0 mmc.mn COAL MONGOLIA 2018 (0975.HK) 4 SEPTEMBER 2018 - - PowerPoint PPT Presentation

mmc.mn

(0975.HK)

COAL MONGOLIA 2018

4 SEPTEMBER 2018

Gobi desert, Mongolia UHG and BN mines are located in South Gobi province.

Unexpected opportunity for Mongolian coal?

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Disclaimer

FORWARD-LOOKING STATEMENTS

We have included in this presentation forward-looking statements. All statements that are not historical facts, including statements about our intentions, beliefs, expectations or predictions for the future, are forward-looking statements. The reliance on any forward-looking statement involves risks and uncertainties, and although we believe the assumptions on which the forward-looking statements are based are reasonable, any or all of those assumptions could prove to be inaccurate and as a result, the forward-looking statements based on those assumptions could also be incorrect. We undertake no obligation to publicly update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise, except as required by applicable laws, rules and regulations. In light of these and other risks and uncertainties, the inclusion of forward-looking statements should not be regarded as representations by us that our plans and objectives will be achieved. All numbers in this presentation are approximate rounded values for particular items.

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MARKET OVERVIEW COMPANY OVERVIEW CONCLUSIONS

Agenda

mmc.mn 221 210 212 227 206 237 70 140 210 280 1H2017 2H2017 1H2018 Production Consumption

Market overview

Chinese steel industry robust performance

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COKE PRODUCTION AND CONSUMPTION COKING COAL IMPORTS

Mt Mt

Source: Shanxi Fenwei Energy Information Services Co., Ltd (“Fenw nwei”), World Steel Association, National Bureau of Statistics of China, General Administration of Customs of China.

COKING COAL PRODUCTION AND CONSUMPTION CRUDE STEEL PRODUCTION AND CONSUMPTION

Mt Mt 220 225 214 259 255 247 80 160 240 320 1H2017 2H2017 1H2018 Production Consumption 425 406 451 384 378 411 130 260 390 520 1H2017 2H2017 1H2018 Production Consumption 36 34 29 10 20 30 40 1H2017 2H2017 1H2018

mmc.mn 600 1200 1800 2400 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 FOR Tangshan FOR Luilin #4 EXW Baotou EXW Jingtang (mid vol) 90 180 270 360 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 FOB Aus (low vol) FOB Aus (mid vol) CFR North China (low vol)

Market overview

Coking coal price remained strong

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CHINA COKING COAL PRICES1 COKING COAL STOCKS AT CHINESE END-USERS

USD Mt

Source: Fenwei, Platts. Note: 1 VAT inclusive.

COKING COAL STOCKS AT CHINESE PORTS SEABORNE COKING COAL PRICES

CNY Mt 2 4 6 8 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jingtang Rizhao Lianyungang Qingdao Fangcheng 4 8 12 16 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Coke plants Steel mills

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Market overview

Regional trends in China

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MONGOLIA CHINA

UHG HG BN BN Note: YoY percentage change in crude steel output Jan-Feb 2018. Sources: NBS, Financial Times.

Crude steel production Coke production Mt 2016 2017 Change (YoY) 2016 2017 Change (YoY) 1 Inner Mongolia 18.1 19.8 9% 28.2 30.5 8% 2 Ningxia 1.6 2.3 44% 7.7 7.5

• 2%

3 Gansu 6.3 5.6

• 11%

5.1 4.7

• 7%

4 Hebei 192.6 191.2

• 1%

53.1 48.1

• 9%

5 Xinjiang 8.7 11.1 28% 15.7 15.9 1% 6 Tianjin 18.0 18.1 1% 2.0 1.6

• 23%

7 Shanxi 39.4 44.3 13% 81.9 83.8 2% 8 Shandong 71.7 71.5 0% 44.2 39.3

• 11%

9 Liaoning 60.3 64.2 7% 21.3 22.2 4% 10 Others 391.7 403.6 3% 189.9 177.8

• 6%

Wi Wint nter er cur curb area reas

1 4 3 5 2 6 7 8 9

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Market overview

Coal is the main commodity in Mongolian exports

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MONGOLIAN EXPORTS COMPOSITION

6% 6% 7% 7% 10% 10% 30% 30% 47% 47% 43% 43% 26% 26% 15% 15% 12% 12% 20% 20% 37% 37% 42% 42% 33% 33% 27% 27% 26% 26% 20% 20% 19% 19% 22% 22% 45% 45% 49% 49% 33% 33% 26% 26% 1% 1% 4% 4% 5% 5% 9% 9% 9% 9% 12% 12% 15% 15% 8% 8% 5% 5% 5% 5% 5% 5% 12% 12% 24% 24% 16% 16% 6% 6% 2% 2% 3% 3% 7% 7% 7% 7% 9% 9% 15% 15% 10% 10% 8% 8% 6% 6% 6% 6% 6% 6% 4% 4% 3% 3% 4% 4% 1% 1% 2% 2% 3% 3% 2% 2% 3% 3% 4% 4% 6% 6% 5% 5% 5% 5% 8% 8% 12% 12% 11% 11% 8% 8% 7% 7% 6% 6% 28% 28% 22% 22% 30% 30% 18% 18% 13% 13% 12% 12% 14% 14% 13% 13% 15% 15% 17% 17% 14% 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Coal Copper concentrate Iron ore Gold Zinc concentrate Crude oil Others

Source: National Statistical Office of Mongolia

In general, Mongolian export income is mostly driven by commodity export revenue generated by the mining sector. In 2017, coal, copper concentrate, gold, iron ore and zinc concentrate were the top-5 exports of Mongolia alongside with crude oil. Supported by high prices., coal was representing 47% of the total exports at its peak in 2011. Following the downward pricing trends in the international markets, coal revenue declined to 12% of the total exports in 2015, but with recovered prices and record high tonnages exported, it accounted for 37% of the country’s total exports in 2017.

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MARKET OVERVIEW COMPANY OVERVIEW CONCLUSIONS

Agenda

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Company overview

Sizeable coking coal resources and reserve base

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̶ The Company owns and operates two open-pit coking coal mines, namely Ukhaa Khudag (“UHG”) deposit within the Tavan Tolgoi coal formation and the Baruun Naran (“BN”) deposit, both located in the South Gobi province of Mongolia. ̶ UHG mine is located ~540 km south of Ulaanbaatar, the capital city

• f Mongolia, and ~245 km from the Mongolia-China border crossing

Gashuunsukhait-Ganqimaodu (“GS-GM”). BN mine is located ~30 km south-west of UHG mine. ̶ UHG mining license was granted in 2006 and BN mining license was granted in 2008. The Company performed exploration work at Tsaikhar Khudag (“THG”) area in 2011-2012 and was granted THG mining license in June 2013. All licenses permit the Company to engage in coal mining activities for an initial period of 30 years, extendable twice by 20 years each. ̶ The latest UHG Coal Resources estimate was prepared as at 31 December 2016; BN and THG Coal Resources estimates were prepared as at 30 June 2015. Based on the latest estimates, pro- forma total Coal Resources were 1,080 Mt. ̶ The latest Coal Reserves statements for UHG and BN deposits were prepared as at 1 January 2018. The estimates were prepared based on open cut, multi-seam, truck and excavator mining

• methods. As a result of the updated statements, pro-forma total run-
• f-mine (“ROM”) Coal Reserves of UHG and BN deposits increased

to 509 Mt.

JORC (2012) Statement1 UHG BN THG Pro-Forma Total Total resources2 (Mt) 680 330 70 1,080

• Above 300m

462 232 54 748

• Below 300m

222 95 18 335 Total ROM coal reserves3 333 176

• 509
• Coking

320 176

• 496
• Thermal

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• 13

Total marketable reserves3 195 91

• 286
• Coking

156 71

• 227
• Middling

26 20

• 46
• Thermal

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• 13

Notes: 1 Due to rounding, discrepancy may exist between sub-totals and totals. Rounding rules refer to Clause 25 of the JORC Code (2012).

2 Includes Measured, Indicated and Inferred Resource category. 3 Includes Proved and Probable Reserve category.

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Company overview

The only coal producer in Mongolia with fully integrated operations

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Mining Processing Site Infrastructure Transportation & Logistics

̶ Access to GS-GM border crossing for exports to China using ~245 km heavy haul paved road. ̶ BN and UHG mines are connected by ~30 km heavy haul paved road. ̶ In-house fleet of around 450 double trailer trucks with ship- load of 130 tonnes. ̶ 18MW air-cooled power plant in operation since 2011; supplemented by connection to the central grid. ̶ Water supply facility with 117 l/sec capacity was completed in 2011. It was further expanded in 2014 to make the total water supply capacity up to 200 l/sec. ̶ Open-pit mines with mine-life in excess of 25 years, based

• n the current production

plans. ̶ Mining operation at UHG commenced in Apr 2009. ̶ BN mine commercial production started in Feb 2012. ̶ CHPP comprises 3 operating modules each with a 5 Mtpa capacity, making the annual total processing capacity 15 Mtpa. ̶ Construction phases completed: Jun 2011 – module I Feb 2012 – module II Jun 2013 – module III

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Company overview

Washed coking coal quality

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Source: ITR Norwest 2010, the Company data.

10.5% ash HCC product 9.5% ash SSCC product Sea eam 1.40 Float Ash . . . . . . . . . . . . . . . . . . . . . . . . . 1.40 Float Yield . . . . . . . . . . . . . . . . . . . . . . . . 1.45 Float Ash . . . . . . . . . . . . . . . . . . . . . . . . . 1.45 Float Yield . . . . . . . . . . . . . . . . . . . . . . . . Volatiles (ad) . . . . . . . . . . . . . . . . . . . . . . . . . . Volatiles (daf) . . . . . . . . . . . . . . . . . . . . . . . . . Inherent Moisture . . . . . . . . . . . . . . . . . . . . . Phosphorus (ad) . . . . . . . . . . . . . . . . . . . . . . . Total Sulphur (ad) . . . . . . . . . . . . . . . . . . . . . . CSN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fluidity ddpm . . . . . . . . . . . . . . . . . . . . . . . . . Sapozhnikov Y mm . . . . . . . . . . . . . . . . . . . . . Sapozhnikov X mm . . . . . . . . . . . . . . . . . . . . . G Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reactives Vitrinite % . . . . . . . . . . . . . . . . . . . . Reflectance % . . . . . . . . . . . . . . . . . . . . . . . . . CSR measured . . . . . . . . . . . . . . . . . . . . . . . . . CRI measured . . . . . . . . . . . . . . . . . . . . . . . . . 0C 3A 4A 4C 12.1 9.4 9.0 7.9 41.0 65.8 66.9 71.7 13.6 10.5 9.8 8.5 54.9 78.7 75.5 78.3 21.3 22.4 22.9 23.9 24.2 24.9 25.4 26.4 0.9 0.7 0.8 0.7 0.075 0.117 0.089 0.134 0.4 0.6 0.4 0.7 8 ½ 8 ½ 8 8 26 168 435 564 12 13.5 13.5 15 14 18.5 21.0 20.5 80 85 87 88 64.1 63.9 55.8 58.2 1.29 1.25 1.23 1.28 69.5 64.8 69.4 66.3 21.3 28.4 24.1 25.3 8 9 8.2 7.2 67.9 66.3 9.1 7.7 75.5 69.6 29.6 31.2 32.8 34.1 1.1 1.6 0.102 0.126 0.8 0.4 6 5 364 1560 16 15.5 27 30.5 92 90 65.5 60.7 1.01 1.09 39.5 40.4 40.0 40.0

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Company overview

Expanding cooperation with end-user customers

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COOPERATION WITH SHENHUA INNER MONGOLIA COOPERATION WITH BAOTOU STEEL

̶ The Group signed a 10-year General cooperation agreement on coal sales with Shenhua Inner Mongolia Coal and Coking Co., Ltd (“Shenhua Inner Mongolia”) in May 2018, which was an important milestone to further strengthen its relations with one of the largest coke producers in Inner Mongolia. ̶ During the visit of the Prime Minister of Mongolia to the People’s Republic of China in May 2017, the Group signed a long-term Cooperation agreement with Baotou Iron and Steel Co. Ltd (“Baotou Steel”) and broadened its relations with the largest steel producer in Inner Mongolia, which is located in close proximity to the Group’s UHG and BN mines.

mmc.mn 0.1 0.7 4.2 4.0 3.6 4.2 4.1 4.3 4.6 4.2 4.8 0.0 2.0 4.0 6.0 8.0 1H2017 2H2017 1H2018 Stripping ratio…

Company overview

Production output remains “strangled” by logistics constraints

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WASHED COAL PRODUCTION

Mt

Note: 1 Combined stripping ratio of UHG and BN mines.

2 Combined washing yield and product output of UHG and BN mines.

ROM COAL PRODUCTION

Mt

̶ In 1H 2018, total CHPP ROM coal feed was 4.0 Mt, of which 3.5 Mt and 0.5 Mt were sourced from UHG and BN mines, respectively. ̶ The Company produced 0.8 Mt and 1.2 Mt of primary products in 1Q 2018 and 2Q 2018, respectively. ̶ The primary products include washed hard coking coal (“HCC”) and washed semi-soft coking coal (“SSCC”). ̶ The secondary product is washed thermal coal (‘middling”) with high calorific value >6,000 kcal/kg.

UHG BN

̶ In 1H 2018, prime overburden movement at UHG and BN mines were 15.0 million bank cubic metres (“bcm”) and 5.6 million bcm, respectively. ̶ BN mine production resumed in 4Q 2017. ̶ Combined ROM coal production at UHG and BN mines for 1Q 2018 and 2Q 2018 were 1.8 Mt and 2.5 Mt, respectively.

0.8 1.0 0.9 2.0 2.1 2.0 2.8 3.1 2.9 73% 73% 73% 0.0 1.5 3.0 4.5 6.0 1H 2017 2H 2017 1H 2018 Total yield Primary product Secondary product

mmc.mn 0.4 0.4 0.4 1.9 1.7 1.7 2.3 2.1 2.1 127.7 133.1 146.1 1 2 3 4 1H2017 2H2017 1H2018 ASP of HCC (USD/t)

Company overview

Increasing revenue stream

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HCC ASP BY SALES TERMS (1H 2018) PROFIT FROM OPERATIONS

Mt USD mln

Note: 1 ASP is a blended average of HCC.

2 Includes mainly SSCC and middlings.

REVENUE SALES VOLUME AND ASP1

USD\t USD mln HCC Others2 72.1 51.9 69.8 30 60 90 120 1H2017 2H2017 1H2018 245.9 230.5 272.2 180 210 240 270 300 1H2017 2H2017 1H2018 129.5 140.8 176.3 50 100 150 200 DAPGM adjusted price FOTGM price (exc VAT) C&F price (exc VAT)

mmc.mn 16.9 24.1 22.6 10 20 30 1H2017 2H2017 1H2018

Company overview

Transportation costs impacted by border crossing inefficiencies

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GM BORDER CROSSING DAILY AVERAGE THROUGHPUT2

USD\t

TRANSPORTATION COST1

Trucks 1,152 650 687 500 1,000 1,500 1H 2017 2H 2017 1H 2018

Note: 1 Combined weighted average transportation cost from UHG to GM, including third party contractors.

2 Combined average throughput of all coal trucks crossing GM border per operating day.

̶ Inefficiencies at GS-GM border crossing continues to impact daily export throughput, limiting the number of trucks crossing the border. 1Q 2018 GM border crossing average throughput was the lowest in the last two years. While the situation has improved since May 2018, it remains uncertain whether the improvement can be sustainable. ̶ In July and August 2018, coal transportation was disrupted from time to time due temporary closure of roads from the mine area to GM caused by heavy rains and flooding. ̶ The Company increased its’ transportation capacity by 150 double trailer trucks bringing the total capacity to around 450. The first 100 trucks were delivered towards the end of 2017, while the remaining 50 trucks were delivered during 1H 2018. ̶ In 1H 2018, the Company shipped 2.4 Mt of coal products for export from Mongolia to PRC utilizing trans-shipment facility located at Tsagaan Khad (“TKH”), in compliance with the GoM Resolution No. 320 (dated 29 November 2017) which temporarily suspended customs clearance at mine sites in Tavan Tolgoi area and requiring exporters to utilize customs bonded yards located at TKH. ̶ On 20 June 2018, the GoM issued Resolution No. 185 and lifted the ban imposed on coal customs clearance from the mine sites in Tavan Tolgoi area. ̶ Starting from July 2018, the Company is performing coal exports transportation using both direct UHG-GM route and UHG-TKH and TKH-GM two-step route.

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MARKET OVERVIEW COMPANY OVERVIEW CONCLUSIONS

Agenda

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Area A

Conclusions

Target market region

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China Railway Corporation railway China Shenhua railway UHG-GS paved road Customers UHG HG

MONGOLIA

Area C Area B

CHINA

BN BN GS-GM

MONGOLIAN COAL EXPORTS

By declared volume at custom clearance1: By declared value at custom clearance1:

234.8 182.0 286.5 1,282.4 985.3 1,413.8 18% 18% 20% 500 1,000 1,500 2,000 1H2017 2H2017 1H2018 MMC share USD mln Total MMC 10.9 6.3 8.5 19.1 14.3 18.3 13% 13% 13% 8 16 24 32 1H2017 2H2017 1H2018 MMC share Mt

Source: National Statistical Office of Mongolia, the Company data Note: 1 Total declared export volume and value at all Mongolian border points are sourced from National Statistical Office of Mongolia.

Total via GS-GM

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Conclusions

Summary of key points

• China is the world’s largest producer and consumer of coal and steel, therefore policies adopted by the Chinese authorities have far-reaching

impact on the global markets for steel making ingredients including coking coal.

• Chinese regulators have continued to enforce strong pollution control guidelines while undertaking supply-side reforms by closing excess capacity

in industrial sectors, including coal and steel industry. These have positively impacted the supply and demand balance, resulting in improved market environment for steel making raw materials such as coking coal.

• International coking coal markets demonstrated strong performance since the end of 2016, driven by a lift in global steel production, along with

supply-chain disruptions both within China and in sea-borne markets caused by extreme weather conditions.

• Although Chinese coking coal prices are having similar patterns with sea-borne coking coal prices in the long-run, short term volatility with large

price spikes caused by supply disruptions makes Chinese buyers simply retreat from the markets and rely on land-borne supplies from domestic sources (mostly from Shanxi) or Mongolia.

• The market is also facing regulatory disturbances such as UN embargo on North Korea restricting coal imports to China; Recent international trade

tensions resulted in 25% tariff imposition on coal imported from USA to China.

• Traditionally, steel production in China was concentrated in Bohai-Rim area - provinces like Hebei, Tangshan, Liaoning, Shandong and Jiangsu.

However these areas are strongly impacted by the policies targeting pollution and overcapacity curbs.

• Major infrastructure projects undertaken within China’s “One Belt-One Road” will continue to support increasing steel production in northern and

western regions of China which are in close proximity to Mongolia.

• According to the data from Mongolian National Statistics Office, Mongolia’s coal exports to China in 2017 reached a record-high volume of 33.4 Mt,

representing 29.4% increase compared to 25.8 Mt reported in the previous year. However, the cross-border logistic bottlenecks remain as the main factor limiting further increase of coal exports volumes, particularly via GS-GM border crossing point.

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Conclusions

Coal exports infrastructure

GS-GM Border crossing points – operating Border crossing points – planned Toll roads – planned Toll roads – operating UHG TKH BN Kha hang ngi-Mand ndula la ZU ZU-ERLIAN Tsa sagaan Del l Uul ul-Ulz lzii BA BAYANNUUR ALA LAXAA UMNUGOBI DOR ORNOGOBI BA BAOTOU Jinquan

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THANK YOU

Mo Mongolian Mi Mining Cor

• rporation

16F Central Towe

• wer

Suk ukhbaatar Di District Ulaanbaatar 14200 Mo Mongolia www.mmc. c.mn inv nvesto tor@mmc.mn