Non Technical Summary:

UHG Phase II
Energy Resources LLC
Ulaanbaatar, Mongolia

February 26, 2010

www.erm.com
Energy Resources LLC

Non-Technical Summary:
UHG Phase II
February 26, 2010

Project No. 0103775

South Gobi, Mongolia

Environmental Resources Management

15810 Park Ten Place, Suite 300
Houston, Texas USA 77084-5140
T: +1 281-600-1000
F: +1 281-600-1001
www.erm.com

with

Sustainability East Asia LLC

701 San Business Centre
Prime Minister Amar’s Street-29
8th Khoroo, Sukhbaatar District
Ulaanbaatar, Mongolia
T: +976 11 7011 4921
www.sustainability.net.au
TABLE OF CONTENTS

1.0 INTRODUCTION & PROJECT LOCATION 1

2.0 PROJECT DESCRIPTION 2

2.1 ANALYSIS OF ALTERNATIVES 4

3.0 ENVIRONMENTAL IMPACT ASSESSMENT AND MITIGATION 5

4.0 MITIGATION AND MANAGEMENT 17

List of Figures

1 Project Location
2 Project Layout

ii G:\2010\0103775\14650Hrpt-NTS.doc
1.0 INTRODUCTION & PROJECT LOCATION

Energy Resources LLC (ER) and its subsidiary Energy Resources Rail LLC (ERR)
are proposing to develop Phase II of the Ukhaa Khudag (UHG) Project
(hereafter, “the Project’). The Project will build on the current Phase I mining
operations to include:
• expansion of the existing UHG coal mine (from 2 million tonnes per annum
[Mtpa] to 15Mtpa) and related infrastructure (pipelines, internal roads,
fencing, workshops, ancillaries);
• a coal handling and preparation plant (CHPP);
• a coal export railway to China (225 kilometres [km] in length, plus a 10km
loading loop at the mine);
• coal-fired power generation facilities, constructed across two stages (12
Megawatts [MW] and 100MW) to support UHG operations;
• a ground water abstraction field (including a bore field and water supply
pipeline for mining and mine support facilities);
• an airstrip; and
• expansion (to a total capacity of 1,250 persons) of worker accommodation
facilities.

The Project construction and operations will be conducted in accordance with

Mongolian law as well as international agreements, regulatory requirements,
and best practice guidelines such as those of the International Finance
Corporation and World Bank. Additionally, the Project will comply with the
Performance Requirements of the European Bank for Reconstruction and
Development (EBRD) and the Asian Development Bank (ADB).

The UHG mine is located in Tsagaan-Ovoo bagh of Tsogttsetsii soum in

Umnogovi aimag (South Gobi region) of Mongolia. It is located approximately
4km to the north of the undeveloped Tavan Tolgoi coal deposit, approximately
90km east of Dalanzadgad (the provincial capital), approximately 220km from
the Mongolia-China border, approximately 150km from Ivanhoe Mines' Oyu
Tolgoi copper-gold deposit, and approximately 540km from Ulaanbaatar (the
national capital) (Figure 1, end of document).

Tsogttsetsii soum has a population of approximately 2,245. The Tsogttsetsii soum

centre is located approximately 1km northeast of the mine camp and contains
basic administrative and social infrastructure including a hospital, secondary
school, dormitory, culture centre, stores and a post office. This soum centre has
comparatively well developed mobile communications, a 24-hour power service
and connection to the aimag centre, Dalanzadgad, with an unpaved road.

The proposed Project railway will be located entirely within Umnogovi aimag,
originating near the mine in Tsogttsetsii soum and passing through Bayan Ovoo
and Khanbogd soums (which have populations of 1,500 and 3,000, respectively).

Environmental Resources Management 1 G:\2010\0103775\14650Hrpt-NTS.doc

2.0 PROJECT DESCRIPTION

An overview of the Project components is presented below:

Mine Expansion

There are four primary seams considered for mining in the UHG coal field. Of
these, two are best developed, thickest and most continuous, and contain the
majority of the coking coal resources. These two seams are currently being
mined as part of Phase I “Fast Track Mining” for production of an unwashed
coal product that is being trucked in raw form to Chinese markets.

The UHG mine expansion component of the Project will focus on extracting high
quality metallurgical (coking) coal and thermal coal from a Permian age coal-
bearing basin that includes coal seams that have been folded and faulted to a
great extent in many areas. The UHG mine area contains multiple seams of
widely varying washing characteristics and likely end uses. Some seams have
the potential to produce premium hard coking coals while other seams may be
classified as either semi-soft/hard coking and/or thermal coals.

The UHG mine development plan includes the mining of the UHG deposit over
approximately 20 years through the progressive expansion of the existing mine
pit (which is located in the northeastern extent of the resource). From the current
Phase I open pit, mining will advance to the west and south to form the Main
Pit. A separate pit, the West Pit, will be used to mine the most western extent of
the resource. The mine is proposed to be expanded over a five-year period to a
full production capability of 15Mtpa run-of-mine (ROM) coking coal, equivalent
to about 10Mtpa of washed product.

Coal Handling and Preparation Plant (CHPP)

The Project will include a CHPP that will wash coal in order to produce a variety
of high value coking coal and thermal coal products. The plan for the CHPP
facility is to achieve a 2,500 tonnes per hour feed rate through a four-stage
development and construction process.

Railway

The railway will extend for a distance of approximately 225km between the
UHG mine and the Mongolia-China border crossing of Gashuun Sukhait. The
Project is proposing to develop and operate Class 1, standard gauge (1435mm),
single-track, supporting diesel-electric powered locomotives with a maximum
loaded speed of 80 kilometres per hour (km/h) and a maximum unloaded speed
of 100km/h. The railway will be constructed on an elevated layer of ballast and
subgrade, and a number of culvert crossings will be installed beneath the
railway along its entire length to facilitate crossing by people, livestock and wild
animals and to maintain surface water flow patterns.

Environmental Resources Management 2 G:\2010\0103775\14650Hrpt-NTS.doc

Power Generation Facilities

The Project will require a significant power supply, and the required power will
increase commensurate with an increase in coal production. Electricity for
existing operations is supplied by diesel generators. However, an increased
power supply (beyond the capacity of the diesel generators) will be needed to
support the Project as mining operations expand and power demand for
construction and operation of the CHPP increases.

Initially, a 12 MW coal-fired power plant will be constructed to meet short-term

electricity demand at the mine and for Tsogttsetsii soum centre. Once this is
completed (within the first two years of the Project), construction will begin for a
100MW coal-fired power plant. It is estimated that this power plant will be
capable of powering the full-scale planned mining operations, the full-scale
CHPP, associated infrastructure, expanded mine camp facilities, the railway, and
the nearby Tsogttsetsii soum centre.

Water Supply

Water requirements for the mine expansion, CHPP, power station, and mine
camp expansion will be sourced from a combination of the open pit mine
groundwater inflow, water returned from the CHPP tailings storage facility
(TSF) and make-up water provided from the Naimant Depression aquifer area,
where a bore field will be established to access the deep water reservoirs (which
are not currently used by local herders).

Additional construction water demand for the railway will be temporary and
limited to the proposed 7-month construction period over two summers.
Construction water will be required for various purposes including
compaction/conditioning of fill material, dust suppression, and water supply to
construction camps. Ongoing operation of the railway will create an additional
permanent water demand for various purposes including supply for workshops
and stations.

Airstrip

The Civil Aviation Authority of Mongolia and the Ministry of Tourism and
Transportation have granted the Project permission to construct an airstrip in the
vicinity of the UHG mine site. The airstrip will be used to transport workers to
and from Ulaanbaatar for rotational work rosters. ER will engage a local air
charter service company to operate flights on a regular weekly or bi-weekly
basis. The airstrip will be located in the valley north of Tsagaan Ovoo bagh,
approximately 6km from Tsogttsetsii, and will cover an area of approximately
115ha.

The airstrip is proposed to be developed in two stages. The first stage involves
constructing a gravel airstrip and the associated infrastructure. The second
phase, once flight numbers increase and the operation expands, involves sealing

Environmental Resources Management 3 G:\2010\0103775\14650Hrpt-NTS.doc

 the airstrip with bitumen. Extra parking area and additional airplane storage
sites may be constructed as part of the second expansion phase.

Expanded Mine Camp

The expanded mine camp complex includes the following components:

• 150 room units, accommodating a total of 650 workers;
• canteen;
• recreation area;
• central atrium; and
• mine offices.

In addition to housing facilities, the expanded mine camp will also include:
• garage for small vehicles;
• power and heating plant (expanded from existing facilities);
• potable water treatment plant;
• security check points; and
• laundry and washroom.

The total area proposed for the expanded mine camp is 2.5ha, in addition to the
current camp coverage of approximately 3.5ha.

2.1 ANALYSIS OF ALTERNATIVES

The alternatives considered are those key options with the greatest potential to
influence the environmental and/or social impacts of the Project. These
alternatives relate to: options for disposal or re-use of CHPP tailings effluent;
power generation options; consideration of various water supplies;
consideration of rail transport against road transport for product export; and
options for accommodation and transport of workers.

Of these alternatives, one of the more significant alternatives considered was

whether or not to build the railway to China (as an alternative to continued and
increased truck haulage along the existing coal road). Based on the scale of
ecological and social impacts from continued and expanded trucking, as well as
economic factors, construction of a railway (and cessation of truck haulage) was
selected as the preferred alternative.

Environmental Resources Management 4 G:\2010\0103775\14650Hrpt-NTS.doc

3.0 ENVIRONMENTAL IMPACT ASSESSMENT AND MITIGATION

The Project will have a variety of environmental and social (including health)
impacts, which include some considerable positive effects as well as a number of
potential adverse impacts. The ESIA prepared for the Project describes in detail
each of the potential impacts identified, structured in terms of Project attainment
of EBRD Performance Requirements, as well as measures focused on developing
enhancements for positive impacts and mitigations for negative impacts.

A summary of the impact assessment findings and mitigation commitments is

presented below:

Landscape and Geology

The most significant permanent impact to the landscape and geology in the area
of influence will occur within the mine, as a result of the creation of two mine
voids, a waste rock dump up to 80m in height and a tailings storage facility.
These impacts are localised to the mine area itself; however, the features will be
highly visible in contrast to the mostly flat surrounding landscape.

The railway, although not of a height comparable to the mine features, will cross
through areas with virtually no signs of prior development or human
disturbance.

These impacts will be mitigated with management techniques that focus on site
restoration and rehabilitation measures, where practical.

Greenhouse Gases

The largest sources of direct greenhouse gas emissions for the Project will be the
combustion of diesel during mining, combustion of diesel through transport of
coal by rail, and the combustion of coal at the on-site coal fired power plants.

A number of features have been incorporated in the design of the Project to

reduce the greenhouse gas emissions from Project operations to the extent
practicable; these include the use of an efficient coal-fired power station, and the
use of a railway (in lieu of trucks) to transport the coal to market.

Air Quality

The Project will impact air quality through both construction-phase and
operations-phase emissions of pollutants such as particulate matter, sulphur
dioxide, and nitrogen oxides. A combination of qualitative and quantitative
analysis was used to predict air quality impacts, including air dispersion
modelling for operations phase impacts. The results of this analysis indicated
that the most significant sources of predicted impacts to ambient air quality in
the vicinity of Project operations are particulate matter emissions for mining

Environmental Resources Management 5 G:\2010\0103775\14650Hrpt-NTS.doc

operations and sulphur dioxide and nitrogen oxide emissions from operation of
the power plants and CHPP.

In the case of particulate matter emissions from mining operations, modelling

predicted that maximum annual-average ambient concentrations resulting from
Project operations would exceed Mongolian National Standards for Urban Air
Quality, but that these exceedances would be confined to within 5km of the
mine, and would not reach the Tsogttsetsii soum centre. However, modelling
predicted that maximum 24-hour average ambient concentrations in excess of
Mongolian National Standards for Urban Air Quality would extend up to 30km
of the mine.

It is important to note that the maximum concentrations discussed above are

directly associated with the high wind speed episodes that occur in the region. It
is understood that the (natural) particulate matter concentrations experienced
during these high wind episodes can be orders of magnitude above the relevant
Mongolian air quality standard, and as such the contribution of Project-related
TSP to the environment is likely to be less significant than the prediction
suggests. Moreover, the high-wind speed episodes will in many cases necessitate
cessation of all mining operations due to health of safety considerations, and as
such, the predicted impacts are likely to be a significant over-estimation of
particulate matter emission impacts.

In the case of sulphur dioxide and nitrogen oxide emissions from operation of
the power plants and CHPP, modelling predicted that maximum ambient
concentrations resulting from Project operations would exceed Mongolian
National Standards for Urban Air Quality, but that these exceedances would be
confined to within 3km or less (depending on the pollutant and averaging
period) of the mine, and would not reach the Tsogttsetsii soum centre.

In terms of mitigation, particulate emissions from mining operations (as well as

for construction activities) may be effectively controlled through the adoption of
a range of good management practices, proactive controls to prevent dust
propagation and effective housekeeping. In the case of sulphur dioxide and
nitrogen oxide emissions, the power station and CHPP will be operated in
accordance with industry best practice, including suitable commissioning trials
and compliance tests to demonstrate that process emissions to air are minimised
to the extent practicable.

Water Resources

The potential impacts of the Project on surface water and groundwater resources
stem from the reduction of the availability of water resources, the potential for
contamination of water resources from Project activities and diversion or
interception of natural surface water flows in Project-developed areas.

Environmental Resources Management 6 G:\2010\0103775\14650Hrpt-NTS.doc

The abstraction of groundwater from the Naimant Depression will result in
permanent localised drawdown of water levels in the deep aquifer resource. The
impact of this drawdown is limited by the absence of other users of these deep
water resources; however, it should be noted that these deep aquifer sources are
non-replenishable. In addition, the open mine pits will create a sink for
groundwater within the mine area, with both shallow and deep groundwater
surrounding the pits draining towards the pit voids.

Reduced groundwater availability has been partially mitigated through the

development of new water resources for local herder families who previously
used groundwater from the mine vicinity. The new wells were developed
beyond the area of influence of the mine pit and are accessed seasonally by a
number of families who use pasture in the mine vicinity.

In addition to these measures, ER will implement appropriate management

plans, including a groundwater management plan which is designed to protect
the availability and quality of groundwater resources in the vicinity of the
Naimant Depression. A part of this is to ensure that the water availability of the
region is considered in the engineering design of all associated projects
regarding water use and water recovery.

Groundwater quality within the mine area, in particular beneath the TSF, may be
at risk of contamination from ground placement of acid-forming mine and
CHPP wastes and this impact will be addressed through specific management
measures to minimise acid generation and prevent the mobilisation of
contaminants within waste disposal structures. To manage these risks the Project
will implement an ARD Management Plan and TSF Management Plan.

Potential surface water contamination issues (principally as a result of

unintended spills or discharges to natural surface water courses) will be
managed through the implementation of appropriate management planning,
including a surface water management plan, hydrocarbon management plan and
waste management plan.

The Project will result in a number of features (principally the mine, TSF and
railway) that have the potential to divert or intercept surface water flows from
their normal courses. The design and construction of mine-related infrastructure
will consider surface water regimes and where possible attempt to maintain
natural flow patterns. In those situations where intercepting surface water
drainage is unavoidable, measures will be implemented with the primary
objectives of preventing flow from entering the mine and maintaining sufficient
flow downstream of the mine disturbance area, thereby preventing secondary
impacts such as contamination and vegetation loss.

Soil

Although the soils within the mine area are generally poorly developed and
eroded, the shallow surface topsoils are important to plant growth and moisture

Environmental Resources Management 7 G:\2010\0103775\14650Hrpt-NTS.doc

retention and are therefore an essential component for sustainable pasture
management and ecological function. The major impacts on soil resources will
result from the disturbance associated with mining, waste placement and
construction of infrastructure. Soil contamination from windblown coal dust
may also impact soils surrounding the mine area. Key components of mitigation
of impacts on soils will include topsoil stripping and temporary stockpiling (for
use in future rehabilitation), land restoration and minimising disturbance.

Noise

Noise emissions from the Project will occur during as a result of both
construction and operation activities; the principal sources of Project noise will
include the following:
• operation of the mine fleet and earthmoving equipment;
• blasting within the open pit (planned at depths greater than 15m);
• construction and operation of the CHPP;
• construction and operation of the power plants;
• construction and operation of the airstrip;
• operation of coal trucks prior to start-up of the railway; and
• construction and operation of the railway, including quarrying for railway
ballast and subgrade.

Mongolian standards currently establish a maximum environmental noise goal

for residential receptors of 60 decibels (A-weighted) (dB(A)) during the daytime
and 45dB(A) during the night time.

Taking into account the attenuation of noise levels over the 7km distance to the
Tsogttsetsii soum centre, sound levels from the mine operation (assuming a total
sound level of 140 dB(A)) would be reduced to a level on the order of 55dBA at
the soum centre; this is below the maximum Mongolian residential daytime
standard. It is further noted that the barriers provided by the waste rock dump
will decrease noise levels even further, as will the fact that mine equipment will
also operate predominantly in-pit (i.e., surrounding below ground surface),
providing an additional barrier to sound movement.

For railway construction activities, noise modelling produced a recommended

offset distance of 550m from the track centreline to meet the noise criteria of
55dB LAeq,1hr for the daytime period and an offset distance of 1,500m from the
track centreline to meet the noise criteria of 45dB LAeq,1hr for the night time
period, should night-time construction be required.

For transportation of raw materials along haulage routes to the construction area
along the railway alignment from nearby quarries and borrow pits, modelling
produced a recommended offset distance of 30m from the haul route centreline
to meet the noise criteria of 55dB LAeq,1hr for the daytime period and an offset

Environmental Resources Management 8 G:\2010\0103775\14650Hrpt-NTS.doc

distance of 100m from the haul route centreline to meet the noise criteria of 45dB
LAeq,1hr for the night time period, should night-time construction be required.

For railway operations, noise modelling produced a recommended offset

distance of 15m from the track centreline to meet the noise criteria of 55dB LAeq,
1hr for the daytime period and an offset distance of 65m from the track centreline
to meet the noise criteria of 45dB LAeq, 1hr for the night time period.

Proposed mitigation measures are aimed at ensuring equipment design

minimises noise emissions, implementation of appropriate occupational health
and safety measures for workers in high noise environments, and verification
that residential receptors are not located within areas that will be subjected to
noise levels above Mongolian or international standards.

Waste Management

The primary waste streams that will be generated by the Project include, but are
not limited to mine waste rock; CHPP coarse reject; CHPP tailings; power plant
ash; waste oil; and mine camp and temporary construction camp wastes. Limited
quantities of hazardous wastes may be generated for the Project, including
medical wastes, minor quantities of hazardous chemical containers from water
treatment and cleaning chemicals, used batteries, and solvents from workshops.

Waste rock with high pyrite occurrence identified during operational testing will
be managed to ensure that oxidation rates are minimised through burial within
non acid forming material. The specific placement of acid forming waste rock
within the non acid forming material will minimise the potential for leachate
within the wastes to be in contact with acidic material. Acid forming CHPP
waste will be blended with crushed limestone prior to disposal in the waste rock
dump, and covered with a compacted inert waste cover during operations to
minimise oxidation and potential for acid leachate.

The ash, fly ash and bottom ash from the power plants and boilers will be
disposed of in the waste rock dump area. It is envisaged that after 10 years of
power plant operation, a significant portion of the fly ash generated will be used
in local industries such as brick making processes, cement industries and
internal plant road construction. The bed ash will continued to be disposed of to
the waste rock stockpile, or alternatively, sieved to material size and reused as
bed material makeup for the CFB boilers.

A wastewater treatment plant will be constructed to process the wastewater

generated from the mine camp. This area is being jointly developed by the
Project and the local soum government.

The potential impacts associated with the disposal of wastes will primarily be
managed through reducing wastes disposed of to landfill. Waste reduction will
occur through the development and implementation of a detailed waste
management plan for construction and operations.

Environmental Resources Management 9 G:\2010\0103775\14650Hrpt-NTS.doc

Where non hazardous wastes are unable to be recycled or suitable markets for
re-use are unavailable, then disposal to the Tsogttsetsii landfill will be necessary.
The mine operations will need to support the soum administration of this
landfill site to ensure that waste landfill operations do not pose an ongoing risk
to groundwater from contamination.

Hazardous waste materials will be collected within a central waste handling

facility for packaging and transport to dedicated and approved hazardous waste
facilities off site.

Traffic

The coal haul road is in a very poor state of repair due to the level of traffic,
which is currently between 200 and 500 trucks per day. Although the ultimate
Project plan will be to initiate coal shipments via railway, thus virtually
eliminating truck haulage of coal, there will be interim impacts of truck traffic as
a result of the increasing production output from the UHG mine prior to railway
commissioning.

As the coal haul road is used primarily (though not exclusively) by coal trucks,
the direct impacts to traffic flow are expected to be negligible. Instead, the
principal impacts associated with this increased coal truck traffic relate to
specific impacts to resources/receptors (i.e. air quality, ecology and noise) other
than non-Project drivers. The principal mitigation measure to address impacts of
truck haulage of coal is the construction of the railway, which will virtually
eliminate truck haulage by the Project. In addition, as an interim mitigation
measure, the upgrade of the coal haul road will reduce environmental and social
impacts until the railway is built.

Fauna

Project activities have the potential to impact wildlife in the following ways:
• displacement, disturbance, and mortality due to clearance of approximately
700ha of natural habitats;
• direct wildlife injury or mortality caused by vehicular traffic, construction
machinery, and workers;
• creation of a barrier to migration (the railway) and associated reduced
connectivity of fauna populations, and/or isolation of local animal
populations and habitats;
• interruption or modification of surface water features effecting water and
foraging sources; and
• habitat degradation as a result of construction noise, vibration, dust, and
lighting from work camps.

Environmental Resources Management 10 G:\2010\0103775\14650Hrpt-NTS.doc

The impacts associated with wildlife displacement are expected to be minor
during the railway construction period, given that the construction activities will
be short-term in nature, moving from one end of the corridor to the other.

Current Mongolian law dictates that the entire railway corridor be surrounded
by animal proof fencing to minimise impacts to domesticated and wild animals.
Without extensive mitigation measures, fencing of the entire rail corridor has the
potential to restrict the dispersal and migration of some species. The Project is
currently engaging with Mongolian legislators to determine if an exemption may
be granted on the grounds that the mandatory fencing will impede the
movement of migratory animals. The preferred option is an unfenced rail
corridor for these reasons. However, as the current law dictates the corridor
must be fenced, the Project design, potential impacts, and mitigation measures
assume a fenced rail corridor.

Four migratory ungulate species, the Asiatic wild ass, goitered gazelle,
Mongolian gazelle, and argali, inhabit the Project area and conduct seasonal
migrations through the area. These species are considered Rare or Endangered in
Mongolia, as per the Mongolia Red Book and Mongolia Red List of Mammals.

The railway design has taken into consideration the need to facilitate animal
movement and migration across the area traversed by the railway. In
consultations with the design team, the original design was augmented from the
initially proposed 20 randomly placed culverts of various sizes to nearly 100
strategically-placed culverts, located and sized in accordance with best practice
standards. The design allows for culverts, migratory and hydrological, to be
located at an interval of approximately every 2 km along the railway. In areas of
significant migratory activity, specifically the southern 20km of the railway,
culvert spacing is maximised to one migratory culvert per kilometre. The
proposed locations of migratory culverts take into account field verified natural
migratory corridors along topographic relief, dry creek and lake beds, and
vegetated areas. This strategic placement will follow natural animal movement
pathways and facilitate animal access to traditional sources of food and water.
Additionally, the revised design provides a multitude of migration corridors
across a variety of ecotones to enhance the success of migration across the
railway corridor. While there will be an adaptation period before animals begin
to regularly use the migratory culverts along the railway, it is expected based on
other studies that animals will begin using the culverts as soon as construction
activities and high levels of human activity cease.

To improve the likelihood of the success of the designed-in and supplemental

mitigation measures outlined above, the Project has agreed to conduct
construction and post-construction monitoring of the migratory fauna of the
Railway Project Area. This monitoring will focus on assessing the success of the
designed-in mitigations and aiding in the design and location of supplemental
mitigation measures, if they are deemed necessary.

Environmental Resources Management 11 G:\2010\0103775\14650Hrpt-NTS.doc

With regard to the proposed expansion of the UHG mining operations and
associated infrastructure, the assessment of potential fauna impacts associated
with the development of the Project considered the likely impact on abundance,
geographic distribution and productivity of fauna at the species and ecosystem
level. The assessment concluded that there would be no major impacts to fauna
identified with any component of the mine expansion aspects of the Project.
However, the disturbance associated with the mine and associated infrastructure
footprint will result in moderate permanent impacts to local fauna due to habitat
loss. Mitigation measures in this sense are focused on minimising disturbance
and ensuring that restoration measures include objectives to maintain ecological
function.

Flora

The mine expansion impact on flora is largely due to the disturbance of

approximately 3,500ha required for the mine expansion and mine related
infrastructure. Although this loss of vegetation is locally significant, the
disturbance required for mine development does not significantly reduce the
extent or distribution of the vegetation communities which are represented
widely across the south Gobi region.

Similarly, because the vegetation communities within the railway corridor are
common and contain no unique characteristics that are not found elsewhere in
the region, the impact of vegetation loss associated with this component of the
Project are expected to be minor.

Four very rare and 11 rare species protected by the Mongolian Law on Natural
Vegetation are known to occur in the region crossed by the railway; three species
of conservation significance are known to occur in the area impacted by the mine
expansion.

The primary mitigation measures for flora impacts include minimising removal
or disturbance of vegetation or replanting of native vegetation; implementing
education programs for construction and operational personnel; and
implementing an exotic and invasive species monitoring program will help
mitigate impacts to flora. These measures will be revised and updated on an
annual basis in order to deliver continuous improvement in environmental
performance.

Ecological Protected Areas

The railway corridor crosses a portion of the Small Gobi Strictly Protected Area
(SGSPA) and the Galba Gobi Important Bird Area. The SGSPA is a key habitat
for migratory ungulates of the region. Impacts of the Project on the viability of
the ecological protected areas will be minor and largely positive because the
railroad, once operational, will significantly reduce the ongoing impacts
associated with the unconfined roads currently being used in the region.

Environmental Resources Management 12 G:\2010\0103775\14650Hrpt-NTS.doc

The Project design (i.e., inclusion of animal migration culverts) and the
mitigation measures proposed for fauna and flora have been developed to
minimise impacts on fauna and flora and, in turn, the ecological integrity of the
SGSPA and the Galba Gobi Important Bird Area. These measures will be revised
and updated on an annual basis in order to deliver continuous improvement in
environmental performance and minimise long-term impacts to the protected
areas traversed by the Project.

Employment

Employment generated from Phase II activities will create a large number of jobs
for the Umnogovi region. In addition to direct employment, indirect jobs will be
created by businesses drawn to the region because of economic activity
associated with the mine.

Anticipated employment related impacts include:

• numerous temporary construction jobs during the first 2-3 years of the
Project;
• long-term, high-quality jobs created for the life of mine and for railway
operations;
• indirect job creation from service and supply jobs to meet demands from
resident workforce and the mine itself; and
• risks of unmet community expectations for jobs due to a lack of suitability of
local candidates, during construction and during the transition from
construction to operations.

Whilst predicting exact figures for job creation (and overall population influx) is
difficult, it can be assured that the Project will create a large number of jobs
indirectly. This will have positive local economic impacts as well as positive
regional employment effects. However, there are also possible negative impacts,
especially related to social infrastructure provision to support the increased
population in the Project area.

Mitigation measures in this regard will include clear communication regarding

employment estimates, timeframes and skills; investment in skills training; and
implementation of a local hiring plan.

Labour and Working Conditions

By providing labour conditions and worker rights that adhere to Mongolian

laws and international standards, and providing added value investment in
training, employee housing and healthcare, the Project has the potential to show
leadership at a local, regional and national level which could impact the quality
of life for workers and their families nationally.

Potential impacts identified relate to the large number of construction and

operational employees and the associated risk of unsafe and/or non-compliant

Environmental Resources Management 13 G:\2010\0103775\14650Hrpt-NTS.doc

worker accommodations, and a lack of rights to collective bargaining and
dispute resolution.

Mitigation measures include clear communication to contractors regarding

standards, laws and regulations; establishing compliance assurance procedures
for camps (e.g. audits, sanitary standards, etc.); contractor performance
evaluations on worker welfare and establishing penalties for non-compliance.

Economy

The Project will create a significant source of direct revenue for the region and
the nation. Direct sources of revenue will include salaries paid to Mongolian
workers, capital expenditures, royalties, import taxes, and other taxes, tariffs,
and fees. The magnitude of these direct revenues will be considerable, and will
be augmented by the indirect revenues which will be derived over the course of
the Project life.

In order to minimise the Project’s potential negative economic impacts

(particularly on local residents and herders) and to maximise its positive macro-
economic impacts, the following mitigation measures will be adopted:
• Community relations and public consultation activities will address the
livelihood concerns of local herders and soum residents including
identifying options for local economic development;
• Local sourcing and procurement opportunities will be considered to promote
sustainable small business development;
• Long-term job training will be established to ensure that local residents are
able to hold a significant share of Project-related jobs (i.e. Mongolian-born
residents are more likely to spend money in Mongolia); and
• Local government capacity building initiatives will be supported.

Social Infrastructure

The Project will have broadly positive impacts on the social infrastructure of the
region in the long-term. This will include improved hospitals, more schools and
enhanced access to social and other services in an area which currently suffers
from acute difficulties in accessing social services. The benefits of the Project will
stem from direct investments made in health provision (which occurred in Phase
I and will be expanded in Phase II), as well as from the increased tax payments
that will be made at all levels of government, which will allow the government
to invest in expanded health services.

There are, however, potential negative impacts to social infrastructure, with

population influx placing an additional strain on the current medical and
educational facilities. This strain is currently evident in Khanbogd soum, where
the population influx (unrelated to the UHG Project) has placed pressure on
existing school, hospital and electricity supplies. Adverse effects will manifest
primarily during and shortly after the construction phase.

Environmental Resources Management 14 G:\2010\0103775\14650Hrpt-NTS.doc

To help mitigate risks and enhance positive outcomes, ER has commenced
planning and construction of a ‘mine town’ in Tsogttsetsii soum centre to
accommodate UHG workers and their families, and to meet added educational
and medical needs. The development of this mine town for permanent
employees will allow resident UHG employees to have their medical and other
needs met, without impinging on existing services. However, this medical
facility will explicitly be available to all soum residents, not restricted to only
Project employees.

Community, Health, and Security

Recognising that the Project will bring considerable benefits to the surrounding
soums and communities, there remains the risk that community health, safety
and security will be negatively impacted as a result of Project activities. Potential
positive and negative impacts of the mine expansion and railway development
were identified by integrating information collected during the baseline studies
and stakeholder interviews. The impact assessment considered the various
activities that may occur during the different but overlapping phases of
construction and operations.

The ESIA has identified and evaluated potential impacts and mitigation
measures to existing health, safety and security conditions and emerging public
health and safety challenges in Tsogttsetsii, Bayan-ovoo and Khanbogd soums,
in relation to an increase in mining and associated activities.

Land Acquisition, Involuntary Displacement, and Economic Displacement

As a result of Project construction and operation, surveys conducted during July

– August 2009 for the ESIA determined that 30-40 herder households may be
physically or economically displaced by the railway, and 5-10 herder households
may be economically displaced by the mine expansion. The railway-affected
households are those assumed to have either a summer or winter dwelling (or
both) within 500m of the railway alignment. These households will be
compensated for permanent impacts on the siting of their winter dwellings
and/or loss of access to grazing areas.

Further survey work conducted during January 2010 identified an actual 17

households considered to be physically displaced and 54 households considered
to be economically displaced as a result of the Project. Updates to the profiles of
physically and economically displaced households, in addition to resettlement
plans and outcomes of resettlement activities will be captured in the RAP.

Mitigation measures include conducting physical displacement in accordance

with internationally recognised standards; in-kind compensation; minimising
impacts of construction activities; and detailed and regular communication with
local communities.

Environmental Resources Management 15 G:\2010\0103775\14650Hrpt-NTS.doc

Cultural Heritage

The railway construction will involve soil movement from areas along the
railway route. This activity poses a risk to tangible cultural heritage such as
ovoos (shamanistic cairns), stupas and other sites of cultural interest. Mine
expansions will occur within an area that has already been subject to a detailed
archaeological investigation and no additional impacts are expected.

To reduce the risk of affecting cultural heritage, the Project has conducted pre-
construction surveys to assess any areas of cultural sensitivity along the railway
route. Archaeological surveys were conducted by The Mongolian Academy of
Sciences, Institute of Archaeology in July 2009 to identify any potential historical
sites along the railway route. Identified high value sites will be excavated by the
Mongolian Academy of Sciences to prevent damage.

To mitigate the potential impacts on tangible and intangible cultural heritage,

mitigation measures will include implementation of chance find procedures;
stakeholder engagement activities used to monitor community concerns; policies
to minimise impact of camp workers; and cultural heritage training for staff and
contractors.

Environmental Resources Management 16 G:\2010\0103775\14650Hrpt-NTS.doc

4.0 MITIGATION AND MANAGEMENT

ESMP Organisation

Acknowledging that the Project will have impacts on the local environment and
society, as set out in this document, ER is committed to mitigating negative
impacts and enhancing positive impacts (i.e., benefits), through implementation
of an Environmental and Social Management Plan (ESMP).

The purpose of an ESMP is to detail the objectives, schedule of activities and

responsibilities to manage, limit and mitigate negative impacts (and enhance
positive impacts) from the Project and set verifiable indicators against which
Project (and Contractor) performance can be measured. A Final ESMP for Phase
II of the Project will be submitted along with a final version of this ESIA, and the
final version will incorporate outcomes from community consultation activities,
especially feedback on proposed mitigation and enhancement strategies.

The ESMP follows the general design philosophy and approach of the Phase I
ESMP previously prepared for the management of impacts associated with the
initial “fast track” stage of mining. However, the construction of the railway
component of the Phase II Project is recognised as having a specific set of
potential impacts associated with the activities of Contractors; for this reason,
Contractors selected for railway construction will, prior to initiating construction
activities, be required to prepare and have approved a suite of Environmental
and Social Management Plans (ESMPs). To establish a basis for preparation of
these ESMPs, a specific set of ‘Performance Expectations’ have been specified,
and provided to the railway bidders, and these are reproduced herein.

During design, construction, start up and operation, Project staff and Contractors
will be accountable for executing work in a way that is compliant with the
expectations set out in this ESMP. The ESMP is designed to ensure compliance
with Mongolian permitting requirements and legislation, the mitigation
commitments made in this ESIA, and the terms of the EBRD project approval.

The ESMP will be revised and updated on an annual basis in order to deliver
continuous improvement in environmental and social performance. The annual
review of the ESMP will incorporate feedback from community consultation as
well as lessons learned.

Environmental Resources Management 17 G:\2010\0103775\14650Hrpt-NTS.doc

 Figures

February 26, 2010

Project No. 0103775

Environmental Resources Management

15810 Park Ten Place, Suite 300
Houston, Texas 77084
(281) 600-1000

Environmental Resources Management G:\2010\0103775\14650Hrpt-NTS.doc

FIGURE 1: Project Location
FIGURE 2: Project Layout