My Mongolia Presentation

Below is the material covered in my presentation which was given during my time working at the bank. I hope this will give you a feel of what is happening in Mongolia and why many believe it to likely be the next great emerging market star. 

2010 Highlights

• Mongolian Stock Exchange (MSE) climbed 121% in 2010 - MSE +50% as of Feb 2011  
• Silk Road Mongolia Index (SRMI) gained 52.7% in 2010
• Worlds second fastest growing economy in terms of USD GDP growth rate
• Mongolian Tugrik best performing currency in 2010 and as of Feb 2011
• Historical High Inflows of FDI (200% increase since 2009)

 

National Assets and Investment Rationale                                               

Mongolia contains the world's largest coal reserves and possibly one of the worlds largest copper and gold reserves. It has the world's second largest concentrated reserves of rare earth materials (17%). They also are expected to have vast uranium resources.

Given this, and given that commodity prices are expected to increase over the next few years (coal by 9.3% and copper by 3.5%, according to a Bloomberg Analyst Survey) it would prove well for investment in the Mongolian mining sector. In the graph below you can see that China's coal consumption is forecasted to grow dramatically over the next two decades, much of which can be fed by Mongolian coal output.

Also, its important to note that China has been the world's leading producer of rare earth minerals (producing over 90% of the global supply). With this in mind, and with the understanding that China has cut their exports by nearly 10% in 2010 and is expected to continue to slash their exports by additional 35% in 2011 because of a growing demand at home, one can only look even more to Mongolia to develop their rare earth reserves to meet this forecasted excess demand.

Political and Developmental Key Point

Mongolia is a young and stable Democracy and has been for 20 years. Through administrations efforts the country has been able to grow it's foreign investment, further diversify it's economy, and eradicating corruption in the nation's stock exchange (MSE). It's not a joke, Mongolia does have a stock exchange, and as of 2006 it was the world's smallest exchange in terms of market capitalisation. In January 2011 the MSE entered into a strategic agreement with the London Stock Exchange (LSE). The goal of the agreement is to provide technical assistance, appoint a new management team, and to provide up-to-date trading technology and surveillance systems designed to eliminate corruption. 

When questioned about why Mongolia would "hand over" its stock exchange to foreigners, Oyun Erdenebulgan, deputy chairman of the Mongolian governments state property committee (part of the government which owns the exchange) said "If you have a new Ferrari and you are not a good driver, how can you drive it? We want to put a Formula One drive in here." 

Aside from vamping up the bourse related infrastructure, the nation has shown a great deal of interest in expanding its hard infrastructure, namely its railroad network. This is vital for the nations growth. Below you can see illustrated plans courtesy of Eurasia Capital, a pan-regional investment bank with focus on Mongolia and Central Asia. The networks in red and green are currently being developed while the blue is a goal to be built on the horizon. It's important to note that along with a development of Mongolia's railroad network comes independence from China, the only country the nation can currently export to with their existing railway lines (shown in black and white on the map below). Because Mongolia does not want to become the raw materials supplier to just one country, these other planned railroad networks will allow them to trade with Russia at reach as far east as Russian Pacific ports, allowing them to trade with the United States, Japan, and other Asian nations. To help finance these large projects, the Mongolian government is said to be structuring many of the state-owned mine IPOs in a way which will 

demand the investor to allocate a small percentage of his invested funds towards them.

Mongolia has not only been planning expanding infrastructure but also expanding foreign policy. Their relations with the United States and Japan are strong in what is known as their "3rd Neighbour" policy. Essentially this is a free trade agreement between these nations which is to go into effect in the beginning of 2012.

A Sure Signs of Positive Movement?

One could say there are some sure signs of positive movement in the modern Mongolia story. First, it's significant that the head of mining team at UBS London joined Resource Capital management in Ulan Bator and has recently moved their with his family. Second are the multiple IPOs which have occurred in the past year which have all increased investors confidence in the small nation. From the $650mn IPO of Mongolian Mining Corporation in late 2010 to the massive much anticipated launch of Erdene's Tavan Tolgoi's IPO to be expected the first half of 2012. The government has shortlisted some of the largest investment banks in the world to usher in this IPO and it's occurrence is expected to greatly stimulate the Mongolian economy. In the IPO, the government is selling 30% of the mine in shares to be listed on the Hong Kong and/or the London Stock Exchange.

My First Posting: Why Mongolia??

After graduating from university last May I decided to take the daring step into the world of finance by doing a 6 month internship at a Private Bank in the West End of London. I say daring because I have never been one gifted with numbers and linear left-brain thinking. That kid sitting staring out the window cloud watching in Trigonometry? that was me. But so with some successful bum steer from the family I decided to give being a "banker" a try. I learned a great deal in those 6 spiritualizing months working at the bank, including the fact that I never want to work in the industry again. However I must be honest and say that I met some hard working successful people who are really good at what they do. More so, I did learn a good amount of financial jargon and how the banking organisation and investment process is structured. Though I would do it again, I am thankful for this experience.

Two months into my internship my grandfather (a 90 year old investor and a financial and geopolitical enthusiast who has not retired, reads ungodly amounts, and has abs and legs harder than mine will ever be from his ritual 7am daily swim) started repeatedly emailing and calling me telling me about what was happening in Mongolia. Since childhood I have received countless news clippings from him and at times its been hard to keep up as his fascination and understanding of the global arena is so strong. But this time, after weeks of phone calls, voice messages and emails directing me to dozens of articles strictly concerning developments in Mongolia I decided to give it more than just a glance. I dove in. During my hours of "free time" at work when none of the bankers had anything for me to work on I begun my research. I read countless articles and reports from investment banks and financial newspapers and journals across the world and soon found myself seriously interested.

After about two weeks my boss happened to be walking by and glancing over my shoulder humorously said, "What's all of this about Mongolia? I've noticed you've been reading quite a bit about it recently." 

A bit embarrassed and unsure the reason why I replied by saying, "Oh it's nothing really... it's just um... something I'm looking at!" 

"Why don't you give the investment managers a brief in next weeks markets review meeting?" 

Hearing the sarcasm in his voice I found myself slightly offended. Trying to defend my initial sheepish reaction I without realising it said, "Sure, I'll put together a presentation!" He was not expecting this response and as walked away seemingly dumbfounded. I smiled to myself as I confidently leaned back in my chair, quickly to start panicking 5 seconds later once I realised what I just committed to.

I put in some serious hours that next week. It was the first time in my life I was seriously researching something so academic yet not related to any school project. I put together a mean presentation and after 6 days was ready to give my presentation to the 20 investment managers. It was short, but straight to the point and after I was congratulated by everyone on my team. The word got around the office quick and soon I had people I didn't know asking about Mongolia.


Right before giving the presentation I asked a coworker/friend to review it. After doing so he said, "Well Avo, the truth is that it's totally useless for us that you are giving this presentation. Not useless because its a poor presentation, rather because we will never invest in such a frontier market as Mongolia; it's kind of against our house view." I can only hope that one day the bank may change their house views and start offering more options in riskier investment opportunities for some of their more adventurous clients. I was the first intern to give a presentation in the history of the bank.