Merryn's Blog

Why adventurous investors should keep an eye on Mongolia

Mongolia is not the easiest place to invest in. But that may change in the next few years. And as a vast country rich in natural resources, it's worth keeping an eye on.

I can't claim to know a great deal about Mongolia. I've never visited this huge, sparsely-populated state, which is sandwiched between China and Russia. And it's not an easy country to invest in in fact, I'm not aware of any vehicles that do so. But I have a hunch that will change over the next few years.

The Mongolian government has finally signed a long-awaited deal with mining groups Rio Tinto and Ivanhoe over the huge Oyu Tolgoi copper mining project, which will have a major impact on the country's prospects over the next few years.

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Investment in Oyu Tolgoi is going to be around the same size as Mongolia's GDP of $5bn. So development of the project up to its 2013 start date is going to mean a huge infusion of cash into the local economy. But this mine is just the start.

Oyu Tolgoi has taken years to get off the ground, mostly as a result of a windfall tax on minerals which was introduced in 2006, and only repealed this year. However, with a deal finally done, progress towards other projects will hopefully be much quicker. And there are plenty of deals to be done.

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Mongolia has huge reserves of copper, coal, gold, uranium and other resources, and is in a prime position to benefit from China's appetite for commodities. Given that the country has a population of just three million, this could quickly transform it from a state that had to go to the International Monetary Fund last year, into a relatively wealthy nation.

The risk, of course, is that these mining riches disappear into a sinkhole of corruption and waste the infamous resource curse. In its favour, after a Russian-style extreme free-market binge followed by a lurch back to socialism, the country's politics seem to be settling into a reasonably pragmatic middle-of-the-road multi-party consensus, which may help prevent it becoming another Nauru.

Of course, investing in a frontier market such as Mongolia is very high risk, but it could be appealing once the right vehicles come along. I don't know of any so far, but I suspect they'll emerge soon: the Wall Street Journal reports that the first Mongolia-focused private-equity fundis already raising money.

Cris Sholto Heaton writes MoneyWeek Asia, a weekly email containing investment ideas and news covering the world's fastest-developing and most exciting region. Sign up to MoneyWeek Asia here .




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