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Source: FT

Laugh if you like, but Mongolia is a serious play

by: David Stevenson  

I’ve been talking up the imminent arrival of Mongolia as a hot new investing destination for years now, usually to hoots of derision.

Last week, though, I had not one but three separate confirmations that Mongolia has finally become the newest “in thing” in the fickle world of investing. The first indicator was at an event for a City think-tank called the CSFI. This august institution usually doesn’t talk much about adventurous investing and certainly not about Mongolia but at a gathering of Big Bears – pessimistic types predicting a coming financial storm – the subject of Mongolia came up.

While most of the speakers were rather predictably banging on about gold, one talked about the growing supply issues facing the global resources sector and the fact that Mongolia seems to have most of the easy access mega projects worth investing in. Crucially, its canny political leadership has no intention of being gobbled up by either the Chinese or the Russians in a resources land grab and is busily playing off each of these superpowers. For example, a new railway project linking Mongolia’s vast coal deposits to its chief customer in China goes all the way to the border but has been built using Russian track gauges.

A couple of days later, another development caught my attention – namely that one of the most successful international stockpickers, James Barstow at Aurora investment trust, has made a big bet on a Mongolian oil play called PetroMatad, which is itself attracting huge attention among the speculative small-cap brigade on the London market. Barstow has also made big bets on London- listed West China Cement, which is an indirect play on the infrastructure and resources boom in neighbouring Inner Mongolia (source of most of China’s coal reserves) and Shaanxi province. It’s best to see the Mongolia story as part of a wider regional narrative that includes the Chinese resource-rich provinces of Xinjiang and Inner Mongolia, as well as the state of Mongolia proper.

The clincher for me, though, came with the news that a specialist investment research firm called Eurasia has launched  . . . wait for it  . . . a Mongolian equity tracking index. Now before we all fall over ourselves to issue buy orders for that lesser-spotted Mongolian exchange-traded fund, I should say that the index is still a vulnerable, young waif, comprising an odd mixture of hugely speculative miners and a few financial services groups. But its launch speaks of a new mania gripping the Asian markets. Barely a week goes by without some Hong Kong-based outfit announcing it’s about to launch a big new Mongolian division. I’ve heard of aircraft arriving in the Mongolian capital, Ulan Bator, crammed full of bankers, mining execs and stock promoters all desperate to come up with the next Big Mongolian Thing.

I’d suggest that the fun and games have only just begun when it comes to this landlocked, resource- rich country. I’m absolutely certain that we’ll see some specific Mongolian funds emerge which that offer investors a more attractive play on this frontier market – at the moment all but a handful of the companies on the Eurasia index are very specific resource exploration companies. The biggest opportunities will be in the broader service economy sector as well as in real estate and infrastructure. But I predict the multiplier effects of billion-dollar projects will cascade into the small, illiquid local stock market, triggering a massive bubble.

Origo’s chief executive Chris Rynning says: “It is inevitable that Mongolia will experience bubbles with international investors charging in, creating immediate domestic wealth and rapid asset appreciation.” He adds the important caveat that “a lot of Mongolian companies look very pricey already. I think many of them will struggle to meet their production targets, mainly because of slower-than-expected infrastructure build-out”.

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Eurasia index - worth a longer look.

If you believe, as I do, that the Mongolian story has much further to run, I’d suggest looking further down the list of companies in the Eurasia index and spending some time researching Entree Gold on the Canadian exchange, as well as our very own Central Asia Metals.

Origo Partners (also known as Origo Sino India – ticker OPP) could be an interesting sideways bet on Chinese small caps and the growing Mongolian local stock market. Origo is fast expanding its Mongolian business with a blizzard of new deals. It recently invested in a copper project called Knicora, and announced a banking venture with a Mongolian industrial group. It also has a stake in at least three other mining businesses in the country. I wouldn’t be surprised if it plumps for both a Hong Kong and a Mongolian listing to rev up interest in its shares, which are still valued on the London market at some way below its net asset value.

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