Your Introduction to Natural Resource-Rich Mongolia
It’s the fastest-growing economy on the planet. And it will probably remain so for at least another decade. It’s growing so fast it’s almost hard to wrap your head around it. As one of my contacts there wrote to me over the weekend:
Anyone who thinks that GDP is growing at under 50% a year clearly doesn’t understand economics… If you spend $10 billion in capex in an $8 billion economy, the economy grows a whole lot.
Is that possible? An economy growing 50% a year?
It is… as I’ll show you. There are only a few ways to participate, but the best way is our new speculative buy, which I’ll get to down below.
The economy I’m talking about is Mongolia.
Mongolia first got on my radar last April. I wrote about it in my newsletter Capital & Crisis. Since then, I’ve written a few other updates as I continue to follow the story.
The story is actually pretty simple. Mongolia is rich in natural resources. It’s loaded with coal, gold, copper, iron ore and even rare earths. It has oil, molybdenum, tungsten, phosphates, tin, nickel, zinc and silver. As one friend of mine put it, “Every time someone sticks a shovel in the ground, they find something of value.”
The riches are largely untapped. There are two big mines coming online soon.
Oyu Tolgoi is a copper and gold project. OT should start operations in the second half of this year and ramp up from there. It will be one of the three largest copper-gold mines in the world. Then there is Tavan Tolgoi, which is a coking coal project. TT also has large uranium reserves. TT should start production in 2014.
The spending on these mines is what’s driving the economy. Mongolia’s economy basically doubled between 2006 and 2010. That’s four years. It will double again this year in about half the time.
It’s a small economy right now — $8 billion or so. Investment in the country will probably total $50 billion over the next five-seven years. So you can imagine the explosive results that could come from that kind of expansion.
Imagine a place crawling with thousands of mine workers. Think of all the amenities they’ll need. Housing. Food. Clothes. Financial services. The mind boggles.
There are few precedents. One might be Kazakhstan, a somewhat similar former Soviet satellite with a resource boom. From 2002-08, apartment prices in downtown Almaty (the largest city in the country) rose 833%. Land prices rose 8,000%. Stocks rose 2,425%.
That gives you something on the potential upside in Mongolia.
This landlocked country is wedged between two giants — Russia and China. Not surprisingly, these two are its biggest trading partners. Exports to China alone make up 92% of total exports. Coal is Mongolia’s main export, followed by copper, iron ore, zinc, cashmere and gold.
Mongolia’s imports also come mostly from China and Russia, which account for 31% and 25% of total imports.
Mongolia itself is fairly large in land area. It ranks 19th globally and is about twice the size of Texas. The empty Gobi Desert dominates the southern third of the country. The rest is grassland and steppe.
Only 2.7 million people live in Mongolia, making it one of the world’s most sparsely populated countries. For perspective, that’s about as many people as live in Dallas County, Texas. Mongolia’s population is young, with a median age of only 26. About one-third of the population is under the age of 14. A youthful population is a plus. A growing market needs workers. And a young population is also more adaptable and welcoming to change. Finally, there are no overhanging pension issues as in Western markets.
All of these positives have attracted a lot of attention more recently. The Economist, for example, had a briefing on Mongolia called “Mine, All Mine.” It described the scene in Ulan Bator (UB), the nation’s capital:
“UB is a boomtown on the frontier of global mining. Hotels are bursting; the Irish pubs, of which there are several, are heaving with foreign miners, investment bankers and young local women with very long legs and very short skirts. French bistros serve steaks the size of tabloid newspapers.”
There is no place like it.
Right now is a good time to get involved, too, because Mongolia has elections coming up in June. Elections create political uncertainty. Many investors are holding off until after the elections. The country has been through gut-wrenching changes and not everyone is happy. My contact in Mongolia tells me people expect riots after the election. But then things will settle down, and after the elections — and the removal of uncertainty — the market will likely take off.
There is another big catalyst unfolding in Mongolia, as if it needed another. Brad Farquhar, a friend of mine who runs a fund focused on Mongolia called Nomad Capital, writes about it in his latest shareholder letter:
“The second big story is the initial public offering by the Mongolian government of Tavan Tolgoi (TT), one of the largest coking coal deposits in the world… The government has given shares in TT to every Mongolian citizen, and is preparing to list the company in London and Mongolia simultaneously. The timing is somewhat unknown, and with 2012 being an election year in Mongolia, there is additional uncertainty. But the completion of this offering will put significant new wealth in the hands of every Mongolian. This should be good for share prices in other companies, as well as the overall level of economic activity in the country, as Mongolians spend their new windfall.”
But there are few ways to invest in Mongolia. Investing directly in Mongolian stocks is a trial in patience and not easy. The total trading volume on the Mongolia Stock Exchange averages about $250,000 a day. The whole exchange!
There are a number of private funds lining up capital to invest, but nobody with a track record of any kind. I’ve seen some of the targets in these funds. One private fund aims for annual returns of 30% net of fees. That hints at what investors think is possible.
There are, of course, risks. The government could always muck it up. Inflation could get out of hand. Commodity markets could tank. But the upside is huge. It’s still early in Mongolia’s story… and I think you should own a piece of it.
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