The Mongolian stock market has been a giant bear since peaking on February 25, 2011, Mongolia’s benchmark, MSE 20 is down a staggering -58%. The situation is no better in USD. This year, the stock market has seen a steady decline since the beginning of the year, down about -22% in MNT terms (see chart below) and -39% in USD terms.
The largest company in Mongolia is the beer and beverage company, APU JSC. APU surprisingly, is only down 2.8% this year and it represents a whopping 39% of the index.
What happened to the rest of the Mongolian Stock Market? The other two big constituents of the index are Tavantolgoi JSC and Sharyn Gol JSC; both representing about 11% of the index. Sharyn Gol is down only -11%. Tavantolgoi JSC is down -65% (primary asset the is mammoth-sized Tavan Tolgoi coking coal deposit). Of the remaining 17 companies in the index, about half are mining-related, and the other half are from a diverse array of sectors in the economy.
Mongolian growth has been solid, GDP yoy grew at 14.3% in 2Q 2013. With that kind of growth, what has caused the slide?
Well, foreign investment has plummeted, down 43% from the prior year. China imports about 90% of its exports to China. Coking coal, which is one of Mongolia’s most important exports is down -50% in volume to China. Volumes were down, but prices were down as well. Coking Coal prices only started recovering in August of this year. Most sellers have yet to realize some of the benefits of that price rise, due to quarterly price settlements. Mongolia was the largest supplier to China for coking coal in 2011 and 2012, but thus far in 2013, Australia has been significantly ahead. This is significant because Australia beat Mongolia in volume, as did Canada. Australia and Canada have the highest quality coking coal in the world and generally realize prices that are 2 – 2.5x the price realized by Mongolian producers.
The slumping foreign investment levels and continued tensions with Rio Tinto over the behemoth Oyu Tolgoi mine have caused Mongolia’s currency, the Mongolian Tugrik to fall -22% this year; one of the worst EM/FM currency performers this year. The parliament has been recalled once and may face further hurdles. The people want improved foreign investment rules, and a welcoming environment for foreign investors.
The coal industry is waiting for a railway that seems like it may never be built. It will though, and when it does, it will change the dynamics of the supply chain for coking coal in China. Steel mills on the coast may become uncompetitive with steel mills set up in Northern China, built alongside a railway connecting with Mongolia. This write-up, provides a great overview of Mongolia’s coal industry.
So I’ve veered in a few directions here, but the bottom-line is, growth domestically has been great, and continues to have a rosy outlook. The coal market is recovering, China is recovering, and Mongolia is improving its foreign investment rules. It is already quite easy to open up a stock account in Mongolia (post to come soon), and at these price levels, the market is extremely attractive.
Tavan Tolgoi holds a world-class coal asset and has inordinately suffered in terms of valuation. The same goes for Sharyn Gol. Mongoliin Tsahilgaan Holboo JSC is well positioned to benefit from the growth in the economy, as the primary telecoms company in the country.
Unfortunately, information on Mongolian companies is not readily available on Bloomberg or Reuters. The websites for the companies are poor. However, if you’re willing to do the grunt work, you may be able to get enough information to make an educated investment decision.
With respect to the mining companies, there are issues with foreign partners, but these local companies will have to be involved in some capacity. The types of assets in Mongolia are not found elsewhere in the world today, and based on potential value, are bargains today. Just Tavan Tolgoi at today’s depressed coking coal prices has a potential asset of over $14bn. Its current market cap is slightly below $100mm USD.
Mongolia will continue growing. It’s GDP per capita is about $4,000. If you are looking for some natural resources exposure in a Frontier Markets portfolio, Mongolia may be one of your better places to invest.
If you have any questions or comments, please let us know. We have contacts in Mongolia that we would be happy to direct you to.