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Mongolia Displays New Buy Signals for Foreign Investors

Commodities / Asian Economies May 29, 2016 - 12:15 PM GMT

By: Dylan_Waller

Commodities font-weight:400; ">Mongolia, which can be considered one of Asia’s most vulnerable frontier markets, has been through a flurry of ups and downs during the past five years.  Once praised as the world’s fastest growing economy, economic growth has recently approached recession levels amid the commodity bear market, China’s economic slowdown, and the rapid drop in FDI experienced from the delay of Oyu Tolgoi, and other mining disputes.   Mongolia is a strong commodity export economy, and approximately 90% of these exports go to China, making it most vulnerable to the current commodity bear market and China’s economic slowdown.  Furthermore, its economic performance has been hindered by the unpredictable actions of the government, which has been another strong factor for driving away FDI.  The current economic landscape necessitates a shift in this previous anti-FDI attitude to avoid a recession, and notable improvements have already taken place this year, which will help improve Mongolia’s reputation for foreign investment.  Mongolia is heading in the right direction, based on events that have taken place in recent months, and now is a strong time to consider stocks that are in a bottoming out phase.


Recession Averted/Potential for 2nd Boom in 2020

Mongolia’s Annual GDP Growth expanded by 3.1% during the 1st quarter of 2016, quite a feat for this struggling economy.  There are currently no short term catalysts for growth for the country, when considering commodities and China’s future economic outlook, and lower growth projections are now being made for this year.  The World Bank has projected 0.8% growth for this year, and the IMF has projected 0.4% growth this year.  Optimism for Mongolia’s economic turnaround is not misplaced, but does certainly require one to take a futuristic view.  The main catalysts for Mongolia’s economy will not fully come into play until 2020-2021, when its Oyu Tolgoi Mine goes into production.  Rio Tinto, with its partners the Mongolian government and Turquoise Hill Resources, have approved the next phase of developing Oyu Tolgoi Copper and Gold Mine, which is a strong point of reconciliation for the country.  The development of this mine will begin in mid 2016, and first production is projected to take place in 2020.  This project is projected to contribute to 1/3 of the country’s GDP, and its implementation is a breath of fresh air for the country and foreign investors, as the previous three year delay has reduced investors’ confidence in Mongolia.  An important lesson from 2012 and 2013 is that it is not worthwhile to buy into Mongolia when growth is strong, as history has proven that Mongolia’s economic growth has not been stable.  Instead, I think the most worthwhile investment approach is to invest during dark times, when stocks have bottomed out, and to sell sometime after Oyu Tolgoi goes into full production in the 2020s.

Resolution of Disputes with Foreign Investors: Buy Signal

The government previously had a 7 year dispute with Khan Resources, a uranium miner in Mongolia, but has agreed to pay $70 million to this Toronto listed company.  The Mongolian government met with this company at a Canadian Mining Conference in Toronto, and resolved to pay this amount to the company to improve its image with foreign investors.  Khan Resources’ stock has responded very well to this new announcement, nearly doubling from its price in early March.

The resolution of this dispute can certainly be considered a macroeconomic boost for Mongolia’s economy, and a sign that the government is beginning to recognize the necessity of improving its image for investment.  FDI is a necessity at this point, and this resolution was perfectly timed, as it was coupled with the beginning of the Oyu Tolgoi Mining Project.

Another significant resolution to note occurred during early 2015, when Kincora Copper resolved a dispute with the Mongolian government, which was delaying its exploration efforts, and caused nearly $7 million impairment for its balance sheet.  This reconciliation creates a strong investment case for this company, which is active in Oyu Tolgoi, and recently announced a new merger on May the 25th.  This merger will allow it to utilize HPX’s typhoon technology, which is instrumental in the discovery and delineation of high grade orebodies present at Oyu Tolgoi.  Like several stocks active in this country, Kincora Copper’s stock price trades at a far cry from the levels of 2012 and 2013.

Positive Movement for Other Stocks

Since early March, a large number of stocks have delivered strong returns.

  • Xanadu Mine’s stock price increased from 0.10 on March the 1st, to its current price of 0.21.
  • Erdene Resource Development’s stock price increased from 0.17 on March the 1st, to its current price of 0.33.
  • Khan Resource’s stock price has increased from 0.44 to 0.86.

I previously mentioned these three companies in a Mongolia Investors’ Confidence Report, and all three of these companies have experienced positive stock price movement since March the 8th:

  • Mongolia Growth Group’s stock price has only increased by 2.6%.
  • Mongolian Mining Corporation’s stock price increased from 0.07 to 0.10.
  • Kincora Copper’s stock price increased from 0.02 to 0.04.

The positive movement for stocks in recent months displays all of these stocks’ correlation to economic and political events in Mongolia, thus solidifying the value of a top down investment approach for a diverse portfolio of stocks with significant operations in Mongolia.  An improved economic environment for Mongolia in the 2020’s would produce wonders for a large number of stocks, as the sell off has been strongly based on negative sentiment for Mongolia.  Events in recent months display that improvements are taking place in Mongolia, marking now as a strategic entry point for investors.

Mongolia is Analogous to Chile

The South Gobi is a relatively unexplored area compared to other copper belts, as it currently has had less than 6 years of foreign exploration.  Mongolia can be considered a virgin territory, relative to other strong copper producing countries such as Chile and Peru.  The untapped nature of Mongolia’s copper belts in the South Gobi is very similar to Chile in the 1970’s, making investment in this area a strong, futuristic trend to tap into.  Chile had very limited exploration during the 1970’s, but now operates approximately 100 exploration projects.   Kincora Copper is one of several stocks located in this strategic area of Mongolia, which is expected to be the world’s third largest copper mine, and is also joined by companies such as Xanadu Mines and Entree Gold.  This is a wonderful futuristic trend to buy into, for investors who have a time horizon of more than five years, as stock prices returning to 2012-2013 levels would produce bar none returns for investors who chose to invest now.

Buy During the Gloom, Sell During the Boom

The previous 2 year dispute over Oyu Tolgoi resulted in FDI collapsing from $4.4 billion to $0.5 billion between 2012-2014.  The country’s annual GDP growth consequently collapsed from its peak of over 15% in 2012, to its current level of 3.1%.  The approval of phase 2 of Oyu Tolgoi, which will start in mid 2016, can certainly serve as a catalyst for Mongolia’s 2nd economic boom, which should take place in 2020-2021.  The implication for stock returns that would occur amid a 2nd economic boom in Mongolia is very powerful for a large number of stocks with significant operations in Mongolia, and most specifically in Oyu Tolgoi.  Oyu Tolgoi is moving forward as planned, and the resolution of the government’s long dispute with Khan Resources has also resulted in a necessary improvement for Mongolia’s previous notorious anti-FDI attitude.  Stocks are following with positive movements due to these catalysts, and many still trade at far cries from the higher levels experienced during Mongolia’s economic peak.  Mongolia is appealing for very few investors, after the rapid declines experienced since 2012, which has left many investors rightfully cynical.  Mongolia does present a high level of risk for investors, yet the current situation presents strong opportunity due to the perceived risk being much higher than the actual risk.  Moreover, the untapped Oyu Tolgoi has the potential to be a very salient area for mining in the future once operational, and investing before stocks potentially boom provides the opportunity for bar none returns.

Those willing to give the country a 2nd chance, amid new political and economic improvements that will come into full fruition in 2020, have the potential for strong returns.  I retain my conviction for Mongolia as a small/high risk portion of a frontier market portfolio, and furthermore encourage investors to buy during dark times for the strongest upside.  The 2nd boom that will be driven by Oyu Tolgoi in the 2020’s is the opportune time to sell, not buy.  Significant improvements made in recent months further edify my conviction for the contrarian opportunity that Mongolia offers investors.

Dylan Waller is a Contributor for Seeking Alpha and Smartkarma, and a Macroeconomic Researcher for the crowdsourced consultancy Wikistrat. His research focuses on frontier and emerging markets, with a primary focus on the strategic advantages of Vietnam, Pakistan, India, The Philippines, and Mongolia. 

Email: dylan@nomadicequity.com

Website: www.nomadicequity.com

Copyright © 2016 Dylan Waller - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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