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  • Mongolia Finally Passes New Securities Law 7 comments
    May 28, 2013 7:12 PM | about stocks: TRQ, MNGGF


    Mongolia's parliament finally passed a long-awaited securities law on Friday that will allow the state-owned firm mining the enormous Tavan Tolgoi coal deposit to launch a $3 billion initial public offering at home and overseas.

    Khangai Altai, the chief executive of the fledgling Mongolian Stock Exchange said the new law would also help attract more companies to the exchange by introducing international standards, adding that it could eventually bring total market capitalisation to around $30-$40 billion, from only around $1.3 billion at present.

    According to a statement issued by the exchange, the law will allow companies to list on multiple markets, enabling those currently operating in Mongolia but listed on overseas bourses to launch IPOs at home as well.

    The new legislation is also an essential part in allowing Erdenes Tavan Tolgoi LLC, the state-owned miner of the coveted Tavan Tolgoi coking coal project, to list in London and possibly Hong Kong.

    The cash-strapped state-owned developer, Erdenes Tavan Tolgoi, has been planning to list the eastern Tsankhi block of the Tavan Tolgoi project for years, but the fundraising has been repeatedly delayed. The company said in January that it would not happen this year.

    The passing of this law was one of catalysts I was waiting for with regard to the next upleg in the economy in Mongolia. The market there is off around 35% since Jan 1, 2013 and the economy has slowed to a growth rate of 7%. This has, in my view, put the fear into the politicians in Mongolia who are now doing what is necessary to make Mongolia a place attractive to capital. They have to repair the damage they caused by enacting the kneejerk nationalistic policies last year. However I think they have mostly learned a lesson. The next major catalyst will be the announcement of concentrate shipments from Oyu Tolgoi sometime next month. I have been selectively buying shares in Mongolia. Names like brewer and spirits maker APU, ready mix provider Remicon, and securities broker with over 80% market share BDSEC, along with E-Trans Logistics. I also continue to like Mongolia Growth Group which trades in Canada. Turquoise Hill is another one I have bought as

    Disclosure: I am long TRQ, OTCPK:MNGGF.

    Stocks: TRQ, MNGGF
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  • MSE.Investor
    , contributor
    Comments (90) | Send Message
    The Securities Markets Law is a bit more than a potential listing of ETT (which faces other issues).
    For the moment, the local Clearing Banks are an impediment to the development of the MSE.
    Once FOREIGN Clearing Banks can operate (jan. 1, 2014), then brokers (local or foreign) will be able to have Escrow Accounts with them and that will be a great incentive for foreign fund managers that may not feel comfortable having their cash with local banks.
    Once foreign banks operate as Clearing Banks, then foreign brokers with Direct Market Access will be able to operate…and create some very serious impulsion to MSE while for now local banks “rule” and “procedures” are quite cumbersome and depressing for those (me included) already operating there while before july 2, 2012 upgrade it was MUCH EASIER.
    29 May 2013, 07:25 AM Reply Like
  • John Polomny
    , contributor
    Comments (596) | Send Message
    Author’s reply » Do you see the MSE as being currently undervalued, overvalued, or valued correctly? Is your view that the necessary changes are taking place in order to change investors perception regarding investing Mongolia?
    29 May 2013, 09:48 AM Reply Like
  • MSE.Investor
    , contributor
    Comments (90) | Send Message


    Investing in 2011 was somewhere a wild bet, top-down approach, trying to identify sectors that would benefit (basically positively correlated to the TURNOVER of the mines) from the spillover from mining into the real economy and then buying stocks …available. I had no clue about valuations, just looked at prices it traded for years before to identify if I was buying in a man-made top, and saved the mines (which I did not buy) it was ok. Then it was about guessing how if the GDP was to go up by X2, X3, X5 ….whatever how it would affect those sectors and the stocks then start a very tedious process (I think it worst now liquidity wise) of accumulation. At some point a bit later, some visits on the ground, just having a look at the companies (not bugging management with questions on numbers) and trying to understand their very simple business models was quite interesting (discovering some gems thanks to plain common sense watching and thinking). Then in the following years, it was becoming possible to get some sense of numbers (including on MSE website where the numbers of companies reporting has increased VERY SERIOUSLY, as well as the timing of the reporting) and most of them are very good. No need to speak and read Mongolian to decode financials posted on MSE website.


    In my mind, most MSE listed companies are seriously undervalued when you just look at PER or Price To Book. Once you look at Earnings Growth it is even clearer.


    Then once you add a growth factor on the GDP and you try to imagine those companies (factoring-in dilution for capital raising) it’s very exciting.


    In short those stocks are like long dated call options on the GDP of Mongolia.


    BUT for now it’s very difficult for those stocks to trade higher and closer to “fair value” (whatever that means) because of the “circuit-breaker”. There is a +/-15% daily limit on Close but the “CLOSE” is defined as the LAST TRADED price so if the stock does not trade for at least ONE share then the LAST TRADED price is unchanged and the CLOSE is unchanged, and therefore the trading range for the next day is unchanged. In short, if a stock is massively BID ONLY but there is not a single seller (very often) within the current trading range, the trading range does not change and it can stay there for weeks-months-…So if a stock is massively undervalued and everybody is aware of it (therefore no seller) nothing changes. And for instance there is quite a number of stocks where the Last Traded Price is way lower than the Book Value (which may have been understated as there was no incentive to do otherwise). De facto, many market capitalizations are much smaller than what they should be and the market capitalization of MSE is understated accordingly, because of this …technical issue.


    Because of other technical issues, there are very few foreigners shopping on MSE so when locals are selling bits and pieces they got from privatizations 10-15 years ago, they are selling (may be happily at 10x their historical grant) in a empty market…


    Because of this, everybody loses: MSE has a lower market capitalization and is less visible on international radar screens, local undervalued companies face (additional) problems raising equity (some prefer to go for delisting instead), smaller MNT turnover translates into smaller fees for brokers,…and foreign investors don’t take MSE seriously and stay home, waiting for the green light signal.


    For those already setup and operating on MSE, it’s still the opportunity to accumulate shares on the cheap, but it’s not a free lunch. It is very time consuming. If you do not focus on mines or APU (the biggest market capitalizations), then whatever the size of your order to your broker, your average ticket size is likely to be lower than US$500!! Enjoy!


    So for now, if you are a fund manager and investors ask you to create a “Mongolian onshore fund”, your answer is NO. There are many good reasons for this (performance is NOT one because saved the mines, most MSE listed stocks did very well). With Securities Markets Law induced changes on the horizons, some of those pretexts will disappear and some will jump into the Mongolia sandpit…and then benchmarking/quintiling will do the rest like it happened on the NASDAQ in 1998-1999 where the inflow of money drove up the benchmark through the first movers leaving little to choice to others ending up with a pricey market…but we are not there yet.


    However for discussion with friends that have an eye on MSE while not trading there, most of them believe they can move in when THEY WANT which I think is a grave illusion.


    A MSE portfolio is not something that can be built in few weeks…. :) It takes much longer than this, even for a …retail investor during very quiet times! So imagine hedge funds rushing in once the light runs green !


    Necessary changes:


    Technical issues are being fixed, slowly, over time. The Securities Markets Law is 1.5 years late but is a good start. The MSE just upgraded its website making it more friendly with more information (that you may not often find in other markets).


    The current drop in liquidity post July 2, 2012 MSE upgrade is mainly related to the fact that now investors need to have Escrow Accounts at local Clearing Banks to trade in a fake T+3 (for now cash HAS to be there when trading!). Opening (basically go to UB!) and operating an Escrow Account is a headache (inconsistent rules and procedures), so some foreigners that were trading BEFORE July 2, 2012 and have MSE listed positions in their account at the MSCH&CD (clearing house) have not yet opened an Escrow Account, …waiting for their next trip (when?) to UB to do so. The pool of potential buyers is de facto affected.


    The excessive privilege (tiny) local banks are getting also affects the MNT government bonds auctions. How long before MoF takes action, for its own sake? Mongolia should know by now than diversifying its sources of capital, debt and equity, is critical…especially if it wants to negotiate its terms!


    How foreigners are impacted by the capital gain tax is still unclear and other technical stuff like this.


    The Securities Markets Law should enable foreign custodian banks to become local Clearing Banks on Jan. 1, 2014 and that will make life much easier for foreign investors. By then some brokers will have Direct Market Access systems. I think Mongolians don’t understand yet what kind of consequences this implies.


    Anyway, there are quite a number of technical issues to be fixed…and being fixed slowly, but there is also the problem of perception Mongolia has created over the last two years, moral hazard!


    Can a government sign an agreement and the next governments just ignore it for whatever reason? I don’t think so. It creates a bad precedent and international investors may wonder if the agreements THIS government signs will be enforced by the next ones. The Government of Mongolia and the MPs have seriously overlooked this. Ignoring the OT elephant in the room for a while, there is the case of mining licenses that were “suspended” early 2013 because of some corruption cases years before. Those who have bought in good faith the licenses afterwards are in the twilight zone now waiting (something Mongolia cannot afford), they are not even parties to the court cases but have problems get paying their dues (checks returned!) to renew their licenses. So they wait and look elsewhere for now.


    Status quo is not an option as Mongolia is running out of cash while the list of critical projects is increasing daily with the public awareness and recently acquired needs.




    For instance in the case of the new SEFIL (which I think is good enough!) GOM has to sign asap some agreements and make them as public as possible as TEMPLATES to give clear signs to investors.
    29 May 2013, 11:23 PM Reply Like
  • MSE.Investor
    , contributor
    Comments (90) | Send Message
    While my comment is very long it is still scratching the surface in term of how this market works.
    For instance some may wonder “how reliable” are “financials” posted by MSE listed companies on the MSE website?


    While I think most companies would genuinely try to adapt to the new situation and do their best, some may not…and it may not be bad news!!!


    2-3 years ago, or before, would a MSE listed company have ANY incentive to publish its REAL earnings …or understated ones?


    Is there anyway for controlling shareholders to borrow against their listed shares? No.
    Is there anyway for listed companies to raise equity placing new shares? Not really for now.


    If earnings are understated, the tax bill is cut and the share price is unlikely to take off, helping controlling shareholders to grab, by bits and pieces, the shares that were scattered all around Mongolia during the privatizations.


    So if earnings and book values are not accurate, I am more keen to believe they are understated than otherwise.
    30 May 2013, 12:42 AM Reply Like
  • John Polomny
    , contributor
    Comments (596) | Send Message
    Author’s reply » MSE.Investor, thanks for your in depth comments. You are correct it was/is a pain in the neck to open an escrpow account with a clearing bank. I went through that a year ago. I agree that the market is undervalued and I think it is an opprutune time to continue to accumulate undervalued shares.
    30 May 2013, 07:45 AM Reply Like
  • MSE.Investor
    , contributor
    Comments (90) | Send Message


    An excellent newsletter giving a great tour of the MSE website.


    I am wondering how many stock exchanges in the world provide so much details, especially when comparing to that small one!


    The work done by MSE put even more responsibilities on Mongolian politicians to deliver on their side!
    11 Oct 2013, 06:52 AM Reply Like
  • ulaanbaatar007
    , contributor
    Comments (8) | Send Message
    The OT cost overruns:



    Paragraphs 10 to 12 are really worth reading.


    Luckily RIO has been sensitive enough not to flag
    while under constant criticism!
    26 Nov 2013, 04:52 PM Reply Like
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