07.28.2010, PRESENTATION, Mongolia building a sustainable economic growth through downstream...

Mongolia: building a sustainable economic growth through downstream industries and infrastructure

Presentation • June 2010

National Development and Innovation Committeeat o a e e op e t a d o at o Co tteeSainshand Industrial Complex Task Force Team

Agenda

Executive summary 3

Macro-economic goals of Mongolia 4

Industrial park development in Sainshand city, Mongolia 8

Mongolia railway strategy 9

I l i l f l i d i l d i f j 12Implementation plan for large industrial and infrastructure projects 12

Integration of large mines with industrial developments 16

Fi i t t f il t ti 17Financing structure of railway construction 17

Next steps 21

2

Executive summary

• Mongolia has huge, untapped resource reserves

• It is a back-door to #1 commodity consumer nation in the world

• Miniscule GDP compared to market valuation of reserves

Th G t f M li t li d l d li i i d t i th• The Government of Mongolia streamlined new laws and policies aimed at massive growth

• A flood of foreign liquidity waiting to pour in

3

Millennium Development Goals based Comprehensive National Development Strategy of MongoliaDevelopment Strategy of Mongolia

NationalNationalNational Development Strategy of Mongolia

Mongolia is a country of contentment

We, Mongols, shall respect our history and culture, have our national Mongolia’s development is a

National Development Strategy (NDS) of Mongolia*

Visi

on

Mongolia is a country of contentment with vast lands, abundant natural resources, admirable history, and

glorious future.

dignity, be highly educated and confident in ourselves so as to

realize our desires and aspirations, live comfortable, prosperous and contented lives in our homeland.

guarantee of its security and independence. The root source of its

development lies in the national unity.

tegy

2007 - 2015 2016 – 2021 period2007 - 2015 period

• Synchronize EGSPR with NDS• Increase jobs (unemployment rate at max 3%) • Enhance coordination for poverty reduction

Create a so ereign ealth f nd

Stra

tal

s

j ( p y )• Create a nation-wide database• Provide economic incentives for new jobs

• Create a sovereign wealth fund• Reduce poverty

GDP growth: 14% GDP growth: 12%

Mongolia successfully developed its economic growth vision and

Goa

GDP growth: 14%GDP per capita: $5,000

GDP growth: 12%GDP per capita: $12,000

44

g y p gnow it is working on the process on how to achieve these targets

* Parliament of Mongolia resolution 12 dated Jan. 31, 2008 endorsing National Development Strategy of Mongolia

Mongolia’s National Development Strategy objectives in perspective with other Asian advanced and developing countrieswith other Asian advanced and developing countries

$40,000

30,000

35,000

20,000

25,000

10,000

15,0002021 Objectives: GDP per capita $12,000

2015 Objectives: GDP per capita $5 000

stan

epal

mar

este

desh

odia

Laos

ndia

stan

nam

n Is

d

NG

ibat

i

ines

anka

golia

utan

esia

uatu

onga

moa

hina

ives Fi

ji

land ysia

wan

orea

Kon

g

unei

apan

pore

0

5,0002015 Objectives: GDP per capita $5,000

Achievement of the National Development Strategy would catapult Mongolia into

Afg

hani

s

Ne

Mya

n

Tim

or-L

e

Ban

glad

Cam

bo L In

Pak

is

Vie

tn

Sol

omon

Pap

ua

Kiri

Phi

lippi

Sri

La

Mon

g

Bhu

Indo

ne

Van

u

To Sam C

h

Mal

d

Thai

l

Mal

a

Tai w Ko

Hon

g K Bru Ja

Sin

gap

55

p gy p gone of the top economies in the regions

* International Monetary Fund, World Economic Outlook Database, October 2009

A new railway infrastructure planning should consider linking all mineral deposits of Mongolia(1)mineral deposits of Mongolia(1)

Coal Deposits Iron Ore Deposits

Uranium Deposits Oil Deposits

61) The minerals study prepared by Mr. Odkhuu, D., a Member of Parliament, lead group of geologists from Geosan LLC, Mongolia.

The Government of Mongolia retained the Boston Consulting Group to assist in development of an integrated mining and railway strategy(1)assist in development of an integrated mining and railway strategy(1)

71) Boston Consulting Group, Railway Infrastructure Development Strategy for Mongolia, October 2009

Creation of downstream industries would enable to achieve a sustainable economic growth for Mongoliasustainable economic growth for Mongolia

Mining Diversified Exports1Processing in Sainshand industrial clusterRailways Railways

Coa

l / Ir

on

TavanTolgoi

Tomortei& others

Coal imports into Asian countries will grow ~9% a year between 2009-2015


55 68

Coking coalconsumption (M t)

~2500



55 68

Coking coalconsumption (M t)

~2500

CokePlant

IronPellets Plant

HBI / DRIPlant

Coal Gasification

Cop

per

OyuTolgoi

& others*

Taiwan

Republic of Korea

China

India

30

2009 2015

112009 2015

2009 2015

6

2009

9

201535

56

2009 2015

Japan*~435 **

Taiwan

Republic of Korea

China

India

30

2009 2015

112009 2015

2009 2015

6

2009

9

201535

56

2009 2015

Japan**~435

Copper Treament

Copper Smelter

Cde

Oil

Tamsag& others

India

Domestic consumption supplied by domestic productionCoking coal imports

India

Domestic consumption supplied by domestic productionCoking coal imports

Oil Refinery

Cru

d & others

Utilities Mine Power Plants~650 MW

Cluster Power Plant~800 MW

China is the biggest Asian market for copper, concentrate makes the bulk of imports


*

1,317

2009

1,337

2015

3,812

Copper consumption (M t)

~1,151



**

1,317

2009

1,337

2015

3,812

Copper consumption (M t)

~1,151

Refinery

Companies that send letters of interest for participation:• Coke plant – ThyssenKrupp Uhde GmbH• Metallurgical facilities – Midrex Inc., a company of Kobe Steel• Coal chemical facility – ThyssenKrupp Uhde GmbH

Offsites Water Facilities, Housing and Other Offsites*

?????

2009 2015

446406

2009

618492

2015

1,558

1,504

2009

2,178

2015 585

2009

766

2015

593

2009

669

2015

Japan

Republic

of Korea

TaiwanChina

**

?????

2009 2015

446406

2009

618492

2015

1,558

1,504

2009

2,178

2015 585

2009

766

2015

593

2009

669

2015

Japan

Republic

of Korea

TaiwanChina

81) Source: Boston Consulting Group

Coal chemical facility ThyssenKrupp Uhde GmbH• Power plant – RWE GmbH• Crushing and concentration – Outotec Oy• Copper smelting – Outotec Oy Copper cathode imports

Copper concentrate imports

Domestic consumption supplied by domestic productionCopper cathode importsCopper concentrate imports

Domestic consumption supplied by domestic production

Illustration of the railway infrastructure development of Mongolia(1)

91) Ministry of Road, Transportation, Construction and Urban Development of Mongolia, Railway Policy for Mongolia, April 2010

New railway infrastructure would enable Mongolia to export resources and processed goods to multiple export markets(1)and processed goods to multiple export markets(1)

101) Ministry of Road, Transportation, Construction and Urban Development of Mongolia, Railway Policy for Mongolia, April 2010

Industrialization foot-print of Mongolia is based on processing of mineral resources(1)mineral resources(1)

111) Boston Consulting Group, Railway Infrastructure Development Strategy for Mongolia, October 2009

Experiences of building industrial clusters show that development through cluster concepts increase economy competitiveness1through cluster concepts increase economy competitiveness1

JUBAIL INDUSTRIAL CITY

Country: Saudi Arabia

MIDAMERICA INDUSTRIAL PARK

Country: Oklahoma USA

SHANGHAI FENGPU INDUSTRIAL PARK

Country: ChinaCountry: Saudi ArabiaProject Developer:

Royal Commission for Jubail and Yanbu

Year: 1975Process Units:

Country: Oklahoma, USAProject Developer:

Public Trust


Country: ChinaProject Developer:

Government of ChinaMunicipal Governments


• Petrochemical Facilities• Steel Works Facilities• Fertilizer Facilities• Railways• Highways• Airport

• Construction• Oil and Gas Piping• Fertilizer Facilities• Pulp Paper Plants• Petrochemical Facilities• Railways

• Electronics Factories• Communication Plants• Biotechnology Facilities• Healthcare Facilities• High Technology Facilities• Construction Facilities• Airport

• Ports• Power Plants

• Railways• Highways• Aiport• Ports• Power Plants

• Construction Facilities• Leather and Textile Plants• Power Plants• Highways• Railways• Aiports

Concentration of infrastructure (railways, electricity, gas, communication) decrease operating costs of the industrial users

Project Amount:US$ 30 billion

Project Amount:US$ 19 billion

AiportsProject Amount:

US$ 15 billion

Governments, aiming to create a sustainable economic development,

p g

121212

, g p ,attracted investments by the development of industrial clusters.

1) Michael E. Porter, Council on Competitiveness. See also “The Development of the cluster concept – present experiences and further developments”, Christian Ketels, Harvard Business School, 11/26/2003.

The Government established to implementation units to create an environment to attract local and international investmentsenvironment to attract local and international investments

NDS Government Resolutions Relevant Institutions Resolution 118 Planned Projects

“Sainshand” industrial complex (“Projects”)

Coke Plant

cess

Uni

ts

Resol tion 299

Steering Committee Cement PlantSteering Committee: Prime Minister, Ministers, MPs

Task Force Iron Pellets Plant

HBI/DRI Plant

ProcResolution 299

Resolution 320Meeting Note 52Resolution 118

re1

Implementation Task Force: Chairman of Cabinet Secretariat of the GOM

Advisors:• Program Manager

Plus (PMC+)

Coal Gasification Plant

Oil RefineryInfr

astr

uctu

rNDICMOF, MFALI, MRTCUD, MMRE, MOE & others

Plus (PMC+)• International Counsel

together with Local Advisor

• Financial Advisor• Environmental Power Plants

Faci

litie

s2 Copper SmelterAgencies: SPC, MRAM, RAM, PAM, WAM others

The Government will implement these projects through Public-Private-Partnerships (“PPP”)

Consultant

Railways (Phase 1) Civ

il F

Working group: NDIC

13131313

p p j g p ( )by providing concession rights to local and international investors.

1) The Steering Committee shall include Parliament members, Government and non-government organizations.2) NDIC shall be the contracting party to all local and international advisors. MOF is to fund necessary operating capital.

Visualization of Sainshand Industrial Complex

Following Process Units are envisioned to be builtenvisioned to be built in the complex:

1. Cement Plant2. Coke Plant3. Iron Pellets Plant4. HBI / DRI Plant5. Coal Gasification Plant6. Oil Refinery7. Copper Smelter7. Copper Smelter8. Power Plant

141) Government of Mongolia resolution 140 dated June 2, 2010.

Implementation of the industrial complex shall start with PMC+ developing a Master Plan together with NDIC1developing a Master Plan together with NDIC1

NDIC

The NDIC team will work together with the International

NDIC

Program Manager Plus(PMC+)2

gCounsel and the Local Advisor

Railway EPC Process Units EPC

Oversight on selective projects(If required)

(PMC+)2

Contractors Contractors

Coke Iron Pellets HBI/DRI CopperOilCoal

Power Plants

Water FacilitiesOffsites& Utiliti

Process Units3 Coke Plant

Iron Pellets Plant

HBI/DRI Plant

Copper Smelter

Oil Refinery

Coal Gasification

Civil Facilities& Utilities

151515

1) Program Manager Plus Terms of Reference is described in Attachment 1.2) Bechtel and Fluor have expressed interest in the Global Project Manager’s role. US Eximbank formally issued a letter of interest to support project development activities of

these companies. 3) Ministry of Mineral Resources and Energy conducted preliminary study on multiple industrial zones.

Preferred delivery model is EPCM or EPC Main contractor or responsible

Subcontractor or support

Supervision

Contractual relationship

Managerial relationship

Delivery

Project value chain*

S BD C SU&C

O&CM & I

DEFEED

Multiple lot

Owner contracts with all suppliers necessary to perform project

• Owner Owner

ymodel Basic description Agent Contractual relationship model

S BDP S.E&F

C &C M

Multiple lot (owner integrated)

perform project completion and is fully responsible for all integration tasks

• Contractors

Contr. A(Engin.)

Contr. B(Equip.)

Contr. C(Constr.)

EPCM

EPCM is responsible for managing all aspects of Engineering, Procure-ment, Construction, including management

• Owner

• EPCM

Owner

EPCM

Contractor assumes Engineering, Procure- • Owner Owner

including management of all contractors contracted by the owner

• ContractorsContr. A Contr. B Contr. C

EPC

Engineering, Procurement, Construction activities for a defined project scope and is responsible for all its sub-contractors

• EPC

• Sub-contractors Subctr A Subctr B Subctr C

EPC

16*S – scoping, BD – basic design, FEED – front-end engineering and design, P – procurement, DE – detailed engineeringS.E&F – supplier engineering & fabrication, SU&C – start-up and commissioning, O&M – operations and maintenance

Industrial and Railway project will be implemented under the Law of Mongolia on ConcessionsMongolia on Concessions

Parliament of MongoliaC

Government of Mongolia

Concession Approval

Concession Decision1

Related Line Ministry

Tender Participants5

yRegulatory Authority ²

State Property Committee Bidd

ing4

p yAuthorized Entity³

Tend

er B

Concession Agreement

1) Law of Mongolia on Concession 2010 01 28 – Article 6 1 2

1717

1) Law of Mongolia on Concession 2010.01.28 – Article 6.1.22) Law of Mongolia on Concession 2010.01.28 - Article 3.1.63) Law of Mongolia on Concession 2010.01.28 - Article 3.1.74) Law of Mongolia on Concession 2010.01.28 - Article 11, 12, 135) Law of Mongolia on Concession 2010.01.28 - Article 11.3.35-a) Chinese, German, Korean, Russian and US companies expressed interests to participate

The private sector is the driving force for building of Processing Units on international project financing basison international project financing basis

State Property Committee

Mongolia Commodity E h

PROCESS UNITS1F i ht A t

Committee

Concession Agreement

Exchange

• Linking with NYMEX and other commodity exchanges

• Provides price discovery

TY:

30-4

0%

PROCESS UNITS

Supply Agreement

Freight Agreement

Products:Companies that

expressed interest:Freight Agreement

• Provides price discovery• TransparencyTavan

Tolgoi LLC

O T l i

Local Sponsors

International Sponsors

EQ

UIT

ECA Guaranteed

• Coke• Iron pellets• HBI/DRI• Copper cathodes• Synthetic gas

Oil fi

• ThyssenKrupp• Noble Group• Hopu Investments• and others

Offtake Agreement

Oyu Tolgoi LLC

Other mineral

Multilateral Tranche

Tranche

BT:

60-7

0%

EPC Agreement

• Oil refinery(industrial diesel and other oil products)

deposit

Commercial Tranche

DEB

Operations & Maint.

Agreement International Banks

1818Ministry of Mineral Resources and Energy conducted a preliminary study on other possible industrial zones in Mongolia.

The Law of Mongolia on Concession will provide a legal framework for building a new railway infrastructurebuilding a new railway infrastructure

MRTCUD Central train control system t R il A th it 2Railway Authority

Regulatory Authority1at Railway Authority2

(PTC2-a, GPS2-b)

JSC UBTZ

Operator

State Property Committee

Owner of the railway infrastructure

CommitteeAuthorized Entity3

Railway building on a

100% government ownership5

Terms of Concession

Wid (1 520 ) 8Railway building on a BOT basis4

Engineering design standards

Land lease payment6Paymentsid b

Wide gauge (1,520 мм) 8

CASH FLOW STREAM FOR FINANCING

1) Law of Mongolia on Concession 2010.01.28 – Article 3.1.62) Law of Mongolia on Railway Transportation 2007.07.05 – Article 142-a) Positive Train Control System2-b) Global Positioning System3 Law of Mongolia on Concession 2010.01.28 - Article 3.1.7

Freight payment (greater of)7 Number of wagons

Freight (ton/km)

paid by an Operator

19

CASH FLOW STREAM FOR FINANCINGg4 Law of Mongolia on Concession 2010.01.28 - Article 45) Law of Mongolia on Railway Transportation 2007.07.05 - Article 6.16) Law of Mongolia on Railway Transportation 2007.07.05 - Article 19.1.17) Law of Mongolia on Railway Transportation 2007.07.05 - Article 20.1.38) Mongolian Railway Strategy, MRTCUD

Concessionaire Railway Project Company financing structure either via project finance or a sovereign bondproject finance or a sovereign bond

Eq it Sponsors E port Credit Agencies1•State Property CommitteeGovernment of Mongolia Equity Sponsors Export Credit Agencies1

ShareholdersAgreement

Guarantee or Insurance

p y• International Sponsor

gMRTCUD & Railway Auth.

ConcessionApproval

Railway Project Company

ConcessionAgreement

State Property Committee International BanksLoan

Documents

Operating & Maint. ContractEPC

or EPCM Contracts

Offtake Contracts

Engineering and Construction Company

Offtakers Operating Company

Construction CompanySupply

Contracts

Sub-Cont. #1Sub-Cont. #2

Sub-Cont. #3

201) Other types of credit enhancements could be used, such as Multilaterals and private insurance companies

Supplier #1Supplier #2

Supplier #3

Railway financing transaction diagram

15% Down paymentEPC(M) Contractors n R il P j t CEPC(M) Contractors

Sales Contract 100%

Rai

l Util

izat

ion

Agre

emen

tRailway Project Companypm

ent P

aym

ent

Mining Company

e C

ontra

ct

Equ

ip

JSC UBTZ

mm

odity

Offt

ake

Freight Contract

International Banks OfftakersSales Proceeds C

om

85% GuaranteeExport Credit Agencies

2121

Equipment suppliers and engineering companies could serve as alternative equity investments with no deposit ownership claimalternative equity investments with no deposit ownership claim

Financing Mix Objectives / Motivation Pros Cons

OECD country’s exports increase • Long tenor, low cost • Assets / liability match• Credit history creation

• ECA processing lengthECA Guaranteed Tranche

Local economy development • Long tenor, low cost• Increase project profile

• Processing length could be long compared to commercial

Multilateral Tranche

%

Deb

t

Commercial tranches • Some structures could be self-liquidating structure

• Track record creation

• Market interest ratesCommercial Tranche

T k t fi i f i l E f l M k t diti d i iC it l k t t ti

p j p p

60 –

70

Supply chain and/or geographic market share interest

New technology Corporate governance

Strategic Investors

Take-out financing for commercial tranche, given favorable market conditions

• Economy of scale• Special features

• Market condition and pricing• Mismatched assets / liability• Rating requirement

Capital market transaction

quity

Maximize investment return (IRR > 25%)

Economic development Giving up upside potential Possible loss of management control

Financial Sponsors

market share interest Corporate governance

–40

%

Eq Equipment and technology suppliers

• Sales technology and equipment

• No deposit ownership• New technology introduction

Engineering and construction companies

• EPC or EPCM contract • No deposit ownership• New technology introduction

30 –

22

p gy

According to BCG’s socioeconomic impact for building railways and Sainshand industrial parkSainshand industrial park…

1 3

2 4

2323

Source: The Boston Consulting Group, Railway infrastructure development strategy for Mongolia, October 16, 2009

Industrialization could increase Mongolian GDP to $41 bln over 11 years compared to current approximately $5 blncompared to current approximately $5 bln

2424

Source: The Boston Consulting Group, Railway infrastructure development strategy for Mongolia, October 16, 2009

Action timetable for 2010-2011

2525

Contact address, telephone:

N ti l D l t d I ti C ittNational Development and Innovation CommitteeShainshand Industrial Complex Task Force TeamGovernment building 2, United Nations Street 5/1, Chingeltei district, Ulaanbaatar 15160, MongoliaTelephone: 976-11-265912Fax: 976-11-327914

National Development and Innovation Committee

2626

pSainshand Industrial Complex Task Force Team

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