The Mongolian capital market is in its development stage. Chris MacDougall, Managing Director, Investment Banking at Mongolian Investment Banking Group, explains to MMJ about the future of the country’s capital market and the main services of his company, which is a new player in the field.
What’s the purpose of your company’s operations in Mongolia? Why did you establish the organization here?
MIBG has actually been around since 2008. It is a subsidiary of FSCo LLC, a wholly owned Mongolian enterprise involved in venture capital, life insurance and investment banking. The current management team, myself included, joined the firmat the beginning of 2012. We saw an incredible opportunity to position the firm as a mining outfit focused primarily on metals exploration through foreign listed companies. Since then, we have developed our business to include a wide range of minerals and have established a growing client base ofinternational and domestic entities.
Could you tell us what your organization’s main servicesare and its main advantages compared to other firms in the same field?
MIBG is a full service investment bank offering underwriting, stock broking and investment advisory services including economic and sector research.
We now have one of the strongest research divisions in the country with analysts covering economic and legislative developments, key events in the mining sector and specific Mongolian equities. Additionally, we produce free content that we distribute every Monday to thousands of readers from a wide range of backgrounds and interests in Mongolia.
This advanced knowledge of market conditions has provided our team with a significant advantage. Timely and qualified information supports not only our research offering but also helps to identify opportunities being driven by macro and equity related events.
Now the Mongolian capital market is not large, but many think it will expand significantly in the near future.
What future opportunities do you expect in the Mongolian stock market?
What are the challenges and bottlenecks in bringing development here?
We have a very positive view on the development of Mongolia’s capital market, specifically the opportunities that will be created in the coming year at the Mongolian Stock Exchange. Considering the changes that the Mongolian Government has introduced just this year tells us that they are committed to providing the necessary framework for the markets to expand. Considering these factors and the supportive legislative environment and favorable pricing that currently exist, we feel that the foundation for another record year is in place.
Currently, the exchange is faced with investor concerns of volume, liquidity and reporting. However, we anticipate that these problems will be resolved through the introduction of the new Securities Market Law, which takes effect on January 1st. Additionally, we believe that a wider range of securities will soon be on offer. Provisions for dual-listings through the new law will likely drive foreign listed companies active in Mongolia to gain exposure on the local exchange. This will significantly increase the attractiveness of the market and will result in a renewed interest from both institutional and retail investors.
The future challenges that Mongolia’s capital markets could face will likely be the result of rapid expansion and the difficult task of managing this growth. The market itself and many of the key participants are relatively young and growing pains should be expected. However, Mongolia is not your average frontier market and the Government has already implemented systems and legislation that will prove adaptable as the market matures.
Similarly, the approval of the Investment Fund Law is another example of how Mongolia’s capital market is developing, this will allow for Mutual and Private Investment Funds to be structured domestically. The result will be further professionalization and an expansion of the available capital towards Mongolian projects.
Could you tell us your company’s successes in this area?
Anticipating the changes to the Securities Law, the Investment Law and the Investment Fund Law we began working with a number of domestic and foreign clients since late last year to prepare for the opportunities that would be created in the market. In particular, we are working with a number of clients that are preparing to list on the Mongolian Stock Exchange once the new law becomes effective.
While it is difficult to predict how we will compare to the competition, we do believe that we will be one of the leading firms providing underwriting and broking services to both domestic and foreign clients in the new year.
What new service are you planning to offer to your clients?
As mentioned, we feel that underwriting and stock broking will be key growth areas for our business in the coming year. We have already been preparing for the change and have positioned ourselves to focus on these particular services.
This year is relatively cloudy for the mineral commodity market. Prices of coal, copper and iron ore fell. How do you expect the Mongolian commodity market to fair this year and the next year?
Are you optimistic or pessimistic?
How well or badly will the global commodity market impact our country’s market this year and the next year?
The general outlook for commodities is not great. Most analysts point to a prolonged slow down in developed countries and weakening global growth as key catalysts to the end of the super cycle. But there are those who still believe commodities have some room to grow. As our firm is Mongolia centric our view is being driven by one factor, Chinese demand. We maintain a positive view on Chinese growth and believe that the current push for economic reforms will prove to strengthen the market and ease concerns over the country’s growth trajectory.
While there is some discontent domestically regarding Chinese participation in Mongolian projects, it is clear that Mongolia is extremely fortunate to be in such close proximity to the world’s largest consumer of many commodities. If we see further downside in commodities pricing, competing nations such as Australia and Canada will be disadvantaged by higher transport costs compared to those of Mongolia, while Mongolian producers should be able to continue exporting at a profit.
In the future, Mongolia will be both positively and negatively impacted by the change in commodities prices. The economy is driven by the mining sector and as a result both private and Government budgets depend on the success of the industry. The current Government budget, which has been faced by falling Copper and Coal prices is a clear example of this challenge.
How can Mongolia use these good and bad results from the global market?
Finding good in an economic downturn can be difficult for any country. Mongolia has obviously faced challenges as a result of the current economic situation, but we strongly believe that the country is better positioned today than it was last year.
At the moment, Mongolia is taking the right steps forward. Even though we are facing difficult economic conditions, the country is using the current situation to increase its competitiveness against similar markets and create a stronger environment for investors. Needless to say, there are more changes that need to be made, but the Government appears to be using the current downturn to steer the country in the right direction.
Mongolia has successfully done this before, most recently in mid 2009 when the Government made key legislative changes in the midst of the global economic downturn and positioned the country for the greatest economic expansion in its history.
Some analysts believe that OyuTolgoi’s stock will be bullish soon.
Recently, the Government’s delegates met Rio Tinto’s people in London.
Although there was good news at the meeting, OyuTolgoi’s share price has been falling.
How do you explain this situation?
And you know all the share prices of Mongolia focused mining companies have fallen this year.
OyuTolgoi’s London board meeting produced what appear to be positive results. Representatives from both the Government of Mongolia and Rio Tinto have characterized the discussions as successful and have said publically that there is a united front that is focused on moving the project forward. Similarly, according to reports from the meeting, fifty percent of the issues between the two parties have been resolved.
However, as you have pointed out, the share price of Turquoise Hill has yet to reflect this positive news. This is likely due to concerns that those issues left outstanding are the most significant and have the ability to sideline the project further. Of particular concern are the discussions involving the stalled underground development of the project, cost overruns and management fees, all of which appear to be the gest hurdles for the two parties to overcome.
Needless to say, OyuTolgoi is still the most important investment story in Mongolia right now. It represents the mining sector as a whole and provides the international community with a sense of doing business in Mongolia’s political and legislative environments. Successfully concluding the outstanding issues before the end of the year will be crucial in rebuilding confidence among investors and will be seen as yet another positive development for the Mongolian economy.
As for the rest of the industry, it is no secret that Mongolian focused companies have experienced a sell off over the past two years. This has been driven by political and legislative uncertainty as we have discussed before. Unfortunately, as the Mongolian picture began to improve,we saw further downside due to the global outlook, which has held many companies at their all time low.
Lastly, what advice do you give our country’s shareholders and clients?
As mentioned previously, the market conditions and changing legislation provide a unique buying opportunity for investors. With highly prospective projects being developed by publically listed companies, investors can acquire sizeable positions in Mongolian assets for minimal commitments. For this reason, we believe that the outlook for Mongolia is extremely positive and continue to review prospective opportunities on behalf of our clients.
That said, investor confidence is still weak and the Government of Mongolia will need to demonstrate that they are committed to the new legislation for the long term. Catalysts such as the OyuTolgoi dispute and the current economic health of the country are also concerns that will require clarity before investors flock back to the market.
Needless to say, we have a positive long-term view on the Mongolian mining sector and the economy as a whole. However, we do have short-term reservations and continue to provide objective advisory to our clients so that they are fully aware of both the opportunities and the risks involved with investing in Mongolia.