Commodity Risk Management course for a Wind Horse University; Fall 2007, based on presentation for Gold mining companies in 2002 dedicated to 80-th anniversary of Gold Mining Industry in Mongolia

1. OCHIR CONSULTING CO., LTD.
PRESENTS
INTERNATIONAL MARKET
RISK MANAGEMENT
Ulaanbaatar 2007-Fall

2. CLASS OBJECTIVE
 Introduction to market price (FX and
commodity) risks and financial derivatives
 Students are expected to learn how to make
calculations on financial derivatives
 Practical use of basic financial derivatives
2

3. MONGOLIA-BANANA REPUBLIC
Major export items
CU copper
AU gold
Cashmere
 others
3

4. 2 main ways to boost profits
Keep costs down,
Commodities price risk
management
4

5. MINERS & DEALERS
MINERS DEALERS
5

6. MINERS & DEALERS
MINERS DEALERS
 GEOLOGICAL  SUPPLY &
SURVEY DEMAND
 INTERNATIONAL
 MINING POLITICS
 INTERNATIONAL
 PRODUCTION
ECONOMICS
6

7. GOLD CHART 1992-2002
e-mail: ochir_co@magicnet.mn 7

8. COPPER CHART 1992-2002 MCU0, Close Monthly
USD
30Sep 1438.50
T
30Sep 1438.50
3000
2800
2600
2400
2200
2000
1800
1600
1400
Jul92 Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul 8

9. GOLD CHART 1997-2002
9

10. COPPER CHART 1997-2002
MCU0, Close Weekly
USD
18Oct 1497.25
T
2400
2300
2200
2100
2000
1900
1800
1700
1600
1500
1400
1300
Sep97 Jan98 May Sep Jan99 May Sep Jan00 May Sep Jan01 May Sep Jan02 May Sep 10

11. COPPER CHART 2000/IX-02/X
MCU0, Close Daily
USD
21Oct 1519.75
T
1950
1900
1850
1800
1750
1700
1650
1600
1550
1500
1450
1400
1350
1300
Sep00 Oct Nov Dec Jan01 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan02 Feb Mar Apr May Jun Jul Aug Sep Oct 11

12. GOLD CHART 2001-2002
e-mail: ochir_co@magicnet.mn 12

13. COPPER CHART 2001/X-02/XMCU0, Close Daily
USD
21Oct 1519.75
T
21Oct 1519.75
1680
1660
1640
1620
1600
1580
1560
1540
1520
1500
1480
1460
1440
1420
1400
1380
1360
1340
1320
Oct01 Nov Dec Jan02 Feb Mar e-mail: ochir_co@magicnet.mnJul
Apr May Jun Aug Sep Oct 13

14. GOLD CHART YI-IX/2002
e-mail: ochir_co@magicnet.mn 14

15. VI/4-VIII/1 LOST OPPORTUNITY
FOR 1 TONN OF GOLD
1 TONN= 1 000 000 gramm = 32 150,72
06.04.02 $ 330,00 32 150,72 10 609 738, 45
08.01.02 $ 298,00 32 150,72 9 580 914, 56
LOST OPPORTUNITY $ 1, 028, 823. 89
15

16. IS COMMODITY PRICE RISK A
FORSE MAJOR?
NOT REALLY
IS THERE A WAY OF AVOIDING
COMMODITY PRICE RISK?
YES!
AND IT SHOULD BE HANDLED!
16

17. NECESSITY OF COMMODITIES
PRICE RISK MANAGEMENT
 NO COMMODITIES RISK MANAGEMENT
MEANS PURE BET ON ONLY PRICE
INCREASES
 IF THE PRICE GOES BELOW COST OF
PRODUCTION THE MINE GETS CLOSED
 THE BANK WHICH LENT TO THE MINER
WILL BE EXPOSED TO CREDIT RISK
17

18. NECESSITY OF COMMODITIES
PRICE RISK MANAGEMENT
 BANK
REQUIREMENT
 RAISES CREDIT
RATING FOR
MINERS
18

19. NECESSITY OF COMMODITIES
PRICE RISK MANAGEMENT
 Meridian's Kennedy:
 * We did it (hedge) for bank loans,
* two-thirds of the industry was hedged!!!
Kinross Gold Corp. CEO Robert Buchan:
After the company announced in April it
would not renew a hedge on 500,000 ounces
of gold he got a call the next day from a bank.
Source: Reuters, 10.01.02, 6:57 PM ET
19

20. NECESSITY OF COMMODITIES
PRICE RISK MANAGEMENT
 HELPS TO ISSUE
SHARES ON STOCK
EXCHANGES
 HELPS IF THE MINE
WANTS TO ISSUE
INTERNATIONAL
CORPORATE BONDS
20

21. IT IS TIME TO RAISE
FINANCES
 MAJOR INTEREST RATES ARE AT LOWEST
LEVELS RECENTLY
 SINCE 1999 MONGOLIA HAS “B” CREDIT
RATING, WHICH IS NOT BAD AT ALL
 MONGOLIAN COMPANIES HAVE NOW
POSSIBILITY TO GET CREDIT RATINGS &
ISSUE INTERNATIONAL CORPORATE
BONDS
21

22. REAL INTEREST RATE DIFFERETIALS:
WORLD VS MONGOLIA
INTEREST RATES, 12 MONTHS
LOCAL CURRENCY Annual REAL INTEREST
INTEREST RATES IN Inflation RATE IN
MONGOLIA (CPI) MONGOLIA
min min
2002.9.30 17,0% 3,1% 13,9%
FOREIGN CURRENCY LIBOR,
(USD) INTEREST 12 months: INTEREST RATE
RATES IN MONGOLIA USD DIFFERENTIALS
min
2002.9.30 12,0% 1,7% 10,3%
22

23. STANDARD & POORS
Sovereign Ratings List
Ratings are as of September 19, 2002 (updated weekly)
Local Currency Foreign Currency
Long- Short- Long- Short-
Sovereign term Outlook term term Outlook term
rating rating rating rating
Argentina SD SD SD SD
Bulgaria BB Stable B BB- Stable B
China BBB Stable A-3
Ecuador CCC+ Stable C CCC+ Stable C
India BB+ Negative B BB Negative B
Indonesia B- Stable C CCC+ Stable C
Mongolia B Stable B B Stable B
Morocco BBB Negative A-3 BB Negative B
Pakistan B+ Stable B B- Stable B
Panama BB Stable BB Stable B
Russia BB- Stable B BB- Stable B
Senegal B+ Stable B B+ Stable B
Turkey B- Negative C B- Negative C
Ukraine B Stable B B Stable B
Uruguay B Negative B B Negative B
Venezuela B Negative B
Vietnam BB Stable B BB- Stable B
23

24. ERDENET GOT “” RATING
S T A N D A R D & P O O R’S
Research: Erdenet Mining Corp. Assigned First
Corporate Credit Rating In Mongolia
Publication date: 14-Mar-2002
Analyst: Peter Stephens, Melbourne, John Bailey, HK
MELBOURNE (Standard & Poor's) March 14,
2002--Standard & Poor's said today that it
had assigned it’s single- ‘B’ long-term
corporate credit rating to Mongolian mining
company, Erdenet Mining Corp.(EMC). This is
the first corporate credit rating assigned to a
company in Mongolia. The rating and its
importance to the Mongolian reflects the
company’s 51% ownership by the
Government of Mongolia (B/Positive/B) and
its importance to the Mongolian economy.
The outlook is stable.
24

25. CONDITIONS OF ERDENET
CORPORATE BOND ISSUE
 MINIMUM AMOUNT = $ 50-100
 INITIAL MATURITY- 3 YEARS
 INT= LIBOR + COUNTRY + COMPANY
RISK RISK
INT = 2% + 2-3% + 2-3 %
INT = ( per annum ) 6-8%
* * duration of the process of road-show to final
realization once the project (Bank Feasibility
Study) done - 3 months
25

26. COMMODITIES PRICE RISK
MANAGEMENT TECHNIQUES
SPOT ORDERS
FORWARD CONTRACTS
OPTION CONTRACTS
SWAP CONTRACTS
e-mail: ochir_co@magicnet.mn 26

27. GOLD CHART YI-IX/2002
e-mail: ochir_co@magicnet.mn 27

28. FORWARD CONTRACTS
 Gold is to be sold at a Price, quantity and
maturity to be set on the contract date.
 Unmined gold can be sold out
 Forward prices are set at time of contract
 Miner gets an OBLIGATION to sell
 The forward sell price will be set and wont
change whatever prices will be during the
contract maturity or at the end of maturity
e-mail: ochir_co@magicnet.mn 28

29. Forward contracts
F = S+S *dI/100*dT/ 360
F = Forward prices
S = Spot prices
dT = Contract maturity /in days/
dI = Difference btwn USD and Gold
Interest rates /in per cent/
e-mail: ochir_co@magicnet.mn 29

30. Class Case: Solution
 S=900 USD/TOX
 I(us)=LIBOR= 1.7 per
annum
 I(Au)= 1.0
 dI= 1.7-1.0= 0.7 S 900,00 USD
 dT= 30 LIBOR
I(Au)
2%
1%
d(T) 30
F=900+ F 900,525 USD
900*(0.7/100)*30/360
F=900.525
e-mail: ochir_co@magicnet.mn 30

31. Forward contracts
BENEFITS COSTS
 COMPLETE  NO DIRECT COSTS
INSURANSE AGST ASSOCIATED
PRICE DROPS
 PRODUCER MAY
 PROVIDES LOSE POTENTIAL
CLEARANCE AND PROFIT FROM
STABILITY IN
PRICE INCREASES
FOLLOWING
BUSSINESS PLANS
IN CASE PRICES
RISE
e-mail: ochir_co@magicnet.mn 31

32. GOLD CHART YI-IX/2002
e-mail: ochir_co@magicnet.mn 32

33. OPTION CONTRACTS
BY BUYING PUT OPTION
MINER GETS THE RIGHT TO
SELL THE COMMODITY AT
PRICE, QUANTITY, AND
MATURITY PRESET AT THE
CONTRACT DATE.
e-mail: ochir_co@magicnet.mn 33

34. OPTION CONTRACTS
PROFIT/LOSS ON PUT OPTION (STRIKE @ $318)
$20
$15
PROFIT / LOSS
$10
$5
$0
295 300 305 310 315 320 325 330 335
-$5
e-mail: ochir_co@magicnet.mn 34

35. OPTION CONTRACTS
BENEFITS COSTS
 COMPLETE
 OPTION PREMIUM
INSURANSE AGST
PRICE DROPS
 PRODUCER GETS
FULL BENEFITS
FROM PRICE
INCREASES IN CASE
PRICES RISE
e-mail: ochir_co@magicnet.mn 35

36. OPTION CONTRACTS
OPTION-FREEDOM OF CHOISE
 OPTION - FREEDOM OF CHOISE
 OPTION – INSURANCE AGST
COMMODITIES PRICE DROP
e-mail: ochir_co@magicnet.mn 36

37. OPTION CONTRACTS
 1994 - AIGI OFFERED PUT
OPTION TO ERDENET AT A
STRIKE OF $2,800 WHEN SPOT
COPPER PRICES WERE
AROUND $3,000
e-mail: ochir_co@magicnet.mn 37

38. COPPER CHART 1992-2002
MCU0, Close Monthly
USD
30Sep 1438.50
T
30Sep 1438.50
3000
2800
2600
2400
2200
2000
1800
1600
1400
Jul92 Jan93 Jul Jan94 Jul Jan95 Jul Jan96 Jul Jan97 Jul Jan98 Jul Jan99 Jul Jan00 Jul Jan01 Jul Jan02 Jul 38

39. POTENTIAL ANNUAL PROFIT OF ERDENET
IF IT BOT PUT OPTION @ STRIKE $2,800
ANNUAL ERDENET COPPER SALES
in0.9999 of metal 120,000.00
1995.01 $ 2,800.00 120,000.00 $ 336,000,000.00
10.01.02 $ 1,440.00 120,000.00 $ 172,800,000.00
ANNUAL LOST OPPORTUNITY- 2002 $163,200,000.00
39

40. SWAP CONTRACTS
We have a swap transaction if the
commodity is sold on spot and
bought back at forward date
or bought on spot and sold out on a
forward date.
40

41. GOLD CHART YI-IX/2002
e-mail: ochir_co@magicnet.mn 41

42. SWAP TRANSACTIONS
BENEFITS WEAK POINTS
 ALLOWS TO FULFILL  NO DIRECT COST
FINANCIAL OBLIGATIONS  WON’T INSURE
IN CASE OF FROM A PRICE
UNPLEASANT PRICE DROP
CONDITIONS
 ALLOWS TO RAISE
FUNDS AT A MINIMUM
COST WHEN REQUIRED
42

43. CONFRONTATION ?
“I KNOW MY JOB!” “NO LOAN!”
43

44. CO-OPERATION ?
44

45. CONCLUSION No 1
IS COMMODITY PRICE RISK A
FORSE MAJOR?
NOT REALLY
IS THERE A WAY OF AVOIDING
COMMODITY PRICE RISK?
YES!
AND IT SHOULD BE HANDLED!
45

46. CONCLUSION No 2
 NO COMMODITIES RISK MANAGEMENT
MEANS PURE BET ON ONLY PRICE
INCREASES
 IF THE PRICE GOES BELOW COST OF
PRODUCTION THE MINE GETS CLOSED
 THE BANK WHICH LEND TO THE MINER
WILL BE EXPOSED TO CREDIT RISK
46

47. WHAT IS INT’L PRACTICE?
 Meridian's Kennedy:
 * We did it (hedge) for bank loans,
* two-thirds of the industry was hedged!!!
Kinross Gold Corp. CEO Robert Buchan:
After the company announced in April it
would not renew a hedge on 500,000 ounces
of gold he got a call the next day from a bank.
Source: Reuters, 10.01.02, 6:57 PM ET
47

48. CONCLUSION No 3
 IT IS IN THE BANKS’ INTEREST
TO EXERSIZE OR DEMAND
COMMODITIES RISK MANAGEMENT
48

49. WHOM TO ADDRESS ?
 BULLION BANKS
 OCHIR CONSULTING CO., LTD.
49

50. YOUR ADVISOR
OCHIR CONSULTING CO., LTD.
 INTRODUCING COMMODITIES RISK
MANAGEMENT TECHNIQUES IN MONGOLIA IN
CO-OPERATION WI BANK OF MONGOLIA AND
GOLD MINERS, CONNECTING THEM TO
INTERNATIONAL MARKETS,
 BULLION AND METALS MARGIN TRADING WI THE
24-HOUR MONITORING AND DEALING DESK
 SEMINARS AND TRAINING FOR THE MINERS IN
ASSOCIATION WI MINERS’ ASSOCIATION OF
MONGOLIA, BANK OF MONGOLIA, MINERALS
DEVELOPMENT CENTER, BANKERS
ASSOCIATION OF MONGOLIA.
 ASSISTING IN CORPORATE BOND ISSUE,
 ASSISTING IN GOLD REFINING AGREEMENTS
e-mail: ochir_co@magicnet.mn 50

51. YOUR ADVISOR
OCHIR CONSULTING CO., LTD.
 MORE THAN 15 YEARS IN THE BULLION AND FOREX
 4 YEARS AS DIRECTORS OF BANK OF MONGOLIA:
 FX & BULLION RESERVE MANAGEMENT
 INTERNAL CONTROL & ADMINISTRATION DEPTS
 CABINET MEMBER PORTFOLIO HOLDING:
 MINISTER OF FINANCE (1999-2000)
 MINISTER OF JUSTICE (1999-2000)
 DEPUTY MINISTER OF JUSTICE (1990-1992)
 WORLD BANK & ADB FSAC PROGAMME-
COMMODITIES RISK MANAGEMENT INITIATIVE FOR
COPPER, GOLD & CASHMERE WAS MADE AS A
REQUIREMENT FOR THE CONSEQUTIVE TRANCH
DISBURSEMENTS WAS PUT AT OUR PROPOSAL
51

52. YOUR ADVISOR
OCHIR CONSULTING CO., LTD.
Peace Avenue-44/753
Ulaanbaatar 14250 MN
Tel: +976 9918 5150
Email: ochir.consult@gmx.com
e-mail: ochir.consult@gmx.com 52

53. Project Principals
Yansanjav OCHIRSUKH
 Professional Occupations:
 1993-99 Bank of Mongolia (Central Bank), gold trader, Director for Gold & FX
Reserves, Member of Board
• Raised Net International reserves for the Bank fm
USD 4.0 mln in 1992 to USD 180 mln in 2000
• Twice negotiated and improved gold refining agreements for the Central bank
• Sold on net about 60 tons of gold
• Personal dealing record: around USD 20.0 mln
 1996-97 Consultant on emerging economies, Operations Evaluations Department,
The World Bank, Washington DC
 1999-2000 Finance Minister of Mongolia for three consecutive Governments
• Initiated and finalized Sovereign rating process for Mongolia fm S&P
• Initiated set up for commodities (copper, gold and cashmere) price risk
management program for Government under the World Bank & ADB-
financed FSAC Program
• Introduced Mongolia as Member of European Bank for Reconstruction &
Development as well as European Investment Bank
• Closed 2 biggest troubled commercial banks
• Granted License 3 new commercial banks
• Governor of IMF, World Bank, ADB, EBRD & EIB for Mongolia
 2000-Present OCHIR Consulting Ltd., President & CEO
e-mail: ochir_co@magicnet.mn 53

54. SPECIAL GRATITUDE
BRIGHT STUDENTS OF
GLOBAL
LEADERSHIP
UNIVERSITY
e-mail: ochir_co@magicnet.mn 54

55. THANK YOU
FOR YOUR KIND ATTENTION!
e-mail: ochir_co@magicnet.mn 55

56. Next class:
Visit to Bank of Mongolia Museum
Date & Venue
Time
30-Oct-08 Bank of
Mongolia
15:59 pm (The Central Bank)
e-mail: ochir_co@magicnet.mn 56