Myanmar!!!

The crowd has disappeared from Mongolia like a fart in a windstorm. 2011 was “The year of Mongolia”, where asset prices skyrocketed and it was hip to have an operation on the ground.

Now, many of those who made (or tried to make) their mark in Mongolia have flown south for the winter. Partly to blame is the onset of a liquidity crisis.

With banks lending money in some cases in excess of 30%, the Tugrik falling off a cliff, menu price inflation in excess of 20%, South Gobi Sands losing its mining license, the government continuing to wave its big stick at Rio Tinto and the fact that it’s starting to get cold…well, you see my point.

I just painted a pretty pessimistic scenario to say the least, but frankly I couldn’t be happier.

I’m writing this from Seoul. After having spent several months on the ground in Ulanbaataar, I am better able to observe and report the situation that Mongolia finds itself in, rather than being in it myself.

At the moment the tide is going out and those who are distressed, mainly due a lack of liquidity, are creating a lot of opportunity for those with cash. From F&B, real estate, mining and industry, significant fragmentation continues to exist, waiting for entrepreneurs to close the gaps.

In my view we are entering a period where people and companies are looking to shed assets on the cheap in order to raise capital. With our network on the ground we are receiving significant deal flow (not that it’s all good deal flow) and beginning to be encouraged by some of the valuations we are seeing.

For the naysayers who spout off that Mongolia has no private equity, my rebuttal would be that there ARE a few sound PE deals, so “sniffing around” and doing your own digging could still reap rewards.

Mongolia is likely to experience a deepening slump for some while, with foreign capital steering clear due to Parliamentary elections and a plainly stupid mining law.

BUT, recently the Democratic Party announced a 4-year plan which has the potential to temper foreign investors’ anxiety.

Here’s a glimpse of some of the positive takeaways:

• Ensure that the budget deficit does not go beyond 2% of GDP.
• Impose liability on the management of state-owned enterprises operating with losses and restructure such enterprises in a way to operate profitably.
• Refund 90% of corporate income taxes paid by economic entities with annual sales revenue not exceeding MNT 1.5 billion, who are engaged in businesses in all sectors excluding mining, minerals, import of petroleum products, crude oil export, cellular service providers, alcohols, spirits and tobacco.
• Support the policy to sustainably develop the mining sector through increasing on an annual basis the budget investment for territorial geological mapping, explorations and prospecting, enriching the geo database, and increasing the reserves of the minerals.
• Cover 40% of the total territory by 2016 in the 1:50,000 scale geological map and general exploration work funded by the state budget with the purposes of prospecting the territorial geological formations, the distribution characteristics of mineral elements and their future prospects.
• Give priority to bring into operation the auto road connecting Ulaanbaatar with Zamiin-Uud, and reduce the artificial rise of inflation by enhancing the capacity of the Zamiin-Uud border port.

However, like any country moving from a robust free market to one where the government takes a little more responsibility, some less foreigner friendly highlights have come about:

• Carry out a policy allowing state regulation of the prices of basic products which have impacts on prices of fuel, petroleum, electricity and other goods and products.
• Renew or invalidate double taxation agreements with other countries in line with the interests of Mongolia.
• Mongolia shall be entitled to own up to 51% of a company established to exploit strategically important deposits explored with financing from the state budget.
• Create a legal environment to enable the national economic entities to have preferential supplier or sub-contractor right in the projects implemented in the mining sector.
• Cooperate with foreign direct investors on mutually beneficial basis. After recouping the initial investment put into Oyu Tolgoi development, continue talks to renew the investment agreement on mutually beneficial terms for both the sides.

That last point regarding OT is an issue of contention for investors. I was also told by a contact recently that certain members of Parliament want an annual payment in addition to what has already been agreed. All I can say is, we will see.

However, while the Mongolian government has some polarized views on how to move the country forward, I am not too terribly worried. I believe that if you operate in industries which are not strategically important (mining, telecom, media), the ability to execute will be much easier. For example, the government and aid organizations give grants for agriculture.

So, looking at Mongolia and its rapidly changing tides, I am still enthused as to what can be done in the country and how things will potentially play out.

There is a dire need for industry, services and everything in between, and distressed opportunities are just starting to present themselves, not to mention some interesting value plays on the MSE.

Amid this slowdown, before copper and coking coal prices rise again, I plan to be strategically positioned for when the crowd runs back to this amazing country; then I’ll head to Myanmar!

– Scott Baker

“Collective fear stimulates herd instinct, and tends to produce ferocity toward those who are not regarded as members of the herd.” – Bertrand Russell