Mongolia: Two Steps Forward, One Step Back?

Given our bullish stance on Mongolia, which seems to conflict with much coming out of the mainstream press these days, I figured it prudent to reach out to our on-the-ground contacts, mainly self-appointed news mogul “Mogi” Munkhdul Badral, whom some of you had the pleasure of meeting whilst in Mongolia at our Meet Up last July.

While certainly not the “last word” on all things Mongolia, Mogi, and our other sources, are experiencing and reporting first-hand on what’s going on in real-time. Contrast this to the mainstream news, who are more often than not reporting from afar. We think the information we are getting is, and has been more reliable.

So, Scott and I rang Mogi up and had a chat. You be the judge…
Chris: Mogi, the news coming from the major outlets around Oyu Tolgoi has been predominantly negative. How much of this do you think is due to political rhetoric surrounding negotiations over budget issues? At the same time we see commitments from the IFC and EBRD which are sending a completely different message to the market. Whats your thoughts?

Mogi: Hi guys. To this question I’d say: since when did any action of a politician become OK to be taken literally? This is why governments should never (try to) be in the business of making money. Politics always trumps profits. Before we start shaking and scratching our heads about how naïve and counterproductive Mongolia’s handling of the whole OT conundrum has been, which it has of course, I have a reciprocal “shaking” and “scratching” of my head towards the rest of world. You see, the world hasn’t updated its pocket manual on “How to deal with the Mongols” seemingly  since the times of the Mongol Empire! I remember a story of how Chinggis Khaan forced the world to need such a manual when a certain nation sent back a severed head of the Khaan’s envoy when he had asked “politely” for their submission. The Khaan taught them the first of the “don’t-dos” when faced with the Mongols by massacring the entire population in kind.

So in these times, when investors are bewildered by local politics, it suits best to follow the lead of the most experienced and seasoned Mongolia investors. Those being the likes of the World Bank, EBRD, and ADB. They came to Mongolia to set up shop right along with the 1990 democratic transition. Being the earliest of investors in the modern capitalist version of Mongolia, I’m not surprised IFC and EBRD are unfazed by the rhetoric and decided to invest billions of their dollars and billions of others’ as well in Mongolia’s flagship project. Unlike the sovereign bonds, which were successful by the sheer fact that (yield chasers) people didn’t have anywhere else to put their money, this is a loan to a project that doesn’t come with the safety of a sovereign backing. So this a great testament to the mid to long term future of Mongolia as a reliable investment destination.

Chris: Mogi, how much weight then do you place on the governments arguments that “Oyutolgoi LLC” the affiliated company of Rio Tinto, has breached agreements made with the government? Accusations are, amongst other things that they have augmented their initial investment by 40% without amending the feasibility study, that they have not yet established a contract between the executive authority and management team which is a breach of Mongolian law. Another accusation is that they have erected concentrate containers in China without permission from the Representative Leading Council.

Mogi: No weight at all. To me all the issues are penny ante disputes that should not be publicly waged, but you’ll probably agree politicians never miss a chance to confuse and brainwash people to their advantage. What I do put weight on is the global reporting of the matter, and how the world chose to needlessly punish every single Mongolian stock. But smart investors know that this is actually the perfect time to invest, as long as you believe long term fundamentals are there, which frankly no single individual has disputed. Which is why I commend and respect you guys for seeing exactly that opportunity.

Scott: Mogi, how’s the weather (laughs.. since I spent the dead of winter there myself!). But seriously, about 10 days ago the Prime Minister of Mongolia announced that the GOM has prepared an amendment to the Strategic Foreign Investment Law (SFIL) that regulates foreign investment into strategic sectors. According to the Prime Ministers announcement the proposed foreign investment restrictions will no longer affect private sector entities and will only regulate foreign state owned enterprises. That’s huge news, but I am still worried that nearly every sector outside of mining is also classified as “strategic”. This includes everything from water rights to agriculture to renewable energy. This revision will get investors excited, but will anything have really changed?

Mogi: The weather is getting warmer in general Scott, but like all things Mongolia these days, it’s two steps forward, one step back (laughs). Looking at what the local media is reporting, the government is considering lifting the deal sizes altogether and leave just foreign SOEs subject to approval. As it was reported, foreign State Owned Enterprises will need to obtain parliamentary approval if they intend to acquire more than 49% of an entity that operates in Mongolia’s strategically important sectors. The current law defines the strategically important sectors as: Mining, Finance, and Communications. Well, I guess when you put all of those in the pot not many viable sectors are left.

That’s another thing we seem to be getting known for, 2 steps forward and 1 step back. It’s that 1 step that’s easiest to make but hurts the most and 2 steps forward that are the hardest to make but never gets the proper recognition. Which I guess is probably the best way to make it right really. Best lesson learned is from a mistake you made yourself, right? It’s like with parenting, you can only guide them, not control them.

The Bank of Mongolia recently reported that YoY foreign direct investment has dropped 41%. This decline has been largely blamed on the introduction of the new law which was approved in May of 2012. The introduction was a knee-jerk reaction to the bid by state owned Aluminum Corporation of China Limited (Chalco) to acquire a controlling stake in SouthGobi Resources.

Regardless, the pending changes will be welcomed news for investors and should reinvigorate foreign capital into the market. While the Draft Minerals Law is still an obvious concern we believe that this announcement should be seen as a strengthening commitment to foreign investors from the Government.

Scott: Yeah, look it’s progress coming when it’s really needed the most. Meanwhile we are quite amazed that the Tugrik has stayed in such a tight trading range since September, hovering around 1,400/USD. What does this tell you about the reality of what’s going on with the government? Government coffers are nearly empty. Do we see a negotiation with Rio or another signal a “go” with the printing presses?

Mogi: With FDI drying up, you would imagine that demand for tugrik would subside, but Bank of Mongolia has been quite agile in controlling the rate. If you saw on my newswire, Ministry of Finance has also been quietly selling hundreds of billions of tugrik government bonds to partly fill the budget deficit and partly to roll previous government obligations. Refusing to accept bids for USD from local banks, and also converting to tugrik and depositing $600m, according to BDSec, of Chinggis Bond proceeds in local banks. You can guess from this that local banks are struggling with cash too just like the government is.

Scott: We’ve heard rumours that Rio Tinto is in talks with the government to plug the budget deficit for this fiscal year as opposed to renegotiating terms for Oyu Tolgoi. Is this a sufficient move in your opinion to get the government to stop its bickering and jointly move forward with Rio to get Oyu Tolgoi producing and start generating tax revenue?

Mogi: It’s not a rumor any more it seems. Mining Minister Gankhuyag stated after the 2nd round of meetings, that they have reached some constructive agreements. One of them being the “unpaid” taxes issue which the government claims OT owes but OT states they already used it as tax credits in 2012. Gankhuyag stated publicly that the government has agreed to pay back the entire $250 million prepayments OT paid ($150m in tax prepayments and $100m in dividend prepayments) through 2014-2015. So you can safely assume that OT has agreed to pay back the $150m, that’ll help with the 2013 budget deficit. You may recall that the 2013 budget passed late last year had earmarked $300m that they will collect from OT in additional payments.

I have no doubt in my mind that, even with its current bickering, Mongolia will not dare do anything that would delay the June startup of OT even by a single minute. Simple as that.

Scott: Having spent time in Mongolia, it’s no surprise to me that the Mongolian people are so patriotic. Since some of the local populace doesn’t approve of mining, what is the possibility of the government finding common ground with mining companies in the near term only to bring about larger issues, such as resource nationalism in years to come? And, after tarnishing its image in 2012, how does the government go about promoting a healthy environment where mining firms with multi-decade timelines feel safe investing in land, labor and capital?

Mogi: Nice one Scott. I’m sure you wanted to say nationalistic (laughs). Yeah, I guess every nation is plagued somewhat by it. nationalist disguised by patriotism. Something I find worrisome wherever it occurs. But I guess you don’t survive as a nation with having the 19th largest country in the world with the smallest density population by being nice and friendly to everyone. But now we as a nation need to learn to step among the global community and curb some of our extreme forms of nationalism.

I guess you have to trust that Mongolia can manage to learn on the job. I think we are building a good track record of doing exactly that. You are right that mining has built somewhat a bad reputation among the general population. Partly because there are of course genuine people who are affected by mining like herders, and mostly because our politicians are skillfully harnessing our sense of patriotism towards whatever they want to target. But Mongolia is big enough of a country that 100 more OTs would be just dots really. As a culture of herders I guess we’re just not used to being off limits to any part of the country. So the responsibility lies with the mining companies to build strong ties to the community, from the very first foot you set on your license, and embrace what I now will coin as “nomadic mining” (trademark). You heard it first from me guys.

Chris: Thanks Mogi, we appreciate the update!

Mogi: My pleasure. All the best for your Cambodia Meet-Up. Glad to see you haven’t forgotten us over in Mongolia just yet (laughs).

Chris: Hey, you’re welcome to come join us in the 45 degree celsius environs of Phnom Penh my friend!
You can see why we choose to get our information from trusted sources. It’s the kind of information we use to base our own investment decisions on.

Our boots-on-the-ground analysis is not always correct, but at least if, and more likely when we blow it somewhere, it’s not from a lack of research or due diligence on our parts. No one can be right all the time, but hard work and trusted relationships can get you far!

We invite any questions, comments or feedback. Just drop it down below.

– Chris

“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” – Mark Twain


This Post Has 5 Comments

  1. NC

    Interesting. Only comment is about taking leads from “the most experienced and seasoned Mongolia investors… World Bank, EBRD, and ADB.”
    EBRD does mainly lending, and I don’t think WB and ADB invest in equity either. Rio Tinto is equity – completely different ball game. EBRD’s security is real assets, Rio’s security is agreement/promises etc. The concept of equity ownership, governance etc is less developed, people are more comfortable with secured short term borrowing. Plus the lending rates by EBRD etc is below market rates, and its also supported by grants.

    1. Mogi

      Hi NC,

      You do have a point. ADB, WB, and EBRD are not by mandate purely for profit. But also think they are not charity organizations. They do expect to fully recuperate their investments, if not at a good profit, but a break even at the least. EBRD, IFC (World Bank) are definitely equity investors. A hybrid equity/debt is what they prefer but one goes with the other most times. EBRD’s hybrid debt/equity in Altain Khuder iron iro mine, MAK’s Tsagaan Suvara copper/moly deposit, …

      IFC owns 9.3% in Khan Bank, …

      Shoot me an email and I can put you on my Mongolia newletter.


      1. Chris

        EBRD certainly has a number of equity investments, as they always have had in emerging markets.

  2. Sam Khawaja

    Hi NC

    I am interested in share market investment in Mongolia.
    How do I go about this ?

    Sam Khawaja

    1. Chris MacIntosh

      Hi Sam
      There are certain companies listed on foreign exchanges, mainly Canada and Australia but to trade stocks on the local exchange you will need to open brokerage accounts in Mongolia. This can be done remotely. Though its a shameless plug our “Mongolia Boots on the Ground” package provides account opening forms, includes interviews with the brokers we trust and much more.

Leave a Reply