For long time readers, Harris Kupperman (Kuppy) needs no introduction. For more recent readers Harris is a friend, fellow cynic, hedge fund manager and CEO of Mongolia Growth Group (Ticker: YAK.V). Someone crazy enough (we are very grateful) to move from sunny Florida to Ulanbaatar in order to take advantage of the growth there.
Harris writes periodic commentary on his excellent website Adventuresincapitalism.com, which I encourage you to check out.
I decided to transcribe a recent conversation I had with Kuppy, the first part of which you’ll find below for your enjoyment.
Chris: lets talk about this Mongolian political saga first Harris. What do you make of it?
Harris: Politics is always fascinating. The key thing to remember is that Mongolia just had a democratic election last summer. The Democratic Party is now in charge. It is only natural to expect some changes as the new party takes control.
Chris: Indeed, you know OT contributes just 7% to NPV for Rio so RIO walking away from it would not be completely unrealistic. On the other hand OT contributes directly and certainly indirectly to multiples of that for the Mongolian economy and government. In short Mongolia needs OT more than Rio needs OT. Under this setup it seems foolhardy for the government to do anything that seriously puts OT in jeopardy.
Harris: OT is now producing copper. No one wants to stop the mine from increasing production. I really do not expect anyone to do anything that would threaten the mine. There is some discussion over who pays what going forward. There’s a lot of attention paid to this, but we’re talking about small changes overall. I see nothing that will alter my thesis about this one mine totally changing the economic picture in Mongolia. OT will be good for the Mongolian people. OT will be good for Rio Tinto.
Chris: Mongolian equities have been hit hard this last year. As you know we’ve been buying. Is your hedge fund involved in Mongolian equities any longer and if you were not the CEO of MGG what do you think your hedge fund would be positioned like right now?
Harris: I made a conscious decision to exit almost all of my fund’s MSE positions this summer so that I could avoid any perceptions of conflict of interest and we have nearly completed that process. The only position that I will keep is BDSec (the largest broker in Mongolia). That said; I’d certainly be using weakness in share prices on the MSE to add to positions or initiate new ones if I were an investor on the MSE. Mongolia has a very bright future and moments like this are the time to buy bargains.
Chris: MGG has grown unbelievably quickly since inception and you’ve managed to continue to conclude accretive transactions to the company. What does 2013 look like for real estate in Ulaanbaatar and for MGG?
Harris: I think that the current liquidity crisis in the banking system will continue as the central bank fights inflation. This will make it difficult for people to roll over mortgages and it will lead to many construction projects in need of financing. We are actively researching a number of distressed properties and construction projects that we hope to either partner on, or purchase and complete. I think these distressed assets are the real opportunity right now.
In 2012, we were lucky in our timing in terms of exiting a number of non-core properties and generating nice gains. We are now looking to use the decline in prices to acquire additional properties at prices that are a good deal below the highs that we saw in 2012.
In summary, 2013 is a year to be an aggressive buyer, particularly if you have the capital to take over distressed construction projects and complete them. Many of these projects are now being offered at twenty to thirty percent implied yields upon completion. In a world with very low yields, these numbers are quite attractive, especially when you consider that these yields should continue to grow with GDP growth in Mongolia.
Chris: You recently listed your shares on the TSX Venture exchange, which is a substantial improvement from the CNSX. I can actually get a live price quote now! (laughs)
Harris: This was a long time in coming. When we originally did our listing, we were searching for an exchange that would be affordable and let us move quickly with less paperwork and oversight. I wanted to put my money into Mongolia, not legal fees. As the company grew, we realized that we needed to move our listing to a more prominent exchange. It took almost 9 months of paperwork and substantial legal expense, but I’m glad the process is finally over.
Chris: Can you talk about that process?
Harris: Let’s just say that the exchange’s due diligence process is exhaustive. We did 3 separate sets of title opinions on our properties, we had 2 sets of title opinions on our corporate structure, we had a Canadian broker do an on-site visit to see our operations and we had our auditors do a mini-audit to show that our third quarter numbers were accurate. Our books and assets were reviewed by over a dozen independent firms. I’m glad that this process is now done, as it very seriously distracted the management team from running our business. That said, I think it was worth it. Since we listed on the TSX-V, our average daily liquidity has increased substantially and much more importantly, as you say, we now have live quotes that any broker can monitor.
This is all part of the process of turning what was essentially a start-up operation into a very professionally-minded organization. Last week, we had our 2 year anniversary as a company, and it’s amazing to think about how far we’ve come from day one when it was just Jordan and I. The Mongolian economy has done exactly what we expected it to do in terms of growth, but now we have the infrastructure and team to much more effectively take advantage of the opportunities that we see. I think that the next few years will be a period of very strong value creation for our company.
Chris: Uggggh, the paperwork involved running a public company or even a hedge fund just makes me want to blow my brains out. Not a day goes by that I am not grateful for not having to deal with this. On a different note, you spent a little time checking out Cambodia, a country we’ve been looking at as well. What was your overall impression of the place when you last visited?
Harris: I think Cambodia will be a growth story, and a success, but I just don’t see any catalyst. There are lots of poor places that will be less poor in 20 years, and if you get behind that trend it will be good for you. The question is then why Cambodia instead of any other country that is in a similar situation?
Chris: Good question, though if we’re looking at a growth story then we don’t need a catalyst per se. In the growth and success story space there are a few good opportunities, however there are some unique characteristics to Cambodia. Unlike countries such as Myanmar for example, they have a stock exchange and about a dozen listings in the pipeline for 2014 and beyond. Provided they are managed correctly I can certainly see Cambodia attracting not only listed equity investors, but private equity as well with a view that a conduit for exit exists where it previously didn’t.
The other aspect is that of valuation. I mean I like some of these emerging or frontier economies, but in some of them the valuations don’t make a whole lot of sense to me. Myanmar at the moment is a little frightening, as every Johnny-come-lately seems to be diving in with scant regard for risk or valuation. Cambodia as a whole doesn’t have a bunch of paper MBA’s swooning all over it and competing with us.
Harris:: Good points.
Chris: Well then, let’s hope to have a beer in Phnom Penh in April at our Meet Up if you can swing it..?
Harris: Love to.
…to be continued…