that even Beijing won't appreciate. Rare earth is the collective name for 17 elements that produce powerful magnets, or improve a metal's ability to withstand high temperatures. The elements are critical to high technologies such as hybrid-car batteries and wind turbines, but lately it's their demand-and-supply fundamentals that's drawn wider interest: China controls nearly all of the world's supply. The minerals were once exported by disparate Chinese miners at bargain-basement prices, but with rare earth's rising economic importance has come increasing state control of the market. Most notably, the government has merged rare-earth mining companies and limited exports. The latter may be intended to encourage rare-earth users to move manufacturing facilities to China, but it nevertheless means pricing of the minerals both within and outside of the country is distorted—and Beijing could lose more than it gains. For one thing, rather than rare, the minerals were actually just too costly for most companies to produce in the past. But China's export caps, the latest of which came in July, are ratcheting global rare-earth prices higher and creating competition for Chinese miners. Australian and U.S. sources, slowed in the past by the higher development costs in these countries, will be online soon. It may not stop with the quotas. State-run newspaper China Daily reported this month that two of the country's designated state-owned rare earth developers are considering a plan to "unify prices." Even officials at the state-backed Chinese Society of Rare Earths said they're uncertain where the plan might lead but the fear is this means Beijing's thinking of using its high degree of output leverage to set prices. To be sure, China has every reason to seek the most bang for its buck from native resources. But it's making the market for rare earth less transparent. Instead, by setting prices in a competitive, transparent way, Beijing could attract investment and become a long-term leader in this industry. That's a rare opportunity. China risks missing it.

Source: The Wall Street Journal Asia BEIJING LOOKS TO BROADEN RENMINBI USE China will allow foreign central banks and overseas lenders substantially to increase investment in its domestic interbank bond market, in a move aimed at encouraging internationalization of the Chinese currency. The People‘s Bank of China, the central bank, said on Tuesday that it had launched a pilot project to allow more foreign access to its largely closed domestic interbank bond market to ―encourage cross-border renminbi trade settlement‖ and ―broaden investment channels for renminbi to flow back [to China]‖. Beijing is trying to encourage use of the renminbi for trade as part of a long-term plan to promote it as a reserve currency and reduce China‘s exposure to the US dollar, now used for most Chinese trade. This will be the first time that non-resident institutions are permitted in China‘s biggest bond market to trade government and corporate debt. Foreign financial institutions are currently only able to invest renminbi they already hold onshore. Non-resident institutions and individuals that hold renminbi are currently only able to deposit them with Chinese and Hong Kong banks. Although there is only a relatively tiny amount of renminbi held outside the country, the demand for Chinese bond investments is expected to be high as the currency continues its gradual appreciation. Beijing has also signed currency swap agreements with central banks and monetary authorities in seven countries, with agreements totaling a little over Rmb800bn.

Source: The Financial Times CHINA SOLD MORE TREASURYS, BUT MARKET RALLIES ON Demand for U.S. government debt has been so strong lately that not even an apparent slowdown in China's appetite for it can stop the rally in bonds. The price of the 10-year Treasury note leaped on Monday, pushing its yield, which moves in the opposite direction of price, to 2.579%, the lowest

since March 2009. This came despite a Treasury Department report suggesting China was a net seller of U.S. debt in June for the second month in a row. Not long ago, such a report might have caused a selloff in Treasury bonds. China has since 2008 been the world's biggest foreign holder of Treasuries—and still is, holding USD843.7 billion in U.S. government debt as of June, according to Treasury data. But China's holdings fell by USD24 billion in June and USD32.5 billion in May, according to the latest Treasury International Capital data. They are down USD96.2 billion since peaking last July. Short-term shifts in these monthly numbers are volatile and can be misleading. Analysts say China and other big foreign buyers are likely routing some Treasury purchases through the U.K. and Hong Kong, which would distort the TIC data. U.K. Treasury holdings have nearly quadrupled in the past year, perhaps partly for this reason. And much of China's selling has simply been to shed some of the short-term securities it bought during the financial crisis. And China is unlikely to fade as a buyer soon. It must protect the value of its large dollar holdings, for one thing. More important, it must buy Treasuries to help keep the value of its own currency low to make its exports more attractive. Read more… China's Treasury purchases for years have been a key ingredient in keeping U.S. borrowing costs low, and any sign of wavering in Chinese demand has caused market alarm. China's central bank has often expressed interest in diversifying its holdings, and there are signs that it has been swapping some dollar holdings for European and Japanese debt this summer. Currently, however, there seem to be plenty of buyers to make up for any lack of appetite on China's part. For one thing, Japanese investors have steadily bought more U.S. debt as China has shrunk its portfolio. Japanese holdings rose to USD803.6 billion in June and have increased by USD82.7 billion since last July.

Source: The Wall Street Journal Asia REBALANCING THE WORLD ECONOMY: EASIER SAID THAN DONE There is a fair amount of agreement that the world economy is in need of rebalancing between countries that overspent prior to the crisis, financing the spending with government or private borrowing, and countries that supplied those countries goods even while financing their spending habits. Simply put, the consensus now requires U.S. households to save more and Chinese households to spend more in order to achieve the necessary rebalancing. Indeed, many believe that if only the United States toned down its consumerist culture and its households tried to stay within a monthly budget instead of having a Micawberish optimism about the future, and if only Chinese households stopped fearing Armageddon and started spending more, all would be well. Of course, it is simplistic to reduce global trade imbalances to a bilateral imbalance between two countries. But since this is how the popular debate is posed, it is useful to ask whether rectifying the imbalances is only a matter of American and Chinese households switching personalities. Clearly, consumer behavior is driven by habits formed over time, many of which are culturally determined — driving a Hummer, the gigantic low-mileage S.U.V., used to be an acceptable means of signaling the size of your wallet in the United States before concerns about global warming spread. No longer! However, the focus on consumer behavior misses the deeper policy underpinnings of the behavior we see. What about the Chinese household? Here again, policies are important. While, undoubtedly, the absence of a significant old-age safety net (and the paucity of children, the traditional Asian safety net) offers Chinese households a strong incentive to save, those savings rates are not significantly higher than savings rates in other Asian countries. Read more… China‘s overall savings rate has gone up in recent years because Chinese corporations are earning and saving more, while household consumption is low because Chinese households earn a much lower fraction of the income generated by the economy than in other countries. Why is this? Because the Chinese economy has a strong bias favoring its corporations and against its households; interest rates on household bank deposits are really low so that corporations can get cheap credit and so that the central bank can maintain an undervalued exchange rate; corporations get cheap inputs like energy, natural resources and land; taxes on corporations are low, so their after-tax profit is high; and state-owned corporations pay very little of the gigantic profits they generate back to the state as dividends. As a result, household after-tax income is low, and consumption is low. All this means that if China is to rebalance growth, it has to start being kinder to its households. The recent willingness of the Chinese authorities to tolerate worker strikes for higher wages

suggests they want to increase household incomes. Higher deposit interest rates, higher corporate taxes (with a commensurate reduction in household taxes), and fewer subsidized inputs for corporations will also help. But these changes will not come easily, for they will put enormous pressure on corporate profits, something corporations will resist. And profitable corporations have a lot of power of resistance, even in a one-party state. Moreover, the Chinese authorities will be wary of imposing large adjustment costs on corporations too quickly and causing large job losses. The recent crisis has convinced the Chinese of the dangers of relying so much on foreign demand, so they do want to boost household consumption, but the steps they take will again be gradual. The bottom line is that rebalancing requires more than cultural change, it requires policy changes that will imply considerable political pain in the short term. After this brutal recession, the natural tendency is to try to go back to the old patterns of growth before attempting change — the United States is trying to revive consumption while China is trying to revive exports. Unfortunately, though, if the will to change is not found in the midst of a deep crisis, it is unlikely to be found as the recovery gathers steam. It is easier for politicians to emphasize the need for other countries to change while neglecting their own responsibilities. (This is part of an article written by Mr. Raghuram G. Rajan, formerly chief economist of the IMF.)

Source: Global Viewpoint/Tribune Media Services CHINA‟S ECONOMY IS SET TO TOP JAPAN‟S China is expected to surpass Japan this year as the world's second-largest economy, an unprecedented position for a still-developing country and one that has brought strains as well as triumphs. Second-quarter GDP figures from Japan reported Monday morning show that its economic output, at USD1.288 trillion, fell short of the USD1.339 trillion China reported for the three months ended in June. That suggests that China is likely to pass Japan once and for all this year. China's output has topped Japan's before, in the last quarter of the year, when the Chinese economy tends to run hotter for seasonal reasons. Outpacing Japan in an early quarter is seen as a good indication that China has the momentum to zip past Japan for the full year. Once final numbers for all of 2010 are compiled, many economists expect China to overtake Japan as the world's second-largest national economy in U.S. dollar terms. The gap between China's USD5-trillion economy and the U.S.'s nearly USD15-trillion output remains very large, and even at current growth rates—which may not be sustained—it would take China a decade or more to match the U.S. A little over a decade ago, China was the world's seventh-largest economy at prevailing exchange rates. It passed Germany to wind up at No. 3 in 2007. For 2010, Germany is expected to rank fourth, France fifth and the United Kingdom sixth. The next emerging economy is Brazil, in eighth place after Italy. Read more… China's exact global ranking is a function of how economies are measured. For example, in terms of purchasing-power parity, which takes into account the goods and services a country's currency actually buys at home, China has long since surpassed Japan for second place behind the U.S. By contrast, China's output per person, at about USD4,000, is about a tenth that of Japan's. China's shift in position has come as the Japanese economy has muddled through two decades of sluggishness, in stark contrast to China's sizzling growth. In some ways, China is retracing the path Japan blazed during its boom of the 1980s, when it was the new economic heavyweight and its companies were putting money into building factories around Asia. China, to bolster its own position, has focused on reassuring neighbors about its plans for a "peaceful rise", spread aid and investment with fewer conditions than Western countries, and worked seriously in cultural outreach for the first time. There is increasing awareness in foreign-policy circles that China's increasing economic weight can be threatening as well as attractive, and needs to be handled carefully. China's collective national wealth is starting to translate into political clout, but also making it a target of criticism from other world leaders. Many Western officials see China's policy of export-led growth as the main cause of global trade imbalances. While China's economic strength may give it power and influence, it doesn't always win friends.

Source: The Wall Street Journal Asia CHINA NEEDS DO MORE THAN SHUT FACTORIES TO MEET ENERGY USE TARGETS China is directing 2,000 industrial companies to shut obsolete factories to meet national energy intensity targets. Five years ago, Beijing pledged to cut by a fifth its industry‘s energy intensity, a

measure of energy consumed by unit of output. That goal looks in jeopardy, mainly because the USD586-billion stimulus package rolled out in 2008 favored China‘s biggest and dirtiest industries. In the aftermath of the Lehman shock, China chose growth over the climate. Now the panic is over, there are tentative signs that it is planning another push to improve the efficiency of its smokestack economy. That is to be welcomed, so far as it goes. Measuring energy intensity was much criticized in the run-up to the Copenhagen summit on climate change as a poor substitute for setting overall emissions targets. In fact, as the Japanese have argued, there is much to be said for focusing on how much energy individual industries use, a bottom-up approach that can be more practical than setting grandiose (sometimes unattainable) goals. In China‘s case, the problem is implementation. In practice, far from the eyes of the planners in Beijing, many party cadres have favored growth and job creation, and left environmental improvements for another day. Nor are Chinese data on energy use – surprise, surprise – entirely trustworthy. Recent statistical revisions make it easier for industry to meet its five-year target. There are even suggestions that the recent crackdown is not all it seems. Some of the factories slated for closure have already stopped producing. Read more… Beijing is not blind to the merits of cleaning up its industry. For every unit of output, China uses almost six times more energy than Germany or Japan, a horrendous waste. Pollution is also a potential source of unrest, particularly since the Olympics, when Beijing‘s inhabitants were reminded of what blue skies actually look like. There is certainly more rhetorical urgency in the clampdown on heavy industry. Chinese officials are even hinting that it may be worth sacrificing a percentage point or two of growth to meet energy intensity goals. As Mr.Yasheng Huang, a China scholar at the Massachusetts Institute of Technology, has said, it is easy to produce high headline growth by digging holes and filling them up again. Too much Chinese economic activity is still spent in similar activities. It will take more than a dubious target dubiously implemented to convince skeptics that Beijing is really serious about a clampdown.

Source: The Financial Times

POLITICS ONE DIES AS HERDERS AND NINJAS CLASH IN GOBI-ALTAI One man was killed and more than 20 people were injured in armed clashes last week between herders and ninja miners in Darvi soum in Gobi-Altai. The herders were resisting the efforts of around 100 miners to dig for gold in pasture land. The clashes lasted for more than an hour. The soum administration had earlier warned the ninjas to stay away, but they started digging near Elstiin Valley and enraged the herders. The provincial police have arrested 30 people and are investigating the events. Reports say the trouble broke out when a group of ninjas began digging for gold. Local herders protested but they were outnumbered and finally one of them opened fire, fatally hitting a 30-year-old ninja in the head. Herders are concerned at the loss to pasture land but the ninjas refused to listen to their pleas, instead shouting, ―What else can we do? If we don‘t dig, we die of hunger.‖

Source: News.mn HAND-MINING IMPOSSIBLE TO STOP, SAYS OFFICIAL An official of the Professional Monitoring Department in Gobi-Altai has said stopping artisanal mining, in the province and elsewhere, is an almost impossible task in the present circumstances. Law enforcers are being hamstrung by lack of support from prosecutors in cases instituted by ‖ninjas‖ to get back 49 metal detectors and other equipment used in hand-mining that were confiscated last year. ―Prosecutors say we cannot take away people‘s means of livelihood, but without the power to confiscate these, all our effort will be a waste of money and time,‖ he has said. The official also said that few of the 50 or so companies with exploration licenses in the province do any actual work, even though they try to extend their license every year. Their goal is to sell it for a high price later. ―This trade in mining licenses must be stopped,‖ he feels.

Source: Ardiin Erkh PM BACK IN ULAANBAATAR AFTER 3-WEEK TOUR OF 9 PROVINCES Prime Minister S.Batbold returned to Ulaanbaatar on Sunday after a three-week tour of 70 districts

in nine western and central provinces. Everywhere he went, he held meetings with local people and explained to them policies, programs and achievements of the Government, before asking them to come out with their suggestions and grievances. Before leaving for Ulaanbaatar at the end of his 5,600-km trip, the Prime Minister talked to media in Uvurkhangai province. He said he had enjoyed his interaction with common people away from the capital, and was struck at all his meetings with them by their resilience and optimism, even in the face of adversity like the dzud. He had told people that thousands of new employment positions will need to be filled as grand projects start taking off and industrial complexes begin to come up. However, only those with proper and adequate vocational training will be considered for these jobs, so facilities for such training must be expanded. Small and medium enterprises will continue to be encouraged, mainly in the livestock products sector which needs many more processing units to add value to the raw material. Despite the financial crisis, the Government has spent about MNT100 billion in the past two years to provide credit to SME entrepreneurs. Much more is needed, and talks are being held with the Japanese government for a grant of USD50 million. All levels of the administration, including those in the provinces, must work to reduce poverty through generating employment, he said. He also said that he had explained to herders the benefits for them to come from the proposed commodity exchange. Herders faced several problems such as limited marketing facilities and complained that too many middlemen in the milk and meat trade kept the profits of the primary producers low. The government will pay more attention to bring suppliers and consumers closer. A concessional loan of USD200 million is being discussed with China for livestock husbandry.

Source: Zuunii Medee MONGOLIAN MPs IN BOTSWANA TO STUDY MINERAL REVENUE USE A delegation of Mongolian MPs recently visited Botswana to learn how the country has successfully managed revenues from minerals. The MPs are members of the Standing Committee on the Budget and such were interested in minerals as well as fiscal policy. Mongolia has decided to study practices in Botswana, Norway and Chile before formulating its own policy. The Minister of Finance and Development Planning, Mr. Kenneth Matambo, told the delegation that at independence in 1966, Botswana was one of the 25 poorest countries in the world and depended on grants from the United Kingdom to finance the government budget. When diamonds were discovered in the 1970s it created an opportunity to start economic development. Revenues were channeled to develop infrastructure, and water, health care, primary education and roads network were identified as priority sectors. Agriculture was also emphasized as most people in Botswana were dependent on subsistence farming. Rapid economic development was achieved by saving part of the revenue surpluses for the future. At the end of April, 2010, the accumulation was enough to cover19 months of the country‘s import needs. The accumulated reserves were partly used to finance part of the huge budgetary deficits that followed the recent economic and financial crisis. Mr. Matambo advised the Mongolian MPs not to get excited over the sudden influx of mineral revenues and urged them not to spend these on increased and unproductive consumption. Instead, they should be invested in areas that ensured sustainable development. Botswana‘s economic planning is based on the principles that it is not advisable to be excessively dependent on natural resources because they are exhaustible, that economic crises can always recur, and that it is more sensible to have a diversified economy, instead of one overly dependent on minerals.

Source: www.mmegi.bw RUSSIA PLACES AGREEMENT ON URANIUM JV BEFORE ITS PARLIAMENT Almost a year after it was signed on August 25, 2009 in Ulaanbaatar the Russian Government has placed before the lower house of the Russian Parliament for ratification its agreement with Mongolia on setting up Dornod Uranium, a joint uranium mining company with limited liability. The shareholders will be Atomredmetzoloto (ARMZ) on the Russian side and MonAtom LLC on the Mongolian side. Both are State-owned. Mongolia has never sealed deals in uranium with other countries. The product output of the joint venture is planned at 2,000 tons per year.

Source: Ria Novosti PM AND SENIOR CHINESE OFFICIAL VOW TO STRENGTHEN TIES Mongolian Prime Minister S.Batbold and Mr. Wang Jiarui, head of the International Department of

the Communist Party of China (CPC) Central Committee, discussed bilateral ties on Monday. Mr. Batbold, who is also chairman of the Mongolian People's Revolutionary Party, said Mongolia will continue to work with China to add new substance to the Mongolia-China good-neighborly partnership of mutual trust and push the ties to a new stage. Developing a stronger relationship with China is among the priorities of the foreign policy of his government, and is also in the interests of the two peoples, he added. Mr. Wang conveyed the sincere greetings and good wishes of President Hu Jintao, Premier Wen Jiabao and other Chinese leaders to Mr. Batbold, and said China would like to make joint efforts with Mongolia to implement the consensus reached between leaders of the two countries, taking into account each other's core interest and major concerns. The two sides should forever be good neighbors, friends and partners, he added.

Source: Xinhua HIGH REGULATORY OFFICIAL UNDER SCANNER The Economic Crimes section of the State Inspection Authority has begun investigating charges against Mr. D.Bayarsaikhan, Head of the Financial Regulatory Authority, relating to his role in allowing Anod Bank to raise capital by selling fresh shares, in contravention of the Securities Law. This is part of the broader investigation of charges against the bank‘s administrators. Mr. Bayarsaikhan has already been interrogated several times and his statements are being reviewed to see if specific charges can be brought against him for colluding in a scheme to cause loss to the public.

Source: Udriin Sonin CHARGES OF ILLEGAL DEALS AGAINST NUCLEAR AGENCY Business circles are rife with stories of how laws are being manipulated, if not downright ignored, in the uranium sector. The latest of these concerns a uranium field in Arkhangai, where an exploration license was originally issued jointly to Mr. Ts.Soyombo, head of Mongol 3000 LLC, and a Russian company, URG Investment. When the nuclear energy law was adopted, and all licenses were required to be re-registered, Mr. Soyombo managed to get the fresh license in the name of Mongol 3000, with no reference to URG, even though the Russian company had held 51% share in the joint venture. URG officials visiting the NEA were always asked to be patient and told that the re-registration process was yet to start. When they did get to know what had happened, URG went to court, which asked Mongol 3000 to pay a fine of MNT1.7 million. However, Mr. Soyombo had a plan B ready for this eventuality. He sold his 49% share to a person called A.Erdenebat, who is believed to be a front man for Sumo champion Asashoryu and his brother. There should be nothing wrong in a successful Mongolian going into business, but why must laws be bent and why must the nuclear energy connive in such blatantly illegal deals? The answer may lie in the well known fact that Mr. Soyombo and Mr. S.Enkhbat, Head of the Nuclear Energy Agency, are childhood friends. As for the second part of the story, the NEA chief and Asashoryu have similar links, both coming from Uvurkhangai.

Source: Udriin Sonin SMOKELESS UB PROGRAM GETS NEW NAME AND WIDER SCOPE After failing to get its Smokeless Ulaanbaatar program approved in the Spring session of Parliament, the Government has now made some changes in it, following suggestions from a working group established for the purpose, to make it more acceptable to MPs. The program is now called New Construction, to emphasize that its goal is to boost various types of construction in all parts of Mongolia -- infrastructure, city development, energy, engineering and roads. More apartments will be built and jobs created, giving a fillip to the economy, and creating clean and safe living conditions. The program also aims to regulate people‘s migration to urban centers, particularly the capital city, develop regional centers, and improve administration of smaller cities. The larger goal is to reduce the difference between cities and rural areas. In this the program now has a wider scope than the earlier one which focused on reducing the air pollution in Ulaanbaatar. It now has eight parts and will proceed in two stages. The first phase, from 2010 to 2012, will see construction of schools, hospitals, kindergartens, professional training and industrial centers, sports complexes and trading centers. Migration to Ulaanbaatar will be controlled when the regions have access to better education and health services, and more employment opportunities. Care would be taken to ensure that this development does not lead to further pollution. Use of coal will be

reduced and modern technology will be introduced to tackle air pollution, the level of which should be brought down by no less than 60 percent by 2013.

Source: Ardiin Erkh UMNUGOBI DEVELOPMENT COUNCIL HOLDS FIRST MEETING The Umnugobi Regional Development Council held its first meeting on August 10 in Dalanzadgad, and discussed and approved its work procedures and work plan for 2010. A representative of Oyu Tolgoi LLC reported on the progress of implementation of relevant provisions of the investment agreement. The council also formed its g overning board at the meeting. Mr. D.Damba, president of the Mongolian National Mining Association is a member.

Source: Mongolian National Mining Association ALTERNATIVE HEATING ARRANGEMENTS TO BE MADE FOR 25,851 GER DISTRICT HOUSEHOLDS The Mayor of Ulaanbaatar has prohibited 25,851 ger households in 12 sub-micro-districts of the city from burning coal for heating this winter. His office will arrange for alternative and less polluting heating arrangements for them to be provided by 12 companies.

Source: Udriin Sonin “WE CANNOT ALLOW ANOTHER ULAANBAATAR IN THE GOBI,” SAYS ENVIRONMENT MINISTER Environment Minister L.Gansukh has said the Southern Gobi region has limited water reserve and several studies will have to be reviewed and the discrepancies in them reconciled before a clearer picture emerges of water availability for the Tavan Tolgoi project. The concern of the Mineral Council about excessive and imprudent water consumption in mining has been clearly reflected in the Oyu Tolgoi agreement. The investors referred to potential reserves they had explored. The water department assessed their claims and found them acceptable. The situation now is that the underground water of Gunii Khoiloo can be used until 2018 and other water sources should be found by then. The water consumption during production will be strictly monitored. Asked abut the likely ecological hazards of the proposed heavy industrial complex in Sainshand, Mr. Gansukh agreed that mineral processing poses risks to the environment. ―Our Ministry has the legal authority to disallow construction of any plant if it feels the environmental impact will be unacceptable,‖ he said. ―But of course this can be done only after considering all other options.‖ Active exploration and transportation activities in the last few years have seen many animals moving away from their traditional habitat. ―Unfortunately, animals cannot be made to follow a migration road we offer. The road and railway projects will be planned so that they do not obstruct pasture switching, and normal migratory movement. Also, whatever is built should be kept low enough so that animals can cross them easily,‖ he said. Deploring that post-mining reclamation is very much neglected, the Minister conceded that the monitoring here needs improving. The responsibility for monitoring should lie with central and local professional inspectors and the penalty for infraction of the law should include cancellation of license. Active help from local residents will strengthen the monitoring of the reclamation program. This has been incorporated in the Oyu Tolgoi agreement and will be seen in the Tavan Tolgoi project also. Some areas near Tavan Tolgoi and Oyu Tolgoi have already changed dramatically and are growing into towns. ―We shall not allow another Ulaanbaatar to come up in the Gobi, and will insist on green facilities in no less than 40% of the total territory,‖ Mr. Gansukh said.

Source: The Mongolian Mining Journal CRIMINAL LAW TO BE PUBLISHED IN BRAILLE The fact that no laws are available in Braille puts the blind in Mongolia in a difficult situation when they get involved in any judicial investigation. This is going to change, as the Human Rights Commission gets ready to issue the State Constitution and the criminal law code in Braille, with support from an Italian Government organization, Aifo. The European Union Human Rights Commission and the State Investigation Authority have also cooperated in the project.

Source: Ardiin Erkh

IMPACT OF MINING ON HEALTH TO BE ASSESSED The Government has sought the help of Simon Fraser University in Canada to prepare an appropriate methodology for evaluating the impact of mining on human health. Civil society organizations have been at the forefront of demands for such assessments, particularly in view of the anticipated mining boom in the next few years.

Source: Onoodor CHINESE HAVE MORE MONEY THAN OFFICIAL DATA SHOW The good news: Chinese people have more money, on average, than most analysts realize. The bad news: Most of that extra wealth lies with the already-rich, widening income inequality beyond that suggested by official figures. This crowd is often supplementing its earnings with 'gray' income which can include kickbacks, bribes and the like. These are the conclusions of academic research into China's real income levels by Mr. Wang Xiaolu, of the China Reform Foundation, an economic development research group. Happily, the sponsor of the research, Credit Suisse, provides a silver lining: Its analysts have thoughtfully proposed a number of stocks and sectors that could benefit from the fact that China's filthy rich are both filthier, and richer, than they seem at first sight. Based on a detailed look at spending and income patterns in China in 2008, Mr. Wang estimates China's average urban household income is 90% higher than official data. His figures suggest the top 10% of Chinese households are 3.2 times richer than public data show, while the second decile's income is 2.1 times higher. Behind this official underestimate of Chinese household wealth lies what Mr. Wang terms 'gray' income, such as government and party officials receiving outsize cash gifts when their offspring marry, or benefiting from a bit of insider trading in the property market, or receiving under-the-table payments in return for favorable treatment. Such items contributed to total hidden income in 2008 of nearly USD1.4 trillion, equivalent to roughly 30% of China's GDP. One corollary, that the gap between China's rich and poor is becoming ever wider, is a worrying social problem. Still, not to let corruption and inequality get too much in the way of a good investment story, Credit Suisse's takeaway is that there could be even more latent potential in the Chinese consumer story than investors currently suppose. That's good news for luxury goods providers like LVMH or BMW, for Chinese property developers, and for gambling companies with a big presence in Macau. Rather than a consumption basket, maybe call this one a corruption basket.

Source: The Wall Street Journal

NEW MONGOLIAN REGULATIONS

The following new law and amendments were published in the latest weekly Government bulletin. Unless otherwise decided by Parliament, they will take effect ten (10) days after publication.

Date Laws

11.08.2010 1. Law on Budget Stability

2. Amendments to Law on Budget Organization's Administration and Financing

3. Amendments to Law on State Consolidated Budget of Mongolia

4. Amendments to Law on Special Fund of Government

Please visit BCM's website, Legislative Working Group, for a summary of new Mongolian laws. BCM members who wish to access 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

“DISCOVER MONGOLIA” (SEPTEMBER 8-10) ADDS NEW SESSION, PARLIAMENT HOUR This year‘s Discover Mongolia Investors‘ Forum will take place on September 8-10 in Ulaanbaatar. The Organizing Committee plans to have, in addition to the usual Government Hour, a new session, Parliament Hour, where current and prospective investors will be able to interact with the country‘s lawmakers, and to know about the legal framework that Mongolia wants to set up in the mining and exploration sector. Mr. Bernard J. Guarnera, President of Behre Dolbear Group Inc., will be the Keynote Speaker and will talk on a study conducted by the Group on ―Where not to invest‖. Among the other speakers is a Mongolian MP, Mr. D.Odkhuu, whose topic is ―Mongolia‘s Regional Development Concepts‖.

The Premier Sponsor for this year‘s event is SouthGobi Resources, and the Gold Sponsors are Erdene Resource Development, Micromine Mongolia, Hunnu Coal, Geosan, and Prophecy Resources. The Regular Sponsors are: Aspire Mining, MoEnCo, Monnis, PricewaterhouseCoopers, Runge Group, Trade and Development Bank of Mongolia, and Energy Resources. ___________________________________

1ST ANNUAL MONGOLIA INVESTMENT CONFERENCE The 1st Annual Mongolia Investment Conference in on September 7 in Ulaanbaatar, co-organized by Eurasia Capital, will provide insight into the most promising sectors of the Mongolian economy through in-depth discussion of the market and the products. It will showcase a range of Mongolia-based opportunities in the natural resource and financial sectors and beyond. The conference also offers investors the chance to meet key decision-makers in Mongolia and to learn of the key market drivers, risks and influences in the frontier market. The session will be preceded by a trip to Oyu Tolgoi and Ovoot Tolgoi in the South Gobi on September 6. All efforts will be made to arrange any one-on-one meeting requested in advance by participants. Seats are limited and access is guaranteed only to those registered. For more information and applications, please contact Ms. Zhyldyz Sadyralieva at zhyldyz.sadyralieva@eurasiac.com or at 976 99061673. ___________________________________

“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.

____________________________________

“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.

____________________________________ NEW POSTINGS ON BCM WEBSITE‟S „MONGOLIAN BUSINESS NEWS‟ The draft Tavan Tolgoi Investment Agreement which was submitted by the Government to Parliament is posted in both languages to BCM‘s websites, (www.bcmongolia.org) and (www.bcm.mn), ‗Mongolian Business News‘ for your review. 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]

July 31, 2010 *9.8% [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 – August 19, 2010

Currency name Currency Rate

US dollars US 1,316.05

Euro EUR 1,690.40

Japanese yen JPY 15.40

British pound GBP 2,042.45

Hong Kong dollar HKD 169.34

Chinese yuan CNY 193.73

Russian ruble RUB 43.28

South Korean won KRW 1.12

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.