Feeling adventurous? Here’s the next great land of opportunity
By
Dominic Frisby Dec 19, 2011
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I want to move away from doom, gloom and despair in today’s Money Morning and look at an area of opportunity.
It’s quite a big area – 603,909 square miles, in fact – though at one stage it covered 13 million square miles: everything from Poland in the west to Korea in the east, from Siberia in the north to Oman and Vietnam in south.
I’m talking, of course, about Mongolia.
How Mongolia could take business away from Brazil and Australia
Here’s a statistic that took my breath away when I first heard it a fortnight ago from Jamul Jadamba of Mogul Ventures Corp (my sincere thanks to Jamul for his time – much of the information in this Money Morning I sourced from him). China has a population of 1.4 billion people. Mongolia, immediately to the north, has just 2.8 million.
Sure, China is about six times larger. But Mongolia is hardly small. It’s the world’s 19th largest country. For it to have a population 1/500th the size of China’s – or 1/5th of the 14 million we have living in the London metropolitan area - I find astonishing. I understand it’s among the most sparsely populated countries on earth.
That means it is unlikely to be competing in the future with populous countries like Vietnam, Indonesia or Bangladesh in the world of manufacturing. It simply doesn’t have the workforce. The opportunity for Mongolia lies in its natural resources – mining and agriculture. It has them in abundance.
And, thanks to its location, it could quickly become the supplier of choice for China – threatening the dominance of countries like Australia and Brazil, which are becoming increasingly expensive to work in.
Take coal. Mongolia’s coal exports have grown in the last ten years from little more than nothing to something like 25 million tonnes a year, with growth of 50% in the last year alone. Exports are predicted to hit 50 million tonnes by 2015. The Tavan Tolgoi deposit is the world’s largest deposit of coking coal. Foreign partners with superior mining expertise and technology are being brought in to ramp up production, and 15% of the state-owned company’s shares are expected to list in London next year.
Another example of the potential here is the Oyu Tolgoi copper-gold discovery made by Ivanhoe Mining in 2001. It is now being developed with the Mongolian government and Rio Tinto, and was probably the discovery of the century.
It’s the world’s largest undeveloped copper-gold project, containing in the region of 81 billion pounds of copper and 46 million ounces of gold. Production is anticipated for 2013. (From 2001 to 2013 – that’s how long it takes to get a large mine like this into production – no wonder secular commodity cycles go on for so long).
There are many more discoveries waiting to be made, I am sure, particularly in the south – in the Gobi desert region – as more and more state-of-the-art Canadian and Australian exploration techniques are employed. The challenge is infrastructure.
There are few paved roads. The country is land-locked. Rail transport carries something like 93% of freight. There is the main line, the Trans-Mongolian Railway, which runs north to south, from Russia to China, but there’s not much more than that.
Parliament has recently approved plans develop and build an east-to-south-west network to connect the resource-rich areas. Construction has already begun, but something like 4,000 miles of track need to be laid, so it’ll be a while before we see results.
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Four reasons to start researching Mongolian investments now
From shortly after the end of WWI until 1990, Mongolia was communist and heavily supported by the Soviet Union. Peaceful democratic revolution came in 1990 and in 1992 a new constitution was introduced. The country is mining friendly, if bureaucratic, and the government is trying to encourage business. But at present the process of issuing new mineral exploration licences is on hold, while the government tries to clean up existing licences and mineral laws.
I have grave concerns about the state of the global financial system, as you probably know, and I’m not sure now is the right time to be putting speculative money to work. However, while we are in bear market mode, it’s a good time to be researching potential opportunities for when good times return.
I see four exciting areas. The first is mineral exploration. With luck, the freeze on new licences will soon end, so there be plenty of opportunities in early-stage explorers. But, should they find anything, you want to be long gone by the time the decision is taken to build a mine. Just look at the Ivanhoe project if you want to see how long it takes to get to production.
Second, I would be looking at infrastructure companies, particularly those involved in road-building and railways. Third, you could consider some simple exposure to the Mongolian stock market, which has performed with considerable strength relative to other indices. I hear that a Mongolian stock market exchange-traded fund is mooted for the near future, with Van Eck the issuers – we’ll keep you informed.
And fourth – an idea that comes from a hedge fund manager who emails me from time to time (he, like Lord Voldemort, shall not be named) – Mongolian government bonds are an area to watch. The Mongolian government is looking to borrow money to fund its rail construction network.
Now, the Mongolian currency is weakening against the dollar, and commodity prices are falling just now, so they are not a buy just yet. But eventually the commodity cycle will turn back up. The Mongolian government has comparatively low levels of existing debt. And in a few years’ time, it will start to receive revenue from its large mining operations, so it should be good for the money.
We’ll be keeping an eye out for ways to play the country. In the meantime, if this has whet your appetite for investment adventure, you should read this week’s MoneyWeek magazine cover story from my colleague James McKeigue. James has taken a look at opportunities in another sparsely populated, resource-rich region – the ‘Stans’ of Central Asia: How to profit from the scramble for resources in central Asia. If you’re not already a subscriber, get your first three issues free here.
Our recommended article for today
- Recession might be taking its toll on the tourism industry in the West, but the rise of the middle classes in emerging markets will take up any slack, says James McKeigue. Here, he explains the best ways to cash in: Profit from the new tourism boom.
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Dominic Frisby
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