September 25, 2012
Reposted from the UB Post
By Travis Hamilton
According to Australia’s Resource Minister, Mr Martin Ferguson, the mining boom in Australia is “over.” BHP Billiton recently cancelled its USD 30 billion expansion plans for its Australian Olympic Dam project, Rio Tinto has abandoned several Australian projects, and Fortescue Metals has announced hundreds of job cuts and a significant downsize of its expansion plans. These moves highlight Mongolia’s growing competitive advantage to deliver comparably cheaper resources to China – and potentially Japan & South Korea. Whilst the sun has begun to set on Australia’s mining boom, the resource sector in Mongolia is preparing for rapidly increasing exports as new mines and transport infrastructure come online.
August was another challenging month for the resource sector; however recent news of stimulus initiatives from China and the US appears to be providing much needed market confidence. The US Federal Reserve has announced QE3, following similar moves from the ECB, and in line with our expectations, China is stepping up infrastructure developments as part of stimulus efforts to revive economic growth. According to HSBC, the Chinese government may boost infrastructure spending growth to an annual pace of more than 20% in the coming months. Road building, subway projects, rail infrastructure, new sewage plants, five additional port and warehouse projects and two waterway upgrades are but some of the initiatives announced –projects that will underpin continued and increasing consumption of Mongolian resources.
The implications of increased Chinese infrastructure development and consumption bode well for Mongolian resource exporters and the country’s economy at large.
Of the 17 positions within the portfolio, 11 lost ground, 4 gained and 2 finished the month flat. The MSE Top 20 lost 8.3%; our MSE listed positions fell roughly in line with the market, althoughRemicon JSC lost 14.47% (after gaining 20% last month). Following a raft of positive company announcementsHaranga Resources gained 13.73%.Erdene Resource Developmentcontinued to slide, losing 21.74%, even though the company’s separation of its North American and Mongolian is on track to be completed on or before October 31 – a move that we expect will provide investors with clarity of assets and strategy and should provide shareholder value uplift. Xanadu Mineslost a further 20% (now down 67% since October 2011) and Mongolian Mining Corp fell 14.73%.
The Khan Mongolia Equity Fund performance for August was -10.41%.The Net Asset Value as at 31 August 2012 was USD 57.75.The August Factsheet can be downloaded by registered users of the Khan Investment Management website –www.Khan-Management.com. Despite negative share price performance in July, Khan Investment Management firmly believes that companies held in the portfolio represent significant value.
I recently travelled to Mongolia for 3 weeks and visited many companies and their mine sites with my colleagues Narantuguldur Siajrakh, Director, Khan Investment Management, and Oliver Belfitt-Nash, Head of Research, Monet LLC. In brief, the trip reaffirmed our strong conviction that portfolio companies have substantial upside potential
Companies whose sites we visited included Mongolian Mining Corporation, Erdenes Tavan Tolgoi, South Gobi Resources, Erdene Resource Development, Xanadu Mines, Haranga Resources& Eruu Gol. As well as a trip to one of the Chinese border crossings to view trucking volumes and procedures, we also visited Bold Resources, EIT andAPU JSC.
Haranga Resources, currently undertaking Mongolia’s largest drilling program with 8 rigs spinning, recently signed an MOU for 5Mtpa of export rail capacity, and according to an independent assessment by ProMet Engineers, the Selenge Project has a base case NPV of USD 1.1 billion (with a combined exploration target of 160-320Mt of iron ore). Eruu Gol signed a 25 year exclusivity agreement with Winsway Coking Coal, and will ramp up production to 30Mtpa by 2017. Mongolian Mining Corporation have begun construction of their private rail infrastructure, and Aspire Mining, which has already defined the second largest coking coal reserve in Mongolia, was awarded its mining license. Aspire Mining’s directors have been adding to their shareholding – an encouraging sign for investors. Guildford Coal has announced production andChalco dropped its bid for South Gobi Resources, shortly after which Rio Tinto moved to replace its CEO.
In addition to attending Discover Mongolia 2012, the preeminent forum for the widest international exchange on Mongolia’s minerals developments, I presented as a panelist at Frontier Securities’ 6th Annual Invest Mongolia Conference which was well attended by international investors.
Mongolia’s new coalition government line-up has been officially completed, with parliament approving the last five cabinet members on August 20th. On Friday September 7th, whilst receiving heads of diplomatic missions and international organisations, Mongolian Prime Minister Altanhuyag emphasized the importance of foreign investment, saying foreign direct investment plays a significant role in the development of the economy. “The new government will be open to foreign investment” he said, promising that the government will strengthen transparent, favourable legal frameworks for foreign investment. These comments have been greatly welcomed as international investors have been waiting for some time for the new government to indicate their stance towards foreign investment following a period of uncertainty since the June General Elections.
Finally, I would like to criticize Mr Doug Schoen of Forbes. His inaccurate, misleading and often false comments about Mongolia and its political landscape threaten the growth and prosperity of an emerging nation that has made great progress in its fight against corruption and is widely regarded as the democratic anchor of Central Asia.
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