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On December 24 and December 27, 2012, I published two articles calling a bottom and turnaround on the price of Turquoise Hill (NYSE:TRQ) shares, a company I had previously been negative on. In these articles I mentioned that I believe all Mongolia related stocks would turn positive on the recent news cycle. Mongolia Growth Group (OTCPK:MNGGF) has now moved to the front of the line of other Mongolian companies ready to move up with additional positive news.


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Source: Yahoo Finance Turquoise Hill chart from December 24, 2012, to January 4, 2013.

After the market closed on January 4, 2013, Mongolia Growth Group announced that the company will be up-listing its primary Canada listing from the Canadian National Stock Exchange to the TSX Ventures Exchange (pending final approval).

Mongolia Growth Group's primary business in Mongolia is investing in real estate in Mongolia's capital of Ulaanbaatar. The thesis of the company is that a combination of factors will push the prices of central Ulaanbaatar property up dramatically in the coming 5 to 10 years. The two main points of this thesis are:

  • An economic boom on a scale with recent booms in Qatar and Kazakhstan over the last 20 years. Mongolia is at the beginning of a major mining boom. Mongolia GDP in 2011 was $8.5 billion. The largest copper-gold mine in the country (Turquoise Hill's Oyu Tolgoi), which starts production this year, will generate $6 billion per year toward Mongolia's GDP by 2020 (year 7 of production using conservative numbers with prices for copper and gold that are significantly lower than today). There are many other mines throughout the country that are being developed as Mongolia's resources are only now being discovered. Mongolia's population is only 2.8 billion people which means, according to Jim Dwyer of the Business Council of Mongolia, there is estimated to be over $330,000 of natural resources in the ground per citizen. GDP growth and per capita income growth are going to rise dramatically which will push the price of everything, including real estate assets, upward.


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Qatar's GDP growth. Source: Google Finance, World Bank.


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Kazakhstan's GDP growth. Source: Google Finance, World Bank.

  • Multiple pressures on the value of central Ulaanbaatar real estate. Ulaanbaatar is where roughly half of Mongolia's population lives. Most major shopping and services are in the city's center. The current infrastructure of the city services the center best. There are limited roads leading to the center which makes commuting to the center from a distance time consuming, and being able to live in the center is something people will pay a premium for. Today, in Ulaanbaatar's center, you can find Dior (OTC:CHDRF), Armani and Louis Vuitton (OTC:MAGOF) stores but there is not a McDonald's (NYSE:MCD) or Starbucks (NASDAQ:SBUX) yet. As the economy grows, more business are going to come in and want prime central commercial real estate: near the business district, near the shopping district, near the area with most of the night life, along the primary roads leading to the center; and all of these things are essentially in the same place.


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Source: Mongolia Growth Group December 2012 corporate presentation.


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Source: Mongolia Growth Group December 2012 corporate presentation.

I got in touch with the CEO of Mongolia Growth Group [MGG], Harris Kupperman, to ask him a few critical questions for potential new investors.

Jon: Congratulations on the news MGG is in the process of up-listing (final approval pending). I think one thing potential new investors will appreciate is the attention to detail MGG has taken since its inception in February 2011. Can you talk a little about the rigorous auditing standards MGG has undergone to value all its properties and the challenges for a property company in Mongolia to meet the highest international auditing standards.

Harris: I think the key thing to remember about MGG is that I am an investor and shareholder in MGG first, and CEO second. Over the years of investing in other companies, I have come to learn just how little you actually know about a company compared to what you think you know from the outside looking in. Therefore, when we built MGG, I told everyone that we would do everything possible to provide the maximum in transparency, corporate accountability and then engage internationally respected firms so that other shareholders have the same confidence in our numbers and assets that I do.

We use PWC for our audit work and one of the largest international property valuation firms for our annual property valuation work. Trying to do everything to international standards has not been easy as Mongolia is a frontier economy and a lot of the infrastructure that you need in order to conduct these audits are just being put in place. Just think of how many Mongolians need to be hired by the big 4 audit firms? There might not even be enough skilled accountants today in Mongolia. This takes time and training. It cannot be done in a day or even a year. It is a long-term process. However, we have been very impressed with everyone that we have worked with. I think the professionals are up to international standards, Mongolia just needs ten times more people with similar training, and this leads to bottlenecks and slow turnarounds. As the economy of Mongolia continues to grow, I think that everything will continue to become easier.


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Source: Mongolia Growth Group December 2012 corporate presentation.

Jon: Ulaanbaatar is the coldest capital city of a sovereign nation on the planet, and was rated the world's second most polluted city in 2011. As the economy grows, one would imagine Mongolia will fix the pollution problem. However, before you moved to Mongolia you were running a hedge fund from an office in South Beach, Miami, Florida. At the end of this article is a list of five blogs you wrote about Mongolia in fall of 2010 before you started Mongolia Growth Group. What made Mongolia special enough to you that rather than invest in someone else's company there, you needed go from being a hedge fund manager to CEO, start your own public company to invest there, and move there?

Harris: Honestly, I did not set out to be the CEO of anything. The real issue was that I could not find a company that met my very exacting standards for transparency and corporate governance in Mongolia, nor could I find a company that was truly leveraged to the growth of GDP and the consumer. It was not for lack of trying. I probably met with over 50 companies during my first two trips to Mongolia. Finally, I decided that compared to the opportunities that I am likely to see over the next few years in other countries, investing in Mongolia was the sort of investment that I could not afford to miss out on. Therefore, I gathered a few friends and we set out to build the sort of company that we could not find when we went there first as investors. Investing in Mongolia today is just one of those very unique opportunities that you get once in your life. I couldn't afford to miss it.

Jon: Two related questions. Using January 4, 2013, closing price of $3.86, what is MGG's price to book value right now? Following on that number, can you contextualize that number and discuss: Ulaanbaatar real estate price growth over the last 5 years; what happened to real estate prices in places such as Qatar and Kazakhstan during their economic booms?

Harris: Unfortunately, I am not allowed to give guidance as to what I think the liquidation value of our assets is today. I would like to instead note that we did a valuation at the end of 2011 and the property market had a very good year in 2012. Given that we have built a portfolio of assets that aims to have leverage to the growth of property assets, I have to think that our assets have at least tracked the broader market, or done better-and as I said, 2012 was a very good year for property assets in Ulaanbaatar. Finally, I should point out that we've become increasingly skilled at adding value to existing assets through renovations. This is in addition to the growth of the portfolio value through pure GDP growth.

I think it's important to look at countries like Kazakhstan and Qatar as templates for what can happen when a resource economy has a sizable GDP growth spurt. Unlike a country like America that does a low single digit number over time, in a resource economy, when the main resource asset finally starts to produce, you have an increase in GDP that can be a five or ten-fold increase in just a few years. This growth is intoxicating and that's why I am now so focused on Mongolia. I think it is the next boom country based on resource production. So let's look at what happened in Almaty in Kazakhstan.

At the start of the boom, there was a lot of poverty and nothing much of value. You could have bought apartments in downtown for less than a nice suit. Ten years into the oil boom and those apartments are worth a few hundred thousand dollars-each. There has been plenty of volatility along the way, but the point is that you had huge increases in value over the past decade. The same sort of math can be applied to ground floor retail space. There are old Soviet Apartments now retrofitted as retail space and selling Brioni suits. You can buy diamonds and other luxury goods out of these places. Fifteen years ago, you had families still living in these apartments. The upside is astronomical. I wish I could talk about what happened to office space or modern retail malls, but they didn't even exist at the start of this boom, so you cannot track prices. Of course, the first guys who built these modern structures made fortunes. Think of one and 2 year paybacks on building a real estate asset. That's not supposed to happen. And then, there's Qatar. 20 years ago, Doha was a little village. Think of it now.

This is what happens during a resource boom. Will Mongolia track it, thus far everything I've seen on the ground seems to say yes. I'm not telling you that we're in the first inning, there has already been a lot of price appreciation since the end of Communism, but the big price increases happen as the main resource assets come online. Oyu Tolgoi starts producing copper in a few weeks. You want to have exposure as this asset comes online and ramps up. This is why we built MGG the way that we did. We want that exposure to what we think is the next Almaty or Doha.


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Source: Mongolia Growth Group December 2012 corporate presentation.

Jon: Mongolia Growth Group has had multiple rounds of capital raises since its inception. There has been debate in public spaces and investment newsletter forums on if these capital raises are accretive or dilutive for current shareholders. What are the advantages to a current shareholder when (and if) you have another capital raise?

Harris: I want to start off by saying that I am the largest shareholder of MGG and I spent over $3 million dollars of my own money to purchase my shares. I don't take any salary, options or other compensation. When we raise capital and I get diluted, I feel it just as much as other shareholders. I want to make sure that MGG only raises money when we can do something VERY smart with the money. Thus far, I think that we have succeeded in being intelligent when it has come to spending the money that we have raised.

I should point out that there are certain fixed costs to being a public company. As the portfolio grows, those costs should not grow substantially from where they are today. Therefore, as we raise capital, it serves to substantially increase our earnings as incremental rental revenue will drop to the bottom line at a much higher rate than existing revenue. As long as there are economies of scale involved in growing the business and we can buy undervalued assets, it would make sense that we should be thinking about how to grow our capital base. Hopefully, we will eventually hit the critical mass where we can start to utilize overseas debt and not be exposed to continued dilution that comes from raising equity.

Jon: The thesis is pretty simple. Find a good macro trend (Mongolia's GDP is going to go up exponentially), figure out a way to get long it (real estate), buy and hold on. Economic booms have corrections, bubbles, and busts along their upward trajectory. Can you talk about the local team you have on the ground in Mongolia, the value of your staff compared to the value of the property portfolio they have helped build, and how the MGG team helps MGG navigate marketplace movements?

Harris: At a young company like MGG, so much of the future success is dependent on the key people. We have roughly 70 Mongolians working for the company and we have spent a lot of time on hiring and training them. We rely on them for everything from buying assets, to leasing the assets to collecting the rent. Our entire insurance company is run by Mongolians. There isn't a single expat there at this point. We now have quite a few Mongolians in very senior positions at our company and we think that over time, the number of Mongolians who occupy key positions will continue to grow.

Our people are our eyes and ears in terms of what happens day to day. When they hear of distressed assets, we are the first to know. This is key. As you point out, while Mongolia is booming, property prices will not go up in a straight line. Our guys have the pulse of the market and in the spring, they felt that things had gotten overheated. They helped us to very accurately time our exit from over a dozen smaller assets that we wanted to sell. In addition, they felt that prices would drop, which they have, and this has meant that we have been patient and waiting to spend our capital, rather than having chased after assets this spring and summer when the first mini boom was happening. Now you can buy similar assets at nice discounts and we're finally getting focused on buying things again. My friends and I might be the guys who organized a Mongolian company, but it really is our Mongolian team that has built the company on a day to day basis.

Thanks very much to Harris Kupperman for stopping by to talk with Seeking Alpha's readers.

For readers interested in researching the company further on their own, I have created a library of other relevant work and data about Mongolia Growth Group.

Source: 5 Questions With Harris Kupperman, CEO: Mongolia's Next Stock Going Up?