Boomtown Mongolia

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At first glance Ulan Bator hardly looks like a boom town. The city centre is a charmless confusion of Soviet vanity projects, office buildings and dilapidated apartments, while on the edges of town ghettos of gers (yurts) spread up the mountainside. To a casual observer, the only hints of a mining boom might be the abundance of taverns and the Landcruisers that jam the streets.

But outside the town one Friday night, a crowd of investors shimmying around an outdoor bonfire paints a picture that is in some ways more revealing of Mongolia today. Pop hits pulse through the air and vodka flows unrelentingly as people start to dance to the beat of DJ Zola, who spins out of the back of a truck. The party is one of the pitstops on a tour for fund managers and investors from London, New York, Moscow and Zurich who have come to see the opportunities on offer in Mongolia, one of the hottest destinations for resources investment today.



On one side of the fire, Altai Khangai, the 29-year-old acting chief executive officer of the Mongolian stock exchange – one of the best performing in the world last year – warms up his dance moves. Nearby a vodka-soused banker named Sergey invites me on a resources tour of Siberia, complete with promises of slaughtering a castrated ram. Soon a young mining analyst fresh out of Oxford is entertaining guests by taking running leaps over the flames. “We’re the only private equity house with a bonfire,” croons a slightly tipsy host.

Mongolia is one of the world’s last great mining frontiers, a freak of geology with more than $1,000bn in probable mineral deposits. For millennia those resources went undiscovered while herders roamed the steppe and Genghis Khan led his armies to conquer Asia. It wasn’t until the Soviet era that geologists seriously explored Mongolia’s deposits.


Even hardened mining hands tend to start using superlatives when they talk about Mongolia. Ed Rochette, a former senior vice-president with Ivanhoe Mines who spent his career securing mining licences in far-flung corners including Burma, the Democratic Republic of the Congo, Indonesia and Kazakhstan, says it’s unlike anything he has ever seen. “Two years ago I would have 20 projects come to me, and almost no investors. Today I have 20 investors, and almost no properties,” he says, settling into a booth at a dimly lit bar called Casablanca, popular for its burgers and green-miniskirted waitresses. “I’ve been in Mongolia for 10 years, but this story is just beginning.”

Today’s mining rush was touched off in 2009 with the signing of an investment agreement for the Oyu Tolgoi mine – known as “turquoise hill” because of the greenish rock outcrop that indicated copper. The site has $350bn of probable reserves of copper, gold and silver – more than 50 times Mongolia’s GDP. The negotiations dragged on for years, but when the deal was finally concluded the signal was clear: Mongolia was open for business. The following year foreign direct investment swelled to 30 per cent of GDP.

Mongolia’s vast deposits are juxtaposed with an economy that produced just $6.7bn last year – slightly less than Armenia. The country has just three million people, and 11 times as many livestock as humans. But the resources there are set to redefine not only Mongolia, but also global supplies of key commodities. Take thermal coal: Mongolia has 152bn tonnes of probable coal reserves, enough to fuel every power plant in China for the next 50 years.


Ulan Bator is quietly bursting at the seams. High-end properties are sprouting up in the city centre, where a Louis Vuitton and Ermenegildo Zegna look out over the central Sükhbaatar Square. Rents for new 140 sq m flats nearby are going for $2,800 a month. Because of the building boom, the price of cement in Ulan Bator doubles in September, when contractors rush to pour concrete before the winter freeze. Construction workers are in such short supply that even North Koreans can be found on building sites around town.

There’s also a shortage of bankers, creating opportunities for anyone willing to brave the bitter cold and choking winter smog. “In terms of deal-making it is the reverse of what you expect in London or New York, where you have 20 investment banks chasing the same deal,” says Eric Zurrin, director general of Resource Investment Capital (ResCap), a Mongolia-focused investment bank. “In Mongolia there are more opportunities than there are advisers, from an investment banking perspective.” To take advantage of that, Zurrin left his position as a director of metals and mining at UBS in London last year to join ResCap.

Although Ulan Bator has just a million residents and a small handful of daily international flights, working there is no great handicap when it comes to raising capital. “What we’re finding recently is that the capital is coming to you – you don’t have to go very far to find high net worth individuals or global resources funds looking for opportunities or calling you up,” says Zurrin.

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Unlike the gold rushes of the past – with their brawling saloons, boom towns that turn to ruin, and outlaws jousting for turf – in Mongolia it’s private equity houses and global investors who are playing the role of prospector. In the taverns of Ulan Bator, bankers are hunched over their beers discussing who is a spiv and who isn’t. The other popular conversation is who has been beaten up recently – in the literal sense. One banker relates getting robbed at knifepoint in front of his house by a man who jumped out of a manhole cover.

But still the draw is irresistible. For some it’s a chance to make money; for others it’s the thrill of the risk. Talented Mongolian professionals are flocking back as well to be a part of the growth, often abandoning jobs in the City or on Wall Street for better opportunities in Ulan Bator.

Masa Igata, founder and CEO of Frontier Securities, an Ulan Bator-based securities investment advisory firm, says he came to Mongolia after growing weary of Tokyo. “I felt like I was in a hot tub, in an onsen, for many, many years,” says Igata, who left his position as a managing director at Citi in Tokyo in 2004. “I thought I should work in a much more aggressive, stressful, but exciting place.” He visited Mongolia and loved it, but failed to make money on his first investment there because he was swindled by his stockbroker – convincing him of the need to set up an investment advisory service.

Others put it more simply. “We regularly get people coming into our office with a bag of green rocks, saying are you interested in this?” says Ean Alexander, a former Macquarie banker who moved to Mongolia in February as managing director of a Mongolian investment bank, MICC. “I don’t know anywhere else in the world where you would see an opportunity like that.”

Part of the reason Mongolia is so attractive to investors is that it is relatively open to foreign investment, with an open capital account and liberal foreign investment policies, in contrast to neighbouring China. When Mongolia’s economy was redesigned in the 1990s after the split from the Soviet Union, policymakers took their cues from free-market economists as they up-ended the centrally planned economy.


However, the current influx of capital and runaway economic growth pose challenges to the economic and political systems in place. Foreign investment in the mining sector quadrupled between 2006 and 2010, reaching $820m last year. At times capital inflows have nearly destabilised Mongolia’s currency, the tugrik, which was the second-fastest appreciating currency in the world last year relative to the US dollar. Inflationary pressures are building as well and the government is hard-pressed to keep inflation in the single digits.

“Since 2010 the challenge of coping with mining revenue has become critical,” says Chuluundorj Khashchuluun, chairman of the National Development and Innovation Committee. “Revenue from mining has increased so rapidly it has impact on all other sectors.” He prints out a PowerPoint presentation for me that says it all: this year, GDP growth will be a respectable 8.2 per cent, but in two years it will soar to more than 20 per cent.

Although most Mongolians are growing richer – gross domestic product per capita has doubled in the past four years – sectors of the economy such as agriculture and the cashmere industry have been doing poorly. A strong tugrik has made non-mining exports uncompetitive, a phenomenon known as “Dutch disease”. To see those left behind by the growth, one need look no further than the ger districts that ring Ulan Bator and house more than half the city’s population, often without basic sanitation or sewer systems.


And with more money flowing in, the opportunities for corruption grow. Transparency International ranked Mongolia 116th out of 178 countries in terms of corruption perceptions in 2010, putting Mongolia in the bottom 35 per cent in the world. Environmental degradation is also a growing concern as mining activity increases: some herders have been forced off their land by mines sites and others fear losing their water supplies as large mines tap aquifers underground.

These growing social pressures make the question of what to do with mining revenues a crucial issue for politicians. It seems fitting then that I meet Prime Minister Sükhbaatar Batbold at the launch of the newly minted Mongolian Development Bank, which will use mining revenues to extend policy loans to infrastructure projects. Batbold, a former businessman whose name means “hard as steel”, sees the development bank as part of a broader mission: making sure Mongolia avoids the resources curse. “That is the challenge that the government and people of Mongolia are facing,” he says as he settles down in a black leather chair so new it almost squeaks. The role models for Mongolia’s growth are Norway, Canada and Chile, he explains. “The main issue here – why some succeed and some fail – is the issue of governance, of transparency, and of competitiveness.”

To avoid the resources curse, mining revenues are being carefully tracked and channeled. Leading the effort is the Human Development Fund, which is handing out $200 in cash to each citizen this year and will focus on housing, education and healthcare in future. Soon revenues will also be channeled into a fiscal stability fund, a nest egg for use in the event of a crash in commodities prices.

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In keeping with its free-market foundations, Mongolia is also convinced of the power of the public listing process to promote transparency for state-owned resources. “Hopefully all the mineral wealth and assets of Mongolia will be going through the scrutiny of the public offering process, especially if they are strategic,” Batbold explains. “This way people have equal opportunity to participate and to benefit from this development, and things are very clear within the rules, so that not only a few people gain from this wealth.”

That philosophy paves the way for a slew of big public offerings, a prospect that has excited bankers to frenzy. Tavan Tolgoi, as the first state-owned mining resource to go through the public offering process, is a blueprint for the future Batbold envisages – one where every Mongolian is literally a shareholder in the country’s mineral resources. The asset is expected to list early next year, and 10 per cent of the shares have been distributed to each citizen. The privatisations that followed Mongolia’s split from the Soviet Union tried a similar “voucher” system that was largely a failure – some Mongolians remember exchanging their vouchers for bags of flour, unaware of their true value – and officials are determined to avoid similar mistakes.


“The public has high expectations because Tavan Tolgoi is one of the world’s largest deposits,” explains Enebish Baasangombo, executive director of Erdenes MGL, the state-owned company developing Tavan Tolgoi. “We hope that it would be a jumbo IPO,” he says with a soft chuckle. Tavan Tolgoi’s western block is being developed under a separate tender process, one which has left Mongolia’s powerful neighbours jockeying for a role in the development of the deposit.

In February, when Erdenes was selecting banks to advise on the listing, top banks sent high-level representatives to Ulan Bator to deliver their pitch. In the popular Grand Khaan Irish bar, the fierce competition incited a shoving match one evening between two bankers competing for the deal. The offering, which will float 29 per cent of the company on one or two international exchanges, is likely to raise more than $10bn.

The listing of Tavan Tolgoi is also being courted by global stock exchanges. When Erdenes hosted a conference to discuss the IPO, both the London and Hong Kong stock exchanges were invited to give presentations. Hong Kong caught London unprepared with an aggressive hard sell on the benefits of listing in Hong Kong, according to several people in the room. “We were a little too genteel,” a member of the LSE crew tells me with a sigh. “Next time our team is going to come out in force.”

On the back of these listings, Mongolia’s own stock exchange, housed in a pink building on Sükhbaatar Square, is nursing its own ambitions. Today, the exchange is sleepy: the trading day lasts just two hours, and traders are long gone when I arrive for a 3pm interview. With fewer than 40 actively traded companies and no new listings in the past two years, the exchange is so small that traders often carry their orders in on a memory stick. That will soon change, however. In January, the Mongolian Stock Exchange (MSE) partnered with the LSE to revamp its trading system and regulations. I sit down with Altai Khangai, the acting chief executive officer, and Bill Gorman, the LSE-appointed president of the exchange, and they sketch out their plan. According to their calculations, the MSE will see $45bn in listings in the next 10 years through the privatisations of state-owned companies and strategic assets – that’s more than 30 times the total market cap of the exchange today.

“It’s like we are setting up a whole new exchange,” Altai says. Last year the exchange’s Top 20 index grew by an eye-popping 138 per cent, more than doubling, but Altai and Gorman explain that this is partly due to flaws in the way the index is calculated. In September, if all goes according to plan, the exchange will move to a new electronic trading platform that will make it easier to spot improper trades; allow traders to work from their offices; and ultimately allow global integration with other exchanges.

“LSE looks at Mongolia being a cornerstone for the Asian market,” Gorman says. “The potential in Mongolia is extraordinary … One day it will be like Dubai, everyone will be passing through.”

Back at the bonfire, cups of vodka are tossed on to the flames, sending out green and blue flares. Guests begin piling into Land Rovers and I squeeze in next to a young Etonian, former minister Jonathan Aitken’s son, who is seeking his fortune in Ulan Bator along with a few classmates. We all end up at a nightclub called Faces where young urbanites are dancing the night away.

The optimism in Ulan Bator is infectious. But Mongolia is in many ways made vulnerable by its vast resources. Economists warn that the economy could still go into reverse if the price of copper were to drop. And Mongolia is highly dependent on neighbouring Russia and China, who historically have tried to muscle their way into prized mining contracts.



The bankers are just a precursor to the rush of money about to pour in, as Tavan Tolgoi, Oyu Tolgoi and other yet-to-be discovered deposits start to come online and put to trial the economic and political systems in place. Can a young democracy equipped with the best intentions really succeed in transforming itself into the next Norway, or the next Canada? It could be a brutal test.