What Mongolia's Mines Mean for Metal ETFs

After more than six years of negotiations, the government of Mongolia has signed a major deal expected to drive billions of dollars of foreign investment into the Asian country. The agreement for the $4 billion Oyu Tolgoi copper and gold mine is a major step forward for one of the world’s most resource-rich countries that has struggled to attract investment dollars from developed nations.

In many underdeveloped countries, mineral wealth has offered opportunities for development and prosperity during the recent commodity boom.

But uncertainty over the degree of government involvement in mining operations and tax ramifications has caused many would-be investors to steer clear. With a clear framework now in place, Mongolia looks to be ready to unlock some of the world’s largest untapped reserves of coal, copper, gold, and other commodities.

The Oyu Tolgoi mine, located just north of the China-Mongolia border, is owned by Ivanhoe Mines, a small Canadian firm in which mining giant Rio Tinto owns a 10% stake. The mine is expected to produce 450,000 metric tons of copper, equal to about 3% of global supply according to Elisabeth Behrmann. The mine could yield some 330,000 troy ounces of gold. With gold prices surging above $1,000 per ounce, the market value of the untapped reserves could top $350 million.

The mine isn’t expected to go online until 2013, and even then the quantity of minerals expected to be produced makes it unlikely that Oyu Tolgoi will have a major impact on world supply for precious metals, coal, or copper. But if the mining operation proves to be a success for both foreign investors and the Mongolian government, it could open up one of the world’s largest untapped sources of minerals and other natural resources.

Mongolia is a vast country with a significant nomadic population. Although it is the world’s 19th largest country and second-largest landlocked country, Mongolia is the least densely-populated independent nation in the world, with a population of less than three million. While mineral resources such as copper, coal, tin, and gold account for a significant portion of the Mongolian economy, a significant portion of the vast country remains untapped, limited by a lack of infrastructure and necessary technology.

ETF Plays on Mongolia’s Mining Move

Mongolia’s move to open its doors to foreign investors stands to provide a huge boost to the developing nation. But it also provides a major opportunity for resource and mining companies around the world to get a piece of the action. Three ETFs engaged in global mining operations are highlighted below:

• Emerging Global Advisors Emerging Markets Metals & Mining Titans Index Fund (EMT): This ETF offers targeted exposure to companies engaged in industrial and precious metals exploration, extraction, and production in the emerging world. EMT invests in several countries bordering Mongolia, including China and Russia. Since its inception in May of this year, EMT has gained more than 35%.

• Market Vectors Gold Miners ETF (GDX): Gold ETFs have been extremely popular in recent months as investors embraced cheap, easy exposure to a tested inflation hedge and safe haven. GDX offers exposure to firms engaged in the discovery and extraction of gold, a group of equities that generally performs well as gold prices rise. GDX has seen cash inflows of nearly $1.2 billion this year, and has gained more than 70% over the last year (by comparison, GLD is up about 21% over the last 52 weeks).

• Market Vectors Hard Assets Producer ETF (HAP): HAP is slightly more diversified than GDX, investing in companies engaged in the production and distribution of hard assets and related products and services. HAP’s holdings include precious and industrial metal firms, as well as energy and agriculture producers. HAP has gained more than 30% so far in 2009.

Disclosure: No positions at time of writing.

Comments

[Mad Hedge F...:]

nas There’s nowhere I won’t go to make a buck, so I had to sit up and pay attention when friends in Tokyo told me that the next big Asian equity play will be in Mongolia. Genghis Khan’s ancestral land has enormous mineral resources which make it a natural commodity play (did he know?), and it has one of the world’s most GDP friendly population pyramids. But incompetent government administrators with antiquated Soviet era sentiments managed to kill every nascent development opportunity in the crib with onerous windfall taxes and harsh joint venture restrictions. The resources stayed in the ground. National elections finally turned over the regressive administration in 2008, and the anti growth tax regime was dumped last week. Mongolia is now close to inking a deal with Ivanhoe Mines (IVN) and Rio Tinto (RTP) to develop the massive Oyu Tolgoi gold and copper mine, which could lead to a doubling of the GDP in five years. We’re talking a gigantic 450,000 tons of copper and 330,000 ounces of gold a year. Also on tap is the development of huge coking coal and uranium deposits. The spillover benefits for the rest of the economy would be substantial. Mongolia’s Lilliputian stock market offers few opportunities for foreign investors. So unless you want to get a job there or invest directly in a local company, you’ll have to wait for the ETF to come out, and then the dip to get in. This is exactly what unfolded in Vietnam. Now that visas are no longer impossible to get, as they were in my day, my Japanese and Chinese speaking son tells me that Ulan Bator has become the trendy place for American college grads fleeing unemployment at home. Who knows? Give me a low enough PE multiple and I might even develop a taste for sheep brains and fermented mare’s milk.

Oct 07 08:12 AM

[The Recusant:]

It is sad but inevitable that cultures slip from their traditions when faced with economic hardships. Such is the case with Mongolia. The lack of cashmere exports due to low prices has forced the government to consider alternative sources for income. The increased emphasis on exploiting their mineral wealth will unfortunately destroy their traditional semi-nomadic herding culture and force the population into permanent communities. Visit Mongolia within the next few years because the yurts and yaks will become a thing of the past very shortly.

Oct 07 10:31 AM

[Alan Young:]

Good article; I'm always eager to learn more about small niche markets. But I have questions about your ETFs.

To benefit from the explosive growth of a small market, you have to be willing to bet on a small target. IVN is up 40% since the news of this deal broke a few weeks ago. That is a rare opportunity.

Last time I checked, HAP was heavy on the oil industry; not exactly your cutting-edge growth market, and scarcely relevant to Mongolia.

GDX is cap-weighted, so most of its holdings are in large, ongoing producers of gold (and a little silver). It's unlikely that the opening of the Mongolian resources will have a discernible effect on it.

Oct 07 11:25 AM

[mbob:]

Yeah, "Toxic Bob" the Clinton's pet defiler is in there grabbing with hands and snout.

Get ready for arsenic leaching pits, the same meth culture as Sublette County, Wyoming where gas fracking crews work insane hours, squalid "settlements" and corrupted officials. Oh, and don't forget our "NGO" label of nomads as "terrorists."

Oct 07 11:27 AM

[absolute re...:]

I think it is a good article as well. I am new to seeking alpha and there is so much information to process here. I am following Michael, David Frye, Ron Rowland, John Peterson and David Brown (made over 10% on a recommendation last week). Do you or any readers have other suggestions on who to read because I don't have enough hours in the day to read all of this.
Thanks in advance.

Oct 07 01:58 PM

[Paul Harper:]

On Oct 07 11:25 AM Alan Young wrote:

IVN is up 40% since the news of this deal broke a few weeks ago.

Purely on the basis of the terms of the deal, which look a lot like RTP taking over Ivanhoe over time :

"Rio Tinto initially made a US$303 million investment in a 9.95% shareholding in Ivanhoe Mines Ltd in October 2006 under the terms of a Placement Agreement, and has the obligation to invest US$388 million for a further 9.95% holding at the conclusion of an unconditional investment agreement with the Mongolian government (Tranche 2)"

Rio Tinto and Ivanhoe have recently agreed to a short term, month by month extension of the October 27 deadline for completing Tranche 2.

badabing !!!

"Under its current agreements with Ivanhoe Mines, Rio Tinto has the right to acquire up to 43.1% of Ivanhoe’s shares under fixed price options, with a right to further increase that interest to 46.65% through on-market purchases."

imo, it is unfortunate, as RTP will make a great job of ripping up & polluting Mongolia's already fragile landscape.

Oct 07 02:10 PM

[absolute re...:]

Paul,

I have some puts on IVN.......do you think based on this that I should close them? Thanks.


On Oct 07 02:10 PM Paul Harper wrote:

>
>
> IVN is up 40% since the news of this deal broke a few weeks ago.
>
>
> Purely on the basis of the terms of the deal, which look a lot like
> RTP taking over Ivanhoe over time :
>
> "Rio Tinto initially made a US$303 million investment in a 9.95%
> shareholding in Ivanhoe Mines Ltd in October 2006 under the terms
> of a Placement Agreement, and has the obligation to invest US$388
> million for a further 9.95% holding at the conclusion of an unconditional
> investment agreement with the Mongolian government (Tranche 2)"<br/>
>
> Rio Tinto and Ivanhoe have recently agreed to a short term, month
> by month extension of the October 27 deadline for completing Tranche
> 2.
>
> badabing !!!
>
> "Under its current agreements with Ivanhoe Mines, Rio Tinto has the
> right to acquire up to 43.1% of Ivanhoe’s shares under fixed price
> options, with a right to further increase that interest to 46.65%
> through on-market purchases."
>
> imo, it is unfortunate, as RTP will make a great job of ripping up
> &amp; polluting Mongolia's already fragile landscape.

Oct 07 04:53 PM

[Paul Harper:]

sorry, am not into options so am in no position to give advice in that area, but would look at the share price of IVN resettling over the next week or so, after that, who knows ? I have not run any fundamentals on them.


On Oct 07 04:53 PM absolute return guy wrote:
Paul, I have some puts on IVN.......do you think based on this that I should
close them? Thanks.

Oct 09 02:39 PM

[JonBlaine:]

Mongolia has changed very rapidly over the past decade. For those interested in this type of thing, Fortune magazine did a several page article on the changes in Mongolian society a few years ago. Very interesting stuff.

I think a question investors need to ask though is the risk that Mongolia is going to end up like Latin America. There are many countries where resource wealth has lead to corruption and possibly military dictatorships. Activists and leftists might also be able to restrict mineral production.

Oct 22 04:52 PM