John Polomny's  Instablog

BDSEC:

Mongolia's central bank plans to cut interest rates on mortgages by almost half to 8 percent from around 15 percent this month, following a new policy approved by the government to ease financial burdens on the middle class.

The new mortgages require a down payment of 10 percent to 30 percent and must be paid back in 20 years, the Bank of Mongolia's Chief Economist Sandagdorj Bold said yesterday in a telephone interview. The loans are valid for apartments smaller than 80 square meters (861 square feet), qualified applicants must have a full-time job, and monthly payments cannot exceed 45 percent of the family income, he said. The policy goes into effect on June 17.

Mongolia is experiencing double-digit growth and new job opportunities in the mining industry and its supply chain are building a middle class that is in need of housing. The strongest demand is in Ulaanbaatar, where half the city residents live in unplanned neighborhoods called "ger districts," which lack infrastructure such as running water and central heating.

"The intended purpose is to support the middle class and support the long-term sustainable economic growth by increasing the savings of the middle class," said Bold, adding that the 8 percent figure is meant to track the Bank of Mongolia's target rate for inflation. "It can vary plus or minus one percent depending on performance of the inflation."

I am against this from a political and ethical standpoint but it will benefit the real estate market in Mongolia longer term. Although these are exactly the types of schemes that help create bubbles. Should be helpful to Mongolia Growth Group down the line as the entire real estate market will increase in value as people begin borrowing for homes and apartments.

Disclosure: I am long MNGGF.PK.

There have been quite a few articles recently about the impending platnium group metals deficit that is shaping up for 2013. It appears the cost of mining the metal is substantially higher than the current market price for quite a few platnium miners. This article highlights their plight.

A substantial reduction in primary and secondary supply is expected to move the platinum and palladium market from surplus to deficit in 2012, according to the Johnson Matthey Platinum 2012 Interim Review. Gross demand for platinum is predicted to remain firm, however, severe disruptions to platinum mining are expected to result in a 10% drop in global mine production of platinum. The report also estimates an 11% decline in supplies from recycling. Together, these factors are expected to result in an overall 10% decline in worldwide platinum supplies and a deficit of 400,000 oz. Gross demand for palladium is predicted to increase 15%. However, both mine production and recycling are expected to contract by 4% each, and stock sales by more than two thirds, resulting in a deficit of 915,000 oz.

Unlike many other metals that are found in numerous regions, the majority of platinum and palladium production is concentrated in South Africa and Russia, which combined to account for 88% of platinum production and 80% of palladium production in 2011.

Miners in South Africa have been trying to shutdown higher cost operations but have met resistance from the government and unions. In addition their is an intrcine fight going on between two mining unions that is also leading to more unrest. In Russia, the majority of the PGM's are produced as a by-product of nickel mining by Norlisk Nickel. Those operations are extremely aged and the grades are dropping. In the end the lack of supply will lead to higher prices which will bring on more production with a time lag. Yes market price signals still work. The trick is to find a low cost producer that I can use as a vehicle to capitalize on higher PGM prices.

I think I have found the ticket in LSE AIM listed Sylvania Platinum. Sylvania is not like the typical hard rock miner such as Impala or Anglogold which need huge amounts of capital and thousands of unionized workers to mine narrow veins nearly a mile underground. Sylvania is a dump processor and has low costs, a small number of employees, and is more akin to a manufacturing operation than a mining operation. Over the last decades as mining has progressed in South Africa huge tailings dumps have accumulated as a result of previous mining efforts. At current prices the dumps hold economic quantities of PGM's. Sylvania's business model is simple; spray water from monitors onto the dump, catch the runoff, transport it to a processing plant, and recover the metal. In addition to the dumps the company also processes fresh tailings from current chrome mining operations.

The company bought the operation turnkey from another company and has had to make a few capital investments to fine tune the operation. The company is looking to get production up to 60,000 ounces per year at a cash cost of below $600. The company uses a blended cost to account for the mix of palladium and platinum. The company has also committed to returning cash to shareholders if it cannot reinvest in operations that clear a minimum 20% IRR. The company is currently cashflow positive and is cheap relative to its peer group.

Downside is the fact that all the operations are in South Africa. There will be occasional labor unrest and this will affect the company when the mines supplying tailings go on strike. However, these things usually resolve themselves over time and I think the risk is worth it at least for me. Check out the company's presentation and website and by all means do your own due diligence as only you are responsible for your investment decisions.

Disclosure: I am long SAPLF.OB.

It was reported yesterday that shipments of concentrate from the mine would begin 6/14/13. The very next day that has been cancelled. This is the kind of yo-yo decision making and information management that is, in my view, killing Mongolia's credibility with foreign investors. The good news is that Rio Tinto continues to mine and concentrate is piling up at the mine awaiting an agreement in order to begin shipping. Hopefully this will begin after the presidential elections on 6/26/13.

Reuters:

Reuters and traders had been invited to a ceremony on June 14 at the site in Mongolia's South Gobi Desert to witness the first exports from the copper and gold mine to China, but were informed late on Wednesday the trip was off.

Oyu Tolgoi LLC said nothing had changed from previous statements that it was expecting first exports before the end of June. Rio Tinto declined to comment.

Start-up of the mine, the biggest in the country, is being closely watched by other companies and investors in Mongolia, who have been rattled over the past year by new regulations and concerns raised by the government over Oyu Tolgoi.

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"We're hopeful come the second half of the year people will become a bit more positive on Mongolia," said Sam Spring, chief executive of Kincora Copper, a copper explorer with a project near Oyu Tolgoi.

"Hopefully, Oyu Tolgoi ramping up and the completion of the project financing helps, as does the presidential election."

Disclosure: I am long TRQ.