ANNUAL%20REPORT%202015%20eng

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Chairman’s Statement Dear Shareholders, The global coking coal markets continue to face persisting imbalance between supply and demand, which led to coking coal prices dropping to the lowest levels seen in the decade. In the fourth quarter of 2015, benchmark prices of coking coal settled at the lowest since 2005. Industry research reports estimate that it may take at least two years for coking prices to rise above current levels, provided that around 30 million tonnes (“Mt”) of annual supply is removed from the seaborne market to offset receding Chinese demand and new supply from ongoing mine expansions. In China, the Group’s principal market, the crude steel output fell last year for the first time since 1981, amid a wider slowdown in the country’s economy. According to the National Bureau of Statistics (“NBS”), Chinese crude steel production declined 2.3% year-on-year to 803.8 Mt in 2015. The steel sector, the main consumer of coking coal, has been plagued by overcapacity in China and the rest of the world for several years, and global steel prices have plummeted in the face of oversupply. It was reported by the NBS that in 2015 China’s coal output dropped 3.5% year-on-year to 3.7 billion tonnes, the second consecutive year-on-year decline, and China’s coke output dropped 6.2% year-on-year to 448 Mt. Chinese import of all types of coal fell 30.0% in 2015 to 204.2 Mt, having fallen by 10.8% in 2014. Decreasing Chinese coal consumption is the major factor behind the fall, although softer prices in the domestic market also contributed to weaker imports, along with the acceleration of Chinese currency depreciation from the third quarter of 2015 onward that made imports more costly. The coal industry within China is subject to fierce competition between producers from various regions. It is expected in near future to result in accelerated mine closures among high-cost producers. Recently, the Chinese government revealed plans to tackle chronic overcapacity in the coal sector by closing 4,300 small and inefficient coal mines, and to cut total industry annual coal production capacity by 700 Mt over the next three years. In recent years, in order to improve the Company’s competitive position, the management has successfully achieved significant cost reductions through improvements to operational efficiency and productivity. Unfortunately, these improvements were not sufficient to offset the continued sharp decline in product prices. Therefore, the management has prioritized resolving financial issues with a focus on preserving liquidity and managing its balance sheet. In light of the adverse market conditions, and to better protect the interests of all stakeholders, the Company has initiated a dialogue with its lenders, and the financial and legal advisors of the steering committee of its noteholders about a possible restructuring arrangement in relation to its debt facilities. The Company is committed to transparent communication with broader investment community with the ultimate goal to achieve outcomes acceptable, and in long term, beneficial to all its stakeholders. Annual Report 2015 15
Chairman’s Statement I believe that with the support of all our stakeholders, the Company will be able to maintain pursuit of its long term development objectives, including the opportunity to engage in coal exploration, mining, processing, and transportation activities at Tavan Tolgoi coalfield in Mongolia. This is evidenced from the Group forming and leading a consortium jointly with China Shenhua Energy Company Limited and Sumitomo Corporation and the ongoing negotiation process with the Government of Mongolia (the “GoM”) in relation to the conclusion of definitive agreements with the GoM and its consortium partners in connection with the Tavan Tolgoi coalfield development. The ultimate benefit to Mongolia as a result of this will be significant improvement of the competitive position of Mongolian coal in international markets by consolidating commercial operations within the Tavan Tolgoi coalfield under a public private partnership (“PPP”) model. However, any final outcomes of this transaction remain highly uncertain given the complex nature of negotiations involving multiple parties. On behalf of the Board, I would like to express my sincere gratitude for the continuing long-term support of our shareholders. Also, I would like to convey my appreciation of all efforts made by our staff to pursue our vision to become a leading mining company in the region. Odjargal Jambaljamts Chairman 24 March 2016 16 Annual Report 2015
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Corporate Governance Report BOARD O
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