Leverage China By Investing In Mongolia

by: Joseph Harned

Yes, Virginia, there is a way to leverage China. It's called Mongolia!

In resource terms, a wise man said Mongolia is to China as Canada is to the United States. Mongolia is China's attic, just as Canada is ours. And like all attics, it has oft times been forgotten; but ignoring this extraordinary resource would be our loss. Like Canada, Mongolia contains a wealth of treasure, a wonderful people, a frontier spirit, a healthier lifestyle, and a way to leverage the growing economy to its south, without, to my mind, greatly increasing risk, and only marginally increasing obscurity, compared to investing directly in its southern neighbor. We leverage growth in the U.S. by investing in Canada. And now is the time for all good investors of strong constitution and high risk tolerance to leverage growth in China by investing in Mongolia.

OK. But what's the leverage? On January 18th, 2012, the World Bank revised downward growth prospects for the coming year worldwide. The organization now predicts that the global economy will grow at about 2.5 percent this year, with the developing countries at 5.3 percent, and China at 8.3 percent, but Mongolia at 14.9 percent. In other words, the latest projections show Mongolia growing at roughly six times the rate of the global economy, nearly three times that of the developing world, and almost twice as fast as China. And if that isn't enough, on January 30th, the Business Council of Mongolia projected 2013 growth to exceed 25%. That's leverage.

Of the multinationals currently investing in Mongolia, the strongest bet to my mind is Rio Tinto (NYSE:RIO), which owns the lion's share of a gargantuan copper and gold mining complex (James T. Alreddy, WSJ June 2, 2011, but no longer in their archive), and possesses all the technical expertise to pull it off: a British-Australian multinational, it is the fourth largest publicly listed mining company in the world according to Wikipedia, and has just acquired 51% of Ivanhoe Mines in Mongolia.

Another interesting play should become available in June, when the huge coking coal Mongolian mining IPO Tavan Tolgoi in the south Gobi Desert will list in London as a global depository receipt, according to the Wall Street Journal of 20 January. The world's largest deposit of coking coal, it is due north of China, the world's largest consumer of coking coal. Are you seeing a pattern here? I plan to purchase these GDRs in June.

The Mongolians' own stock market is open in the capitol, Ulan Bator as it is spelled in the West (Mongolians prefer Ulaanbaatar), but like all new markets it appears thin and skittish, and individual stocks trade somewhat sporadically. As a retiree sans pension, I have not had the chutzpah to dip my toe in that market in situ, but I have found some alternative direct investments. My favorite is Mongolia Growth Group (OTCPK:MNGGF), whose business plan in insurance and real estate is one I admire. Another is Mongolia Mining Corporation (OTCPK:MOGLF), because after all that's the name of the game. A third is Prophecy Coal (OTCPK:PRPCF) which until Tavan Tolgoi debuts is the only other coal play in town that I'm comfortable with. And finally there is Entree Gold (NYSEMKT:EGI) because, well, it's gold.

I first learned of most of these stocks from Jon Springer's excellent Instablog on Seeking Alpha, found here, and counsel you to follow his continuing explorations. He knows more than I ever shall on the subject, and is off to Ulaanbaatar on yet another fact finding mission later this month. In the interim, I do own all these stocks, and was able to acquire them without difficulty electronically (through Schwab) without having to pay to go through a live broker. However, do your own due diligence, rigorously, first.

Now, step back a moment and look from afar. Diversification? Well, a bit. Copper. Gold. Insurance. Real Estate. Coal. Different coal. More gold. I am all for diversifying further as market opportunities present. But as all of these investments are in one place, namely Mongolia, as a grouping they must come with an outsized warning. Do not invest in these stocks more that you can comfortably lose without wringing of hands (woh) and gnashing of teeth (got). At my advanced age, life is simply too short -- and too beautiful -- for woh and got. After all, this is but one way to leverage China for fun and profit.

Disclosure: I am long RIO, MNGGF.PK, EGI, MOGLF.PK, PRPCF.PK.