COMMENT: Mongolia - right place, right time

By bne IntelliNews July 26, 2010

Alisher Ali of Eurasia Capital -

In the vast expanse of Eurasia, a trained investor eye might notice a subtle dust cloud rising on the Mongolian steppes from the gently trotting economy. This trot is set to become an unstoppable gallop as the country, roared on by the mining sector, emerges from the shadows of the Asian Tigers and takes its place as one of the fastest growing in the world.

Currently, the Mongolian economy is experiencing a vigorous recovery from the recent slump. It is expected to expand over 8% in 2010 and then we think average 20% growth per annum over the next decade, thanks to massive investments into resource projects and the subsequent rise in exports. The government plans to attract $25bn into several major mining and mining-related infrastructure projects over the next five years. Development of some 10 of the largest mineral deposits estimated to be worth $1.3 trillion will provide a huge boost to Mongolia. The $5bn economy is expected to triple over the next five years and grow 12 times to reach $60bn by 2025.

The country's major source of revenue is export of resources, including mining and crude oil, which account for over 80% of total exports. Nearby China is the major market for Mongolian exports, accounting for over 70%. Some 75% of China's imports from Mongolia are resources. Mongolia exports to China all its copper concentrate, coal, zinc, crude oil and three-fourths of its molybdenum. The rebound in commodity prices boosted exports by 71.5% on year to $1.31bn in the first half of 2010.

Mongolia's vast mineral resources and its proximity to China will have transformative effect on the Mongolian economy. Its mining sector is already attracting interest and investments from almost all the major global players. Foreign direct investment (FDI) in the economy continued its dynamic growth despite the global economic crisis. The country attracted $500m in 2007, $683m in 2008 and $801m in 2009. FDI is estimated to exceed $1bn for the first time this year. Overall, Mongolia has attracted $3.8bn in FDI, 61.3% of which went into the mining and oil sectors.

Last October, Mongolia signed an investment agreement with Ivanhoe Mines and Rio Tinto to develop Oyu Tolgoi, the world's largest undeveloped copper-gold mine, rivalling Escondida and Grasberg. In monetary terms, Oyu Tolgoi's estimated resources are worth $300bn and the project cost is estimated at $4.6bn. In 2010, Ivanhoe Mines will invest $758mn into the project. Production is expected to start in 2013 and the mine is projected to produce 540,000 tonnes of copper and 670,000 ounces of gold annually over its 27-year life.

This autumn, Mongolia is expected to conclude a contract mining agreement on Tavan Tolgoi, the world's largest undeveloped coking coalmine with total reserves of 6.4bn tonnes, with a global mining company. Parliament has already set a framework for the mine's development. The license for Tavan Tolgoi, currently held by state-owned Erdenes MGL, will be transferred to the company's subsidiary Erdenes Tavan Tolgoi to be established in the current year. A 30% interest in Erdenes Tavan Tolgoi equity will be offered in an IPO on the domestic and foreign stock exchanges, thus providing an opportunity for foreign investors to participate in this landmark project. A 50% stake in the company will be owned by the state, a 10% interest will be offered to domestic companies at face value and the remaining 10% share will be distributed to the people of Mongolia free of charge. Shenhua, Peabody, Vale, Xstrata, BHP Billiton, as well as Russian, South Korean and Japanese consortia are reported to have expressed interest in contract mining at Tavan Tolgoi. Production at Tavan Tolgoi is expected to start by 2013, with an annual coal output of 30m tonnes over the project lifetime.

Beyond these two projects, Mongolia still has other large deposits of iron ore, uranium, molybdenum, zinc and other minerals and metals. The development of Mongolia's mineral wealth will create one of the most compelling investment stories over the next decade.

Taking stock

Mongolia is the world's best performing stock market so far this year, rising 62.5% as of July 16 in dollar-adjusted terms. The MSE Top 20 Index has been rising since the Mongolian government gave a strong signal about the signing of the landmark Oyu Tolgoi investment agreement with Ivanhoe Mines and Rio Tinto in August last year, which sent the index shooting up 62% in just over 40 days. The index has outperformed the MSCI Frontier Markets Index, which was down 0.9% so far this year as of July 16. We believe that the MSE Top 20 Index will gain over 76% to reach the 11,000 level, putting it among the world's top-performing markets in 2010.

Alisher Ali is chairman of Eurasia Capital

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