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bne Sino-CIS ListExecutive Summary:
This is bne's Sino-CIS newsletter, a list of the top stories covering the growing ties between the countries of the CIS and Asia. To manage your delivery options: click here: | ||
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| 1. China's biggest bank set to enter Poland |
| bne |
| March 20, 2012 The recent Chinese drive into Central Europe continues with reports that the country's largest bank, Industrial & Commercial Bank of China, plans to open a branch in Poland. Poland's financial regulator KNF announced the plan on March 20, saying that it has set a number of information and regulation guidelines that ICBC's branch will have to follow once it opens, reports Dow Jones. As bne reported on March 16, Polish investment agency PAIiIZ claims to have signed an agreement with China's giant sovereign wealth fund China Investment Corporation that will see the Poles scout out deals for the €314bn state fund. PAIiIZ signed similar deals with China Development Bank and the National Development and Reform Commission (NDRC) in December. Meanwhile, Bank of China Vice President Yue Yi announced at the opening of his bank's second branch in Hungary on March 19 that BOC is set to develop its presence across the CEE region. |
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| 2. Rosneft Revision of Chinese contract may trigger stock buyback |
| Troika Dialog |
| 1 March 2012 BoD to vote on lower prices to China today. Kommersant reports that Rosneft's BoD is to approve a $1.5/bbl discount on crude supplied to CNPC under a 20-year contract. The discount will then need to be approved at an EGM to be scheduled by directors today, and shareholders voting against would be able to sell their shares to back Rosneft. Our model already assumes lower prices. The change should end Rosneft and Transnefts dispute with China over how the pricing formula for the 20-year export contract signed in 2009 should be applied. A Rosneft source puts the total revenue loss at $3 bln $150 mln pa with annual exports of 300,000 bpd (15 mln tpa). It should not exceed 1% of EBITDA from 2012 on. Also, according to the company source, Rosneft will still be selling at a premium to Urals of above $5/bbl, which is close to our model assumptions. Buyback price could limit downside. For shareholders voting against the discount at the EGM, the option should be available to sell their shares to Rosneft at a price determined by an independent appraiser. As in 2009, when the Chinese contract was originally put to shareholder vote, we do not expect the buyout to have a major impact on the share price. We have a Buy recommendation on the stock. Alexei Kokin |
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| 3. BPC and Canpotex sign 2Q12 contracts with China earlier than we expected |
| VTB Capital |
| 25 March 2012 price unchanged from 2Q11 as we expected volumes lower than last year Hold maintained News: Yesterday, BPC signed a contract for 2Q12 deliveries with China at USD 470/t FOB China. Volumes include 400,000 tonnes of firm and 100,000 tonnes of optional volumes. Canpotex then signed a similar contract for 500,000 tonnes firm and 200,000 optional volumes. Our View: Since there was no contract signed for 1Q12, BPCs and Canpotexs firm volumes are down 27% YoY and 45% YoY, respectively, in 1H12. While the contract was signed earlier than we expected, the price is in line with our forecast and volumes are significantly lower than last year. We further note that China entered the year with significant inventories and can sustain high consumption rates without accelerating imports in 2H12. Currently, deliveries to other markets are lagging behind last year and we note that India has deferred execution of last years contract (and, hence, negotiations on this years contract). We are therefore maintaining our Hold recommendation for Uralkalis shares. Elena Sakhnova |
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| 4. Uralkali: New contract with China signed, prices unchanged |
| UralSib |
| March 21, 2012 New quarterly contract with China signed. BPC (Uralkalis (URKA LI Hold) international trader) announced yesterday that it has signed a contract for delivery of 400,000 tons of potash in 2Q12 to China at $470/ton. High volumes, prices stall. As Uralkalis marketing and sales director?Oleg Petrov announced last week that BPC did not expect to sign new?contracts with China until April-May and also that he did not see the?Chinese and Indian markets recovering earlier than July-August, the?new contract was a surprise. The signed contract is a positive signal,?indicating demand from China, one of Uralkalis main markets, ac-?counting for roughly 25% of its export sales, is on the road to recov-?ery. Contracted volumes of 400,000 tons (as well as an option for?100,000 tons) account for almost a quarter of the total supplied vol-?umes to China by Uralkali in 2010. On the other hand, the new con-?tracts price of $470/ton remains unchanged from the contract price for China deliveries in 2H11. As Petrov insisted last week that Uralkali would demand higher prices, while BPC agreed to deliver at the same price a week later, it seems that the company agreed to compromise after understanding that the slump in the potash market was deeper and longer than it expected and, thus, agreed to meet its customers halfway, to ensure higher capacity load, as capacity utilization had fallen to 60% in 1Q11. The contract was signed on a quarterly rather than the semi-annual basis, as had previously been the case. This provides the company with more flexibility and would allow it to push for higher prices once demand recovers further. Demand is on a long road to full recovery. We believe that the new contract is a positive sign, although to some extent BPC had to compromise on price. We still see a full market recovery being at least another quarter away and maintain our neutral out- look on Uralkali. We thus reiterate our Hold recommendation on the name. |
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| 5. Inter RAO signs long-term contract to export electricity to China |
| Alfa Bank |
| 1 March 2012 NEUTRAL According to Kommersant, Inter RAO and the National Grid Corporation of China have signed an agreement for the export of 100 bn kWh for 25 years. This export project envisages electricity exports to China of 4bn kWh pa in 2012-2037. It is expected that within the period the export needs will be basically satisfied by capacity from RusHydros HPPs or from RAO ES of Easts thermal power plants. The final price of the contract has not been disclosed. Inter RAOs subsidiary is already exporting electricity in this direction, and, according to its 2010 financials, the price was around $38- 42/MWh. Overall, we think this Chinese project could potentially benefit Inter RAOs operational performance if the contract price is attractive for the company. However, there is still no clarity regarding the final price of this agreement between Inter RAO and China or any potential conditions concerning Inter RAO and RusHydro in this project. As Inter RAO is the main intermediary in this deal, the final profit, i.e. the difference between RusHydros tariff and Chinas price, could be transferred onto Inter RAOs balance sheet. However, at the moment we treat this news as NEUTRAL for Inter RAO until more clarity surrounding the deal emerges. Alexander Kornilov |
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| 6. Rosneft to provide CNPC with a discount marginally negative for the company |
| VTB Capital |
| 1 March 2012 News: According to Kommersant, Rosneft and CNPC have found a solution in their long lasting negotiations over the crude oil price formula in the Rosneft- CNPC supply contact. The paper speculates that Rosneft is to grant a discount of USD 1.5/bbl. This decision is due to be approved today at the Board of Directors meeting. The deal then has to be approved by the companys EGM. Our View: Under the agreement, Rosneft has to deliver 9mmt of crude oil to CNPC over 20 years, starting from 1 January 2011. However, from the very beginning of operations under the agreement, CNPC claimed that Rosneft had miscalculated the transportation costs, which increased the price USD 13.5/bbl. If the new solution materialises, we see at least temporary acceptance of the agreements by both sides, which would mean a negative effect on Rosnefts EBITDA of around USD 100mn per year (about 0.5% of EBITDA 2012F). We see it as marginally negative for the company. However, even with this discount the overall deal remains positive Rosneft given the USD 15bn loan provided by CNPC. At a current rate of around 4% (it depends on the 6 month Libor rate), it is significantly below the rates provided by Russian banks. Each 1% of difference in the rate is equal to USD 150mn, which offsets the discount provided. The deal is classified as significant, according to Russian Law, and might trigger a minorities buyout with the price to be set by Rosnefts BoD later on. However, it must not be lower than the weighted average price of Rosnefts shares for the previous six months, which we calculate as USD 7.69. That is 1.5% lower than at yesterdays close and, as a result, we do not consider a possible future buyout as a driver for Rosnefts shares in the short term. Dmitry Loukashov |
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| 7. Chinese cars now "Made in Europe" |
| Andrew MacDowall in Sofia |
| March 30, 2012 The opening of the first Chinese car factory in the EU was a landmark event for both Bulgaria and Chinese automakers. Noteworthy as the opening was, the plant is still small scale and predominantly Bulgarian-financed not quite the foreign investment coup some would have us believe. But the choice of Bulgaria by Great Wall Motors certainly gives the country a chance to build up its automotive supply chain and develop a much-needed export-oriented industry. It also highlights Bulgaria's competitive advantages as a manufacturing centre. Chinese automakers and those from other emerging markets will also be watching with interest to see how Great Wall's pioneering move into the extremely competitive and demanding EU market fares. The first Chinese-badged vehicles to be made in the EU rolled off the production lines at Great Wall Motor's plant, in Bahovitsa, near Lovech in northern Bulgaria, in February. The factory is a joint venture between Great Wall and Litex Motors, a subsidiary of Litex Commerce, a large and influential Bulgarian holding company originally based in Lovech. Output is expected to reach 4,000 units this year, ramping up to 50,000 when at full capacity as soon as 2013, with total investment reaching €100m. Models produced will include a city car, an SUV and a pick-up truck, with the portfolio potentially expanding in the future. Initially sales will focus on the Bulgarian market, with exports to other Balkan countries starting towards the end of the year, but Great Wall's company president and chief executive, Feng Ying Wang, has said that her company hopes to expand sales across Europe over three to five years. Great wall of money Great Wall is the first original equipment manufacturer (OEM) that is, manufacturer of complete vehicles to establish operations in Bulgaria since an abortive attempt by the UK's Rover in the mid-1990s, which resulted in only 2,200 units being produced. Great Wall's decision to locate a factory in Bulgaria is a fillip for the country. Foreign direct investment, previously an important growth driver, has flagged due to the global crisis and Bulgaria's own sluggish economic performance. With the country's leading investment partners labouring under the Eurozone's malaise, Bulgaria has belatedly turned east. "It's very important, as this is the first sizeable manufacturing plant developed in partnership between Bulgarian and Chinese firms," Borislav Stefanov, executive director of the official InvestBulgaria Agency, tells bne. "Until now, there has been very little investment from China, despite it being a big exporter of foreign direct investment globally. Chinese investment rose from €10m in 2010 to €15m last year, but that's still a relatively small amount." Indeed it is and, for all the fanfare about Chinese interest in Bulgaria, it's notable that the Bahovitsa plant is first and foremost a Litex investment. The Bulgarian company has ponied up 90% of the cash thus far, allowing Great Wall to enter the EU with remarkably little capital risk. More importantly, as the International Monetary Fund highlighted on a number of occasions even before Bulgaria's service-led boom of the mid-2000s came to an end, the country needs to expand its base of export-oriented industries, both to diversify the economy and to balance its current account. And Bulgaria does have a number of advantages for manufacturers seeking access to the EU market and beyond: exports to other member states are free of additional taxes and duties, and trade relations with Balkan non-members are also favourable. As Stefanov points out, Bulgaria has lower costs for labour, land and utilities than most EU members, and benefits from macroeconomic and political stability (for example, public debt is less than 20% of GDP). Flat corporate and income taxes of 10% are the lowest in the EU, and Stefanov insists that they are "staying where they are". Finally, there is location. While not as close to the heart of Europe as Slovakia, for example, Bulgaria is within reach of the former Soviet Union countries and the Middle East, to which Stefanov hopes automotive firms based in the country will look for exports over the longer term. "Both companies Litex Motors and Great Wall Motors desire to deliver quality, affordable, well-equipped and attractively designed vehicles to the European consumers at the best price/product ratio on the market," Kiril Georgiev, advertising and PR manager at Litex Motors, tells bne. "Bulgaria as a country is strategically located for a gradual and long-term entry into European market by Great Wall. Bulgaria also has a high quality workforce and excellent business conditions." Quality issues For the time being, the Great Wall vehicles will largely be assembled from kits manufactured in China, meaning that the value added in Bulgaria will not be as much as it could be. Bulgaria does already have a small but lively automotive components sector, with local and international making parts including cables, seats, hinges, upholstery and cylinder heads. These businesses will be hoping that Great Wall and Litex realise their stated aim of increasing the proportion of locally-sourced components at the Bahovitsa plant. Other suppliers may look to set up in Bulgaria if they see the market growing. "We are looking for national subcontractors for some components," Georgiev says. "We plan to offer them the opportunity to establish production facilities next to our plant and such to establish an industrial area and thus additionally to stimulate the regional and national economy. This process is a long-term one and will take time for implementation in the next few years." The development of a domestic supply chain has been one of the features of Renault's stellar success with its Romanian subsidiary Dacia, which is now one of that country's leading exporters and is supported by a cluster of suppliers around its plant near Pitesti (as well as others elsewhere in the region including Bulgaria). Stefanov also points to the example of Slovakia, which went from having a negligible auto industry in the early 1990s to producing more finished units per head than any other country. "The automotive industry does tend to form clusters quite quickly," he says. "At the moment, most tier-one and tier-two supplies will come from China. Suppliers will be looking to see if volumes increase to provide opportunities for them to come to Bulgaria." David Leggett, managing editor of automotive industry website just-auto.com and an experienced analyst of the sector, strikes a more cautious tone on the development. "Bulgaria is not known as a hotbed of automotive manufacturing," he notes. There are also likely to be questions over the quality of Chinese-built cars assembled in Bulgaria, particularly after well-publicised safety issues with other Chinese manufacturers in Europe in the past. "This is a significant and interesting development, a Chinese manufacturer dipping its toe into Europe," Leggett tells bne. "Great Wall is a pioneer and, if successful, others like Chery will want to follow. But we have yet to see how many units they will sell, and what quality they will be. Let's wait to see how quickly production ramps up." |
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| 8. Chinese Defense Ministry considering USD 4bn contract for 48 Su-35 fighters |
| Metropol |
| March 6, 2012 a purchase that would increase United Aircraft Corporations backlog by 10% According to Kommersant, the Chinese Defense Ministry is close to signing a contract for 48 Russian Su-35 fighters. Although the price has not yet been agreed, the estimated preliminary contract value is USD 4bn, which would make this the largest deal between Russia and China in the last ten years. According to our estimates, the contract could increase UACs backlog by 10%. However, one obstacle remains, as Russia is insisting on legal guarantees for intellectual property rights to prevent China from copying the figher design, as it has done in the past. In 2008 Russia and China signed a framework agreement on protecting intellectual property in the course of military-technical cooperation. In our view, China is likely to agree on the guarantees. We reiterate our BUY recommendation and our fair value of USD 0.02 per share. |
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| 9. Sumy could get Chinese investments into agriculture |
| bne |
| March 20, 2012 Sumy region Governor Yuriy Chmyr has told Interfax that China could invest in the regions' agriculture. "Representatives of China State Farm and Agribusiness Corporation visited us to see our programs for farming development, the construction of milk complexes, and they were interested [in the projects]," Chmyr said in an exclusive interview with Interfax-Ukraine. "Our projects, in particular, are connected with the construction of big farming complexes for cattle breeding, poultry farms, the production of dried milk, grain processing, and the production of bioethanol at distilleries in Sumy region. It's difficult to estimate the sum of investments right now," he said, as quoted by Interfax. |
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| 10. Chinese companies targeting car parts segment, claims Hungary |
| bne |
| March 21, 2012 The Chinese drive into CEE markets looks set to continue with investment in Hungary's auto sector, with Hungary's Investment and Trade Agency (HITA) claiming to be in talks with nine companies in the far east that it says are looking at entering the country's car parts segment. China's Precision Products Manufacturing has already announced its intention to enter a medium-sized (€20-150m revenues)tier 1 or tier 2 car parts supplier, Laszlo Bogdanovits of the National Association of Hungarian Vehicle Parts Manufacturers said, according to Portfolio.hu, which points out that there are 30 such companies in Hungary. HITA meanwhile claims that the segment is one of two in Hungary that could be an attractive target, with the manufacture of branded electronics the other. The investment agency says it is presently in talks with nine potential investors from the Far East - not only Chinese - that are interested in potential parts production in the Hungarian automotive industry. |
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| 11. Russia, China resolve oil pricing dispute paper |
| AFS |
| 7 March 2012 Russian state-controlled companies Rosneft and Transneft have settled a dispute with China over the price for Russian crude oil supplies via pipeline, business daily Kommersant reported on Tuesday. The agreement gives China National Petroleum Corporation (CNPC) a discount of $1.5 per barrel, which will cost Rosneft around $3 billion, Kommersant wrote, citing sources close to the negotiations. Officials from the Russian firms, and CNPC, were not immediately available to comment on the report. Russian oil pipeline monopoly Transneft and Russia's top crude producer Rosneft started pumping oil to China in January 2011 via the first stage of the East Siberian-Pacific Ocean (ESPO) pipeline after receiving $25 billion in loans from Beijing. But Russia and China have been mired in a row over pricing, which is based on the price of Russian crude in its Baltic ports which a differential applied for the cost of transporting the oil eastward. Reuters sources have said the Chinese side objected to the use of transport costs to the Pacific port of Kozmino as a basis for the differential, since the Chinese border crossing is much closer to Russia's east Siberian fields than the port. According to Kommersant, CNPC paid a total of $134 million in arrears to Rosneft in the middle of January. The Rosneft board will review the new pricing terms at a Tuesday meeting, while the board of Transneft approved the changes on Feb. 22, the newspaper wrote. (reuters.com) |
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| 12. Otkritie's new subsidiary in Hong Kong will offer brokerage services on the Russian market |
| bne |
| 16 March 2012 Otkritie registered new subsidiary in Hong Kong, Otkritie Capital Ltd. The new company allows Otkritie to offer brokerage services to local customers interested in the Russian market. "We planned to start working with Asian investors and open an office in Hong Kong long ago. The registration of the company is the first step in this direction," says Alexei Karakhan, Deputy CEO of Otkritie. |
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| 13. Sumy could get Chinese investments into agriculture |
| bne |
| March 20, 2012 Sumy region Governor Yuriy Chmyr has told Interfax that China could invest in the regions' agriculture. "Representatives of China State Farm and Agribusiness Corporation visited us to see our programs for farming development, the construction of milk complexes, and they were interested [in the projects]," Chmyr said in an exclusive interview with Interfax-Ukraine. "Our projects, in particular, are connected with the construction of big farming complexes for cattle breeding, poultry farms, the production of dried milk, grain processing, and the production of bioethanol at distilleries in Sumy region. It's difficult to estimate the sum of investments right now," he said, as quoted by Interfax. |
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| 14. Mongolia subsidized financing for 100 000 apartment program has officially began |
| Frontier Securities |
| 1 March 2012 According to Government of Mongolia on February 21,2012 (http://open-government.mn/read-1317-.html) Government resolved the issue of making a reality for citizens 6 per cent soft financing for residential purchases. Government has resolved for Development Bank of Mongolia to issue securities up to 200 billion MNT(149 million USD using Bank of Mongolias todays reference rate). Finance Minister is to issue a Government guarantee for payments for principal and interests of the securities. Until funding from issuance of securities of Development Bank of Mongolia will come in, commercial banks are issue soft loans to citizens from their own capital. Finance Minister, Minister of Roads, Tranportation, Construction and Urban Development and Mayor of city of Ulaanbaatar have approved on February 21,2012 procedures to issue soft loans up to 50 million MNT( 37 thousand USD) with 6 per cent interest and duration of 20 years to citizens with low and medium income. * The apartments must be enrolled in 100 thousand apartments program which includes 75 thousand apartments in Ulaanbaatar * Borrowers should be able to make 10% down payment * The apartments will be a collateral and borrowers can pay off loan ahead of schedule * Apartments will be built in locations such as Yarmag, Zuun ail, Televiz and 13th subcommittee and state will be responsible for financing required for infrastructure. Also ger substandard housing district will be moved and apartments built. In this way cost of the apartment will be reduced * At the moment 79,486 families have been selected from 159 thousand applications into 100 thousand apartments program * 28,300 apartments from total apartments in the program will be ready within 18 months and 6,341 apartment have area of 50 sq. meters * Government increased area to 55 sq. meters, therefore it has become possible for citizens now to purchase 9,017 apartments * For a start, possibility is created for first time buyer families with 1 to 4 family members of 1-18 age to purchase apartments * Government aims to fully implement 100 thousand apartment program by 2016 According to major Mongolian daily Zuuny Medee on February 29, 2012 Chairman of Land Relations, Construction, Surveying and mapping agency Ts. Gankhuu clarified regarding 100 thousand apartment program situation * It is planned to issue bonds of Development Bank on the domestic market, bonds will be issued, authorized by Financial Regulatory Committee and auction organized * Lending by commercial banks will start probably on March 15-20,2012 * State Bank and Capitron bank have resolved for a start to issue loans from their internal sources * Government has approved a plan to build over 63 thousand apartment by 54 companies in Ulaanbaatar until program is completed in 2016 * Under 55 sq. meters means either two big rooms or smaller three rooms apartment * The construction of the apartments must be completed for 50% * Income of the family must be not less than 750 thousand MNT(560USD) per month * Citizens can apply monies from Human Development Fund towards payment for the apartment * Registration will start tomorrow, March 1,2012 * Soon construction companies with agreement for 100 thousand apartments will be announced through media, 192 companies submitted applications for 158 thousand apartments * State will not participate in issue of price of the apartments In separate article on 9739 apartments to be built in Bayangol district following developments are listed among others * 4800 apartments by Eco Construction LLC * 462 apartments by Nomin Construction LLC According to concrete producer Remicon Joint Stock Company(MSE:530/RMC), those developers are among its major customers (http://www.remicon.mn/index.php?option=com_content&view=article&id=88&Itemid=105) CEO of Remicon JSC E. Munkhsaikhan commented to Frontier Securities * This measure by Government to resolve residential issue of the population is of real support to construction and developer companies. In this way amount of construction will increase and following that there is a trend of increase in need for concrete. This is to impact favorably operations of our company. Besides increase in purchases by our regular customers, opportunity will be created to increase number of new customers for our company CEO/Chairman of Asia Pacific Investment Partners (http://apipcorp.com/) Lee Cashell, a Mongolia focused fast growing operating company that has a range of subsidiaries primarily focused around property development and cement production and that aims to list on the Hong Kong stock exchange within the next twelve months commented to Frontier Securities * We certainly welcome this stimulus measure into the construction and real estate sector that overall will result in general increased residential appetite of the population and more robust market, although we will be impacted favorably primarily through our cement sales, not necessarily from a developer point of view as we are high-end premium housing developer. As a matter of fact, we are feeling positive impact now already, we are able to lock in prices for cement sales contracts for the next year and our customers are prepaying us large down payments in order to secure cement for the next year. Dale Choi Chief Investment Strategist, Frontier Securities |
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| 15. Moody's Disclosures on Credit Ratings of Mongolia, Government of |
| Moody's |
| March 13, 2012 The following release represents Moody's Investors Service's summary credit opinion on Mongolia, Government of and includes certain regulatory disclosures regarding its ratings. This release does not constitute any change in Moody's ratings or rating rationale for Mongolia, Government of. Moody's current ratings on Mongolia, Government of are: Long Term Issuer (domestic and foreign currency) ratings of B1 Short Term Issuer (domestic and foreign currency) ratings of NP RATINGS RATIONALE Mongolia's B1 government bond rating is consistent with our methodology scores of low economic and institutional strengths, moderate government financial strength and high event risk. Long-term economic prospects are bright, but the near-term fiscal outlook is clouded by spending pressures. Mongolia's rating has been constrained by susceptibility to destabilizing boom-bust cycles stemming from (1) an undiversified, dual mining/agricultural economy subject to mineral price vulnerability on one front and occasional extremely severe winters on the other, and (2) pro-cyclical monetary and fiscal policies. Mongolia pulled through the 2008-2009 boom-bust cycle with the assistance of an 18-month IMF Stand-by-Arrangement, successfully completed in the fall of 2010. Under the program, inflation was reined in and international reserves were rebuilt. The health of government finances over the long term will in large part depend on the implementation of the country's fiscal stability law, key measures of which come into play in 2013-2014. Predictability with foreign investment agreements would ensure benefits to Mongolia from the country's substantial mineral endowments. After many years of delay, Mongolia's parliament approved the government's agreement with Ivanhoe Mines and Rio Tinto in October 2009 to develop the very rich Oyu Tolgoi copper and gold deposit. The exploitation of this and other large mineral deposits, such as high-grade coking coal in Tavan Tolgoi, will be transformational for the Mongolian economy, but the management of the windfall will pose considerable challenges to the authorities. The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. |
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| 16. Mongolia: MEC enters into Cooperation Agreement with Shandong Energy Xinwen Mining Group |
| Monet/HKEx |
| March 5, 2012 Mongolia Energy Corporation Limited (MEC) is pleased to announce that it has today entered into a cooperation agreement (Agreement) with Shandong Energy Xinwen Mining Group Co Ltd.(Xinwen). Under the Agreement, Xinwen has agreed to provide technical consultancy services to MEC for a proposed coal washing plant project in Xinjiang, the Peoples Republic of China and its operation in Mongolia |
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| 17. Mongolian imports soar on mining activity |
| Frontier Securities |
| 14 March 2012 ?According to IMF, the ongoing development of the mineral sector is boosting imports, especially of equipment as is strong domestic demand (indicated by surging imports of consumer goods). Monetary policy has not been proactive enough to reign in credit growth, which is also being fueled by rapid growth in monetary aggregates. International reserve accumulation has slowed as the central bank has largely re-frained from intervening in the market and, despite the lack of intervention, the ex-change rate has remained fairly stable in real effective terms. Central bank bill issuance has slowed and the policy interest rate has only been hiked twice this year and the two reserve requirement increases have been partly absorbed by a decline in banks holding of excess reserves. Monetary aggregates, meanwhile, continue to grow briskly. And, therefore, not surprisingly credit growth is surging. Central bank shared IMF staffs views that the flexible exchange rate continues to be well suited for Mongolia and that it, along with the substantially higher international reserves, would provide a critical buffer to a global shock. The flexible exchange rate regime has been working well and continues to be well suit-ed for the Mongolian economy. It will help control inflation, provide a shock absorber against external shocks, and facilitate the real exchange rate changes that are likely to take place over the medium term with the rapid growth in the mineral sector. The flex-ible exchange rate and the fact that international reserves are now at record highs will make the economy more resilient to a global commodity shock. According to World Bank, the Mongolian togrog depreciated by 11.4 percent in 2011 against the US$ . The trends for the year suggest that high domestic inflation has been mirrored in the weakening of the currency. Rising global risk aversion and declining commodity prices are additional factors contributing to the depreciation as has also occurred in other emerging mineral rich economies. According to Bank of Mongolia the main factors of MNT depreciation in 2011 in terms of economic fundamentals were substantial increase in current account deficits and significant reduction in net foreign exchange inflows. According to World Bank, during 2011, reserves reached a record level of US$ 2,460 mn in August, up from US$ 2.09 billion in 2010 . However, with the currency coming under pressure in the final months of 2011, the central bank sold reserves to stem excessive exchange rate volatility, so that by close of year net international reserves had de-clined to US$ 2.27 billion (nearly 25 percent of GDP). According to Mongolian portal shuud.mn on January 10,2010 Governor of Bank of Mongolia L.Purevdorj has said in October, November and December, exchange rate was stabilized at 1400 by doing intervention of 280 million USD or 10 per cent of total foreign exchange reserves. According to World Bank, the current depreciation of the togrog should not be used to abandon the flexible exchange rate. The flexible exchange rate is the single most im-portant policy difference between today and the last crisis. Targeting or controlling the exchange rate, as was the case in 2008, would greatly increase the risk of a speculative attack as reserves are run down to defend the exchange rate. Exchange rate flexibility will reduce the risk of one-way speculative bets on the currency and allow the economy to better absorb external shocks such as commodity price shocks without transmitting these directly to budgetary and export reve-nues as in the previous bust in 2008. More significantly, it will help the economy adjust through movements in the nominal exchange rate rather than through sharp cuts in domestic wages, employment and prices that hurt the real incomes and profits of workers and businesses. Finally, exchange rate flexibility is desirable in that it will reduce incentives for the pri-vate sector or banks for taking on unhedged risk. According to media D. Delgersaikhan, Director of the International Department at the Bank of Mongolia has said in Febru-ary 2012: in 2010, our economy recovered quickly, gaining trust from investors, and a lot of currency was circulating in Mongolia. Additionally, mining operations were in their initial stages, and the public demand for US Dollars was low. This caused MNTs rate to increase by 13 percent. In 2011, the economy had grown by 17 percent; mining operations were un-der heavy development and the demand for USD increased rapidly, both from public and the Government. Although the USD inflow was the same, its outflow had increased; causing an 11 percent drop in MNT rate. In other words, the rate de-pends on the way we spend our income. In the past 3 months, we have placed USD 300 million into circulation to ease the fluctuation According to IMF, extraordinary growth in spending is overheating the economy, leading to high inflation, rapid growth in imports due to excessive domestic demand, and macroeconomic uncertainty are influencing the exchange rate. Many fac-tors could be behind the recent moves, including external considerations (such as an increase in global risk aversion which has tended to cause the U.S. dollar to appreciate and the euro to depreciate in 2011) and domestic factors (such as concerns over macroeconomic stability related to the governments fiscal policy which has tended to put downward pressure on Mongolias currency). According Bank of Mongolia, main indicators of the balance of payments of 2011: Deficit of current account was 2.56 billion MNT and increased 2.9 times yoy or by 1.68 billion USD. This was mainly influenced by service trade deficit rose 3.9 times and reached 1.15 billion USD Good external trade deficit rose 5.1 times and reached 925 million USD. Surplus of capital and financial account was 2.3 billion USD and increased 1.3 times yoy or by 556 million USD. This is connected to net increase of FDI 2.3 times or 2.1 billion USD 54% of this FDI is loan funding, 37% of equity capital and 9% re-investment of income Deficit of current account is financed by inflow of financial capital and foreign exchange official reserves in December of 2011 have reached 2.27 billion USD, this is increase of 8.7% yoy or by 183 million USD. FRONTIER SECURITIES CONCLUSION: Latest data from IMF on surging equipment and consumer imports and rapid growth in money aggregates as well as projec-tions for balance of payments and monetary aggregates in 2012 is in line with our view that that depreciation in 2011 vs. appre-ciation in 2010 is related to dramatically increased spending in overheating economy, high inflation, rapid growth in imports of both merchandize and services and certain degree of macroeconomic uncertainty which has led to excessive domestic demand for USD. Central bank is receptive to flexible exchange rate regime. Multilaterals strongly urge continuation of flexible exchange rate re-gime to Mongolia. Therefore, we continue to view that MNT depreciation will not turn around until there is less demand for USD due to reduction in investment related imports to ramp up of major mines and consumption of imported items, or until massive increase in ex-ports from OT and TT when they come on stream . Consequentially, we could see ongoing weakness of the MNT in 2012. |
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| 18. Mongolian Mining Corp A solid platform for growth |
| Renaissance Capital |
| 9 March 2012 Yesterday (7 March), we released Mongolia: Mongolian Mining Corp A solid platform for growth. ??Strong result. Mongolian Mining Corp (MMC) reported FY11 net income of USD119.1mn; this was up 98% YoY and 1.0% above our forecast. Earnings and margins improved in DecH11 with commissioning of the first coal handling and preparation plant (CHPP) module and paved road between the UHG mine and the Gants Mod border crossing. Coal production of 7.1mnt RoM was slightly above guidance and our forecasts. Sales of 4.77mnt were ahead of our 4.65mnt forecast and included 1.5mnt of washed coal. Realised prices averaged c. USD114/t, below our USD116/t forecast, while total cash costs inclusive of royalties and SG&A of c. USD67/t were equal to our forecasts. MMCs average royalty rate was 9%. ??11.7mnt RoM, 5-8% lower prices in 2012. Management expects 2012 production to be 11.7mnt RoM (10.7mnt UHG, 1.0mnt Baruun Naran), and the majority of coal to be washed at a coking coal yield of 65%. Nearly all 2012 volume is contracted, but MMC expects a 5-8% decline in realised prices. We forecast a decline in MMCs realised washed coking coal price from USD156/t in DecH11 to USD145/t in JunQ12. MMC remains hopeful of a government decision to proceed with rail construction ahead of the start of construction season in April. In addition, MMC upgraded the quality of open pit resource at UHG to 70% coking coal from 56%, following positive wash test results from coal seams previously classified as thermal coal; we assumed this in our forecasts. Capex of USD180-190mn is expected in 2012, excluding rail, to be spent primarily on the third CHPP module (USD95mn), expanded water supply (USD40-50mn) and Baruun Naran to UHG road (USD30mn). ??Conviction BUY; HKD14 TP. We reiterate our BUY on MMC following the solid 2011 result. We upgrade 2012E earnings 2.5% as we increase forecast production to 11.5mnt RoM (11mnt RoM previously), partially offset by small forecast price reductions. Despite our forecast of an impressive growth profile to 22mn tpa RoM in 2015 from 11.5mnt RoM in 2012E, MMC is on a 2012E P/E of just 10.8x. |
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