09.10.2011 Infrastructure building the mining supply chain, Jim Dwyer

INFRASTRUCTURE - Building the Mining Supply Chain

Jim Dwyer, Executive Director, Business Council of MongoliaMongolia Investment Summit – London, 9 December, 2011

Important Mines in Mongolia

Exports of US$9 Billion Possible by 2017

Coking Coal40 million tons/p.a.Value: US$6.0 bil. (est.)

Thermal Coal

15 million tons/p.a.Value: US$1.0 bil. (est.)

Copper and GoldValue: US$2.2 bil. (est.)

Lives of some mines up to 200+ years

The Role of Transport in Mongolia’sNatural Resources Sector

Mining operations require supporting infrastructure,

access among most important for:

• developing sites

• supplying equipment, materials and workers

• transporting commodities to market

On-going mining operations stimulating demand for

transport facilities and services

• increased vehicular traffic creating new tracks

• flights to mine sites on the rise


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2007 2008 2009 2010 2011 (Projected)

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Flights to Mine Sites in Southern Mongolia

Oyu Tolgoi Aerodrome

Tavan Tolgoi Aerodrome

Ovoot Aerodrome


Access could impact investment agreements

Shift in policy to develop eastern and southern RRs

Planned transport investments 2012-2017 (>$8 bil.):

• railways $7.0 bil. (est.)

• roads $0.8 bil. (est.)

• airports $0.5 bil. (est.)

Rail Infrastructure and Coal Mining

Coal has been transported by road, generating excessive dust, creating dangerous driving conditions and damaging land (16 mil. tons exported in 2010)

In 2010, numerous fatalities on “coal roads”

Rail Infrastructure and Coal Mining

For freight volumes of less than 5 mtpa, roads are a more economic means of transportation than rail

It is not economically justified to build railways for:

• commodities that can go by road (copper/gold)

• general regional freight or passenger traffic

Railway development driven by need to transport mineral

resources in bulk to export markets (coal/iron ore)

Planned Railway Investments(2012 to 2025)

2012 to 2017

• 2,000 km of new rail focused in south and east

• 600 km double track/upgrade existing TMR

• total est. cost of $7.0 bil. (est.)

2018 to 2025

• 3,000 km of new rail in north and west

• 400 km double track/upgrade existing TMR

• total est. cost of $8.5 bil. (est.)

Regional Railways

Regional Challenges - Railways

Landlocked country (access more difficult, costly)

Development of, and access to, supporting rail/port infrastructure in neighboring countries:

Russia

• TSR operating at about 75% capacity (60 mtpa)

• RZD planning large investments in TSR BAM, funding?

• ports in Russian far east view Mongolian coal as competitor

• possible new ports for Mongolian coal (Zarubino, Slavyanka)

China

• Chinese lines congested, annual allocation

• considering 3 new lines south from Bichigt

• Dandong Port underutilized, interest in Mongolian coal

Regional Challenges - Railways

Unilateral changes in rail tariffs for int‟l freight:

• Long-term agreement with Russia on discounted tariffs

oamount not fixed, but compatible with China

oother exporters likely to want similar concessions

• August 2011 rates increased (Tianjin-Erlian)

Domestic Challenges - Railways

Funding to construct new lines

TMR nearing its rated capacity of 20 mtpa:

• single track, current throughput 17mtpa

• iron ore exports to increase by 3 mtpa in 2012

Change of gauge at Chinese border/transshipment:

• border crossing facilities constrain export volumes

• $2/ton to $3/ton

Current rail policy - MTZ to operate all railways

Multi-party access to rail infrastructure at fair rates

Overview – Roads Sector

Nearly 50,000 km of roads, but just 5% paved

Low road densities/traffic volumes:

• 3.2 km/100 sq. km

• 1.8 km/100 people

• 40% of roads <100 vpd

Planned Road Investments(2012-2025)

Key objectives to:

• support mining sector development

• improve north-south links to facilitate trade

• link aimag capitals with Ulaanbaatar

2012 to 2017

• 2,450 km of new roads planned

• est. cost of $850 mil. ($365,000/km)

• 1,650 km (67%) to support mining activities

2018 to 2025

• 4,100 km of new roads planned

• overall cost of $1.5 bil. (est.)

Strategies to Upgrade Road Network

GOM actively seeking investors to:

• speed technology transfer

• accelerate construction of new roads

• recently tendered 3 roads on BOT basis – two to incumbent miners

Place greater emphasis on maintaining the existing road network:

• apply systematic approach to asset preservation

Strengthen SPN of works and materials testing

Key Issues and Challenges - Roads

Few projects large enough to attract foreign interest

Low/untested volumes typically require guarantees

• low volume roads difficult to justify economically

Absorptive capacity for large-scale road program

Enforcement of axle load limits

Overview - Air Transport Infrastructure

Mongolia has 21 airports (1 international/20 domestic)

Private aerodroms at OT, TT and Ovoot mine sites

Bilateral agreements with 35 countries

Air Transport Policy

New policy currently before Parliament to:

• establish 6 international airports:

o convert 5 existing facilities

obuild new airport at Sainshand

• encourage private financing/operation

• discussions to privatize MIAT in 2012

• gradually implement open skies (by 2018)

Planned Airport Investments(2012-2017)

Convert 5 airports to international status ($44.7 mil.):

• extend and pave runways - $37.0 mil.

• upgrade NAVAIDS, lighting systems - $3.2 mil.

• enlarge existing passenger terminals - $4.5 mil.

Improvements to existing domestic airports ($125 mil.)

New Khoshig Airport for Ulaanbaatar ($330 mil.)

Air Transport Infrastructure - Challenges

Challenges include:

• lack of funding

• inadequate passenger flows

Regulatory environment evolving:

• separating ATC, safety oversight, economic regulation (carried out by MCAA)

Identify financing for access and utility infrastructure at new UB Airport

DZ Airport to provide international services, OT, TT & Ovoot airports to remain domestic

Smaller, Ancillary Investments Have Potential

Large-scale infrastructure subject to political delays

Smaller options:

• coal transshipment facilities

• logistics centers

• border crossing operations

• maintain existing transport assets

Consider opportunities outside of Southern Mongolia

Mongolia Mining Supply Chain

SUPPLY CHAIN DEVELOPMENT POTENTIALS USD25 Billion worth of mining investments are planned

Of which USD2.5 Billion worth of demand for mining services companies.

Multiplier effect of investment on the mining supply chain will be

significant, estimated at 3 - 5 times

Source: MICC Industry Estimates

MINING/MINING SERVICES SPEND

700M/200M

2,000M/200M500M/40M500M/60M

350M/100M600M/100M

7,000M/600M

Ulaanbaatar


SUPPLY CHAIN DEVELOPMENT POTENTIALS

Has approximately 1,000 identified mineral deposits and 8,000 occurrences

that include copper, gold, iron, coal, and uranium

15 deposits have been targeted by the government as strategically important

Source: (1)http://www.pnowb.org/admindb/docs/Report_PNoWB_FV_Mongolia_FINAL_12NOV09.pdf



In addition to Oyu Tolgoi, at least other 24 other resource deposits to be

developed and privatized

Government plan is to attract about US25 BN in foreign investments into

these projects in next 5 years (Source: Eurasia Capital Jan 2010)

Mining investment requirements % of total (coal case) under 30mn tons/year

production scenario

600MW Power Plant

26%Open-cut

Coal Mining22%Railway,

24%

Others 12%

Coal Beneficiation

16%



Government of Mongolia officially announced list of priority projects to

implement up to 2015 (Decree 320 from 14 Oct 2010) with approximate

estimated budget of $20BN including:

Oyu Tolgoi, $0.4BN

Tavan Tolgoi coaking coal project, $0.8BN

Tavan Tolgoi Power station, $0.5BN

Atanbulag Zamiin Ud highway, $1.2BN

Local and international highway, $1.2BN

New Railroad, of $0.8BN

Fifth power plant, $0.3BN



2,600km Millennium road – paved East-West Road – to be constructed

5,600km of new railroads to be constructed


DIFFICULTIES ASSOCIATED WITH CREATING A SUPPLY CHAIN

Mining business requires an establishment of practically complete

supply chain infrastructure, including physical and electronic and new

urban settlement. This could be hindered with:

Remoteness

Lack of infrastructure to reach the site

Lack of investment

Scarcity of skilled labor to use state of the art technology

Creating a new supply chain will require a cooperation with

neighboring industries and government. This could be hindered with:

Lack of government experience in PPP

Increase in corruption (Transparency International Ranks

Mongolia 120)

Lack of willingness for cooperation


DIFFICULTIES ASSOCIATED WITH CREATING A SUPPLY CHAIN

Existing supply chain could be a part of future supply chain, but might

create problems because of:

Old technology

Inefficiency

Bureaucracy

Labor skill

Infrastructure & Services Lacking

Earthern Tracks Dominate Power Supplies Unreliable

Infrastructure & Services Lacking

Informal Heating Systems Water Supply from Kiosks


Michael E. PorterBishop William Lawrence University Professor

Michael E. Porter is a leading authority on competitive strategy, the competitiveness and economic development of nations, states, and regions, and the application of competitive principles to social problems such as health care, the environment, and corporate responsibility.Professor Porter is generally recognized as the father of the modern strategy field, as has been identified in a variety of rankings and surveys as the world‟s most influential thinker on management and competitiveness.He is the Bishop William Lawrence University Professor, based at Harvard Business School. A University professorship is the highest professional recognition that can be awarded to a Harvard faculty member. In 2001, Harvard Business School and Harvard University jointly created the Institute for Strategy and Competitiveness, dedicated to furthering Professor Porter‟s work.He is the author of 18 books and over 125 articles. He received a B.S.E. with high honors in aerospace and mechanical engineering from Princeton University in 1969, where he was elected to Phi Beta Kappa and Tau Beta Pi. He received an M.B.A. with high distinction in 1971 from the Harvard Business School, where he was a George F. Baker Scholar, and a Ph.D. in Business Economics from Harvard University in 1973.

Teaching

Professor Porter's ideas are the foundation for courses on strategy and competitiveness, and his work is taught at virtually every business school in the world.At Harvard, Professor Porter‟s course, Microeconomics of Competitiveness, is a graduate course open to students from across the university. It is also taught in partnership with more than 80 other universities from every continent using curriculum, video content and instructor support developed at Harvard.Professor Porter developed and chairs the New CEO Workshop, a Harvard Business School program for newly appointed CEOs of the world‟s largest and more complex corporations. Held twice each year by invitation only, the workshop focuses on the challenges facing new CEOs in assuming leadership. His Harvard Business Review article with Jay Lorsch and Nitin Nohria, „Seven Surprises for New CEOs‟ (October 2004), describes some of the learning from this ongoing body of work.Professor Porter speaks widely on strategy, competitiveness, health care delivery, related subjects to business, government, non-profit, and philanthropic leaders.

http://www.isc.hbs.edu/

http://www.isc.hbs.edu/


Research

StrategyProfessor Porter‟s core field is competitive strategy, which remains a major focus of his research. His book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, is in its 63rd printing and has been translated into 19 languages. His second major strategy book,Competitive Advantage: Creating and Sustaining Superior Performance, was published in 1985 and is in its 38th printing. His book On Competition (2008) contains his most influential articles on strategy and competition, including the award-winning Harvard Business Reviewarticle 'What is Strategy?' (1996) and 'The Five Competitive Forces That Shape Strategy' (2008), a revised and extended version of his classic article on industry analysis. Professor Porter‟s next major book on strategy is in process.

Competitiveness of Nations and RegionsProfessor Porter's 1990 book, The Competitive Advantage of Nations, presents a new theory of how nations and regions compete and their sources of economic prosperity. Motivated by his appointment by President Ronald Reagan to the President's Commission on Industrial Competitiveness, the book has guided economic policy in countless nations and regions. Subsequent articles have expanded on the concept of clusters (geographic concentrations of related industries that occur in particular fields) and other aspects of the theory.National Competitiveness. Professor Porter has published books about national competitiveness covering New Zealand, Canada, Sweden, and Switzerland. His book Can Japan Compete? (2000) challenged long-held views about the Japanese economic miracle.Professor Porter chairs the Global Competitiveness Report, an annual ranking of the competitiveness and growth prospects of more than 120 countries published by the World Economic Forum.Clusters. Professor Porter‟s ideas on clusters, first introduced in 1990, have given rise to a large body of theory and practice throughout the world. Cluster-based economic development thinking has resulted in many hundreds of public-private cluster initiatives in virtually every country. The article “Clusters and Competition: New Agendas for Companies, Governments, and Institutions” and On Competition (1998) provide a summary.Regional Competitiveness. Professor Porter extended his work on competitiveness to states, provinces, and other sub-national regions. He led the Clusters of Innovation project which developed a framework for economic policy in U.S. regions. He also created the Cluster Mapping Project at Harvard, which provides rich data on the economic geography of U.S. regions and clusters on a special web site. Professor Porter‟s methodology is the basis for comprehensive new data on the economic geography of the 27 countries of the European Union. The article „The Economic Performance of Regions‟ (2003) summarizes some of the important findings from this data, and a new paper, „Convergence, Clusters and Economic Performance‟ (2006), with Mercedes Delgado and Scott Stern, presents the first comprehensive statistical examination of U.S. regional performance using cluster data.Innovation. Professor Porter is co-author (with Professor Scott Stern and others) of a body of work on the sources of innovation in national and regional economies, including The New Challenge to America's Prosperity: Findings from the Innovation Index (1999), 'The Determinants of National Innovative Capacity' (2000), and 'Measuring the 'Ideas' Production Function: Evidence from International Patent Output' (2000).

http://www.compete.org/nri/clusters_innovation.asp

http://data.isc.hbs.edu/isc/

Equipment Suppliers


MONGOLIAN MINING SERVICES CLUSTER MAP

Materials Suppliers

Airlines / Charters

Financial Services

Investors

DrillingMajor

Drilling, AIDDSurveying

Contract MiningLeighton

Camping Logistics

Lab Analysis

ConsultingRunge

Core: Mining Services

Multilaterals (EBRD, ADB, WB)

Government Institutions

Universities (NUM)

National Mining

Association

National Chamber of Commerce

Business Council of Mongolia

Non Government Organizations

Organizations

for collaboration

Mining Companies

Oil & Gas

Related ClustersUpstream

Downstream

Source: Mongolia

Mining Services

Cluster Research,

(Prof. M.E Porter,

Harvard Business School)


Cluster Value Proposition

The Mongolian Mining Services Cluster has some unique

characteristics. First, Mongolia has strong

cultural, linguistic and political ties to China and Russia. It also

is one of few states that have diplomatic ties to

less accessible states such as North Korea and Burma.

Second, there is a demographic window of opportunity,

which coupled with strong educational institutions, can provide

a solid workforce. Third, Mongolia is politically stable with

relatively advanced democratic and market reforms. Lastly due

to the size complexity and wide range of mineral deposits

present, the demand for mining services is sophisticated and

diverse.

Source: Mongolia Mining Services Cluster Research,

Prof. Michael E. Porter, Harvard Business School

Mongolia Mining Supply Chainlearning from experience

to become a high performing mining industry

These characteristics lend themselves to a value

proposition with the following elements:

1. To be the supplier of choice for central Asia and

politically inaccessible states in Asia.

2. To have world-class geophysicists, geologists, and

mineral economists, combined with cutting edge

technology and the highest safety, and environmental

standards.

3. To be a one-stop-shop for a wide range of services

relating to the diversity of mineral types.

Source: Mongolia Mining Services Cluster Research,

Prof. Michael E. Porter, Harvard Business School


SHARED RISK

RESPONSIBILITY

REVENUE

Creation of mining supply chain is ALL ABOUT SHARING

Between stakeholders

INITIATIVE

INVESTMENT

IMPLEMENTATION JOINT

Note: Complete Study on BCM website, Mongolian Reports

BCM Introduction

• BCM is a leading stakeholder advocate for businesses in Mongolia. Approximately 200

members including most every large domestic and international corporate plus

SMEs, IFI‟s, NGO‟s and Embassies comprise BCM‟s membership. The following

companies are represented on BCM‟s Board of Directors:

1. AIDD 13. Monnis International

2. Boroo Gold 14. Newcom Group

3. Breakthrough PR 15. Oyu Tolgoi

4. Erdene Resources Development 16. Peabody Energy

5. Just Group 17. Petro Matad

6. Khan Bank 18. PricewaterhouseCoopers

7. Leighton Asia 19. QGX Group

8. Lynch & Mahoney 20. Rio Tinto

9. MCS 21. Sant Maral Foundation

10. MICC 22. South Gobi Energy

11. Mongolian Star Melchers 23. Tavan Bogd

12. Mongolyn Alt Corporation 24. Trade & Development Bank

25. UMC Holding

• BCM promotes trade and investment. 100 volunteers in 7 BCM working groups serving

as a forum for dialogue with the GoM, public and BCM members on important „business

climate‟ issues. Our weekly BCM Newswire is the strongest source of

business, economic and political news on Mongolia in English (members only). Bi-lingual

websites link to BCM‟s Mongolian Mining Supply Chain database of 1,300 registered

companies, 90% Mongolia-owned. Monthly BCM member meetings are held in UB with

top government and industry speakers plus networking receptions. In addition several

other special workshops and events are organized.

• If your company is a stakeholder in Mongolia or is seriously considering trade or

investment in Mongolia, BCM Membership is highly beneficial.

Mining Supply Chain Database

BCM’s Mining Supply Chain Database

• The Business Council of Mongolia has developed and completed a database

comprised of 1,300 Mongolian-based suppliers of products and services. These

companies initially registered based upon a nationwide survey conducted by Sant

Maral Foundation as a result of broad nationwide advertising via newspaper and other

forms. The survey was initiated and funded by Oyu Tolgoi.

• The registrants are 90% Mongolian, 5% JVs and 5% foreign–owned. Their

information is classified and included under 26 different industry segments, plus

additional levels of subsegments.

• See the links to the MSC database on BCM‟s websites – bcmongolia.org and

bcm.mn. We expect to see this database improved significantly over time by an IT-

based entity and become a portfolio for international companies to seek trusted

Mongolian business partners. Now 7000 plus hits per month after upgrade of MN site.

• The size of this nationwide database will grow as the ripple effect caused by the

initial splash of the OT agreement spreads. Vocational training will have to be ramped

up significantly to provide trained and qualified Mongolian workers for this supply

chain. More “white collar” professionals needed as well.

• We intend to develop Mongolia‟s largest free B2B online system.

http://bcmongolia.org/



http://bcm.mn/

http://bcm.mn/

http://bcm.mn/

Categories

1. Construction

2. Energy

3. Fixed Plant & Equipment

4. Transport & Logistics

5. Mobile Equipment

6. Maintenance repair operations

& Consumables

7. Production Consumables

8. Textiles & Leather products

9. Agriculture

10. Lights & Lighting

11. Food & Beverage

12. Furniture & Furnishings

13. Ancillary Services

14. Civil & Mining Services

15. Facilities & Site Management

16. Information Technology

17. Maintenance Services

18. Banking Services

19. Advertising & Printing

20. Consulting & audit services

21. Environmental, Health and Safety

22. Research & Development

23. Training and Education

24. Legal consulting/Advocacy

25. Travel

26. Ecology Assessment & Environment

Minor categories

3.1 Materials Movement

3.2 Materials Processing

Sub-categories

Bucket wheels

Conveyor Belting

Conveyor Equipment & Supplies

Reclaimers

Mongolia Mining Supply Chain Database

Thanks for your attention!