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John Polomny
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John Polomny is an individual investor and speculator seeking unique, overlooked, and well researched opportunities and speculations from all over the world.
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  • Recent Thoughts On Turquoise Hill And Mongolia 0 comments
    Aug 17, 2013 2:46 PM | about stocks: RIO, TRQ, MNGGF

    There has been quite a bit of news and information flow from Mongolia recently along with the typical yo-yoing at Oyu Tolgoi. I wanted to take some time to think about what was going on before commenting. As regulars here know I am a big bull on Mongolia. However things have not gone as I had hoped they would. Nevertheless things continue to be a net positive in my view and I am also of the view that the news will be getting better out of Mongolia as time goes on.

    One of the elements that has cast a shadow over Mongolia in the last year or so was the elections both for parliament last year and the recent Presidential election. Politics in Mongolia, which is a democracy, is not much different than in many other countries. The majority of the population has the mistaken view that relying on politicians to make their lives better is an actual rational exercise that will yield a positive outcome. In Mongolia populism is even worse than it is in many mature democracies. The 800 lb gorilla in the room during the parliamentary elections and the recent Presidential election was Oyu Tolgoi and the disposition of the mining wealth that will be generated by this project along with other future large mining projects in Mongolia. There is a considerable amount of opinion among Mongolians that Rio Tinto and Robert Friedland before Rio got too good of a deal with regard to the split on the riches of this mine. In addition, there is and has been quite a bit of corruption in Mongolia. This has been seen by average Mongolians to have led to the politically connected and more savvy players getting wealthy while the majority have seen little or no benefit.

    Whatever the truth actually is people perceive what they want to and act on those perceptions at the ballot box. Getting back to the elections the Democratic Party won the majority in the parliament last year and their candidate, who was the incumbent, won the presidential election last month. Along with this the Ulan Baatar city government is controlled by the DP. This is not unimportant as most of the people in Mongolia live in UB. The DP is considered the most business friendly political party and is seen as being open to further reform which will lead to more growth. The party has also pursued an anti-corruption agenda and there have been convictions and people sent to prison.

    Now that the elections are out of the way and the DP does not have to politic or electioneer the public for several years they can roll out their agenda. It is interesting to note that right after the election the OT mine commenced concentrate shipments which had been delayed due to "22 unresolved outstanding items". Unfortunately the financing for the underground section of the mine has been stalled due to some further issues between Rio and the Government of Mongolia. Rio actually has put together a consortium of financiers to finance the underground development. However the GOM would prefer that the expansion be paid for out of project cashflow. Rio was also under the impression, whether by mistake or not knowing better, that they would need parliamentary approval for any financing. This was cleared up by the GOM saying that this was not the case. This difference in opinion has led to Rio suspending further underground development and recently laying off 2000 Mongolian employees. This is not insignificant as these are high paying jobs.

    So where are we at right now. The OT mine is shipping concentrate and is now up to 80% of capacity. Shipments are taking place and revenue is being generated. I have no doubt in my mind that Rio is an excellent mine operator. The pit part of OT should reach full production in the next six months or so and Rio should have everything optimized. The new government has a huge burden as they control all arms of government so they "own" the economic results going forward. In addition the voters have invested their hopes and dreams into this government also. The burden is for them to perform. This is tricky as they need big growth to lift the 30% or so of Mongolians out of poverty and they need to do it in a way that does not give the impression they are letting the "foreigners" take advantage of them. A recent example of this is the news that the GOM may issue shares representing up to 10-20% of its interest in OT to Mongolians. This than helps to make each citizen a stakeholder and self interested in seeing the mine be successful.

    The country recently reported economic growth of 14.2% but quite a bit of this was on the back of government spending. Granted this government spending was for infrastructure that will have an ongoing economic impact but it was financed by the Chinggis Bond offering from last year. This spending has taken up the slack from the reduced FDI that the country experienced due to its schizo political treatment of foreign capital and the perceived increase in risk. President Elbegdorj is aware of this and has spoken to it. My expectation is that we will see more reform and a rolling out of the red carpet in order to change the perception and to court foreign capital back into the country. I think it will be in fits and starts and we will continue to see episodes like the recent shutdown of the underground work at OT but I think the net result will be positive. The Mongolians really have no choice as the country is really dependent on FDI. It will take some time and the adoption of a trust but verify mentality.

    I think TRQ is an excellent speculation at these levels. Here you have what I consider a trophy asset on par with Grasberg or the Codelco assets in Chile and you can buy it cheap. The mine has a 50 year life and I can almost guarantee it is bigger than we know at this time. We are betting that with the elections out of the way the perceived political environment changes to more business friendly and a revaluation of assets upward takes place to reflect that change. In addition company share prices on the MSE continue to be moribund and you can buy companies for cheap valuations. The ability for foreign big money operators to put capital into the country will be changing early next year with changes that the MSE has implemented around settlement and custody. I expect an influx in money into these upper tier companies like Remicon, APU, BDSEC, and consumer names like SUU the dairy producer. Mongolian Growth Group is the way to go to play the increase in per capita GDP via the real estate market. Harris Kupperman's monthly shareholder letters about what is really going on are worth more than almost all of the press coming out of the country. In conclusion I expect continued progress, albeit in fits and starts. People that have been there or live there know what the true potential of the country is and it is quite a bit more positive than what is reported in the western media. I do not want to sound like I am starry eyed as this is no Dubai but I remain long and continue to buy shares of MSE listed companies along with Mongolian Growth Group on a regular basis. I think people with a long term horizon will be generously rewarded for stepping up and buying at these levels.

    Disclosure: I am long TRQ, OTCPK:MNGGF.

    Stocks: RIO, TRQ, MNGGF
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