Asia Frontier Capital Newsletter – Country Snapshot: Mongolia

Although it is the least densely populated country in the world, with less than 3 million people living in a land area of 1.5 million km2, Mongolia has the potential to see the greatest growth of any country within the AFC Asia Frontier Universe. Mongolia’s economy is traditionally based on herding and agriculture, but is expanding aggressively due to foreign investments in large mining projects that capitalize on the country’s vast deposits of coal, copper, gold, tungsten, tin, nickel, zinc, silver, and iron. Real GDP is expected to expand by 8.4% in 2015 and this should accelerate sharply if the government can resolve an ongoing dispute with a large foreign mining company. Mongolia’s growth is also steered by high levels of agricultural production and the spill-over from China’s epic growth.

Stock Market:

The Mongolian Stock Exchange (MSE), located in Ulan Bator, is the country’s sole stock exchange. The history of MSE’s securities market began between 1992-1995 when 475 state owned entities were successfully privatized through MSE distributing 96.1 million shares worth 8.2 billion MNT (7.0 million USD) to the citizens of Mongolia within the framework of implementing “Privatization Policy” of the Mongolian Government during the transitional period of a central planned economy to a market economy in Mongolia. Secondary market trade began on August 28, 1995 auctioning 16,000 shares of three companies that valued 15,000 USD.

The MSE now lists 212 companies and has a market capitalization of USD 700 million as of February 2015.

Mongolian Stock Exchange website:

Country snapshots for all of AFC’s markets can be found on our website at

AFC Country Report: Mongolia

The key topic that will continue to dictate investor confidence in Mongolia is the issue of Oyu Tolgoi, the USD 6 billion copper and gold mine that has become the focal point of a well-publicized dispute between Turquoise Hill Resources (a subsidiary of mining giant Rio Tinto), which owns 66% of the mine, and the Mongolian government, which owns 34% of the project. Hailed as a transformational discovery that would account for more than one-third of Mongolia’s GDP upon completion, the project has become a litmus test for foreign investment in the country, with many outside observers expressing worry over the ongoing disagreements between the two joint venture partners regarding profit sharing and financing.

Mongolia’s new Prime Minister Chimed Saikhanbelig has tried to revive foreign investment in the wake of the Oyu Tolgoi dispute and several other incidents involving backtracking on mining licenses and changing foreign investment laws. He has proposed an amendment to the minerals law to allow the government to swap its ownership stake in the Oyu Tolgoi project in exchange for future royalty payments from mine developers. The amendment would mean that the Government of Mongolia would be off the hook for providing a significant amount of the USD 5 billion necessary for the construction costs of Phase Two of Oyu Tolgoi, which would help develop the underground portion of the mine, which contains 80% of the deposit’s total value. Rio Tinto, however, does not want to increase its ownership percentage in the project by buying the Government’s stake, especially in light of the fact that global commodity prices are down – in January, copper fell to its lowest price since the 2008 global financial crisis.

Source: Bloomberg

One potential glimpse of hope for foreign investors watching the Mongolia situation came in early March when an international tribunal ordered the Government of Mongolia to pay USD 100 million to Canada-based Khan Resources in compensation for cancelling the company’s uranium mining licenses granted in 2009. Khan’s shares jumped +28% on the news, and the court ruling is hopefully a signal of a move towards better enforcement of laws, contracts, and agreements in the country between the government and foreign companies.

More good news came when the government announced its plan to renew the granting of mineral exploration licenses commencing on 26th January 2015 after a more than 5 year hiatus. There may also be signs of hope for continued political reform as the President of Mongolia also pardoned three foreign employees of coal miner SouthGobi Resources Ltd who had been sentenced to over 5 years in prison for tax evasion. The foreigners had been banned from leaving Mongolia, and the case was plagued by murky details and translation problems, threatening to further derail investor sentiment in the country.

Forward progress by the government is vital to coax back foreign investment, as the country’s Central Bank announced in August of last year that FDI entering Mongolia from January to July 2014 had fallen 70% year-on-year to a total of USD 873 million, following a 43% drop during the same period in 2013. Slumping foreign investment has been the main catalyst for Mongolia’s woes, but dipping commodity prices and a weakened currency have also contributed to the country’s slide.

Byambasaikhan Bayanjargal, the CEO of Erdenes Mongol, the umbrella company that holds the Mongolian government’s stakes in various mining projects in the country, believes he can transform the outlook for mining projects and foreign investment in the country. Bayanjargal, who previously worked for the Asian Development Bank in project finance and helped manage a USD 120 million wind farm project in the country, wants to raise foreign capital and sell shares in the company to create a “Mongolian Temasek” modeled after the highly-successful Temasek Holdings investment company in Singapore that manages about USD 164 billion on behalf of the Singaporean government.

In an effort to diversify the economy away from mining and natural resources, Mongolian lawmakers voted in February to allow the construction of casinos in the country to try and capture some of the Asian gaming market share from its traditional hub, Macau. The proposed law would seek to attract wealthy gamblers from China, Russia, and Japan, while banning gambling for local citizens. The law would enable two casinos to be built in a public-private partnership and would provide a boost for government tax revenues and the slumping economy.

On the political front, Mongolia has become an increasingly important part of Japan’s foreign policy, as Tokyo seeks to counter Beijing’s influence in Asia’s frontier markets and develop stronger ties with countries that have historically enjoyed cozy relationships with China. Similar calculus has been employed by Japan in building ties and substantially increasing investment to Myanmar, Cambodia, and Laos to provide an alternative to Chinese low-interest financing and also help create markets for Japanese companies to make inroads.

Mongolia has also been a useful intermediary for Japan for dealing with North Korea, acting as a diplomatic conduit for talks between the two nations after the kidnapping of several Japanese by Pyongyang decades ago. Ulaanbaatar maintains relations with Pyongyang, and hosted three rounds of bilateral talks on the kidnapping issues between delegates of Pyongyang and Tokyo from 2007-2012, receiving praise from the Japanese media. Mongolia’s neutral policy towards both North and South Korea has helped Ulaanbaatar broaden its geopolitical ties and hedge the risk of any potential future disputes with China or Russia.

President of Mongolia Tsakhiagiin Elbegdorj meets with Prime Minister of Japan Shinzo Abe

Mongolia and Japan signed several free-trade agreements in February, as Japan seeks to find an alternate supplier than China for rare earths minerals used in the production of automobiles and high-tech products. Mongolian imports from Japan (primarily automobiles) dwarf its exports (mainly coal and rare earths minerals), but for a niche sector, Mongolian cashmere, the February talks were noteworthy due to the announcement of a call for tariffs on cashmere to be scaled back by Tokyo. Another aspect of the agreement was Japanese Prime Minister Shinzo Abe’s announcement that Japan would offer USD 308 million in financing to help build the New Ulaanbaatar International Airport (NUBIA), which is slated to be completed in late 2016. NUBIA has been mentioned as a potential location for any future casino that Mongolia might build, and the airport will have a capacity of up to 3 million passengers a year, with cargo capacity set to increase ten-fold.

AFC Travel Report: Mongolia

In  line with our process of being on the ground in the countries we invest in, AFC’s regional research analyst Scott Osheroff, recounts some of his experiences from his travels to Mongolia in February 2015.
Five minutes after turning the last page of Jack Weatherford’s book, Genghis Khan and the Making of the Modern World, my plane touched down in the coldest capital city in the world – Ulaanbaatar, Mongolia.
Having travelled from the heat of Cambodia, the weather upon landing was a very unwelcoming -22 degrees Celsius. As I grabbed my bag from the carousel and walked to the parking lot, my friend casually informed me that I had arrived on the coldest day of the year. Wearing only jeans and a sweater it sure felt like it!

This trip I was on a fact-finding mission, surveying the current state of the economy while meeting with several publicly listed companies on the fledgling Mongolian Stock Exchange to assess potential investment opportunities for the AFC Asia Frontier Fund. An old Soviet city with pockets of modernity, Ulaanbaatar is an outpost for the adventurous and enterprising who are willing to bear the cold winters in one of the most remote parts of the world to try to capture the potential rewards.

On my first morning I decided to brave the cold and go for a stroll in the then -27 Celsius weather to see what had changed since my last trip in June 2014. Heading west past the Olympic Residence, under construction by Asia Pacific Investment Partners, and the Children’s Park where the Shangri La Hotel is being built, it was interesting to see so many cranes hovering over the city. At one point I stopped and turned 360 degrees counting nine cranes. The capital inflows into Mongolia in the later 2000’s and following government stimulus led to a building boom with many projects now in limbo.

Construction woes were the least surprising; I was flabbergasted by how few foreigners were now in the city, even with the expat winter migration that usually happens this time each year. Once a darling of the frontier markets investment community, and briefly the fastest growing country in the world, a mass exodus of foreign talent began in 2012 when several unfriendly FDI policies coincided with a correction in commodities markets. The result is a nascent community of long-term expats who are largely entrepreneurs or who have local families.

Continuing my walk, around lunch time I escaped the cold, stopping by my favourite Mongolian restaurant downtown which serves a one-of-a-kind beef noodle soup. Once inside and having ordered from memory I took to reviewing the menu while waiting for lunch to arrive. In my utter amazement prices had risen 60% in local currency terms in just six months’ time. The unfriendly FDI policies I mentioned previously have led to significant weakness in the tugrik where the exchange rate has subsided from 1,312 in June 2012 to the current rate of 1,983 versus the USD. This momentous decline has led to sticker price shock and my restaurant had resorted to using sticky notes to update pricing, seeking to avoid menu price costs associated with a continually depreciating currency. This is something I never expected to witness outside of my economic history class from my university days.

Onto some positives, in light of the direct harm to the economy that government policies have caused, it seems that the government is slowly learning its lesson. A milestone for the country occurred on 26th January, which was the first time the Government of Mongolia had issued minerals exploration licenses in over five years. As a resource rich economy, mining is arguably the lifeblood of the economy. This change has led to a slow rebirth of interest in the mining industry and resulted in quite a buzz of activity in the local business community, which was refreshing.

The following several days I visited prospective investments for the AFC Asia Frontier Fund as well as some existing companies that are already a part of our portfolio. Two companies with the most potential that I met were a confectionary/bakery producer and a construction materials company, the latter not dissimilar to Home Depot in the USA.

The confectionary company has broad distribution throughout the north of Mongolia and is in the process of retrofitting a section of its factory to produce ice cream and skim milk powder (SMP). This had piqued my interest as the major Mongolian dairies import SMP from large international groups including Fonterra in New Zealand. The company is also expanding distribution into Ulaanbaatar where they believe they can compete directly with the two largest confectionary/bakery groups in the country.

Modern machinery used for food production in Mongolia

The construction materials shopping center is an existing investment and one we perceive as a unique way in which to gain leverage to the real estate sector. The company has over 200 stalls which are fully rented to tenants who sell their products, running the gamut from chandeliers to floor tiles. The majority of the tenants have been renting for more than eight years, the company has a “sticky” customer base which allows them to keep vacancies low and raise rents accordingly. Notably, their earnings per share in 2014 grew by 78.6% as expansion plans see them building similar shopping centers in second tier cities whilst they continually improve their existing facility in the capital.

In the winter time, Ulaanbaatar is the most polluted capital city in the world, with the burning of coal fires in gers making it significantly worse than Beijing! Thus, on the weekends locals and foreigners alike drive out to the countryside for camping, hiking, and of course skiing. As my trip came to a close I was invited by some friends to go cross country skiing north of Ulaanbaatar, bordering the Siberian forest. Making our way across frozen rivers and through the forest was a splendid and relaxing way to indulge in the serene beauty of Mongolia. This trip also further piqued my interest for the future of the Mongolian tourism industry as, even in winter, it offers experiences unlike anywhere else in the world.

A Ger and mountain home in Mongolia

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