.

How to invest …..

..... in a mining project
Richard Harris
+852 9244-6622 [Link]@[Link]

March 2011, Hong Kong

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Richard Harris
Richard Harris – Chief Executive, Portfolio Manager
• Is a veteran of the industry with 32 years experience
• Business building / investment company doctor for the last 20 years
• Lived 40 years in Asia, also in Africa and US
• Launched and managed the first Mongolian liquid mutual fund
• Significant experience in managing mutual, private and pension funds for
institutional, private and retail clients
• Board Director of many investment businesses, and a Mainland China enterprise.
• Powerful media performer: Guest Host on CNBC
• Senior positions with Citi, Jardine Fleming (JP Morgan), and Mellon Newton (BONY)
• Six years a practicing Geologist
• BSc (First Class Hons) King’s College; MSc (Engineering) Imperial College, London;
Harvard MBA (1986), Stanford Graduate School of Business, USA (Certificate 2006);
Peking University Certificate, 2009)
2
Welcome!

“I have never met a person who could

forecast the market” ……
Warren Buffet

3
Unpredictable

4
Too Much Information

• Too short-term focused

• Economists & Gurus have conflicting views

12,000
“Dow 36,000”
The Atlantic Monthly
10,000 September 1999
“The Crash of ’98”
Fortune
8,000
“Will the Rally Pull September 28, 1998
a Fast Fade?
Not This Time”
6,000
Business Week
June 25, 1990 “Is It Armageddon?”
4,000 Forbes
September 21, 1998

2,000 “Stocks: Bear

Market Ahead?”
“Unleashing the Bear”
Fortune
Newsweek
0 December 16, 1994
September 3, 1990
90 91 92 93 94 95 96 97 98 99

Source: Consulting Group.

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Timing

Market timing is always risky!!

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Hope

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What do you want to know?

How to preserve capital?

How to grow capital?

What are the risks?

What are the opportunities?

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Asset classes and the business cycle

Source: Robert Fleming

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The Answers

1. Get it right first time

2. Asset allocation

DIVERSIFICATION

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Importance of Asset Allocation

Asset Allocation is the single most important factor …in portfolio returns

Security Selection
5.0%

Asset Market Timing

Allocation 2.0%
Policy
91.0%

Other Factors
2.0%

Source: 1. Roger G. Ibbotson, “Does Asset Allocation Policy Explain 10, 90 or 100 Percent of Performance?,” Financial Analyst Journal,
January/February 2000; Brinson, Singer and Beebower, “Determination of Performance II: An Update,” Financial Analyst Journal, May/June
1991. Based on U.S. pension fund data 1977-1987. Studies that employ different statistical interpretations produce different results. 2.
Based on U.S. pension fund data 1977-1987. A. Arnott, “Asset Allocation: Revisiting the Debate” Morningstar Principal Commentary,
9/27/1997. Past performance is no guarantee of future results. Real results may vary.

There can be no assurance that these market conditions will remain in the future. Past performance does not guarantee future results. Actual results may differ
materially from the forecasts/estimates. Views, opinions, trends and prices expressed are subject to change without prior notice and are expressed solely as a general
.
market commentary and do not constitute investment advice or a guarantee of returns. 11
Take A Long Term View

Risks tend to even out over time

The big picture (fundamentals) dominate returns

in the long run

News noise, confusing events, conflicting views,

dominate returns in the short run

For our “nest eggs”, we are long-term investors

Some opportunities take time to mature - with high

prospective returns

There can be no assurance that these market conditions will remain in the future. Past performance does not guarantee future results. Actual results may differ
materially from the forecasts/estimates. Views, opinions, trends and prices expressed are subject to change without prior notice and are expressed solely as a general
.
market commentary and do not constitute investment advice or a guarantee of returns. 12
Returns

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Volatility

..… sometimes called risk

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Risk and Return by Asset Class

Mining Stocks

Frontier Markets
Strategic Expected Return

Emerging Markets
Private Equity
Equities
Real Estate
Hedge Funds
High-Yield Bonds
Bonds
Cash
Source: Citi. Bloomberg
0%
0% 10 15 20 25 30
% % % % %
Standard Deviation indication only

…. high returns mean high volatility

There can be no assurance that these market conditions will remain in the future. Past performance does not guarantee future results. Actual results may differ
materially from the forecasts/estimates. Views, opinions, trends and prices expressed are subject to change without prior notice and are expressed solely as a general
.
market commentary and do not constitute investment advice or a guarantee of returns. 15
Different investments improve efficiency

Enhance performance & diversify risk

Portfolio with
wider range of
asset classes
12 100% Equities
40% Bonds / 60% Equities

10
Return %

60% Bonds / 40% Equities

8

Optimal portfolios should lie on this

6 Efficient Frontier

Risk-Free
4 Return 100% Bonds

Source: Citi. This graph is provided for illustrative purposes only

2
0 4 6 8 10 12 14
Risk % (Standard Deviation)
.
. .
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Mix assets of low correlation

Blend assets to optimise return and volatility

Owning both makes overall returns less volatile

Asset Class A
Asset Class B
Combined Asset Classes

Individual Asset Classes

Source: Citi
Asset classes A and B have low correlation
. 17
.

How to invest in a mining project

Richard Harris
+852 9244-6622 [Link]@[Link]

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18
Measuring risk
Standard Deviation measures the tightness of the probability distribution of future returns

Actual Return 95%

will be within Actual Return
±1 standard will be within
deviation of 68% ±2 standard
the expected deviation of
return 68 the expected
percent of the return 95
time. percent of
the time.

Std Dev = 10%

Security B

Security A
-5% 5% 15% 25% 35%

This graph is provided for illustrative purposes only and does not reflect any actual fund.
. 19
How to invest in a mining project

• FUNDAMENTALS

• VALUATION

• LIQUIDITY

+852 9244-6622 [Link]@[Link]

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How to invest in a mining project

+852 9244-6622 [Link]@[Link]

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Majors are growing rapidly

From 2010 to 2011, the top 40 mining companies saw:

• Revenues increase 32% – breaking $400 billion for the first time
• Net profits increase to $110 billion
• Operating cash flows grow, leaving more than $100 B cash on hand at year end
• Total assets approach $1 trillion
Gold (2002 – 11)
Average Gold Grade

Source: CPM Group, CIBC World Markets and ResOpp Publishing

Gold Production (2002-11)

In spite of massive efforts by the mining industry to boost production, gold output is barely
ahead of a decade ago.
Source: World Gold Council, ResOpp Publishing
Copper Price (2002-11)
China share of global metal consumption

Iron Ore

Aluminum

Copper

Source: China Center for Economic Research, ResOpp Publishing

Junior Miners

Per ounce, inferred resource valuation throughout life-cycle

Source: Resource Opportunities

for indication only
Lifecycle of a Junior Mining Share

s
in
Ga
e
ug
rH
Fo
l
ia
nt
te
Po
Sweet
Spot

for indication only

Growth in Frontier Markets
Kazakhstan Stock Exchange (KASE) Qatar Exchange (QE)
• Mkt Cap reached $100bn in May 2008 ($1b in 2000) • Mkt Cap increased over 31x to US$95bn in 1997-2007
• Current market cap: $49b • Current market cap: $88b

KASE Mkt Cap 2005-2008 Qatar Exchange Mkt Cap 1997-2010

from $3b to $100b from $3b to $104b

Source: Bloomberg

high capital growth, often accompanied by volatility

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How to start a Mongolia Fund
Mongolia Awakes!
Currency and resources in an absolute return portfolio

Richard Harris

March 2011, Hong Kong

+852 9244-6622 [Link]@[Link]

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MONGOLIA FUND Case Study

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MONGOLIA Fund Case Study

Fundamentals
Valuation
Liquidity
Structure
Execution
Experience
……………………….. Clients

Inspiration; not perspiration!

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Fundamentals

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Fundamentals

Natural Resources

Growth of a Nation

MNT Appreciation

identifying themes are key to our investment process

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Fundamentals
World class mines Oyu Tolgoi and Tavan Tolgoi will transform Mongolia.
Only 17% of Mongolia is covered under existing exploration licenses.
Irkutsk
RUSSIA
Ulaanbaatar
Asgat
Tumurtei Gurvan
(silver) Mardai
Burenkhaan (zinc, lead) Boroo Bulag
(phosphoryte) Erdenet (gold) Dornod
(copper, molybdenum) (uranium)
Shivee Ovoo Baganuur
(brown coal) (brown coal) Tumurtein Ovoo
Tumurtein Ovoo
(iron ore)
Tavan Tolgoi (iron ore)
Nariin Sukhait (coking coal) Tsagaan Suvarga
(coal) (copper, molybdenum)
Oyu Tolgoi
(copper, gold)
CHINA
Mongolia: Geological Deposits Beijing

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Fundamentals

• Forecasted as the fastest growing economy in Northern Asia (2010-15).

• Inflation is 14.3% and interest rates are 10.8%; (typical transformation)

Forecast on Country GDP Growth Rate (ann. %)

Country 2010 2011 2012 2013 2014 2015
Mongolia 9.5 8.3 7.6 29.6 20.5 15.0
China 10.3 9.5 9.0 8.5 8.2 8.0
Korea 4.5 5.0 4.8 5.7 5.8 5.9
Japan 1.9 2 1.8 1.7 1.7 1.8
Source: International Monetary Fund, World Economic Outlook Database
(Based on PPP valuation of country GDP)

GROWTH: GDP conservatively forecast to be US$15bn by 2015

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Fundamentals

Mongolia – Parliamentary Democracy

Key Country Facts

• Population (2011): 3.1m

• Size: France + Germany + Italy + UK + 20 HKs
• Political system: parliamentary democracy
• Literacy rate: 98%
• Nominal GDP (2010): US$ 6.6 billion
• GDP Growth (2010-15): c.18% p.a.
• Freely traded currency: up 14% yoy

one of the highest growth economies of the next decade

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Valuation

Stocks are NOT expensive

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Lifecycle of a Junior Mining Share

Sweet
Spot
Valuation – Future Growth

• Govt of Mongolia seeks to privatise over 50 state-owned enterprises

• Mining, mineral processing, construction materials, telecoms, aviation & power.

• Dual listing: MSE and international; will raise capital for modernisation and expansion.

• Pre-IPO: Banking Sector

• Growth drivers: development of mining projects, economic growth, re-capitalisation and sector consolidation (M&A).

• Approximately US$400mn total equity in the sector.

• Pre-IPO: Property Sectors

• Property market is characterised by strong demand for residential, commercial and industrial property.
• Drivers: mining sector, international capital inflows and income growth.
• A significant number of residents in Ulaanbaatar live in ger districts and need rehousing.

• Pre-IPO: Private Conglomerates

• Major private business groups are expected to launch multibillion dollar IPOs in HK and London: Monnis Group, MCS
Holding, Petrovis Corporation, Newcom Group and Bodi Group.

• Key sectors include: oil & mining, energy, banking & finance, telecom, real estate, transportation and construction.
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Liquidity

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Liquidity

Silk Road Index, by exchange

May 2011

Index includes companies with majority of assets and operations

in Mongolia
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Liquidity

Silk Road Index (SRI): A global benchmark that tracks the share price performance of
the 30 largest publicly listed companies with assets and operations in Mongolia.

Silk Road Index, top 5 stocks Silk Road Index, by industry

Market Cap, % of Market % of Market Cap
US$b Cap Mining 96.3%
Ivanhoe Mines 15.5 43.7% Oil & Gas 1.6%
Centerra Gold 4.4 12.4% Investments 0.9%
Mongolian Mining 4.4 12.4%
SouthGobi Resources 2.2 6.2%
Winsway Coking
2.0 5.6%
Coal
Others 7.0 19.7%
May 2011

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Liquidity

Mongolian Stock Exchange Mongolian Market Cap: global vs. domestic

(end-Apr 11)
• MSE market cap, 2005: US$50m
2010: $1.1b
May 2011: $1.6b
• 2005-2010: 22 fold increase (+2,297%).
• Over 300 companies listed on MSE.
• London Stock Exchange management Source: MSE, Bloomberg
contract upgrading trading, custody and
regulation.

local market would be uninvestible without international listings

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Fund Structure

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Fund Structure

Investment Philosophy
FUNDAMENTALS
We target long term investment growth by investing in companies with strong business prospects

RESEARCH
‘On-the-ground’ analytical skills enable us to understand geology and social issues, not just the financials

ACTIVE PORTFOLIO MANAGEMENT Investment Process

Port Shelter has 25 years of fund management
Investment
experience combined with local partner skills. Asset Allocation Research and Portfolio
Selection Construction
RELATIONSHIPS
Extensive global and Mongolian-based expertise.
Strategic Asset Themes Mix Return
RISK CONTROL Allocation Factors

Proprietary asset allocation

& portfolio construction tools Tactical Asset Balance Risk
Allocation Field Analysis Factors
PROTECTION
We protect the portfolio through selective hedging.
PORTFOLIO

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Fund Structure

All the Cast:

Manager, Distributor, Investment Adviser, Brokers, Custodian, Administrator
Auditor Annual Audit; 31-Mar
Legal Advisor
Lock-up Period 3-months, after launch
Currency USD
Minimum Initial/Subsequent Investment US$250,000 / US$100,000
Management Fee 2.00% p.a.
Performance Fee 20%
Subscription Monthly
Redemption 5% (<6 months), 4% (<1 yr), 1% (<2 yrs)
Reporting Monthly

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Fund Structure

Risk Management
We construct our portfolio conservatively, and use market volatility to provide performance.
Diversification Supervisory Committee / Board of Directors
- investment’s best ‘free lunch’ - monthly ; non-exec review by Directors
Asset Allocation - guidelines and restrictions reviewed for compliance
- index or not-index? - biannual Board meeting; independent non-exec review
- strategic asset allocation
- tactical asset allocation Custodian / Administrator /(QCF)
- what top-down; what bottom-up?
- external checks and balances by custodian
Investment selection - Standard Chartered Bank / Citibank
- research and modelling own estimates

Portfolio Construction Risk Metrics

- use of ‘books’ to combine risks - followed precisely
- balance; ensure CONSISTENCY
Transparency
Investment Committee
- weekly meeting - full portfolio positions available at our office
- new names discussed
- back analysis ensure correct exposures maintained Leveraging
Hedging - it is not intended to borrow for investment purposes
- hedging of individual stocks or futures to protect our
portfolio
our mantra: DISCIPLINE AND CONSISTENCY
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Execution

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Experience

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Ten lessons

1. There is no free lunch

2. Keeping your money is more important than making more

3. It is harder (but less of a mistake) to buy back when the market is quiet and to
sell when the market is busy , than to do the opposite

4. Many dollars made serve to pay back the losses from the previous investment
(may be reversed)

5. Treat the market with respect and don’t get too clever, it will humble you

6. If it is getting too easy to make money – it is the top of the market

7. Emotion gets the better of most investors at the bottom and top of the market

8. Fear and greed work together

9. Don’t panic, look longer term

10. As soon as you have learned how the market works – they change the rules –
including these

GOOD LUCK
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The Investor …

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Disclaimer
1. This document and all the information, material and data contained herein (collectively “the Document”) may contain confidential and/or privileged material and
is/are rendered on an entirely without prejudice basis. Any review, retransmission, dissemination, copying, reproduction or other use of, or taking of any action
in reliance upon, the Document or any part thereof by any person or entity other than the intended recipient is strictly prohibited. The Document shall not in any
way affect or prejudice the respective rights, obligations and liabilities (if any) of Port Shelter Ltd. (collectively “the Group”) and any entity or party named,
mentioned and/or referred to herein. Any rating, certification or award as mentioned and/or appearing in the Document may belong to a particular entity as
specified in the Document. Further, we make no representation or warranty as to the accuracy or completeness of the Document or any part thereof. We shall
not be responsible for and expressly disclaim any liability whatsoever for any loss or damage howsoever arising [including without limitation such loss or damage
(if any) arising from the use of or reliance upon, or intended use of or reliance upon, the Document or any part thereof, whether or not arising from any error or
omission in compiling the Document or any part thereof].

2. The Document has been prepared for reference only and neither the information, nor any opinion contained herein constitutes a distribution, an offer to sell or
the solicitation of an offer by the Group or its affiliates to buy or sell any securities, futures, options or other financial instruments or to provide any investment
advice or service.

3. Without prejudice to the generality of the foregoing, the Document does not constitute, and may not be used for the purposes of, an offer or solicitation to
anyone in any jurisdiction or country in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make such offer or solicitation
or where such offer or solicitation would be contrary to law or regulation or which would subject the Group or its affiliates to any registration requirement within
such jurisdiction or country.

4. The Group and persons associated with it may have positions in and/or engage in transaction related to the markets referred to in the Document. The Group may
have relationship with any entity or party named, mentioned and/or referred to herein. Managers of the underlying portfolios may have an equity stake in the
underlying portfolios which they manage. Conflicts of interest cannot be ruled out at the level of the underlying portfolios.

5. To the best of the knowledge, information and belief of the Group, all information contained herein is accurate as at the date of publication. Neither the Group
nor its affiliates and any of their directors, officers and employees warrant the accuracy, adequacy or completeness of the information and material contained
herein and each of the Group and its affiliates and each of their directors, officers and employees expressly disclaims liability for any errors or omissions in the
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infringement of third party rights, title, merchantability, fitness for a particular purpose is given by the Group or its affiliates in conjunction with the information,
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6. Under no circumstances may the information contained herein, or any part thereof, be copied, reproduced or redistributed without the express permission and
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7. The price of shares/units and the income from them may go down as well as up and past performance figures shown are not indicative of future performance.
The performance figures shown or indicated in the Document may refer to a particular class of the fund only.

8. The information contained herein should not be considered to be legal, tax, investment or other advice and each prospective investor should consult their own
stockbroker, financial adviser, bank manager, solicitor, accountant or other professional adviser in respect of matters concerning their investment. Investment in
the funds offered by the Group involves special considerations and risks and is suitable only for sophisticated investors for whom an investment in the funds of
the Group does not represent a complete investment programme and who fully understand and are capable of assuming the risks of an investment in the funds
offered by the Group.

9. If you are in any doubt about any of the information contained herein, you should consult your stockbroker, financial adviser, bank manager, solicitor, accountant
or other professional adviser. The information is current as at the date of publication but is subject to change without notice.

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Disclaimer – contd. next page
Port Shelter Investment Management (info@[Link]) may provide its clients access to a broad array of
products and services available through bank and non-bank affiliates.

This document is for information only and does not constitute an offer, or a solicitation of an offer, to buy or sell
securities, to enter into any transaction or to solicit any funds or deposits.

The information contained herein may be based on certain assumptions and is subject to change without notice.
Opinions expressed herein are not intended to be a forecast of future events, a guarantee of future results or
investment advice, and are subject to change based on market and other conditions. Past performance is no
guarantee of future results, and future results may not meet our expectations due to a variety of economic,
market and other factors. Further, any projections of potential risk or return are illustrative and should not be
taken as limitations of the maximum possible loss or gain. Actual results may differ materially.

Although information in this document has been obtained from sources believed to be reliable, Port Shelter and
its affiliates have made no independent verification and as such do not warrant its accuracy or completeness or
accept liability for any direct or consequential losses arising from its use.

Investments mentioned in this document may not be suitable for all investors. Prior to making any investment
decision, you should fully understand the economic and other risks and merits, as well as the legal, tax and
accounting characteristics and consequences of the transaction, and make a determination based upon your own
particular circumstances that the investment is consistent with your objectives and that you are able to assume
the risk. You are solely responsible for consulting your own independent advisors as to the regulatory, legal, tax,
accounting and related matters concerning this transaction and nothing in this document or in any
communication, whether or not in writing, between you and Port Shelter or any of their affiliates constitutes such
advice.

55
Disclaimer – contd. p.2

The contents of this document are confidential and intended solely for the use of Port Shelter and those to whom it has been
delivered. It is not to be reproduced or circulated without our written authority to any other person. The manner of circulation
and distribution of this document may be restricted by law or regulation in certain countries. Persons who come into
possession of this document are required to inform themselves of, and to observe, such restrictions.
Investment products are not bank deposits and do not have the benefit of any depositor protection or insurance scheme. They
are not obligations of, or guaranteed by Port Shelter or any of its affiliates, and are subject to investment risk, including possible
loss of the principal amount invested.

The presentation may make mention of investing in alternative investments. Note that investing in alternative investments is
speculative, not suitable for all clients, and is intended for experienced and sophisticated investors who are willing to bear the
high economic risks of the investment, which may include:
• loss of all or a substantial portion of the investments due to leveraging, short-selling or other speculative
investment practices;
• lack of liquidity in that there may be no secondary market for the fund and none expected to develop;
• volatility of returns;
• restrictions on transferring interests in the fund;
• absence of information regarding valuations and pricing;
• delays in tax reporting;
• less regulation and higher fees than mutual funds; and
• advisor risk

Port Shelter Ltd. . All rights reserved

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