A Mongolian Mogul – Part II

We broke from our conversation with Jamul Jadamba yesterday getting ready to discuss China. Here’s part II…


Chris: You made a great couple of points yesterday regarding China. You can’t compare China to Mongolia at all.

As investors, it’s not just the growth that’s important, but rather the “percentage growth.” I recently discussed this when talking about Frontier Market investing. For a country the size of China (approaching 1.4 billion people) to grow is one thing, but when you have a country like Mongolia, with 2.8 million people, it’s a very, very tiny country on a global scale – the result is much different.

An exponentially growing economy in a tiny country allows an investor immense leverage, and a much higher probability to make multiples on their capital by playing the growth that comes out of this dynamic.

Jamul: Yeah, it’s unprecedented. It’s a tiny population sitting on world class mineral wealth.

Another way to put it is to say that Mongolia’s economy is a hugely leveraged bet on China’s growth as well. So, you’re absolutely right. Starting with a very low base to begin with, in a situation where the supply/demand equation is skewed in our favour, means that you can grow at an incredibly rapid pace.

Chris: The other thing that we mentioned, being a dominated neighbour of China and Russia over the last 100-odd years has been a distinct disadvantage.

If you look back in history there are some other examples of this, historians call it the “advantage of backwardness.” We discussed this previously when predicting prosperity. Essentially you have a situation where a previous disadvantage becomes a significant advantage, usually due to technological changes altering the dynamics of commerce.

Coming back to Mongolia, we have a country that now finds its previous disadvantages to be significant advantages. The fact that the communists controlled the country ensured that much of the mineral wealth remained lifeless. So, the country is still largely untapped, which is why they’re finding new deposits literally every next Tuesday.  Coupled with both Russia and China having turned largely capitalist, and growing strongly, Mongolia could not be in a better neighbourhood.

Jamul: Absolutely. With the changes in the political system, and obviously the economic growth – we’re just on the right trend at this point. I don’t know how long it’s going to last, because I think at some point in time China will have to adjust its political system to its changing economic reality and the demands of its people. I think we have a couple of decades before that really comes to a critical point.

Chris: Yeah, I think the cats out of the bag now in China. It is very difficult for the political class there to revert to a system that they had 50-60 years ago. The abilities of the citizenry are now amplified.

It’s one thing being able to suppress peasants who have little to no capital, such as the North Koreans for example, it’s completely another once capital starts flowing freely. Capital automatically provides people with choices, and with economic choices follows political power. While China is still a single party state, the populace has a much larger stake in the country than they did 60 years ago. This is very influential.

Jamul: Absolutely it is.

Chris: I think the time is going to come where a political change will take place and the only question really is whether it comes in a relatively benign form, or via Molotov cocktails, which is never particularly good for business.

Ironically the political situation in China is almost the opposite of what we have in the West, where people believe they have political freedom, while economic freedoms are stripped from them on a daily basis. The natural progression is that you end up with political suppression as well. History shows us this in full colour.

That being said, any upset in China would likely see demand in everything from coal to zinc to uranium slow down. With the relative size of the Mongolian economy, and the favourable factors of their geographic location, maybe GDP growth slows to something like 3% for a while.

Jamul: Mongolia’s going to be quite different because the base is low, but these jumps in GDP are lumpy. Look at a project like OT. That in itself will have a 25% impact on GDP. There are vast amounts of exploration being done right now, so more and more of these world-class deposits will come online. Mongolia’s base is still low, so a continuous commissioning of deposits the size of OT will have less and less effect on GDP, on a percentage basis. The impacts won’t continue to be 25% bumps, but it will continue to make an impact of say 10%, 5%, etcetera. These are large capex commitments, in most cases being made by large international companies.

Even if Chinese growth slows down, OT is still going to get built. It is going to be a low cost producer in the market. It’s not going to be a linear relationship to the Chinese economy, where China slows down by 20% and Mongolia slows down by 20%.

I think in many ways because we have such a small base, and the capex that’s coming into the country is lumpy and represents long-term capital expenditure commitments, some of this stuff will be pretty sticky. I think projections of Mongolian GPD growth at 15-20% over the next three years are going to stand, barring some true meltdowns – Rio Tinto going into distress, or copper hitting some very, very low prices. Only in these situations could you possibly see some of these projects getting mothballed.

These big underground mines in particular, once you get them started you cannot stop, because it will be very costly to stop and restart it again.

Chris: The other thing worth mentioning, as it’s not well publicised, is that the OT and TT projects, as enormous as they are, are just a slice of the entire picture.

Multiple resources are on the menu. There are multiple other projects being developed in multiple resource sectors. So, if for example you had copper collapsing in price, or some new technology coming along displacing the need for coal, sure it’s going to have an impact on certain projects, but in terms of all the resources in the country they’re very well diversified. I struggle to find something that is going to significantly dent overall GDP growth moving forward.

Jamul: Yeah, I think the biggest risk is really Mongolia’s own internal political risk, especially because we don’t have these other catastrophic risks. We have social problems that are due to poverty and growing pains. The economy is expanding at a rapid pace, and wealth not being very well distributed across the population – that kind of stuff.

We don’t have ethnic or religious tensions. We are a free society; people certainly have outlets to express their frustrations, they vote, they have a say in how the country is run. It’s not a high-pressure cooker.

From that perspective Mongolia is more stable. On the flip-side, having an open, democratic system means that decisions that affect the country significantly will go through a very open, public discourse, and those kind of decisions tend to take time. It’s not just one or two or a dozen people making decisions, it’s a representative democracy with 76 members of Parliament who debate until a consensus is reached.

Certain decisions can be slower because of this democratic process, but these decisions are there to stay. There’s unlikely to be any military coup in Mongolia, there’s unlikely to be an overhaul of the political system where all the prior decisions are thrown out the window. From that perspective I think it’s attractive and feels familiar to Western investors in particular.

Chris: There are often risks that come out of Foreign Direct Investment (FDI) pouring into a country. It can overwhelm an economy, which from an investment perspective can be very lucrative, but domestic tensions can also arise as a result.

Let’s take Angola as an example. You’ve got a lot of influence from foreigners coming in there, and especially the Chinese, who are reluctant to hire locals. This creates a lot of tension among the local populace. Do you have a similar situation in Mongolia?

Jamul: Mongolia is different from a lot of countries in the developing world because it’s a homogeneous country. When you come to do business in Mongolia you usually end up partnering with locals.

There aren’t the issues that you have in South America or in Africa, where you have “classes” of people that are divided either by race or certain tribal affiliations that have been in power forever, and are resented by the rest of the indigenous people. Mongolia is homogeneous, and most of the time if you’re building a mine in Mongolia for example, you have Mongolian partners, Mongolian joint venture partners, etcetera. There isn’t that issue of the indigenous people versus others. That’s point number one.

Point number two, particularly in relation to the Chinese, we have vast experience dealing with China. It’s amazing, for example, that a country neighbouring China has essentially zero Chinese population in terms of demographics, whereas if you look at Thailand, Malaysia, etcetera, there are huge enclaves of Chinese, native Chinese that tend to play quite prominent roles in terms of the economy and in terms of commercial groups.

Mongolians have historically, and continue to be, very careful in trying to ensure that our interests are protected. This is done through the legislature and by the commercial decisions that people make. Our immigration policy has limits on what percentage equivalent to the Mongolian population can come from any single country, which is to prevent the country from being flooded with immigrants from one place.

Thirdly, in Mongolia you would be well-advised to do business with local partners and to hire Mongolians. Unless you have an explicit agreement with the government and explicit contracts. It’s basically impossible for Mongolians to be overwhelmed by foreigners.

It is impossible to come in and bring your hundreds of thousands of workers and start building your projects on your own as some African countries have allowed. From that sense Mongolia’s policy is much stronger. It’s a much stronger sovereign and nationalistic stance compared to other countries, where they cut deals because of high-level corruption.

Chris: I guess it comes down to the judiciary, and the power of that judiciary to impact the level of corruption.

Jamul: Right. For example in a place like Angola, I would imagine that a certain group has been in power for the last several decades at least, and they extract all the “rent” and they strike these commercial deals which are beneficial to them, but detrimental to the rest of the population. In Mongolia that’s impossible, as 97% are ethnic Mongolians. It’s an elected democracy; they’ll get kicked out. In fact they likely won’t even make it out (laughs)!

Chris: I was talking to Harris Kupperman recently with regards to the ethnic background in particular countries. He wrote an interesting piece on Zimbabwe. One of the favourable aspects in Zimbabwe, even though they’ve had tensions in the past, is that they are one of the few countries on the African continent where a majority of the population is from a single tribe. 82% of the populace are from the Shona tribe, which is an anomaly within Africa. Botswana is another example of a country that is homogeneous. The peace and relative prosperity shows.

You look at many of the other countries in Africa and you’ve got 14, 15, 16 tribes that make up the country. Catering to all these different opinions and cultures can be a very difficult thing to do.

When I look at Mongolia I can safely check the “ethnic tensions” box off the list and say, ‘Well, we’re not really going to have to worry about this one. You have a very stable environment for Mongolians and by extension a very stable environment for investment.

Jamul: Exactly, that’s a very strong foundation.


We’ll break there again and finish up with Jamul tomorrow, when we discuss a mining company he is involved with.

– Chris

“Mongol People have nothing in common with the Chinese” –  Tsedendambyn in Modern Mongolia: A Concise History


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