Mongolia – Is This Guy for Real?

Mongolia has a kind of raw seething grittiness to it. It is like a brand spanking new 8 liter V-10 engine with the chassis in place but the rest of the machine is a mishmash of bolted on parts, the seats come from an abandoned Lada, the interior is decorated with sun damaged vinyl from a 1960s Japanese import and somebody stuck the wrong wheels on the damn thing.

The potential is there and you know that if you put your foot down, no matter the appearance it’ll hop. Replace just a few parts and you’ll be enjoying a whole new experience. This promises to be chaotic.

When you put your foot down it may not spring like a rabbit as much as vault like a wrecking ball. That’s how frontier markets tend to work. In fits and starts with enormous volatility thrown in for good measure.

We have spoken extensively about Mongolia some years back, made some good money and over the last 3 years have had a number of investments literally tread water as the Government of Mongolia, fueled by a nouveau riche mentality, Hummers, and a complete misunderstanding of business, business cycles and commodity cycles, proceeded to do what all too many governments do – get in the bloody way!

Asinine – adjective / as:i:nine
1.    extremely or utterly foolish
2.    of, relating to, or resembling an ass

That pretty much sums up much of what we’ve seen coming out of policy decision in Mongolia for the last 3 years. It’s been painful to watch untapped potential be wasted.

The pain is visible in net outflows of capital witnessed in the currency markets as FDI has shrunk by a whopping 62.4% in 2014 and the tugrik has been taken out to the woodshed.


That untapped potential is nothing short of massive, and yet here we sit 3 years on from what can only be described as a complete and utterly foolish political and economically disastrous mismanagement of the two most important projects that the country currently has. Namely the enormous Oyu Tolgoi (OT) project which is the largest financial undertaking in Mongolia’s history and is expected upon completion to account for more than 30% of the country’s GDP. Copper production is expected to reach 450,000 tonnes annually from this one project alone!

Oyu Tolgoi
Oyu Tolgoi mine site

Then there is Tavan Tolgoi, one of the worlds largest untapped coking and thermal coal deposits with an estimated 6.4 billion tonne resource deposit.

When one considers the tiny population of just 2.8 million people and a GDP of just $11.52 billion you quickly get a sense of what an impact the revenues from projects such as these can really have on such a tiny economy.

This missive isn’t about belaboring dumb decisions but rather to look at what seems to be a new dawn. We keep a close eye on the country and have networks constantly feeding us information on the ground. What they’re telling us is that change is afoot.

The new prime minister has been making some waves after coming to power. Very positive looking waves. He has rapidly fired some 1600 government officials, scrapped a slew of government welfare programs and slashed costs at others.

Most importantly he has moved to resolve the dispute over OT. This is easily the largest single thing the government can do right now to restore confidence for foreign investors. A resolution on this will have profound effects to the economy.

Consider that there is a broad coalition of international banks who have devoted funds to the OT project. These funds have been put on hold while the government does battle with Rio Tinto the developer of the OT project. As long as the OT project remains in dispute these banks will not finance any other Mongolian projects. There are dozens of other projects all of which are being held up by this dispute. If that bottleneck is broken we’ll likely see the blood begin to flow through the economy once again.

The prime minister recently put out an address to the people of Mongolia which I managed to get a translated version of from a friend in Ulaanbaatar. I recommend reading the entire document here. Some excerpts from the article I’ve copied below for brevity.

We have abused politics beyond comprehension in the last three years. We thought the mining commodities price would always be high, we became too arrogant with the little success we had, we believed that the rest of the world wouldn’t affect us, as if we were aliens. As a result, our hands became tied by our political dispute, which doesn’t bring food to our tables.

A prime minister admitting that his government has been arrogant and has screwed things up? Am I reading this correctly?

Next topic that I will touch on is price liberalization. One of the favorable measures that Mr. Byambasuren’s Cabinet took for the development of Mongolia 24 years ago was liberalization of prices and tariffs on products.

Today we must finalize and conclude these measures by further promoting classic market economic conditions. Currently the prices of energy, flour and wheat, oil and oil products are being manipulated by the Government, which sets an unhealthy pattern.

By controlling prices on energy we are holding back economic growth and industrial development. Instead of exporting energy, we are barely making ends meet with energy imports. During the last 40 years we have only undertaken extension work on two power plants, but no new plants have been built.

And then there is this little beauty

Unfortunately government entities and the agriculture support fund have started to get too involved in private sector businesses, whereas the subsidy policy became obsolete, production of wheat exceeded demand by 2.5 times. Market-based healthy competition would have taught them to perform their work on fields and not on Chinggis Square.

Therefore, the Ministry of Food and Agriculture is to thoroughly study agricultural companies’ proposals and begin pricing their products according to market principles, starting from this year.

Allowing the market to set prices, reducing tariffs, acknowledging that government has been doing more harm than good. I’d better check to see that he’s not been subscribed to Capitalist Exploits.

The Mongolian Stock Exchange management will be restructured and operated by the London Stock Exchange. MIAT will be restructured with domestic and international partners and management,  we will also renew the civil aviation structure, and we will operate and develop state-owned enterprises under the model of Singapore’s Temasek.

Once again, I encourage intrepid investors to read the entire translated transcript.

While I’ve not done so yet I’ve been considering picking up some Turquoise Hill at these prices. A good friend of mine mentioned to me that he’s long a sh*t ton. He’s been right often enough to get my attention. If we get a resolution we’re likely to see this move first as it’s the most liquid play on the OT project.

TRQThese guys – the Mongolian government that is – are all out of options right now. The next Twitter or Uber isn’t coming out of Ulaanbaatar and nor is the next millionaire rapper. It’s time they used what they have!

– Chris

“It’s not about the cards you’re dealt, but how you play the hand.” – Randy Pausch



This Post Has 4 Comments

  1. Cesar Hubner

    Chris Yesterday the Volume of TRQ Call Option for Jan/2016 was more than 75k contracts. The Daily Average was near 70 contracts, clearly something is brewing…. Nice call

  2. Chris MacIntosh

    Yeah look TRQ traded at $24/share at it’s height. Substantially it’s the same asset we’re looking at. Do we know that this is the turnaround?
    Nope but the price we’re paying to make that bet is better than ever and the political will appears to have come around.

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