Mongolia: No Bottom Calling Zone

by: Jon Springer

Recently I published an interview with a local expert that thinks now is the time to buy in Mongolia. My colleagues at Capitalist Exploits also have suggested it is time to jump back into Mongolia markets. Yet, I am not sure people are done leaving yet.

Systemic problems still seem to exist in the banking sector. The financial stability in the banking sector has improved a bit overall. However, the sector is still fragile.

The recently sold infratructure bond is good news for the government. However, the funds still need to be spent, and spent correctly. Yet, days after the capital for the sovereign infrastructure bond was raised (November 29, 2012), the government was faced with the possibility of it's governing coalition breaking up. Far from doing planning on how to spend the bond money and getting the cash into Mongolia's economic system, the government was instead spending time on keeping itself together.

The foreign investment law [SEFIL] that is vague and poorly conceived has yet to be revised despite most of the Mongolia Investment Summit in October in Hong Kong being devoted to investment professionals complaints about it. Many foreign investors said they would not invest further in Mongolia until SEFIL is revised. While there continues to be rumors that SEFIL will be revised (as per a recent free newsletter from MIBG), it has not been.

Indeed, Deputy Economic Development Minister Chuluunbat (ex-Bank of Mongolia governor and a member of the MPRP) said about the SEFIL to the Wall Street Journal, that pending "amendments would ease the threshold for key projects to need parliamentary approval, from the current $75 million to around $850 million." However, this is but one problem of the SEFIL and does not acknowledge the breadth of arbitrary legal latitude SEFIL gives the Mongolian government against foreign businesses.

The government is now also seeking to revise the mining laws of the country. You can find a downloadable version of the mining law on the President of Mongolia's home page. The president has asked for comments on the law and you can e-mail your comments to

The revisions to the mining laws are getting mixed reviews. However, as noted by MIBG's e-mailed newsletter of December 17, 2012 (subscribe to it here),

Article 66.1 of the draft (Entitlement to hold a license) distinguishes between the two types of entities that are able to hold licenses. These include a company founded by a citizen of Mongolia and foreign invested companies. In the case of a company founded by a citizen of Mongolia not less than 75% of its share capital can be owned by Mongolian citizen and in the case of foreign invested companies not less than 34% of its share amount shall be owned by a Mongolian citizen.

This 34% rule is in line with increasing the number of mines considered strategic despite statements otherwise by MIBG. A mine is strategic, more or less, when the government says it is, and then the government has the right to appropriate 34% of the mine for the government in general, and 51% of the mine if exploration or mining at the resource was ever done by a government entity at an earlier date (including under communism between the early 1920s and early 1990s).

Meanwhile, there are still presidential elections this spring. The last elections were May 24, 2009 and the next one is scheduled for June 2013. The run-up to all other elections in Mongolia this past year has been greeted by resource nationalist politics. Why would the run up to the late spring 2013 presidential elections be different?

Against this backdrop, there is the case of Khan Resources (OTC:KHRIF) vs. Mongolia that should have a decision in 2013. Khan is seeking $326 million in compensation, or a little more than 20% of the value of the sovereign infrastructure bond the government just sold. This is an important case as Khan Resources is suggesting that Mongolia arbitrarily revoked it's mining licenses. There is a lot of vagueness in the laws of Mongolia from the Uranium Law of 2009, the law on mining in rivers and forests (alternatively called The Long Law), the new SEFIL, the newly drafted mining laws and so on. While most mining companies are able to continue doing business as usual, the vagueness of the laws leaves room for the Mongolian government to appropriate mining licenses from mining companies with little notice. This is not a stable environment for mining companies and the Khan Resources case which has been going on for years will now signal:

  • How international law will view sudden legal changes that revoke a company's mining license (in Mongolia).
  • And if Khan Resources wins, whether or not the Mongolian government will respect international law.

(For more on what the Khan Resources case is about, see my article about uranium in Mongolia; the part about Khan Resources begins at the header "One Pure Play, Many Problems" and then continues for several sections)

Thus, there are a lot of headwinds in the coming few months in Mongolia still yet even after the infrastructure bond was voted by Asia Money as the best sovereign bond of 2012.

What do you see?

Here are some charts of stocks on the Mongolian Stock Exchange from Bloomberg. I know most Seeking Alpha readers are only trading in U.S. listed stocks doing business in Mongolia, but wanted to take a look at the local market to see if bottom calling is justified.

Remikon, a concrete company (5 year chart):

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APU, a beverage producer (3 year chart):

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Sharyn Gol, a coal miner (5 year chart):

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BD Sec, a stock broker (5 year chart):

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SUU, a dairy company (5 year chart):

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Compare them to

Here are some popular companies traded in the U.S. and written about on Seeking Alpha.

Turquoise Hill Resources (NYSE:TRQ), copper miner (5 year chart):

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Mongolia Growth Group (OTCPK:MNGGF), a real estate company (3 year chart):

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Mongolian Mining Corporation (OTCPK:MOGLF), coal miner (3 year chart):

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Aspire Mining (OTC:ASPXF), coal miner (3 year chart):

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Prophecy Coal (OTCPK:PRPCF), coal miner (3 year chart):

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So what?

Although the Mongolian Stock Exchange stocks are down off of highs, capital gains have been sustained there better. This begs the question of if

  • Mongolian Stock Exchange stocks are over-valued vs. international stocks
  • or if the international stocks are under-valued vs. the Mongolian Stock Exchange stocks.

As someone who owns a few holding on the Mongolian Stock Exchange, I believe in the current investment climate that the Mongolian Stock Exchange is over-valued and that companies both internationally and on the Mongolian Stock Exchange can still go a little lower. However, I also believe now is a time one could start averaging in to listed companies doing business in Mongolia everywhere. However, averaging in is different than a total buy in, and I would be stepping cautiously in the averaging in process.

Time horizons and risk

A lot of this decision comes down to time horizons. I can say fairly firmly that I think most of the above companies, probably all of them, will be trading significantly higher than current levels over the next 5 to 10 years. However, with the presidential election looming in June and instability still ruling both mining and foreign investment laws, I am hard pressed to say that these companies will not first get cheaper sometime in the next 4 months.

I posted the Mongolian Stock Exchange stocks in large part because investors downside risk in this environment is the 2009 lows, and outside of Mongolian the only U.S. traded company with that long of a track record is Turquoise Hill Resources (TRQ).

A word on the banking sector and other financial plumbing errata of Mongolia

In recent articles, I have mentioned that there were some local concerns that a bank in Mongolia may collapse. These concerns are, for the most part, abating. The top five banks in Mongolia are Trade & Development Bank, Khan Bank, Golomt Bank, Xac Bank and Savings Bank.

Trade & Development Bank has been invested in by Goldman Sachs (NYSE:GS) in the past year. Xac Bank just received a $46 million loan from the European Bank of Reconstruction and Development on December 8, 2012. $46 million goes a long way in Mongolia. Both banks seem in good standing.

I have two anonymous experts about Mongolia's financial plumbing who I will call Moonshot and Lassie. Both think Khan Bank is in relatively good shape because it is mainly a retail bank. The problems in the banking sector have been more so for banks that have mining exposure.

While non-performing loans continue to be an issue, Moonshot says the banking sector was at it's most fragile three months ago in September. He thinks things have relatively stabilized. Lassie on the other hand believes things continue to be very tenuous. Lassie further contends that the recent sovereign bond for infrastructure has emboldened state operated enterprises to pursue dealings with the local banks that are putting the banks under greater pressure.

Essentially, Lassie and Moonshot have provided me an excess of data which is in accord about 85% of the time, and also in accord with data from other sources. However, they disagree about the current fragility of the banking sector. All opinions I can derive on recent events with one of the three largest banks in the country are also divergent.

Headline: Golomt Bank Appoints G. Ganbold as CEO (English courtesy of Mogi's Cover Mongolia news service, translated from Mongolian that appeared on and Golomt Bank website):

December 13 (Mogi) reported first what read to be a press release from Golomt (it said congrats to Ganbold on behalf of Golomt employees) on the morning of 13 December that the Board of Directors on 12 December relieved John P. Finnigan as CEO and appointed Executive Vice President, Retail Banking G. Ganbold as the new CEO. That identical press release was finally posted on their website by noon 14 December

Rumors about this change in management have been wide ranging. I have been chasing down the various rumors which range from "everything is fine" to "something's wrong" at Golomt.

One source says that Mr. Finnigan retired and this was planned. Another source says he was forced out due to challenging events at the company. This is how it goes in Mongolia.

What this all likely, thought not definitively, means is:

1) Golomt is fine.

2) People are nervous and gossip spreads fast in Ulaanbaatar.

However, the nervous behavior is notable. Nervous behavior creates runs on banks that put banks out of business.

The instability of laws from SEFIL to the new draft mining laws to questions about whether the ruling coalition can hold together are not helping to create a stable investment climate. The government needs to stabilize the whole environment as the nervous climate is a liability that could create a major economic disruption.

Wrapping up

Thus, there are arguments to be made to call a bottom. One can say things have become as dim as possible on the bright economic potential of Mongolia. However, it does not feel that gloomy. International markets have green-lighted Mongolia to continue current behavior by snapping up their recent speculative grade sovereign bond at a 5.125% coupon for 10 years.

There are still sizable risks to investing in Mongolia currently, and it is still possible for listed companies to go down significantly further. I am invested long in some holdings in Mongolia, but I have been long in these investment for quite some time and intend to hold them for a long time horizon that is three or more years out. This is not the same time horizon or risk-reward profile as other investors or new investors. Each investor should carefully consider the risks of investing in companies doing business in Mongolia.

The last word after the end

As a counterpoint to this article, it is worth listening to a smart and funny audio interview very positive on Mongolia with Harris Kupperman, CEO of Mongolia Growth Group, by Seeking Alpha's Ian Cassel on MicroCapClub.

Disclosure: I am long OTCPK:MNGGF, OTCPK:MOGLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. On the Mongolian Stock Exchange I am long SHG, RMC, and APU. In the next month I may sell SHG and APU; and if I do I will either remove the cash from Mongolia, or use the proceeds to buy BDS and more RMC. I am not adding any new funds to my Mongolian related holding inside or outside of Mongolia, but may rearrange current holdings. This article does not advocate for anyone directly investing in the Mongolian Stock Exchange where enforcement of accounting standards and corporate governance issues are in their very early days.