How to play Mongolia’s massive mineral wealth

I have had excellent intentions of writing something about Mongolia for you ever since I interviewed Chris Rynning of Origo Partners Plc a few weeks ago. However, I put it off and now I see that Dominic Frisby has beaten me to it in yesterday’s Money Morning: Feeling adventurous? Here’s the next great land of opportunity

Dominic sums up the case pretty well, but the problem for me with Mongolia is China. Its future prosperity appears to be leveraged almost completely to Chinese demand for its astonishingly abundant natural resources. 98% of Mongolian exports go to China.

So what happens if China – and Chinese demand – crashes? Chris – who has worked in China for decades – doesn’t think it will. But even if our bearish case does play out, he isn’t convinced that it will affect Mongolia particularly badly. It is, he says, “always easier” to transport the likes of coal across one land border than over many oceans. That gives Mongolia a massive advantage over Australia, New Zealand and Brazil.

If demand for commodities as a whole falls, it is entirely possible that demand for commodities from Mongolia will still rise. Right now, Mongolia is only just starting out down its exporting path (it is still a net importer) but as it becomes a net exporter (from next year), says Chris, it will find itself with a trade surplus and then, as is usually the way, with a rising currency. That’ll be good for those who invest now.

Investing, as Dominic points out in his piece, isn’t easy. Even Chris – quite the fan of Mongolia – notes that valuations are “all over the place” and liquidity is “hopeless”. However, he also thinks that will change as Mongolia’s partnership with the LSE gets underway and as its large resource groups start to list.

This is risky stuff, but if it interests you, Origo have set up a Mongolia fund which you can find out more about here (minimum investment $10,000). It is interesting for the equity exposure but also for the cash exposure: interest rates in Mongolia are around 14-15% which even if you take its high inflation into account still means that depositors are making a real return of 5-6%. That’s not something you can say of many other countries.