Monday, May 9, 2016

Interview with Mongolia Growth Group CEO Harris Kupperman

I recently had an email interview with the CEO of Mongolia Growth Group Harris Kupperman.

AIA: In our email exchange before I submitted these questions to you I asked what effect the recent notice to proceed on the OT underground works would have on the Mongolia economy. You indicated that it would not do much to grow the economy but rather slow the decline. We have seen growth slow to nearly zero but it seems the economy may be contracting. How bad are things economically in Mongolia? 

HK: Official govt numbers show that economic growth is near zero currently. However the Sales Manager’s Index (SMI) which I’ve attached shows that the economy has been contracting for the past two years. Following a small bounce on news of a resolution to the Oyu Tolgoi dispute, readings are once again making new lows. Most businesspeople tend to follow the SMI as the real gauge of economic activity. The economy in Mongolia is VERY weak and getting weaker. We are expecting a sizable number of bankruptcies this year due to excessive debt, high interest rates and a lack of cash in the system to make payments. It seems that almost all businesses are behind in payments to suppliers and even employees.

AIA: There are elections coming up in June. From your view on the ground in Mongolia how important is the election from an economic standpoint? Is it possible the people are fed up enough to vote for wholesale change? 

HK: The coming election will be the key to determine if the economy will be allowed to recover, or the politicians will focus on their own private interests at the expense of all Mongolians. I get the sense that most voters are incredibly fed up, but they don’t have many options in what is effectively a 2 party system.

AIA: How strong is the nationalist sentiment? There seems to be quite a few politicians and many people in Mongolia that have a negative view towards FDI. I have actually read statements that seem to indicate that some Mongolians think they can develop their enormous mineral endowment without foreign capital and expertise. I hope this is just political posturing or is it? 

HK: Nationalist sentiment seems to be less strong than it was this time last year. Everyone seems to realize that things were better when there was more FDI, the debate now, is on who gets that FDI and what the terms are.

AIA: As far as MGG is concerned, it appears from various corporate results and communications that you and your team have wrung out a considerable amount of costs from the business. However, it also seems that the property market is taking a big hit, which is to be expected, and revenues are also taking a big hit. I know your were trying to get to a cashflow positive situation. If the economy continues to deteriorate will MGG at some point need to seek out additional capital? 

HK: Since I returned as CEO, we’ve made tremendous progress in reversing obvious problems at the business and cutting costs. We’ve taken almost half of our cost structure out of the business and think we can take even more costs out during 2016. However, the revenue side is really hurting us. We expect things to get a whole lot worse in the next few quarters in terms of revenue, which will ultimately affect our ability to get to cash flow positive. For now, our goal is to preserve our capital and make it through this downturn, so that we do not have to raise additional equity capital. Fortunately, the current board supports this strategy, which is the reason that we’ve been able to reduce expenses as aggressively as we have during 2015.

AIA: I believe you are still the largest shareholder and still do not take a salary? Are you still confident in your Mongolia thesis that prompted you to move to Mongolia and create this company? With the current state of the economy is there opportunity for MGG to take advantage of less prudent developers and investors missteps and buy assets at a discount? 

HK: Over the long run, I think that Mongolia will return to being a rapidly growing economy. Unfortunately, the timing of this depends on when FDI returns. I think that MGG will be able to take advantage of other investors who are over-leveraged as we have no debt, however we were not appropriately prepared for this downturn and only started to cut costs in 2015, whereas our competition was cutting costs starting in early 2014. This means that we have been behind the curve and do not have an appropriate war-chest to buy distressed assets. Therefore, our current goal is more focused on survival than growth.

AIA: I recall meeting you in UB several years ago when you were just starting to build the business by buying properties with literal paper bags of cash taken to the closings. You have seen the boom times and now the bad times. What is the most important thing you have learned in your time doing business in Mongolia? 

HK: The key to doing business anywhere is to have solid dependable management on the ground and to keep your costs down. I knew this going in, and my experiences over the past 5 years have repeatedly reinforced this view.

So that is a boots on the ground view from a person who has been in Mongolia back during the boom times through the current downturn. We will have to wait and see what happens during the upcoming elections in late June. Hopefully people that have the best long term interests of all the Mongolian people will be elected and the appropriate changes that need to take place will be made. In the meantime the several trillion dollars in mineral wealth that Mongolia posses are still there and I believe they will eventually be extracted. As always this is a timing issue. However I think for long term investors who are patient buying MGG at these levels represents a long term call option on that mineral wealth. Here is a link that Harris provided to the Mongolia Service Managers Index.

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