09.10.2011 What will it take to get there, Addressing Mongolia’s investment needs and opportunities, Randolph Koppa
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The document discusses Mongolia's growing financial needs as its mining industry expands rapidly. It outlines infrastructure requirements including power, transportation, housing, water and social services that will require billions in investment. Mining exports are booming, but the country's infrastructure is strained as it tries to support the growth. The author uses an airplane metaphor to represent the potential wealth from mining if Mongolia can build out the infrastructure to support it in time.
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09.10.2011 What will it take to get there, Addressing Mongolia’s investment needs and opportunities, Randolph Koppa
- 1. Mongolian Financial Services IndustryMongolian Financial Services Industry Mr O. Orkhon First Deputy CEO August, 2011 Hong Kong Mongolian Financial Services IndustryMongolian Financial Services Industry What Will It Take To Get There?What Will It Take To Get There? Addressing Mongolia’s Investment Needs and Opportunities Mr. Randolph S. Koppa President Mongolia Investment Summit, London, December 8, 2011
- 2. MONGOLIAN SIGNIFICANT EVENTS • 209 B.C. formation of the Hunnu Empire A lot of other things happen…. • 1206 A.D. Chinggis Khan forms the modern Mongolian state A lot of other things happen…. • 1921 A.D. Mongolia a sovereign state• 1921 A.D. Mongolia a sovereign state • 1990 A.D. Mongolia a democratic republic • 2005 A.D. Mongolia exports coking coal to China • 2009 A.D. Mongolia signs the Oyu Tolgoi investment agreement with Ivanhoe Mines and Rio Tinto. (Oct. 9)
- 3. WHAT IS THE SIGNIFICANCE OF THE LATEST EVENTS? Let's answer that with a METAPHOR. Imagine that these events are as if the world had granted to Mongolia and placed in the middle of the Gobi Desert…..
- 4. AN A380 FILLED WITH US 100 DOLLAR BILLS
- 5. HOW MUCH WOULD THAT BE? $10,000, $1 million, $ 1 billion
- 6. ONE BILLION DOLLARS LOOKS LIKE THIS
- 7. HOW MUCH CAN AN A380 HOLD? • In the passenger luggage hold, USD 2 billion • As a cargo plane, USD 15 billion, which weighs almost 150 tons which represents the plane’s maximum payload.maximum payload.
- 8. THERE IS ONE CONDITION You have to get the plane to fly! Then the money can be showered down for theThen the money can be showered down for the Mongolian people to collect.
- 9. LEARN TO FLY AND BUILD THE RUNWAY! • At present the plane is taxing and has turned onto the runway for take off. It is picking up speed. • The runway is being built. • 2.8 million Mongolians are watching. • Will the runway be completed in time?
- 11. WILL IT BE THIS?
- 12. OR WILL THIS FOIL THE TAKEOFF?
- 13. EXPLAINING THE METAPHOR • Mining investment and development and increasing mining operations in coal and iron ore, in particular, are advancing at a faster pace than the underlying infrastructures necessary to handle the growth.
- 14. MINING INVESTMENT LEADS MONGOLIA’S ECONOMIC GROWTH • OT has spent over USD 3 billion in building the copper mine to over 60% completion. • Coal mining operators have raised USD1.5 to 2 billion on foreign exchanges to fund mine developments in coking coal.coal. • Erdenes TT is planning a large IPO to finance developing its East Tsenkhi field • The West Tsenkhi tender will result in further substantial investments by an international consortium.
- 15. CHINA DEMAND DRIVES EXPORT BOOM Even though the mega projects of OT and TT have not yet gone into production, for the past three years Chinese demand for coal, iron ore, petroleum and other minerals have propelled thepetroleum and other minerals have propelled the operational development of mines throughout Mongolia and have put Mongolia on the map.
- 16. NOW TOP EXPORTER OF COKING COAL TO CHINA • Chinese Coking Coal Import volumes by country of origin June 10 June 11 Change % Mongolia 5.8 7.9 +36% Australia 9.7 4.2 -57% USA 1.6 2.7 +66% • In million tones USA 1.6 2.7 +66% Canada 1.6 1.5 -9% Russia 2.2 1.4 -37% Indonesia 1.1 1.2 +12% Total 22.3 19.2 -14% Source: China Coal Resource
- 17. 26 30 35 40 45 16.6 20.5 20 30 40 50 Mongolian Coking Coal Exports to China Actual Forecast AND VOLUME WILL CONTINUE TO GROW 13.8 3.7 4.2 7.1 16.6 0 10 20 2007 2008 2009 2010 2011 2012 2013 2013 2014 2015 Forecast • Average price in 2011 $100 per ton • Average price in 2010 $50 per ton Source: Frontier Securities, TDB
- 18. IRON ORE, ALSO 300 400 600 300 400 500 600 700 Forecast USD mln 87 81 250 300 0 100 200 300 2008 2009 2010 2011 2012 Actual
- 19. EXPORTS BOOM DESPITE LAGGING INFRASTRUCTURE • Exports increased 53% in 2010 to USD 2.9 bn • Exports increasing at 65% rate in 2011 ( USD 3.5 bn 9 mos) • Coking coal export value up 178%• Coking coal export value up 178% • Iron ore export value up 86% • Copper concentrate export value up 32% • Crude oil value up 56%
- 20. MINERAL EXPORT VALUES BOOM Source: NSO
- 21. SO FAR MOST COAL AND IRON HAS GONE TO MARKET IN THIS MANNER This method clearly is not sustainable
- 22. TRUCKS AND MORE TRUCKS Source: NSO
- 23. TRANSPORT • Today 1000 trucks daily travel on dirt roads delivering coal and iron to the Chinese border • Supplies from UB and elsewhere to the mines go by road Yes, the word today in Mongolia is TRUCKSYes, the word today in Mongolia is TRUCKS • UB Railway capacity is strained • Border crossings are jammed The word tomorrow will be TRAINS
- 24. THERE IS A LOT TO DO! The mines and the people need: • Power • Transport • Housing • Public services • Educational services
- 25. POWER – NEW PLANTS DELAY Source: World Bank
- 26. MEANING MORE POWER IMPORTS
- 27. • Need to double capacity in next four years • USD 2 to 3 billion investment needed • Tariffs need to increase 30%-60% POWER • Mine site plants can be project financed • Chandgana another option • Financing of UB plants
- 28. DIESEL: CRITICAL FOR POWER • Diesel powers mine operations • 464,000 tons this year, up 36% • Almost all comes from Russia • Supplies were threatened early summer• Supplies were threatened early summer • Alternative suppliers being sought • More storage capacity being built • Strategic solution is a an in country refinery
- 29. PRESENT TRANSPORTATION NETWORK Source: MRTCUD
- 30. ULAANBAATARULAANBAATAR MRTCUD HIGHWAY PLAN Size 5,571.9km Investment US$ 2.1 bn Time frame 2010-2016
- 31. PLUS, A REAL MOTORWAY! Size 990.4 km Investment US$ 1.9 bn Time frame 2010-2014
- 32. RAILROAD STRATEGIC PLAN Size 1,040 km Investment US$ 3.0 bn Time frame 2010-2014
- 33. RAILROAD CONNECTION TO THE PACIFIC
- 34. URBAN DEVELOPMENT • Ulaanbaatar has 1.25 million inhabitants, 45% of Mongolia’s population • 60% live in substandard housing • Heat by coal and wood stoves • Existing district heating also highly polluting • Ulaanbaatar is world’s most polluted city in winter
- 35. MRTCUD 5 YEAR HOUSING PLAN УЛААНБАÀТА Р ДАРХАН ТӨ В DUNDGOB МАНДАЛГО ВЬ SUKHBAATA R DORNOD KHOVD ӨЛГИ Й ZAVKH AN GOBI-ALTAI ЧОЙР МӨРӨ Н БАЯНХОНГО Р UVURKHANG AI ЭРДЭНЭ Т ЦЭЦЭРЛЭ Г АРВАЙХЭ ЭР ARKHANG AI KHUVSGU L BAYAN- ULGII ULAANGOM УЛИАСТА Й ХОВ Д UVS САЙНШАНД GOBISUMBER ЧОЙБАЛСАН БАРУУН-УРТ ӨНДӨРХАА Н ЗУУНМО Д KHENTII SELENG E АЛТА Й 75 000 household housing in Ulaanbaatar city ДАЛАНЗАДГАД DORNOGOB I DUNDGOB I UMNUGOB I AI BAYANKHONGO R САЙНШАНД 10 000 household housing in the Central region 5 000 household housing in the Eastern region 5 000 household housing in the western region 5 000 household housing in the Khangai region Size •75,000 in Ulaanbaatar •25,000 in Provinces Investment US$ 6.2 bn Time frame 2010-2016
- 36. 3536 3165 4579 3725 5416 6338 9899 6040 4000 6000 8000 10000 MONGOLIAN HOUSING MARKET GROWTH 680 1010 1045 1478 3536 3725 108 119 123 287 267 278 477 447 445 512 722 363 0 2000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-III Source: MRTCUD Housing supply, by thousand sq mHousing supply, by units
- 37. WATER • THE key scarce resource in Mongolia • UB under strain • Desert mining areas have fossil aquifers • Estimates vary, but aquifer supplies are finite• Estimates vary, but aquifer supplies are finite and may not sustain total mining and urban development expected in next several years • Water recycling is essential The word for the future may indeed be WATER
- 38. • Water resources for Gobi: $300 million for ground resources • Piping water from northern rivers: $400 million WATER million • Solving Ulaanbaatar’s needs: $300 million? • Total: $1 billion Source: World Bank study
- 39. PUBLIC AND SOCIAL SERVICES • Hospitals and medical services • Education - education in engineering and technical areas - better teachers properly paid- better teachers properly paid - better facilities Total needs USD 1 to 2 billion
- 40. THREATS TO THE LAND OF BLUE SKY • Air pollution in UB and other cities • Rivers and lakes pollution • Land degradation from mining • Desertification• Desertification • Deforestation • Wildlife endangerment Easily USD 1 to 2 billion in next five years
- 41. OTHER INFRASTRUCTURES • Agricultural • Industrial and commercial• Industrial and commercial • Financial
- 42. AGRICULTURAL • Cashmere: 25% of world’s production but need to move up the value added chain • Grains: almost self sufficient but need more for animal feeds; better quality for humans • Vegetables: plenty of potatoes but more vegetables• Vegetables: plenty of potatoes but more vegetables needed • Meat: potential for further processed products for export • Organic farming potential Opportunities for USD 1 to 2 billion investment
- 43. INDUSTRIAL AND COMMERCIAL PRESENT A USD 20 BILLION POTENTIAL • Building materials such as cement • Clean energy building materials • Petroleum refining • Coke plant • Coal gasification • Smelting • Steel • Steel fabrication such as coal cars • Consumer goods
- 44. FINANCIAL SECTOR INFRASTRUCTURE • Government and municipal debt market • Banking sector • Stock exchange• Stock exchange
- 45. GOVERNMENT DEBT
- 46. MONGOLIAN SOVEREIGN DEBT • Current foreign debt to GDP less than 50% and at favorable rates • Development Bank of Mongolia designated to Raise up to USD 600 million for infrastructure with Ministry of Finance GuaranteeFinance Guarantee • With growing GDP Mongolia can raise USD 3 to 5 billion in sovereign debt, including bilateral debt, the next few years and maintain a sound debt to GDP ratio.
- 47. DOMESTIC PUBLIC DEBT • MoF raised over USD 150 million in local currency bonds in past three months • Purposes: to support cashmere and wool industry, SME and civil servant housing • Investors still mainly local banks • Domestic institutional investor base still small • Limited interest among foreign investors • Need to expand to USD 1 to 2 billion
- 48. TAXES AND DIVIDENDS TO SPEND • Strong budget surplus in 2011 • Heavy spending plans for next two years • Eventually USD 2 to 4 billion surplus over next few years to spend on infrastructure, publicfew years to spend on infrastructure, public services and environment
- 50. THE STRONG GROWTH OF BANKS BEGUN IN 2004 HAS RESUMED Sources: Bank of Mongolia; TDB; Amounts converted from MNT at constant rate of 1,250. * Percentages in annualized rate. Sources: Bank of Mongolia; TDB;
- 51. BUT BANK LENDING TO GDP IS STILL LOW Source: World Bank;
- 52. LENDING MUST INCREASE DRAMATICALLY Sources: IMF; TDB;
- 53. THIS WILL REQUIRE ADDITIONAL CAPITAL Assumes ROAA ranging from 2% down to 1.5% 30% dividend payout 10% capital to total liabilities Sources: TDB;
- 54. MORTGAGE LENDING WILL GROW Sources: BoM; MIK; IMF; TDB;
- 55. PROVIDING HOME OWNERSHIP TO MORE AND MORE MONGOLIAN FAMILIES Potential development of the Mongolian mortgage market Sources: TDB; MIK;
- 56. WHICH WILL PUT PRESSURE ON BANK FUNDING PROFILES • Fixed rate mortgages preferred • Maturity gap mismatches Interest rate risks• Interest rate risks • Fixed rate funding required
- 57. REQUIRING DEVELOPMENT OF A SECONDARY MARKET • Domestic investors needed. Issues: - Yield curve - Depth of investors base • International investors needed. Issues: - Credit rating- Credit rating + Good yield + Currency appreciation • Potentially, MNT 1.5 trillion to MNT 2 trillion of covered bonds or mortgage backed securities
- 58. INTERNATIONAL DEBT CAPITAL MARKET FUNDING WILL EXPAND Sources: TDB; Assumes: Maximum 20% of total foreign currency funding. Maximum 10% of domestic currency funding. Foreign currency loans decline to 20% of total loans.
- 59. STOCK EXCHANGE
- 60. MSE MARKET CAP HAS GROWN DRAMATICALLY IN 2010, BUT IT IS STILL RELATIVELY LOW COMPARED TO PEERS Source: World Bank;
- 61. THE REAL IMPACT IN TRADING AND CAPITAL GENERATION IS STILL VERY SMALL Source: World Bank;
- 62. THE MONGOLIAN STOCK EXCHANGE MUST DEVELOP INTO A REAL SOURCE OF FUNDING FOR CORPORATE GROWTH • Local (non-mining) corporations will look to raise USD 3 to 5 billion. • Locally owned mining companies will look to raise USD 10 to 20 billion State owned entities must list locally• State owned entities must list locally • Dual listings will be needed to attract international investors LSE is reforming the MSE with new systems and rules to be ready end 2011!
- 63. MONGOLIA WILL ALSO NEED TO ACCESS FOREIGN COMMERCIAL DEBT • Structured and project finance • Private placements• Private placements • Public debt markets
- 64. TO COMPLEMENT GROWING FOREIGN INVESTMENT 2.5 3 2.2 2.8 3.65 4.6 2 2.5 3 3.5 4 4.5 5 0.5 0.7 0.8 1.5 0 0.5 1 1.5 2 2007 2008 2009 2010 2011 2012 2013 2014 2015 Actual Projected based on 30%annual CGR
- 66. ECONOMY OVERHEATING? • GDP growth 20% p.a. in Q3 2011 • Core inflation rate now over 12% p.a. • Transfer payments continue • Money supply growing• Money supply growing • Construction up dramatically • Bank of Mongolia taking action • But government still wants to spend Source: World bank
- 67. MINE SPENDING AND TRANSFER PAYMENTS DRIVE INFLATION. Source: World bank
- 68. CONSTRUCTION ACTIVITY BACK UP Source: World bank
- 69. WAGES UP, ESPECIALLY FOR MINERS 600 569 715 788 894 500.00 600.00 700.00 800.00 900.00 1,000.00 Mongolia Average Wages by Sector (MNT '000) 2009 Jan-Oct 2010 Jan-Oct 2011 Jan-Oct 297 392 279 258 219 231 324333 348 267 229 264 324 423 395 371 275 308 346 - 100.00 200.00 300.00 400.00 500.00 Agriculture Mining & Quarring Manufacturing Construction Wholesale & Retail Trade Hotels & Restaurants Financial Intermediation Public Administration Source: NSO
- 70. TOTAL FINANCING AND INVESTMENT NEEDS AND OPPORTUNITIES 2011 TO 2015 • Mine Development $ 12 bn. to $ 20 bn. • Infrastructure $ 8 bn. to $ 12 bn. • Urban development $ 6 bn. to $ 8 bn. • Agriculture $ 1 bn. to $ 2 bn. • Industry and Commerce $ 15 bn. to $ 20 bn. • Environment $ 1 bn. to $ 2 bn. • Social $ 1 bn. to $ 2 bn. • Financial Sector $ 1 bn. to $ 2 bn. Totals: $ 45 bn. to $ 68 bn.
- 71. COULD BE MET LIKE THIS • FDI $ 11 bn. to $ 14 bn. • Domestic sources $ 12 bn. to $ 18 bn. • Sovereign Borrowing $ 3 bn. to $ 6 bn. • Foreign Capital Markets $ 11 bn. to $ 16 bn. • IFI & Foreign bank Loans $ 7 bn. to $ 12 bn. • Donors and NGOs $ 1 bn. to $ 2 bn. Total $ 45 bn. to $ 68 bn.
- 72. OR, JUST 3 OR 4 OF THESE, FULLY LOADED
- 73. Better yet, simply wire the funds through TDBBETTER YET, SIMPLY WIRE THE FUNDSWIRE THE FUNDS THROUGH TDB
- 74. BANK HIGHLIGHTS Financial Results (mln.USD)*■ Mongolia’s #1 corporate bank ■ Rapid growth and improving asset quality ■ Dominant market share in the corporate and SME client segments, FX, money and bullion markets ■ Leading international trade facilitator of Mongolia ■ The country’s first and still only the 2008 2009 2010 2011.09 Total Asset 520.3 564.6 1065.0 1336.3 Total Loans 347.4 281.2 369.5 726.9 Total Deposits 404.6 435.1 912.2 1199.3 Total Equity 54.0 47.1 78.2 120.5 Net Profit 12.9 10.5 16.5 21.8 Capital Adequacy 14.7% 13.0% 15.9 % 11.4% ROA 2.8% 2.1% 1.5 % 2.2% ROE 24.9% 19.5% 22.9 % 32.1% Bank Ratings by Moody’s ■ The country’s first and still only the second time bond issuer on the international debt markets ■ Continuously strong credit fundamentals: Very high profitability with well- managed cost/expenses Diversified loan base and good quality assets Prudent risk management and corporate governance Senior Unsecured EMTN (foreign currency) Ba3 LT/ST Bank Deposits (foreign currency) B2/NP LT/ST Bank Deposits (domestic currency) Ba3/NP LT/ST Issuer Rating Ba3 Subordinated foreign currency issue B1 Local currency bank deposit Ba3 Outlook Stable ROE 24.9% 19.5% 22.9 % 32.1% MNT/USD = 1280.83
- 76. HIGHLIGHTS OF INTERNATIONAL BUSINESS • Mongolia’s #1 leading corporate bank • Top international expertise derived from State Bank of Mongolia origins • 60% market share of foreign remittances • 57% of Mongolia’s trade finance related transactions • $175 million in trade finance credit facilities from international banks • 26 correspondent accounts in all major currencies
- 77. BEST TRADE FINANCE BANK IN MONGOLIA 2011 • TDB has proven itself to be the premier trade finance facilitator taking the majority of votes from world’s major financial institutions to winfinancial institutions to win “The Best Trade Finance Bank of Mongolia 2011” award, by the journal GTR.
- 78. STRONG PROFITABILITY AND EFFICIENCY
- 79. TDB Capital - Overview TDB Capital, TDB’s wholly owned subsidiary, acts as its investment banking arm. It is the first investment bank of Mongolia, which provides corporate finance, research and advisory, securities brokerage, underwriting IPO and debt notes and asset management services. TDB Capital provides access to the world’s capital markets for its institutional, corporate and high net worth individual clients.
- 80. Thank you for your attention! Juulchin Street - 7 Baga Toiruu - 12 Ulaanbaatar, Mongolia Tel: 976-11-31 99 43 Fax: 976-11-31 24 18 Email: [email protected] http://www.tdbm.mn http://www.bankcard.mn http://www.mongolianbusinessguide.com