Untapping Mongolia’s Mineral Riches
When I was invited as a U.S. representative to the Asian Development Bank to speak at the 1991 opening of the Mongolian Stock Exchange, I expected a frontier adventure, as the country had just broken free from Russia to form a fledgling democracy. I got more than I bargained for and, in retrospect, was lucky to get out of there alive.
The first challenge was vodka. Mongolians are the highest per capita imbibers of vodka in the world. I nearly drowned in the stuff as dozens of toasts and calls of “bottoms up” went on late into the evening of my arrival in the capital of Ulan Bator.
The second day I was a bit wobbly but went with my hosts deep into the rugged steppe for a traditional barbecue capped by races to the top of mountains and a clifftop midnight wrestling match. I held my own but a slip would have led to my demise.
Two decades later global investors, especially China and Russia, are eyeing its huge untapped natural resources. Mongolia, three times the size of France with a population of only 2.7 million, is a relatively poor country with a per capita income of about $3,000. But it is sitting on a treasure trove. The country’s top ten mines are estimated to be worth $2.75 trillion in coal, copper, gold, uranium and rare earths.
This makes every Mongolian a millionaire—if they can get this stuff out of the ground and to global markets. Unfortunately, corruption is a rising issue, and inflation tops 20% as a gold rush mentality takes hold.
Still, willing buyers are certainly there, with $5 billion pumped into the economy in 2011 fueling a stunning 17% increase in the country’s GDP.
The Mongolian Stock Exchange is not for the fainthearted, but the brave have been rewarded with returns of 121% in 2010 and 58% in 2011, although the index made up of the largest 20 companies has cooled 10% so far in 2012. There are 332 companies listed on the exchange, with a total market value of $3.2 billion.
There is political risk. Mongolia’s former president is facing corruption charges that he insists were engineered by the current president to keep him from participating in the recent parliamentary elections.
If you’re gun-shy about investing directly in the Mongolian market but want a piece of the action, go with Vancouver-based Ivanhoe Mines (NYSE, IVN, 8), which has a 66% share of Mongolia’s Oyu Tolgoi gold and copper mine, which is on the Mongolia-China border. Temasek, Singapore’s investment arm, recently put up $420 million for a 5.5% stake in Ivanhoe; Australia’s Rio Tinto has a controlling interest in it. Ivanhoe’s stock has lost 64% of its value in the past 12 months as copper and gold prices have pulled back.
The Oyu Tolgoi deposits reportedly contain 79 billion pounds of copper and 45 million ounces of gold. Rio Tinto has already spent $7 billion to prepare the mine for operation. It is expected to begin production in August.
For stocks listed on the Mongolian Stock Exchange, my favorite is APU JSC (APU, 3), the country’s largest beverage company. The company was founded in 1924 and privatized in the 1990s. It has the dominant market share of—you guessed it—vodka and beer while also producing milk and juices.
The Leopard Asia Frontier Fund likes and holds concrete producer Remikon JSC (RMC, 0.14), also traded on the Mongolian Stock Exchange. Right now 80% of the cement supporting Mongolia’s construction boom is imported from China, but Remikon is planning to build an $8 million cement plant near its limestone deposit.
For speculators I’m going with Sydney-traded Aspire Mining (AKM, 0.15). While the company has exploration licenses for five projects, a lot is riding on its Avoot coking coal project, potentially the country’s third largest. Mining is not expected on any scale until 2016. The company has about $28 million in cash with no debt, and the stock price is tempting after falling 77% over the last 12 months.
Mongolia is a frontier market with huge potential. Steel your nerves and take a small stake.
Carl Delfeld represented the U.S. on the Asian Development Bank board and heads the global investment advisory firm Chartwell Partners. He is editor of Chartwell Advisor Global ETF Report. www.forbesnewsletters.com/chartwell.