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Mongolia: Why And How To Invest, Further Considerations

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

Cash is still the preferred method of transactions in Mongolia. There are two very long borders with both China and Russia over which there are without doubt some transactions that do not clear customs. While tipping at restaurants is not customary, I was told hitchhiking in Ulan Bator always involves a negotiated price. Property purchases take place with bags of cash previously checked to ensure the bills are crisp.

In this frontier investment market with its own local rules, there are connected privately held companies that grease the cogs that make the country work. The country is unmistakably still recovering from communism, and the infrastructure that era bequeathed to future generations. Assisting this development and recovery are international aid agencies. These are not all homespun do-gooder aid agencies. Some of these aid agencies are turning a profit on loans and investments in Mongolia’s economic boom. 

Aid Agencies

While how to invest in Mongolia has been discussed, there are more layers to how business gets done in Mongolia, and what impact economic development will have on the Mongolian people. World Bank data shows foreign direct investment (NYSE:FDI) rising steadily, except for a downturn in 2009, and international aid also rising steadily since 2006. This data from the World Bank is in current U.S. dollars:

$93 million FDI + $258 million aid (2004)

$185 million FDI + $215 million aid (2005)

$344 million FDI + $202 million aid (2006)

$373 million FDI + $239 million aid (2007)

$845 million FDI + $246 million aid (2008)

$624 million FDI + $372 million aid (2009)

$1.455 billion FDI + no data yet on aid (2010).

Former aid officials wind up in important positions in Mongolia. The current U.S. Ambassador to Mongolia, Jonathan Addleton, is a career U.S. AID officer who was director of U.S. AID in Mongolia from 2001 – 2004 before becoming U.S. Ambassador to Mongolia in 2008. The new Chief Operating Officer of Erdenes MGL Tavan Tolgoi since October 2011 is Graeme Hancock who was previously working for the World Bank in Mongolia. Erdenes MGL Tavan Tolgoi is owner of the second largest coal deposit in the world. It is slated to have an IPO for 30% of the company next year in Hong Kong and London led by Goldman Sachs and Deutsche Bank.

The European Bank for Reconstruction and Development (EBRD), which began operating in Mongolia in October 2006, will present at the Mongolia Investment Summit December 7th to 9th of this year in London. The EBRD was originally set up after the fall of communism to help countries in central and eastern Europe develop. A former head of the EBRD came to Mongolia on a trip, loved it, and got the EBRD to open an office in Mongolia. Locals say the EBRD is for-profit and making good money in Mongolia. Officially, the EBRD is a quasi-government investment bank mandated to help democratic post-communist countries.

APIP subsidiary Mongolian Properties describes: “The EBRD is the largest single investor in the region and mobilizes significant foreign direct investment beyond its own financing. It is owned by 61 countries and two intergovernmental institutions. But despite its public sector shareholders, it invests mainly in private enterprises, usually together with commercial partners.” The EBRD has been operating in Mongolia since 2006. Along with other aid agencies that invest significant capital in the country, they have influence. Until mining operations within Mongolia are ramped up significantly from current operations, aid agencies are necessary to the economy. More important will be Mongolia’s ability to develop the non-mining portions of its economy to have a long-term sustainable economy for all its’ people without support from aid agencies.  

Local Conglomerates

There are many large privately held conglomerates, as well as family run operations, in Mongolia. Four of the larger conglomerates whose websites could be looked at to understand how businesses are connected in Mongolia are BodiGroup, MCS, NewCom, and Monnis. Beyond the companies listed as subsidiaries that they own wholly or in part on their websites, there are often close business ties with other companies that share the buildings of these respective companies. For example: Oyu Tolgoi staff use AeroMongolia airlines for travel within Mongolia, AeroMongolia is a subsidiary of Monnis, and Oyu Tolgoi’s offices are located in the Monnis tower.

I was left with the impression that the privately held conglomerates exist on a higher tier of operations than companies publicly traded on the Mongolia Stock Exchange. The conglomerates of Mongolia have their tendrils in many business lines and are jockeying for position with each other to be the best positioned for the future. In a country of 2.7 to 3.1 million people, it is safe to say that when people regularly said to me there are from 78 to 100 families running the country, those would include members of the conglomerates and relatives of theirs in the government.

As long as this does not result in persons in the government blocking companies they may not like for biased reasons from economic development, this system can work. However, there were rumors that company-financed infrastructure projects of particular companies were blocked by government officials biased against said companies.

The conglomerates are aware of public stock valuations and I believe over time will sell off portions of their companies, or subsidiaries, publicly while maintaining their privately held core. It is also believed by many sources that there are far too many Mongolian conglomerates and family investment vehicles, and that there will be waves of consolidation in this sector in the future. 

Private Equity in-flows

Beyond the private equity investments discussed earlier, there are many vehicles to invest in Mongolia, and more developing. From publicly traded Mongolia Blue Wolf Holdings (MNGLU), a blank-check company which is led by a group of experienced private equity managers that recently raised $85 million in their IPO to Envidity, a speculative coal gasification and gas to liquids private investment that is trying to raise $1 billion in financing, and has former U.S. General Wesley Clark as its chairman. Two out of three times I visited the Ulan Bator Marco Polo strip club known for being a watering hole of both the western mining and western investment communities – not to mention being known for its contortionist show – I found myself sharing a beer with a private equity manager passing through Mongolia for 5 days or less to figure out how to invest money in Mongolia for their clients. Brokerages and investors based in Mongolia occasionally mention fatigue from “economic tourists.” They are weary of spending time with people who want to learn from them how to invest in Mongolia, but who do not intend to invest money with them. 

Impact on Society

Wage growth

A conversation about wage growth in Mongolia often seems like a conversation between two lying braggarts. Stories of truck driver wages tripling and mining service positions quintupling in a single year abound. However, imbalances in wage growth toward the mining and investment sector will need to be caught up with for other jobs. A recent BDSec report quotes a 11.4% inflation rate which is a significant amount for wages across all professions, as well as government aid programs, to keep up with. An August 27, 2011, report on Mongolia’s budget surplus indicated the government plans to spend a good portion of the surplus on addressing “salary and pension issues.” True to form, by October 3, 2011, there was news of a planned 53% hike in state employee salaries and pensions. 

Language skill drain

I asked multiple people while in Mongolia how the wages of teachers and government civil servants are keeping up with the wage growth in other sectors. I could not get a clear answer except that while wages of those professions will increase, the increases will not match the increases in other sectors. One sector of the society that is clearly having trouble keeping up is the tourism industry. English and other foreign language speakers are in high demand at mining companies and investment firms. By going to a mining company, a former tour guide can sometimes increase their salary by as much as 8 times their prior monthly earnings. 


A significant change in the way the economy operates is the growing population of repatriated Mongolians. These are Mongolians who have lived, studied, and/or worked abroad in Japan, Korea, the United States, Russia, and elsewhere. They bring back a different understanding of cultural values and business standards. They are coming home because they see their home economy growing and bring with them the standards of how developed countries do business. This is an influential group in the country that is changing standards in commerce, accounting, insurance, business practices, and other values they import with them. 

Poverty and environment, helping people up or creating a new tiered system?

Jess Lampe of Asia Pacific Investment Partners came to Mongolia first as a Peace Corps volunteer from 2005 to 2007. Then he went to Thunderbird Business School in Arizona and returned to Mongolia to ask Lee Cashell for a job with the sales pitch that he spoke Mongolian and went to the same business school as Cashell: it worked. Mr. Lampe said in our interview that he went into the private sector (at APIP) from the public sector (with the Peace Corps) because he thought it was a better way to improve people’s quality of life.

The World Bank’s August 2011 Quarterly Report seems to concur with Mr. Lampe citing poverty declining “from 61.1% in 2002/3 to 35.2% in 2007/8.” As business develops in Mongolia, there are indeed more opportunities for Mongolians to have well-paid jobs. As the mining industry ramps up, the government should have more funds on hand to support social programs, infrastructure, and state employee wages. In the private sector, there should be growth in shopping, entertainment, construction, and services. The bottom of page 6 of the same World Bank Quarterly Report discusses as well the Fiscal Stability Law put in place in 2010 to start setting aside funds in 2013 to have saved government funds that are available to counter the cyclical nature of a commodity based economy. The growth of the economy in Mongolia should help the majority of the population.

The flip side is the number that was often repeated to me that 78 to 100 families are the majority stakeholders in the country (76 members of parliament, a President and a Prime Minister = 78). They will do well. There will, with the expansion of mining and investments, and the growth in real estate values, certainly be an expanding middle class. If the government follows up on its issue of 538 shares in Erdenes MGL Tavan Tolgoi to all citizens with future and more significant stockholding offerings, there is the potential for benefits to all members of society as there is in Norway, but the scale of the amount offered to the citizens currently is relatively insignificant and tokenistic.

Mongolians polish their shoes because a person is judged by the first thing that enters the doorway. Yet, if you are in Ulan Bator in the winter, the first thing you may see is that visibility is as little as 30 feet due to smog. One person compared living in Ulan Bator from November to March to being the equivalent of smoking 5 packs of cigarettes a day. The city last year gained the title of the most polluted city in the world.

Yet, those living in the poor “ger district” housing are often up on a hill at the north end of town. While the infrastructure around their homes is poorer than it is in the center of town, and while they may burn anything and everything (from wood to coal to tires) in the winter to stay warm, the pollution tends to go downhill to the bottom of the valley in the city center.

Literacy is high by world standards at 98.5% which is a very good statistic except under communism the data stated literacy was at 99.8%. Perhaps the communist data was inaccurate. But it aids those who question whether enough government funds are invested in education in a country that needs to train its citizenry with the necessary linguistic and technological skills to participate in the economic boom brought on by the mining industry in their country.

The mining industry itself is vastly changing the landscape of the country with holes dug, water necessitated for various processes, and the hope to build up processing plants to export more finished products, and not simply raw materials, in the future. The Fire Nation movement, or other organizations, fronted by 2007 Goldman Prize winner Tsetsegee Munkhbayar are often cited as leading a charge to protect the environment in Mongolia in western media outlets. However, conversations with many people convinced me that Munkhbayar and his organizations are largely marginalized and not particularly influential at all. One person I spoke with who does not like the mining industry themselves responded to my questions about Munkhbayar, “You mean that crazy man?” Thus, the only person generally picked up in the media as a protector of the environment is generally viewed locally somewhere between unknown and ineffective.

Perhaps, there will be a capitalist follow-on industry to the mining sector to help revitalize land that is mined. This is not to advocate that or say it will work, but it seems likely in a country historically based upon nomadic people that land protection will be necessary to maintaining public support for the mining sector.

There is an incredible potential for the country’s mining boom to help all the people of the country, but it is only a potential, and will require significant forward planning by the government. 

Final comments

There are opportunities to invest in Mongolia for people investing a little or a lot. Indeed, if anyone is really boxed out of Mongolia, it is people who have too much money to invest in an economy this size and cannot find the right investment to make a difference in the value of their portfolio. For retail investors wanting to purchase equities, there is Mongolia Growth Group, Origo Partners, Ivanhoe Mines, Kincora Copper, Mongolia Mining Corporation and Prophecy Coal. There are many other companies investing in Mongolia, and one should diversify among several companies so that they are not relying solely on one company. If you invest in only one company, it is highly possible the economy will succeed and your company will not. That risk will be limited by diversification.

For investors with additional funds who understand the risks and potential rewards of sending funds to a foreign nation to be traded in a foreign currency, there is the opportunity to open a Mongolian brokerage account. Although the brokerages say there are no minimums, you should probably invest at least $10,000 that you don’t need for the next 5 years. You may also want to test your ability to pull money out of the country, for your own peace of mind (e.g. send $11,000 and withdraw $1,000 in 3 months time). Keep in mind that opening a brokerage account in Mongolia will require filing taxes in Mongolia.

For accredited and qualified investors, there is a different level of opportunity altogether. There are plenty more private equity opportunities beyond the scope of this article for accredited and qualified investors. I believe for those investing a larger sum of money in Mongolia, a portion of that should be allocated to the real estate marketplace. Additionally, it is advisable to place your real estate investments with someone on the ground in the country that knows how to work the system as there are a lot of ways to overpay.

The big risks to investing in Mongolia are a global economic pull back, an economic pull back in China alone, or an inability to transfer natural resource wealth into wealth for more than a select few. Democracy, aid agencies and investors are all in place pushing for Mongolia’s natural resource wealth to benefit the whole country and not only a few; but the history of natural resources in developing countries requires minding this risk. If there is global a pull back, that would also be an opportunity to invest in Mongolia as the mining industry is on the precipice of ramping up on a grand scale. Thus, if considering commencing an investment plan for investing in Mongolia, you may want to scale your investment in over time to have funds available to invest in pull backs, and to confirm that the government is staying on the right path to managing its natural resource wealth. 

Disclosure: 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 Stocks
Mongolia: Why And How To Invest In Real Estate
Mongolia: Why And How To Invest With Brokerages In Mongolia
Mongolia Weekly News Blog

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