BCM Economic and Capital Markets Update, The Good and

The Not So Good

by Nick Cousyn Chief Operating Officer

BDSec Joint Stock Company

The Good

• Most viewed debt markets as closed to Mongolia, yet GOM successfully raised $240M of net proceeds via Samurai Bonds. December FDI of $196M, while down 12% yr/yr was the highest absolute level since May 2013.

• Parliament lowered taxes on small businesses, which is positive for both economic and employment growth and contributes to the expansion of the middle class.

• New and progressive Investment and Securities legislation, should have a profound effect on FDI and the development of Mongolia’s capital markets.

• Policy which is generally moving towards privatization with the elimination of the State Property Committee, turning these assets into a fund, managed by Ch.Saikhanbileg.

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Relations with China have greatly improved recently compared to the last 2 years.

1. Following the PM’s visit to China late last year, China Shenhua signed an MOU to buy 1B tons of coal over 20 years, equal to 50M tons/year, vs. 18M tons in ’13.

2. China’s increased appetite for Mongolian coal showed in SouthGobi Sands preliminary results for 4Q, which was a record quarter for the company with volumes increasing 230% yr/yr.

3. China has proposed the construction of a pipeline from the oil fields in the Tamsag Basin to China, which would encourage further E&P in the region.

4. China signed an MOU with the Mongolian State Railway to build rail to the Chinese border.

5. On the heels of Mongolia’s progressive Investment Law, a private Chinese company agreed to buy the controlling interest of FreOre for $56M, representing the first meaningful mining acquisition in recent memory.

6. We’ve heard of several other very large infrastructure projects China is pushing for that have yet to be announced.

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Reduction in Gold Royalties • Much has been made of the new Investment and Securities legislation, but the new

gold royalty legislation may be getting overlooked.

• For those who are not aware, the GOM has offered 2.5% royalty rates on gold produced in Mongolia that is sold to the Central Bank, whereas before companies were paying royalties as high as 10%.

• Conversations with the Central Bank confirms participation by miners in this program is very high.

• In 2013 8.9M tons of gold was produced in Mongolia worth $370M, which will likely increase as a result of this progressive royalty. Current gold reserves are 5.8M tons.

• If the Central bank uses this program to increase their reserves of gold, that could be a long term positive to the value of the Mongolian Tugrik

• To put things in perspective, gold production worth $370M would represent 7% of Mongolia’s 2013 money supply, not an insignificant amount.

• In 5 years, Mongolia could easily have over $2B USD in Central bank gold reserves, vs. $5.6B in 2013 M2.

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A Very Strong Stealth Bull Market Underway on the MSE

• MSE Top 20 is not the greatest measure for investors to gauge local stock performance given the large number of government controlled companies.

• 5 of the MSE Top 20 are government controlled and in the aggregate have poor financial performance and in most cases produce losses.

• In April 2013, we produced research which screened for the best local companies, based on Growth, Value and Proprietary disciplines.

• From April 8 2013, our Growth, Value and Proprietary screens produced 10 month returns of +38.5%, 40.7% and 35.8%, respectively. The MSE over the same period was +1% and down 8% for FY’13.

• This approach produced the best performing Mongolian asset class by far and think this bull market is still in its very early stages.

Growth Screen:

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Value Screen:

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Value Screen (continuation from the previous page):

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Proprietary Screen:

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Notable Earnings Performances: GOV, SHG, MIB summaries

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Gobi JSC (GOV) Sharyn Gol JSC (SHG) Moninjbar JSC (MIB)

2012 2013 YOY 2012 2013 YOY 2012 2013 YOY

Current Assets 22.54 28.25 25.3% 11.09 10.08 -9.1% 0.63 1.09 72.4% Non-current Assets 16.15 18.17 12.5% 12.39 23.93 93.1% 0.78 0.83 6.2%

Short term debt 2.82 3.00 6.2% 0.80 5.59 597.6% 0.41 0.77 88.9% Long term debt 14.76 18.81 27.4% - 6.61 n/a - - n/a

Shareholder equity 21.11 24.61 16.6% 22.68 21.81 -3.8% 1.00 1.15 14.3% Debt and Equity 38.69 46.42 20.0% 23.48 34.01 44.8% 1.41 1.92 35.9%

Sales Revenue 23.33 27.86 19.4% 7.88 12.46 58.2% 1.61 3.26 102.1%

Gross profit 6.35 9.28 46.1% 3.05 5.46 79.1% 0.34 0.59 70.8%

Net profit 3.00 4.06 35.3% 1.07 0.66 -38.2% 0.04 0.14 220.9%

unit: million USD (USD/MNT rate at 1750)

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The Not So Good

• Collapse in FDI and most asset prices have had a very negative effect on investor sentiment. Some of these investors have lost vast sums and are not coming back.

• Investors who remain, feel a great deal of uncertainty, they are concerned and fearful about the prospects of resolution at OT and feel this process has gone on far too long.

• These are the same investors Mongolia will look to when they privatize assets. If they get burned again in 2014, these investors will not be there for Mongolia.

• If these investors are not there to support privatization, the buyers of last resort are China and Russia and Mongolia’s “3rd Neighbor” policy is compromised.

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The Not So Good (continuation)

• Investors feel the decision to revoke the disputed 106 licenses did not make a great deal of sense. The buyers would have had no idea that these licenses were being issued incorrectly and illegally, yet they had to pay for the Mineral Resource Authority’s mistake.

• MNT depreciation could have dire consequences if not addressed soon. Mongolia has 40%+ of its GDP denominated in USD and in Tugrik terms, the country’s borrowing costs have increased approximately 35% versus late 2012.

• Mongolia’s largest corporations have significant exposure to USD denominated debt as well. For instance, APU has $71M in USD debt vs. a market cap of ~$180M, their exchange loss on their debt was $8.6M USD in ’13 (non-cash).

• And lastly, everything we’re hearing suggests the Spring Session in Parliament will be extremely partisan and volatile.

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Looking Forward

• Mongolia resolving the long standing dispute with OT (its largest investor) is critical to restoring International confidence.

• 2014 is looking like a year where coal exports to China will recover.

• We expect FDI to turn positive in 2014 and perhaps recovery strongly, should any number of large projects get underway.

• The cycle of negative news needs to be broken for companies and projects to raise the needed capital to be successful.

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THANK YOU FOR YOUR ATTENTION