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Mongolia, an overlooked frontier market

|Includes:RIO, SGQRF, Turquoise Hill Resources Ltd. (TRQ)

I am not particularly excited on the long term prospects of the western developed countries. I define the West as the Western European countries, the US, and Japan. These countries all suffer from the same problems; too much debt, poor demographics, ridiculous government policies, and unsustainable entitlement schemes.

I am a big fan of Jim Rogers and have been since I read his initial book Investment Biker. This is the book that chronicled his around the world motorcycle trip and his thoughts on the countries he traveled through along with the investment implications of what he saw. His firsthand accounts of the opportunities that are available to those with the foresight to understand that the world is a bigger place then just the US along with all my foreign travels led me to begin thinking on a worldwide basis rather than maintaining just a US or western centric view. I remember one particular statement Rogers made that really struck me as historical yet overlooked. He said that moving to Asia today (this was around the year 2000) would be like moving to London in 1800 or New York in 1900. What he meant was that being in those places at those times would have put you at the cusp of two of the largest events in human history; the beginning of the industrial revolution in 1800’s London, and the American century that began in 1900. These were some of the greatest times of wealth creation in the history of man.

I believe that the Asia century, led by China, is now beginning (I am being obvious here but be patient). All of the attributes that led to the success of the English in the 1800’s and America in the 1900’s are now being adopted by Asians. This transformation will include all of Asia and will not be just China, although the Chinese will dominate the century. The fascinating idea is that this time of wealth creation and advancement will be accelerated by the modern communications and relatively cheap travel that we have available to us that were not around for our ancestors. I am not a perma bull or a bright eyed optimist that ignores problems. Some of these places have huge issues around government policy, infrastructure, banking, currencies, etc… However it is obvious that economic power and wealth creation is shifting to Asia. Where the west is scraping along at 2% growth some Asian countries can grow at 9%,10%, or more.

How does this all relate to Mongolia and investing in Mongolia? My first time at bat with a frontier market was Iraq. Readers of the Real Deal know that I have had success there especially in Kurdistan. However the political situation along with the violence and dilly dallying with the implementation of the petroleum law was hindering the progress of realizing the wealth of the 115 billion barrels of oil the country has and needs to develop in order for my investment thesis to bear fruit. I began looking around for another country with the same fundamentals and stumbled onto Mongolia. Mongolia is not endowed with oil but it does have huge deposits of coal, copper, gold, and uranium. The country sits right on the northern border of China, which has an insatiable appetite for resources. Mongolia has had its own political strife in the past but nothing on the order of Iraq. In fact the mining law that mining companies were waiting for the Mongolian government to approve kept being delayed to the point where one of the biggest companies with one of the biggest projects threatened to leave the country out of frustration. In the end the laws were approved and mining and development is progressing.

After I began researching the country and its prospects I realized how unrecognized the economic potential of Mongolia is too many in the western investment community. For example Mongolia is a country with a population of around 2.5 million and a GDP of $5 billion per year. Ivanhoe Mines Ltd. and its partner Rio Tinto has a deal to develop the Oyu Tolgoi copper/gold mine. This mine is going to produce a billion pounds of copper and 330,000 ounces of gold per year every year for 50 years once it comes online in a 2014. Oyu Tolgoi is a great long term story for Ivanhoe but it is even bigger for the Mongolian stockmarket and economy. This single mine will singlehandedly transform per capita GDP growth as each year’s mine output is equivalent to one year’s current GDP! Oyu Tolgoi is only one of a couple dozen mining projects that the government has designated as strategic and that it wants to develop.

A terrific amount of wealth and liquidity will be generated inside the country and as people’s incomes increase some of this liquidity will find its way into the Mongolian stockmarket. The current market capitalization of the Mongolian stockmarket is around $500 million and believe me there is hardly any liquidity. I have a brokerage account in Mongolia and it takes time to get share orders filled as there is very little liquidity. This strikes me as a good thing because it allows the little guy (me and you) the opportunity to get positioned before the tide of foreign money from the Mark Mobious’s of the world pours into the country. 

In conclusion I believe that Mongolia will join the other Asian countries in dominating the 21st century. Mongolia has the resources that the rest of Asia needs to industrialize. The amount of wealth that will be generated over the next several decades is going to be unbelievable. I will note that Renaissance Capital had an interesting note the other day.

Its research team initiated coverage of the country in December with a major report authored by head of research Roland Nash titled, “Mongolia: Blue-sky opportunity.” The report said Mongolia is well positioned to be the fastest-growing economy in the world over the next decade."

“Mongolia’s transformation is now unstoppable,” wrote Nash. “Over the next five years, production of coal will double, gold production will triple and copper output will quadruple. As these resources are bought to market, Mongolia will be transformed into a major economy and its financial markets will become increasingly sophisticated.”

Check out Mongolia.



Disclosure: Long SouthGobi Energy and I own several Mongolian stocks in Mongolia

Stocks: TRQ, SGQRF, RIO