Finance firm sinks teeth into Mongolia

Finance firm sinks teeth into Mongolia

MONGOLIA’S natural resources opportunities have catalyzed one of the country’s first domestically based corporate advisory firms established to link foreign capital to local projects.

Interestingly, the firm is unmoved by the current obsession with coal and believes the “smart money” is in copper-gold. Resource Investment Capital (ResCap) began trading late last month and plans to help domestic companies access the large sums of capital needed for mining exploration and development projects. The firm was established by international Private Equity group, Origo Partners, in joint venture with one of Mongolia’s largest industrial holding companies, Monnis International. ResCap is an extension of Origo’s previous push into Mongolia 12 months ago when it established a specialist investment team based in the capital, Ulaanbaatar, and focused on natural resources.

The opportunities in Mongolia have been well-documented. The Mongolian Government has introduced a series of policy measures and infrastructure initiatives designed to unlock the

mineral value, including support for both government and private enterprises looking to access international capital markets to meet funding requirements estimated to be in excess of

$US25 billion. Many of this year’s largest IPOs have been placed to fund Mongolian projects and this trend is likely to continue. ResCap director general Eric Zurrin said the number of expats operating in Mongolia was predicted to grow from 5000 today to 30,000 in five years as the country’s GDP rose by as much as 25% by 2013. He said much of the investment demand was coming from nearby funds out of Asia, particularly from Hong Kong, and Australian sources of capital, which are following junior miners into Mongolia.

“You see the Europeans and North Americans come around once in the while but it comes down to difficulty of access – it’s a hard place to get to,” Zurrin told Highgrade. Mongolia is rich in both coking and thermal quality coal reserves that are ideally placed to feed China. Capital raisings for coal projects have continued to generate publicity purely by their size, for example, Mongolian Mining Corp and Winsway Coking Coal Holdings just last month said they would raise more than $US1.3 billion for an expansion project designed to meet Chinese coal demand. Headline stories like this have increased the commodity’s profile. It’s therefore not surprising to hear that ResCap has met with several Western investors who are looking specifically for coal projects on which they can float a company. Zurrin, however, is not convinced coal is Mongolia’s best near-term play. “From the discussions we’ve had with investors, everyone is homing in on coal,” he said. “[But] there’s a school of thought that would say following the herd is a mistake and we’re seeing the smart money getting into copper-gold. “What has distracted investors from copper-gold over the last few years has been the windfall tax, which has now been abolished. So within six months of January 2011 when that’s gone, that smart money will turn into ‘follow the money’ as investors scramble for copper-gold sector plays. “A lot of the coal projects – not all of them, but a lot – have been turned over once or twice and then looked at by number of other parties including the Chinese.”

He said other minerals causing a stir were uranium and phosphate. ResCap has also identified a handful of what Zurrin termed “off-shoot” opportunities that would stem from increased resources activity as the continued influx of professionals caused housing and transport problems. The firm is currently helping a local property developer raise $US30 million and is looking at relationships linked to airline development and general human logistics companies. Exciting stories of a vast land of unbounded mineral opportunity has attracted more than its fair share of interest in Mongolia. Equally well-publicised, however, have been the barriers to entry – sluggish bureaucracy and lack of infrastructure being the chief offenders. Zurrin said establishing the contacts needed for a new business venture – something ResCap itself had to do – required a “definite lead time” to decipher Mongolian documents, find the right employees and, most importantly, find a local partner to work with who brings established relationships and contacts. On infrastructure, he acknowledged the limitations but argued that those limitations combined

with the natural resources of Mongolia was precisely the combination that had created the investment opportunity for ResCap and others. “As the rail access – whether it be north through Russia or south through China – opens up, Mongolia will open up. The scale of building a 3000-4000km railway is massive and the cost is even bigger. A $US3-4 billion project for a country with a GDP of $US5 billion is a huge thing. “This is something that investors will have to be patient with, but it will come. It’s a top priority for Parliament and there have been preliminary approvals to build the rail up to access the ports in Russia, but it’s going to take time. The average investor recognises that infrastructure is a hurdle.

“By the time the legal system is perfectly in place and the stock exchange mirrors the LSE and the infrastructure is finalised, investors will have missed the golden opportunity to participate

in the latest and one of the last mining frontiers in the world. It’s having conviction enough to put money into something that’s evolving, which is where the returns will come from.” HG