Mongolia: Finally, A Deal Is Struck

It is rare for a lone infrastructure project to have a material impact on a country’s GDP.  Oyu Tolgoi, Mongolia’s enormous copper mine, is an exception to this rule.  “O.T.”, as locals frequently call it, is expected to generate US$ 5.4 billion in capital investment over the next five years.  In a country with 2013 GDP of just US$ 12 billion, the project will most definitely ‘move the needle’.


However, for the past two years development in OT has been at a standstill amidst a protracted stand-off between the government and the mine’s operator, Rio Tinto.  The dispute has grown rancorous, with nationalist politicians making accusations of foreign exploitation and company officials making equally loud accusations of contract violations and bad faith.  Amidst the standoff, Mongolia’s investment environment has ground to a halt – from US$ 4 billion in 2012 down to just US$ 400 million last year.


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Last night, at a midnight ceremony in Dubai, some long-awaited good news was finally announced.  Prime Minister Saikhanbileg (who was profiled in this Financial Times interview last weekend) met with Rio Tinto officials to sign an agreement and end the dispute.  The path is now clear for an additional US$ 5 billion of investment into OT’s development.


Shares of Mongolian companies have reacted positively today.  Turquoise Hill, an Australian-listed company who owns 66 percent of OT, was up by nearly 10 percent today.  Mongolia Growth Group (whose CEO was recently profiled in one of our podcasts) was up 18 percent as of this writing.  The Mongolian Stock Exchange will almost certainly move broadly higher in today’s trading session.


Oyu Tolgoi is a mammoth project, with 25 billion pounds of copper reserves and 12 million ounces of gold.  When fully operational – which Rio Tinto estimates will happen before 2020 – it will become one of the world’s ten largest copper mines.  This is all going to happen in a country with a population of less than three million.


“Mine-golia”, a nickname that the country has earned in recent years, is set to change dramatically.  As significant as OT will prove to be, it is far from the only mega-mine in Mongolia’s future.  Six billion tons of coal are currently being extracted from the Tavan Tolgoi project, and many more mining licenses have been issued for a wide range of resources.


Mongolia’s reality has already changed dramatically in the past decade since its government began to issue permits to foreign companies.  Ten years ago it would have been difficult to find a Western soft drink in the capital of Ulaanbaatar.  Now it is not at all unusual to see German luxury vehicles speeding past the local Louis Vuitton and Burberry outlets near the city center.


That last point should be clarified, of course – vehicles are rarely able to speed through the city center at all.  Traffic has grown at a far higher rate than the city’s ability to accommodate it.  Consequently Ulaanbaatar is now in the ironic situation of having some of the world’s worst traffic, in the world’s least-densely populated country.


Ulaanbaatar is the quintessential frontier boomtown, and like many frontier market cities who have seen good times it is nearly unrecognizable from just two decades ago.  The number of motor vehicles on city streets has tripled in the past seven years, from 108,000 in 2008 to 375,000 today.  In the absence of intervention that number is expected to triple again within the next five years.  All of this will happen in a Soviet-planned city that was never intended to contain more than a million people.


As foreign investment likely begins to re-enter the country, incomes will rise and (hopefully) Mongolia’s middle class will expand rapidly.  More automobiles will surely enter the market, yet parking infrastructure is nearly nonexistent.  The result is some of the world’s worst rush-hour traffic, and a gaping lack of supply for parking spaces.  In a country where winter temperatures can stay below zero for over six months, this shortage will surely lead to rises in both prices and rents for the relatively few parking spaces in the central business district.


This is just one of the few opportunities that are now in place as Mongolia begins to emerge from the Oyu Tolgoi standoff.  It speaks well to the country’s potential that, even in the depths of this dispute and a 90 percent drop in foreign investment, the country’s economy is still expected to grow by over three percent this year.


Here at Frontera we have spoken at length with our contacts in Mongolia, and are particularly interested in the potential for parking infrastructure in Ulaanbaatar.  Accredited investors are able to learn more by visiting our investor platform here.


As foreign investors once again begin to cast their eyes toward the “Land of the Blue Sky”, they may want to consider opportunities beyond mining.  Property (as both Harris Kupperman and Christopher de Gruben explained in recent podcasts with us) is also an excellent way to access the Mongolian growth story.

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