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Mongolia: Why And How To Invest In Stocks

|Includes: MNGGF, MOGLQ, PRPCF, Turquoise Hill Resources Ltd. (TRQ)

There are many companies traded publicly outside of Mongolia with investments in Mongolia, most of them in the mining sector. There is currently only one publicly traded company outside of Mongolia that is a pure play on Mongolia with no investments in the mining sector. There is another publicly traded company that is a diversified play not linked solely to the fortunes of a single mining company. I will discuss these two currently unique investment vehicles first and then four select mining companies. 

Equities to invest in

Mongolia Growth Group (OTCPK:MNGGF)

Mongolia Growth Group
’s CEO is Harris Kupperman. Mr. Kupperman began running the hedge fund Praetorian Capital Management at the age of 20.  If you had $10,000 invested with his hedge fund in January 2003, today it would be worth $180,000. In his capacity managing his hedge fund, he first came to Mongolia in the fall of 2010. He was drawn by the potential of the marketplace and wrote six blogs on his free site about Mongolia before deciding that the best way to play Mongolia was to set up a publicly traded investment vehicle. After studying other economies with similar resource-based economic booms from Qatar to Kazakhstan, Mr. Kupperman, an avid student of history, concluded the best investment play in a country whose wealth rapidly develops is real estate.

CEO Harris Kupperman and COO Jordan Calonego have neither a salary nor options from their company. Coming from an asset management perspective, they believe in aligning their goals with those of investors in their company, thus their only compensation is increasing their company’s share valuation. Management and the board currently own 37% of the company and have participated in all private offerings to-date.

Mongolia Growth Group was founded in December 2010 with the purchase of all the outstanding shares of a defunct Canadian-listed company that was renamed Mongolia Growth Group. Mongolia Growth Group raised money in three private placement phases to-date. Original investors including board members, CEO Harris Kupperman and COO Jordan Calonego invested in the start-up of the company raising approximately $4,700,000 with 14,167,571 shares outstanding. Thereafter, Mongolia Growth Group raised $14,860,458 in a CDN$1.32 offering that closed on April 8, 2011, and $17,099,572 in a CDN$3.51 offering that closed on June 23, 2011. Total shares outstanding: 30,297,167. Total capital raised: CDN$36,660,030.00. Capital raised in each offering has been roughly allocated: two-thirds toward real estate and one-third toward an insurance company.

It was widely believed by local competitors that Mongolia Growth Group, when recently trading in the $4.60 - $5.10 range, was trading at about 5 times book value. However, due to the pace of real estate price growth and progress along other business lines, their price to book is closer to the order of 3 times book value (if trading in that $4.60 - $5.10 price range) as detailed in the company's recent newsletter. Book value is believed to be about $1.50 based on increases in real estate prices. Validating this valuation, an October 5, 2011, an article by Make A Difference Investment Solutions noted property prices in the city center were up 55% in the prior 6 months.

During my stay in Mongolia, I met separately with Mr. Kupperman about the company’s property business, and Mr. Calonego about the insurance business. Mr. Kupperman thinks obsessively about auto traffic, foot traffic, and mass transit patterns, in the city of Ulan Bator to determine how best to deploy the company’s capital into property that will most rapidly increase the company’s valuation. Mr. Calonego has brought in insurance executives from the biggest insurance company in Mongolia alongside imported western risk managers and accountants to construct Mandal Insurance Company.

Mongolia Growth Group subsidiary Mandal Insurance is now Mongolia’s best capitalized insurance company. Mandal launched its first television advertisement on September 15. Mr. Calonego serves as Chairman of Mandal. Both the president and CEO of Mandal Insurance came to Mandal from Prime Daatgal Insurance (also doing business as Tenger Insurance), a leading insurance company in Mongolia that has its books audited by Price Waterhouse Coopers.

Insurance is a nascent business in Mongolia with less than 5% of the population having auto insurance while any type of home insurance is almost non-existent. The government has a law pending to make auto insurance mandatory starting as early as next year. It is believed by many people I spoke to that a growing use of insurance will have six driving forces: 1) the mining industry and other western corporations require insurance; 2) more ex-patriots living in Mongolia due to the mining and economic boom; 3) many Mongolians who have lived abroad repatriating back to their home country with an appreciation for the utility of insurance; 4) economic growth necessitating it (e.g. when the value of your home or business property is increasing by 3 - 5% per month, do you really want it to suddenly be worth zero if your neighbor causes a fire or flood in your home?); 5) litigious growth – economic growth brings about a growth in legal liabilities (e.g. when the chief executive of a mining company has a fender bender at a busy Ulan Bator intersection, does he want to have to negotiate separately with the three other parties in the fender bender, or let his insurance company deal with it?); 6) the real estate market which currently operates with purchasers paying cash in full will ultimately need to accommodate mortgage lending for people to purchase homes, and mortgages will necessitate property insurance (just as a mortgage industry developed in Kazakhstan during its economic boom).

Mongolia Growth Group’s business plan calls for generating significant cash flow from the property and insurance business lines to deploy further capital into the Mongolian marketplace. As the company’s sole source of new capital before cash flows ramp up to-date has been private placement offerings, there were questions during their last private placement in June whether the offering of more shares was dilutive or accretive. The dilutive argument suggests that when more shares are created, the value of all shares decline, as shares created prior own a smaller part of the company. The accretive argument claims that adding new working capital to the company decreases the price to book ratio, increases assets under management, increases the growth potential of the company, and as long as each offering continues to be at a higher price than prior offerings, they set a new base price under the share valuation.

Shares can be purchased directly in the U.S. with the ticker MNGGF. The company trades in Canada with the ticker YAK. If you are an accredited investor that would like to be aware of any future private offerings, you can sign up for the company updates at the company website. (An accredited investor has income greater than $200k individually, greater than $300k jointly with their spouse, or assets greater than $1m.)

Origo Partners (OPP.L)

is a publicly traded private equity investment company investing in companies geared to leverage China’s economic growth. As a result of this strategy, they hold a significant amount of their assets in China’s neighbor Mongolia. At Origo Partners, I met with Luke Leslie, head of metals and mining investments for the company, and country manager for Mongolia. Mr. Leslie came to Origo from UBS’s mining group.

To find undervalued mining assets, Origo has a team of eight geologists led by former Rio Tinto top geologist John Rickus, a mining executive with over 40 years of experience. On their website there is a list of companies they are invested in without indication of what percentage of each company Origo owns. For example, they own approximately 20% of Gobi Coal and Energy, an asset that a recent Bloomberg article indicated is up for sale although in my meeting on September 15, 2011, it was indicated this company may have an IPO in Canada as well. Mr. Leslie believes Gobi should be worth more than the recently bought out Hunnu coal (purchased by Banpu), as Gobi Coal & Energy has JORC resources of 320 million tons of coking coal with a million hectares of land 260 kilometers from the Chinese border.

Mr. Leslie is confident that the company’s 20% stake in MolyWorld will yield value. Currently the company has the second largest drilling campaign in Mongolia operating eight drills. The molybdenum deposit west of Edernet near Murun, Mongolia, is believed to be a top 5 or better molybdenum deposit pending JORC reporting after drilling. 

Mr. Leslie is also pleased that Origo is a 45% owner of Kincora Copper (see below) and 10% owner of Celadon, among others. Mr. Leslie’s salary is incentivized through the company’s performance in the mining sector, so he and his geological team are motivated to find undervalued and distressed assets. At the same time, they also have engaged in third party partnerships in both Mongolia and China that are leading to other investment opportunities by partnering with native investors. Most recently on November 7, 2011, Origo announced a 50/50 joint venture with leading commodity outfit Trafigura to develop coal and iron ore deposits in Mongolia.

My conversation with Mr. Leslie largely focused on Origo’s holdings in mining and Origo’s plans for Mongolia. Investors should be aware that while most of Origo’s assets are based in Mongolia or China, they do have interests in at least one company based in South Korea, Australia, India and the United States as well. Also, while the company has a tremendous focus on mining investments, it also has investments in agricultural commodities, clean energy, water purification, media, communications, and technology. Management believes the market is undervaluing Origo’s stock due to its diversification, and a lack of knowledge about the value of its underlying assets.

You can purchase Origo stock on the London Stock Exchange. The ticker is OPP.

Individual Mining Companies

Below are four mining companies that investors could consider investing in. I did not meet with any of these mining companies while in Mongolia. These mining companies, all with listings that can be traded in the U.S., were those most often recommended by sources in Mongolia. To consider investing in mining companies only listed on the Mongolia Stock Exchange, one should discuss the investment decision with one of the Mongolian brokerages companies discussed in the next part of this series. 

Ivanhoe Mines (IVN)

Ivanhoe Mines
trades as IVN on the New York Stock Exchange.  Along with Rio Tinto and the government of Mongolia, they participate in the Oyu Tolgoi company that is developing this copper-gold mine that will boost GDP by more than 25% when it goes into full production. The government owns 34% of Oyu Tolgoi. Rio Tinto owns 49% of Ivanhoe. Cameron McRae, Rio Tinto’s Mongolia director is also CEO of Oyu Tolgoi LLC which is a subsidiary of Ivanhoe Mines. Ivanhoe Mines, though diversified in its operations, is the purest play one can make on the production value of the Oyu Tolgoi copper-gold mine.

On September 7, 2011, 20 Mongolian lawmakers wrote a letter to Mongolia’s prime minister requesting Mongolia’s stake in Oyu Tolgoi be upped from 34% to 50%. Mr. McRae warned the government that this would be a bad signal to international investors seeking a stable environment to invest in and could cost the country foreign direct investment. Mongolia’s elections in June were likely at the root of this political action. On October 6, 2011, the government, Ivanhoe, and Rio Tinto issued a joint statement upholding the agreement with the government’s stake remaining 34%, as agreed.

To date, Oyu Tolgoi’s development has been on schedule or more often ahead of schedule to ramp up production for 2013. Whether investing or not, visiting Ivanhoe Mines website for pictures and this October 12, 2011, video uploaded by IvanhoeMinesLtd of the progress at Oyu Togloi is perhaps the best way to understand the scale of this project, and how much this mine will by itself change the economy of Mongolia. 

Kincora Copper (OTC:BZDLF)

Kincora Copper
trades in the United States as BZDLF (former ticker of Brazilan Diamonds) and in Canada as KCC. Kincora’s Bronze Fox deposit is located along the same deposit belt as Ivanhoe’s Oyu Tolgoi, 140 kilometers northeast of it. Ivanhoe held the license for Bronze Fox and explored the deposit from 1997 – 2005. The license for Bronze Fox then passed through a series of owners to Mongolian businessman, Duchintav Khoggor. In September 2010, Kincora began to acquire interest in Bronze Fox from Mr. Khoggor. On August 30 of this year, Kincora reached an agreement to purchase Mr. Khoggor’s remaining holdings in Bronze Fox.

In a speech on March 7, 2005, Robert Friedland, CEO of Ivanhoe Mines said:

I just want to give you a little preview about something called Bronze Fox.  There is a trend there though, you see those circles, that's about a distance of 50 or 60 miles and if we zoom in on Bronze Fox itself, and we've pulled out the slide of Bronze Fox itself. If we have Bronze Fox and Oyu Tolgoi today, and we were just starting the exploration process, it's not at all clear to me that we would screw around with Oyu Tolgoi. 

“The surface manifestations of gold and copper and the aerial extent of the surface manifestations of gold and copper at Bronze Fox are literally keeping us awake at night.  We will begin the drilling of Bronze Fox in early April, and we have very fond hopes of doing it yet again.”

Mr. Leslie of Origo Partners stated that in the process of securing Ivanhoe Mines’ rights to Oyu Togloi, it was necessary for Mr. Friedland to relinquish the rights to Bronze Fox.  

Kincora is a speculative investment and investors should review:

1) the last company presentation from June 2011.

2) the most recent NI 43-101 report of April 7, 2011.

Mining Corporation (MOGLF.PK)

Mongolia Mining Corporation
trades in the U.S. as MOGLF and in Hong Kong as 0975. It is also known by its subsidiary name Energy Resources within Mongolia. It is approximately 20% owned by Mongolian conglomerate MCS (among the largest privately held Mongolian conglomerates). Mongolian Mining Corporation’s primary coal deposit – Ukhaa  Khudag – is located within the massive Tavan Tolgoi coal formation. A composite view from talking to brokerages and investors in Mongolia:

- They have some of the highest quality coking coal in Mongolia.

- They are Mongolia’s leading exporter of coal currently.

- In October 2011, they opened a 147-mile paved road to China to speed up delivery of their coal to China.

- If you read their published announcements on the company website and track what they have done, they consistently attain the goals they say will.

- While management declines many meetings, the management team’s reputation is excellent and their business plan has been well developed and executed, which is far more important than meet and greets.

- It is known that management’s contacts in China are high quality contacts, and their trading relationship with China is very good.

- If and when they have rail service closer to the mine, they should be able to transport up to 15 million tons of coal per year (this is the high number I heard, hence “up to”).

- They are developing a Coal Handling and Preparation Plant, “the first of its kind in Mongolia”

- They continue to make strategic acquisitions such as their recent purchase of the Baruun Naran property from Kerry Mining.

- They have the backing of the European Bank of Reconstruction and Development (EBRD). The EBRD loaned Mongolian Mining Corporation, also known as Energy Resources, $180 million in 2010  (bottom, page 2). The EBRD country director, Mr. Phillip ter Woort sits on Mongolian Mining Corporation’s board.

- Mongolian Mining Corporation has a reputation for a high level of transparency.

Prophecy Coal (OTCQX:PRPCF)

Prophecy Coal
, also known as Prophecy Resource Corporation, trades as PRPCF in the U.S. and PCY in Canada. Chuluunbaatar Baz, President and Chairman of Mongolian conglomerate Monnis, is a member of their board of directors. A composite view from talking to brokerages and investors in Mongolia:

- Their deposit is closer to Russia, and their business plan has always been to sell their coal to Russia and within Mongolia.

- They recently had a successful trial shipment to Russia.

- They have two off-take agreements with Mongolian companies.

- They are actively marketing and looking for traders to buy coal from them.

- They do have to truck their coal as they are not close to railways.

- They are believed to be undervalued based on the company’s 44% interest in Prophecy Platinum (PNIKF.PK in the U.S.; NKL in Canada) along with Prophecy Coal's own assets.

- There is a consensus view of Prophecy as a company successfully executing its business plan. 

Erdenes MGL Tavan Tolgoi

The second largest coal deposit in the world is Mongolia’s Tavan Tolgoi deposit (the largest is China’s Shengi deposit). The government is in the process of selling the western portion of this deposit to a consortium of companies. There is also a company publicly traded on the Mongolia Stock Exchange referred to as “little tt” which is also called Tavan Tolgoi. However, the eastern portion of this coal deposit is currently wholly owned by the government under Erdenes MGL Tavan Togloi.

All citizens of Mongolia are being issued 538 shares of Erdenes MGL Tavan Tolgoi. The London Stock Exchange, which is helping manage the Mongolia Stock Exchange going forward, is conducting an education program for the citizenry on the value of these shares. In an IPO planned to be brought to the market next year, 30% of Erdenes MGL Tavan Tolgoi is to become publicly traded on multiple exchanges. Goldman Sachs and Deutsche Bank are the firms for this IPO.

I am long Mongolia Growth Group, Origo Partners, and Ivanhoe Mines. I have made no trades or investments in the above listed investments in the week preceding publication of this article and will make no trades in any of the above listed investments in the week after this article’s publication. 

Other articles:

Mongolia: Why And How To Invest In China's Canada
Mongolia: Why And How To Invest In Real Estate
Mongolia: Why And How To Invest With Brokerages In Mongolia
Mongolia: Why And How To Invest, Further Considerations

Mongolia Weekly News Blog

© Jon Springer. Please contact for the right to copy or reproduce this article.