A Positive Outlook On Mongolia

by: Jon Springer

This summer, Nick Cousyn became the first native English language speaking employee at Mongolia's largest domestic brokerage, BDSec. Mr. Cousyn came to the company with an American resume of working with institutional investors and high net worth individuals as BDSec's new Chief Operating Officer.

Although BDSec primarily trades on the Mongolia Stock Exchange, this interview will focus on the macro market outlook for the Mongolian economy, and companies doing business in Mongolia that are publicly traded in the United States.

In the interview Mr. Cousyn makes recommendations for investors to consider buying opportunities in Mongolia Growth Group (OTCPK:MNGGF), Mongolia Blue Wolf Holdings (MNGLU), and Turquoise Hill Resources (NYSE:TRQ). As my last three articles on Mongolia have been quite negative, it seemed time to give investors a different view from an expert on the ground in Mongolia who, by nature of his job, has some of the best local research available to him.

Mr. Cousyn is well positioned to comment in an informed way that U.S. investors can understand due to his prior work history. Mr. Cousyn can provide better insight than most as his support staff supply him with daily translations of all Mongolian language news in addition to the news the rest of us have access to in English.

Jon: You worked for about 12 years at investment jobs in the U.S., primarily selling to institutions. Could you elaborate a bit on your background experience and how it qualified you for your current Chief Operating Officer position?

Nick: For those who follow Mongolia closely, they know BDSec is the dominant broker in the country, to say the least. BDSec's market share of traded volume on the MSE is now 85%, up from 68% in 2011. However, they did not have a research product that was up to an international standard, that's where I came in. I've been selling research to institutions for nearly 10 years, in that time I'd like to think I know what a good research product looks like. When I started with BDSec in August of this year, there really hadn't been any research published year to date, in the last four months we've published 12 reports, including 4 initiations of coverage on publicly traded Mongolian companies. BDSec also wanted to pursue an international strategy, which is being implemented currently and is another of my primary responsibilities. So my skill set and BDSec's needs were a perfect match and together we've made incredible progress in a very short amount of time.

Jon: When we met at the Mongolia Investment Summit in Hong Kong (October 30-31, 2012), you said you felt invigorated by your job. You said you felt you were doing a job that could really make a difference. What drew you to move from sunny California to Mongolia where winter weather gets down to minus 40?

Nick: In one word, opportunity. The capital markets in the developed markets are experiencing a severe retrenchment, the likes of which have not been seen in 40 years and it's going to get worse. I started investing personally in Asia in 2004 and continue to do so to this day. Around that time I also started investing and learning about commodities as well and there's no market that captures those two themes better than Mongolia. So I made the decision to come to Mongolia earlier this year and was lucky enough to find an outstanding firm to work for. As far as the weather, I just don't care, it could be minus 100 and I would still be here. Nothing keeps you warm at night like succeeding at your chosen profession and working with great people.

Jon: Okay. Onto investment outlook. Your firm BDSec put out a report on November 13, 2012, titled "Vast Market Inefficiencies Create The Most Compelling Buying Opportunity Since The Crisis of '08/'09" (only pages 1 to 3 apply to investors in U.S. listed stocks). Any stock associated with Mongolia has had a pretty rough run since April when election year politics heated up. There's still the Presidential elections in Mongolia early next year. Could you be jumping the gun a little early with your optimism?

Nick: I'm most certainly early, but you need to be if you want to make real money here. The total market cap of the MSE is less than $1.5B (roughly the size of one small cap US stock), of which the Government of Mongolia still owns 75%, which leaves a "free float" of $375M. BDSec clients already own $255M of local equities, which leaves a true "free float" of $120M (roughly the size of one microcap US stock). The launch of the MilleniumIT system and the new clearing rules have had a disastrous effect on equity volumes and have created large inefficiencies. Markets are so thin here it could take weeks to buy $200K-$300K worth of stock, not to mention the time it takes to send and process account paperwork in Mongolia. So investors interested in putting money to work here should get started immediately, because when equity prices turn, they will likely gap up violently with even less liquidity that is available at the moment.

Jon: Let's get specific about the big elephant in the room. There's a lot going on with Turquoise Hill Resources' Oyu Tolgoi project [OT]. The government of Mongolia [GOM] seems to be indicating they are going to tax the Oyu Tolgoi project at rates higher than agreed in 2009, a few other tweaks here and there, and the minister of mining has said he'll resign if the Oyu Tolgoi Investment Agreement is not renegotiated. What's your near-term outlook on Turquoise Hill for the next 4 to 6 months?

Nick: For the next 4 to 6 months my outlook is positive on Turquoise Hill, I think it's the next 30-60 days you have to watch out for. We identified the political risks with OT two months ago and the investors we talk to were well prepared for what's occurring right now. I read Wall Street research on Turquoise Hills and laugh at how much they write and how little they know. Things will get worked out with the GOM and OT, because it has to. I'm not prepared to speculate exactly how the situation resolves itself, but both sides are looking for a way out of this predicament, which will hopefully put this issue to bed for good. There's just way too much money to be made by both parties to do anything different than to come to a resolution.

Jon: Let's extend that question. What is your long-term outlook for Turquoise Hill Resources in the next 2 to 10 years? And in that, we should consider that Rio Tinto (NYSE:RIO) already owns 51% of Turquoise Hill.

Nick: I would be surprised if Turquoise Hill is a public company in 2 years, let alone 10. Oyu Tolgoi has a resource life of 60 years and RIO will no doubt want to capture all the economics of that. When RIO acquires TRQ is anyone's guess, but RIO is playing chess while everyone else is thinking in terms of checkers. Asia and China specifically, are a huge focus of RIO's, what better way to capitalize on that then to own 100% of one of the top 5 copper deposits in the world?

Jon: I have a list of 21 companies that are publicly traded in the U.S., including Turquoise Hill, doing business in Mongolia. Are there two or three companies on that list you'd recommend investors buy, or consider starting to average into?

Nick: Well we don't differ much in terms of where to invest money stateside, hopefully I can offer some additional reasons for owning 2 of your favorites: Mongolia Growth Group and Blue Wolf. My 3rd favorite might come as a surprise and that's Turquoise Hill, once things settle down.

Jon: Could you tell us more about your thesis on Mongolia Growth Group?

Nick: Mongolia Growth Group has a simple strategy, buy the best real estate in Ulaanbaatar and let growth and inflation make you rich. Look around the world and ask yourself what asset has been the best store of wealth (with an inflation adjusted income stream) and that's prime real estate. You can barely open a newspaper these days without seeing new all-time high sale prices for condominiums in New York, London, or Hong Kong to name a few. MNGGF has both the best ground floor retail and redevelopment portfolios in the country, which will be a powerful generator for shareholder value as time goes on. Management, Transparency and Corporate Governance are all 5 stars in my book.

Jon: Could you tell us more about your reasons for valuing Mongolia Blue Wolf Holdings?

Nick: Blue Wolf are a very smart group of people. As many investors know, MNGL is a SPAC (Special Purpose Acquisition Corporation), where they raise money and then go in search of an asset, in their case they raised $80M, a whopping sum for a SPAC. They haven't bought an asset yet, which puts them in an enviable position, since prices in Mongolia have come in somewhat due to the political uncertainty. $80M goes a long way in Mongolia and I suspect they can pick up an outstanding asset on the cheap, not an easy thing to do normally.

Jon: Could you tell us more about why you consider Turquoise Hill Resources worth looking at, at current prices?

Nick: Where Turquoise Hill is concerned, I think you have to have a patient approach in the near term, since few people fully understand what is going on here in Mongolia. The news cycle around Oyu Tolgoi has been very slow and we've been warning investors for a while now about the political risks surrounding the project. I think we are very close to the point of this story hitting the mainstream press, which will probably be followed by analyst downgrades, which is usually a sign we're near a bottom. Private market value for TRQ is at least $15/share, so whether you buy your stock at current levels or $0.50 lower, it's not going to make a huge difference. Buying great assets during periods of maximum uncertainty can work out very, very well.

Jon: Pulling back. For socially conscious investors, what's your outlook for life and per capita income improving for all the people of Mongolia?

Nick: The outlook for life in Mongolia is extremely positive. The Mongolians I work with want to succeed and enjoy the finer things in life. Their parents and grandparents have told them the horror stories from the days of communism, vouchers for food, long lines and severe hardship. Many of my colleagues have parents who had to do menial work in other countries to earn enough money to feed their family. They want nothing to do with socialism, corruption, or large government. And if politicians don't recognize this, then they will be voted out by these young people who are huge part of the electorate. I think per capita income can double in the next 5 or so years.

Jon: I have written a few negative articles on the near-term investment outlook for Mongolia recently. I think you've read them. Comparing my articles to your firm's recent positive note that values are a compelling buying opportunity, it seems like one of us is wrong. So, am I wrong?

Nick: Let me start by saying you've done investors a great service by bringing these risks to light. You're not wrong and investors certainly have reason to be concerned in the near term. From my perspective, I try to think in terms of cycles and I think Mongolia entered a secular bull market sometime in '09. Secular bull markets can last as long as 20 years and it's within the realm of possibility Mongolia is in a "super cycle" which can last even longer with a greater magnitude. There are always setbacks along the way, panics, wars, severe political blunders, etc., the challenge is to be steadfast during these periods and "buy the dip." And that's what I advocate investors do in Mongolia.

Jon: Final thoughts. The Mongolian economy in 10 years will be...

Nick: I expect to see tremendous progress in the next 10 years and would not be surprised to see 4-5 more Oyu Tolgoi sized resources in production by then, in addition to hundreds of smaller projects mining any number of minerals. The wealth this could create would be enormous and may just exceed everyone's expectations. Less pollution, better roads, a subway and a few Starbucks locations would also be nice.

Jon: Thank you so much Nick for sharing a local sophisticated opinion with Seeking Alpha's readers.

Disclosure: I am long OTCPK:MNGGF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: BDSec is one of seven brokerages in Mongolia I communicate with to assess the Mongolia investment climate, and one of four Mongolian brokerages at which I have an account.