Thursday, April 28, 2011

Mongolia: Boots on the ground report

I returned from my ten day fact finding trip to Mongolia on 4/23/2011. As readers know I was very excited about the prospects for the Mongolian economy over the next five to ten years as the country begins to monetize its mineral wealth. After visiting the country and talking with people in business, finance, real estate, the mining sector, expats, and government I came away even more convinced that life changing generational wealth can be created by investing in the country.
My initial impression when arriving at Chinggis Khan Airport and clearing immigration is that these people want visitors and capital to come into the country. US citizens can get a 90 day visa when entering the country. However if you intend on doing business there I would recommend getting a visa beforehand as there is some rules on entering the country with the intention of working or creating a business. Some people have been detained when leaving because they did not have the proper visas. There was no customs check or stupid questions about why I wanted to enter the country.
On the ride to downtown Ulan Bator I was bit taken back by the remnants of the Soviet era. In fact you drive by many Soviet era apartments and two very large and dirty looking coal fired thermal power plants. However once you enter the downtown and the central business district you begin to see the potential and the transition that is taking place. There are new buildings going up everywhere interspersed with soviet era relics and some gers. The roads quite frankly suck. Traffic is unbelievable once the business day starts. There are crosswalks but traffic does not always stop and you basically find yourself in a real life Frogger game of trying to cross the street by finding a gap and making your way to the center and then waiting for a chance to finish crossing. The best bet I found was to get in with a group of Mongolians and cross in mass.
The capital is refreshingly cosmopolitan and I found no shortage of dining and drinking establishments or shopping venues. It took about 20 minutes to buy a cheap Nokia phone and get a SIM card installed at the local Mobicom office. High speed internet is available and there are many Wi-FI hotspots. Speaking of dining, if you go to Ulan Batar please visit The French Bistro. I ate there three times and the Chateaubriand was the best I have ever had anywhere.
The first part of my visit entailed looking at real estate and investigating opportunities in Ulan Bator. There are opportunities in real estate speculation in certain areas of the downtown. Low double digit returns are possible but I will caution you that you will be competing with expats and locals who have better information and contacts then you do and you will never be offered the best deals as they will keep these for themselves. One opportunity that did present itself was in commercial warehouse space. Most of the warehouse space is of the Soviet era and is in poor shape. One thing that did become clear is that you will need a Mongolian partner as there are language issues and as a foreigner you will have no way of knowing how to navigate the various steps necessary to buy a property.
I met with several brokerage firms and I think there is quite a bit of opportunity in the stock market. There is a dearth of information on the various companies although this is slowly changing. However the lack of information and lower liquidity also work to the smaller investors’ advantage in my view. There are around 350 stocks on the exchange and there is only information on maybe the top 25 stocks. I think it would be worthwhile to do some research on the second, third, and tertiary level companies to see if there are some hidden assets or situations where significant undervaluation exists and then buy up shares. This would have to be done in a block trade after a large shareholder was identified. I spoke with the principals at Eurasia Capital and they are willing to do this research if an investor is willing to step up and do this type of trade. I also know of an enterprising young expat PhD candidate that is researching these unknown companies and will be offering his findings for a fee of around $5k. I spent some time with Eurasia Capital, which are my brokers, and had the opportunity to talk with Alisher Ali the Chairman of Eurasia and he introduced me to his research team. I came away quite impressed and as of now you can access their research, which I have found to be the best in the country, free on their website by registering.
Although the market is up big since the lows of 2009 there are still many undervalued companies that have the potential for nice gains as the economy grows. For example SUU JSC is the leading milk and dairy producer in the Ulan Batar region. The company has excellent growth prospects as Mongolia is a net importer of dairy products, mostly from China. The company trades at around 4x earnings and earnings are growing around 100% per year. Full disclosure I own shares In SUU. It is still easy to open a brokerage account in Mongolia and it is not necessary to travel there in order to complete the account opening. I did talk to several firms and they all intend on making it easier to open accounts including online and at some point they intend to allow for electronic trading. The MSE and the London Stock Exchange have signed an agreement where the LSE will provide management training and advice on upgrading the MSE. This will include better reporting requirements for companies to maintain listing and better back office and clearing operations. I suspect that at some point quite a few companies will be delisted as they will not meet the requirements at the exchange. This is all necessary as the government intends to float various resource companies and distribute shares to Mongolian citizens starting later this year with the Tavan Tolgoi distribution. At some point as the market cap of the exchange increases and liquidity improves I think that a tsunami of institutional cash will flow into the stock market from abroad.
After spending time in the capital I wanted to check out the opportunities in the Gobi region where all the mining is taking place. We headed to Dalanzadgad which is the capital of the Gobi aimag. When you get there you are thrown back into a time warp. Dirt roads, no green grass, no tress, dusty old buildings, and Soviet bleakness are your initial impression. However once you begin to dig deeper you see that things are booming. I counted several new multistory building s either recently completed or currently under construction. These buildings were built to house various banks and to provide office space. I also met with the government planners and was shown their models of how they intended to build this huge planned community in the Soviet five year plan mode. Meanwhile all you had to do was look out the window and see two construction sites being built by enterprising businessmen. I wished the bureaucrats well and moved on to more realistic and important things.
There is opportunity in real estate in Dalanzadgad but you would need a partner to help navigate. I know of one construction project that is ready to go where a state entity will give you land and has infrastructure put in if someone will build apartments for their employees. The employees all ready have the cash to pay for the apartments so the deal could be self financed. It would just take an enterprising person to go down and do the deal.
After returning to Ulan Batar we met with some managers from the mining industry that are building the Oyu Tolgoi copper/gold mine down in the Gobi. We were asking about possible business opportunities. There are many as the mining companies are finding that they have to do quite a bit of ancillary activities to support their construction and mining activities that are not their core competencies. This takes away time from managing their mining and the view I took away was that they are interested in talking to people about off loading these burdens. I asked the question of what happens when you start the mine and the 2000hp motor on the ball mill needs to re-wound. The reply was good question we don’t know as of right now. There is ton of opportunity to provide mining services, housing for workers, fresh meat and vegetables, entertainment, medical services and just about anything else one can think of to these mining companies. The only caveat is you need to be in Mongolia and get yourself known in this circle of people so you can be in a position to hear about these issues and then offer solutions which can be turned into businesses.
The bottom line here is that we have a country of three million people with a current GDP of around $7 billion. The country is sitting on over one trillion in mineral wealth that we currently know about. The place is so underexplored that this is going to swell. The main areas where they are finding coal and copper are literally right on the Chinese border. As the CEO of a Canadian company taking advantage of this growth told me, “This place will be the wealthiest country in the world in ten years”. If we compare Mongolia to what has occurred in other resource rich nations like Qatar and Kazakhstan this will be an understatement.  Indeed, and there are many ways to play this growth along with avoiding the many pitfalls as I outline in The Actionable Intelligence Alert.

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