The Oracle Of Mongolia, Interviewing Mogi
“Mogi” Munkhdul Badral aggregates all the news from around the world about Mongolia every day and puts it out in his Cover Mongolia service via Twitter, the eponymous website and e-mail. He rarely makes comments within his service, but those that he does are insightful and accurate. For some depth on what has transpired in Mongolia this past year and what to expect going forward, here are some insights from the man who knows every piece of news about Mongolia from Mongolia’s Olympic Facebook activity ranking to Ulaanbaatar’s pollution data to international lawsuits. As someone who covers emerging and frontier markets like Mongolia and someone long several Mongolia stocks including long-dated Turquoise Hills calls, following Cover Mongolia on Twitter is obligatory.
Jon Springer: The new Investment Law, Investment Fund Law and Securities Market Law have done a lot to open up Mongolia’s capital markets to foreigners as discussed in an earlier interview with the Mongolian Stock Exchange.
Mogi: These are net positive for Mongolia. The trend began last year when parliament quickly amended the Strategic Entities Foreign Investment Law [SEFIL]. Then, the new Investment Law that replaced the SEFIL and the Securities Market Law. All of this has been a step in the right direction. It is helping investor sentiment to bring back foreign investors to Mongolia. Of course, it depends on how well we can implement and promote these laws. The government seems to be on a campaign that they are open for business again, a slogan they are using at every occasion possible.
Springer: It is nice that Mongolia is open for business again, but aren’t these the same people who closed it for business by passing laws such as SEFIL back in 2012?
Mogi: Not exactly. When SEFIL passed, the Democratic Party [the DP, which now rules] had just exited the ruling coalition. The Mongolia People’s Party [the MPP, the ruling party at the time, the opposition party since summer 2012] was in charge when SEFIL was passed. Of course, the DP was a major party at the time.
Springer: But under the heat of summer 2012’s elections, the DP did support the SEFIL.
Mogi: Yes. DP is not without blame. It was not just the SEFIL to blame. I think larger blame for Mongolia’s image was the DP’s behavior after being elected and particularly how they handled their relationship with Rio Tinto, majority owner of Turquoise Hill and its Oyu Tolgoi project [a world class copper-gold mine].
Springer: So with a lot of new regulations comes the need for a lot of new regulatory enforcement. Has the Financial Regulatory Commission [FRC] – the enforcement agency – been adding staff members to help enforce all the new investment related laws?
Mogi: To my knowledge the FRC has not been able to add more staff members to their budget. Every year they ask for additional staffing and that request is killed in parliament or cabinet meetings. However, FRC has been around for a while and I think they have the necessary capacity to enforce the new Securities Market Laws and Investment Fund Laws though hey could probably use more technical support and staffing.
Springer: Are the new politics of Mongolia that Mongolia is open for business coming from a place of sincere values or is coming out of desperation that there is a need for capital and foreign direct investment [FDI]?
Mogi: I think desperation started this trend. I think it has also helped give courage to politicians to speak frankly. Before if they believed something was correct but politically risky they would stay silent to avoid being ostracized as pro-foreigner but now they can speak out.
The country’s economic crisis is impacting ordinary people. The people now understand why the currency is dropping and their food, which is mostly imported, is more expensive. They now understand that these things were tied to foreign investment. This gives politicians incentives to do things that are good for the economy now, as they now gain political capital by doing the things that will bring the foreign investment back to the country, lower food prices and stabilize and then strengthen the currency.
At very local level elections, I am hearing stories that former MPP strongholds are losing elections to the DP, or at least vulnerable to losing, because people hold the MPP responsible for the anti-foreigner laws that increased the price of their food. The anti-foreigner populism that existed in 2012 has been greatly diminished in the public sentiment.
Springer: Erdenes Tavan Tolgoi [ETT], the massive state-owned coal mine was once slated to have a triple IPO in Hong Kong, London and Mongolia in 2012 that never happened. This was supposed to help the government and the citizen shareholders and be Mongolia’s exemplary state owned enterprise [SOE]. Is that IPO any closer?
Mogi: The IPO of ETT is not any closer than it ever was. It is even more unclear when an IPO will happen. The issue is the prices at which ETT is able to sell its coal. The mine is still selling coal at a discount to China to pay off debts. The debt to China’s CHALCO stems from a $350 million pre-payment to ETT which was passed on the government of Mongolia which the government of Mongolia used for cash handouts to the citizens of the country in the run-up to the summer 2012 elections.
ETT is separated into two parts, the East Tsankhi and the West Tsankhi. The East Tsankhi is being mined to pay China’s CHACLO and then the West Tsankhi is being managed and mined separately by ETT.
At this point, what is hurting ETT the most is the price of coal and the lack of washing capacity on site to improve the value of the coal before shipping it.
China and Mongolia do have a customs agreement where China has a customs office on-site at ETT so the coal from ETT does not need to stop to be unloaded, pass customs and be reloaded at the Chinese/Mongolia border.
There is a railway being constructed between the area where ETT is and the Chinese border. Mongolia Mining Corporation [MMC] had started construction from a nearby mine. The government of Mongolia took over the project and will then compensate MMC for the work to-date. They’ve also bought their coal-haul road, which will help MMC, as they were tight on cash.
Springer: Mongolia trains typically run on Russian gauge that is unfortunately different than China’s narrow gauge railways. It is costly to have to change rail gauge at the border and all the mining assets in the Gobi such as ETT are far closer to China than Russia. Yet, it has been controversial in the past to suggest using narrow gauge like China for new rail construction in Mongolia. Any word on if this railway link between ETT and China will be Russian gauge or narrow like China?
Mogi: There is of course within the government a push for narrow gauge railways but there has been a degree of silence from the government on the final decision, as they don’t want any trouble from within. I think they will announce the decision only when it is final.
Springer: How are things progressing with Rio Tinto and Turquoise Hill’s Oyu Tolgoi copper-gold mine? Is Mongolia seeing an employment benefit and economic boost across the nation from this mine that is global top five copper-gold mine?
Mogi: The mine is benefitting the country. The mine is in the South Gobi, the headquarters is in the capital of Ulaanbaatar, they have training facilities elsewhere around the country and they give out scholarships to Mongolia students around the country. Hopefully there will be a joint agreement reached and announced soon.
There are 15 banks [World Bank, EBRD, Australia Ex-Im Bank, etc.] that have extended the project financing deadline until the end of March of this year. These banks pledged about $2.5 billion last year for Oyu Tolgoi’s 2nd phase of construction that will involve block caving. Phase 2 should start production in 2016.
Phase 1 which is open pit mining has been ramping up production. They have had some difficulties selling their stock piles last year due to issues at the Chinese border. Those issues seem to be settled now. They have been continuing to ramp up production and stock piles. They have now sold off their remaining stock piles from last year.
Once the railway is built for ETT, there should be a rail spur to Oyu Tolgoi as well. It makes sense when the government owns 34% of Oyu Tolgoi and owns the railroad.
Oyu Tolgoi is still getting power from China but there are plans for a power plant for ETT that will also supply power to Oyu Tolgoi. This is planned for completion in 2017. The Oyu Tolgoi agreement mandates Oyu Tolgoi to eventually source its power in Mongolia.
Springer: Regarding the rest of mining in Mongolia, there is a new State Policy on the Mineral Sector. How is this good for the mining industry and foreign investment?
Mogi: There was previously a moratorium on new mineral licenses dating back to 2011. The government passed a new policy on the sector and is amending related existing laws dating back to 2006 to fit the policy.
Springer: Is enough capital being invested by mining companies to find another Oyu Tolgoi sized supermine in Mongolia?
Mogi: The last two years has been difficult for Mongolia’s mining sector. A lot of the exploration, and investment into the mining sector, dried up due to the legal environment and declining natural resource prices. Last few years have been a difficult time particularly for junior explorers to find capital. There have been a few explorers that placed themselves with a good strategic partner such as Erdene Resource Development with Teck Resources and Xanadu Resources is partnered with Noble Group.
Springer: GDP growth has a tendency to be high in Mongolia as it is coming from a low base. What are the expectations for GDP growth as mining production in Mongolia increases? Is per capita income keeping up with the economic growth and inflation?
Mogi: GDP growth for 2013 was between 11.7%. Last year was hurt by the drop in coal prices. Even though copper, iron ore and oil exports all went up last year, due to the drop in coal overall mineral exports from Mongolia were down from 2012. Production from Phase 1 of Oyu Tolgoi ramping up should help out this year and make 2014 another good year of double digit GDP growth. The IMF and World Bank expect Mongolia’s GDP growth to drop to single digits in 2015.
Income for people is going up but the income gap between the wealthy and the rest of the country is widening. Inflation is always a problem for Mongolia. We have never managed inflation well as a country heavily dependent on imports. In 2013, inflation was 12.5% up from as low as 8% in mid-2013.
Springer: At the Mongolia Investment Summit in October 2013, it was reported that Firebird’s James Passin predicted a great year for the Mongolian Stock Exchange in 2014. As Firebird is the largest shareholder on the Mongolian Stock Exchange, that sounds good for Firebird. However, Mr. Passin made no such positive comments in 2012, and is known to mean business when he speaks. How did the Mongolian Stock Exchange fare in 2013 and what are likely drivers of the stock exchange this year?
Mogi: Last year, the MSE Top 20 index was down 7.9%. I don’t think I could be as optimistic as James Passin. In 2010, we were up 121%. I think 2010 and 2014 are different. In 2010, China had 9% growth, commodity prices were at its peak, the Oyu Tolgoi agreement had just be signed and there was a convergence of positive news for Mongolia. That said, 2014 should be a better year than 2013. The new Securities Market Law has taken effect and we should have custodian bank FRC regulations approved shortly in line with the new laws. By the mid-year, we should see the first custodian services in Mongolia allowing investment funds to trade on the Mongolia Stock Exchange.
Springer: Banks are frequently rumored in Mongolia to have solvency issues. What has the government of Mongolia done in the past year to sure up the banking sector?
Mogi: Being a small economy and the economy being heavily dependent on banks, a lot of the local financing comes through our banks. Mining being the biggest contributor to Mongolia’s economy, the banks have been heavily involved in loaning money to mining companies. Thus, the last few years when we have had a drop in mining projects and commodity prices, this has created problems for the banks and their loans. The government of Mongolia has been successful at bringing stability to the banking sector by increasing capital requirement. The recent reports from ratings agencies say they are adequately capitalized to withstand a minor crisis. Last year was largely a profitable year for banks despite the government reorganization of the 5th largest bank Savings Bank into receivership and State Bank.
Springer: The government of Mongolia itself has had some issues with spending more than it is bringing in. The Mongolian tugrik currency has suffered recently because of this. What measures has the government taken in the past year to bring stability to the economy and the currency?
Mogi: In anticipating the fall in FDI last year, the government had various price stabilization programs. The government gave loans to domestic producers to keep their prices stable. Bank of Mongolia has given cheap loans to petroleum importers to keep the prices stable. The government has somewhat been able to artificially keep the economy stimulated with the proceeds of sovereign bonds, what are locally called the dollar denominated Chinggis bonds and the Japanese yen denominated Samurai bonds. With FDI low, the government has worked to keep the influx of foreign currency enough to insulate the Mongolian tugrik, although its fall of 16% in 2013 was a major shock.
The Development Bank of Mongolia raised 30 billion yen [U.S. $293 million] but then paid 5.7 billion [U.S. $56 million] of it to the Japan Bank for International Cooperation as a fee for the guarantee it provided on the Samurai Bonds. The rate on the bonds is 1.52% for 10 years so other than the guarantee money it was cheap money.
Springer: What else is the government of Mongolia trying to do to help the local economy and currency stability?
Mogi: The government is trying to help the economy on two fronts. One is trying to bring back investments and FDI. They have been doing a lot of road shows around the world to promote this. They have also been promoting local exports and local manufacturing that can replace imports. The government also recently announced 300 billion tugrik in funding [U.S. $173 million] for projects to increase exports and/or replace imports with local manufacturing. The government to-date has received over one thousand proposals for this funding.
Springer: You said on Twitter recently that you feel like the ruling Democratic Party “lost a nice opportunity to cement its now undeserved ‘pro-business’ name. Whatever they do now just seems out of desperation.” Could you elaborate on what you meant by that and what your impetus was for saying so?
Mogi: Last year when the DP came into power, their victory was described in foreign media as the pro-business party winning the election and it would be good for the economy. However, the actions they subsequently took and their harsh stance on negotiations regarding Oyu Tolgoi belie that. The current Economic Development Minister has said, “even if our economy fails, we can still go back to herding.” For him, it sounds like it is not a big deal that FDI is falling.
Since they can say that the current problems are not that fall and blamed them on the MPP, they had the opportunity to take more proactive measures than they have. They could have proactively worked on improving the investment image and climate of Mongolia immediately after the 2012 election instead of waiting to react out of desperation when things got worse.
Springer: The new investment laws that are on the books to encourage FDI promise foreign investors tax and legal stability. How ironclad is this stability?
Mogi: It is not. The new Investment Law provides tax stability over a period of time for foreign investors. The argument that this creates stability is two-thirds of the parliament has to vote to change the Investment. However, what happens if the government introduces a new tax? The current investment law provides stability for existing taxes but there could still be a separate new tax law declared that would not be covered by the promised stability under the Investment Law.
Springer: The Khan Resources case will have a settlement ruling this year after the United Nations arbitration hearing ruled in favor of Khan Resources last year (that the government of Mongolia wrongly revoked Khan’s uranium license and gave it to Russian interests). This could be a settlement of several hundred million dollars. Is the government prepared to absorb this settlement and has the government taken measures that will prevent such issues from arising again in the future?
Mogi: Khan Resources and the government of Mongolia are awaiting a settlement hearing with a United Nations arbitration committee in March 2014. The court has already determined that the government of Mongolia is at fault and Khan Resources is seeking about U.S. $325 million from the government. To put this in perspective, the amount Khan Resources is seeking is greater than the amount the government raised with the recent Samurai bonds.
Springer: Lack of execution on infrastructure projects has been something that has held up Mongolia’s development. Rail networks, industrial zones and power plants are all behind schedule. What has the government been doing to pick up the pace?
Mogi: I think infrastructure is something that this government has been good on. A lot of projects that have been stalled or delayed for years have made progress. Last year there were tenders for the CHP5 [Ulaanbaatar’s new power plant] and the contractors have been awarded. Major highway projects have been carried out with over 1,500 kilometers of roads built in 2013. There has been progress with the railway between ETT and China. The Sainshand industrial zone [where Mongolia plans to produced finished products from its raw materials upon completion] development is also picking up pace again.
Springer: You made your Cover Mongolia newswire a business in 2013. Previously it had been a newswire that you did as part of your job with a brokerage firm. How is the business building, and is it showing signs of scaling up?
Mogi: I decided to make Cover Mongolia Newswire a stand-alone business because I saw a market for it. Cover Mongolia currently is a paid subscription service for our aggregated news service. I have one person on staff now. As he gets more skilled at doing everything I have done with Cover Mongolia in the past, I will be expanding Cover Mongolia into more market intelligence and corporate public relations business lines.
Jon Springer, Contributor
Mogi’s Cover Mongolia can be found at covermongolia.blogspot.com, on Facebook /CoverMongolia, on Twitter @CoverMongolia.