02.05.2014 To what extent has Mongolia retained its previously high levels of investment appeal,...
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Transcript of 02.05.2014 To what extent has Mongolia retained its previously high levels of investment appeal,...
Investment Sentiments and Long-Term Opportunities in Mongolia
Alisher Ali Chairman Mongolia Investment Summit 2014 30 April 2014, London
Costs of Poorly Conceived Policies
Power of Sentiments: FDI Slumped, Currency Depreciation, Rating Downgrades
China Factor: Slow Growth and Easing Demand
Mining Stocks: Huge Losses
Interest to Investors:
• Mining: Still Underexplored and Attractive Valuations
• Private Equity: Non-Resource Play
• Real Estate
• Equities: Time to Buy?
• Bonds:
About Eurasia Capital
2
Summary
Costs of Poorly Conceived Policies
Adoption of controversial law on the regulation of foreign investment in entities operating in strategic sectors in May 2012
The law brought negative impacts on overall Mongolian economy and uncertainty for foreign investors as governmental and parliamentary authorization were required to invest in sectors of strategic importance (mining, banking and finance, media and communication)
Amendments were made to above mentioned law on April 2013 to improve foreign investor’s sentiment. (The law no longer applies to foreign private entities)
Adoption of Investment Law in October 2013 and abrogation of law on the regulation of foreign investment in entities operating in strategic sectors to boost economic slowdown and restore foreign investor’s confidence
Dispute between Rio Tinto (majority owner of Oyu Tolgoi mine) and the Government of Mongolia over investment agreement including cost overruns, management fees, dividend, and the second phase project finance of OT
Investor confidence suffered significantly as valuation of Mongolia asset classes (especially resource stocks) plunged over the last two years
3
Government Supported Growth
4
Mongolian GDP Growth Mongolian GDP Growth
Mongolian economy has been slowing down since 2012 primarily due to decline in FDI and falling minerals exports.
However, the economy which grew 17.5% in 2011, maintained its double digit growth rate at 11.7% in 2013, mostly thanks to government spending.
In response to the slumped FDI, exports revenue, surging inflation and domestic currency depreciation, Mongolian government and central bank injected total MNT4 trillions to the economy.
Therefore, GDP growth at 11.7% in 2013 was the result of strong intervention by the authorities - it was not organic growth indeed.
Despite current challenges, Mongolia still has strong fundamentals and is expected to experience high growth rates in coming years as projected by IMF.
Source: NSO Mongolia, IMF
Foreign Direct investment Foreign Direct investment
0
1,000
2,000
3,000
4,000
5,000
2006 2007 2008 2009 2010 2011 2012 2013
FDI in US$ mn
Mineral export Mineral export
0
1,000
2,000
3,000
4,000
5,000
6,000
2004 2006 2009 2010 2011 2012 2013
in US$ mn including coal, gold, copper and etc
Loan growth Loan growth
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
5,000
10,000
15,000
20,000
25,000
2008 2009 2010 2011 2012 2013
in MNT bn 0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
5
10
15
20
25
2011 2012 2013 2014 2015 2016 2017 2018
In US$ bn
Weaker investor sentiments towards Mongolia as growth in China slows: GDP growth in China declined from 10.45% in 2010 to 7.67% in 2013 and the growth rate in 2013 moderate around 7% in 2014-16.
China’s growth moderation directly reflected in commodity demand. Morgan Stanley cut its forecasts (2013) for the S&P
GSCI, which include iron ore, coal, copper, from 6% to 2.5%
Macquarie Research also cut (2013) its forecasts for commodities including copper, aluminum
Consolidation of mining companies over the last five years is maturing. The government encourages Chinese companies to
invest directly in resource projects
Acceleration of Chinese companies’ participation in resource M&A
Global coal price has declined 30% from US$144 to US$101 per ton over the last 2 years
5
90
100
110
120
130
140
150
US$
per
ton
10.45%
9.30%
7.65%
7.67% 7.54% 7.28%
6.97%
4%
5%
6%
7%
8%
9%
10%
11%
2010 2011 2012 2013 2014 2015 2016
GDP growth, %
Source: IMF (from 2013 - expected)
China Factor
Source: Bloomberg
Coal Price, US$/ton
6
China is the largest consumer of Mongolian resources (86% of Mongolia’s total exports in 2013), largest trading partner and investor in Mongolia.
75% of China’s imports are resources: nearly 100% of Mongolia’s copper concentrate, 42% of molybdenium and all Mongolia’s coal exports go to China.
In 2013, export of commodities such as coal, molybdenum and zinc dropped -40%, -42% and -9% y-o-y respectively. However, copper export increased 13%, iron ore 23% and fuorspar 11% which have been for Mongolia considering challenging macro conditions
Exports by Market (% of total, 2013)* Total Mongolian Exports (US$mn)*
Source: NSOM (2013) Source: NSOM
0
1,000
2,000
3,000
4,000
5,000
6,000
2004 2006 2009 2010 2011 2012 2013
Coal Copper Iron Ore Crude oil
Cashmere Zinc Gold Fluorspar
Molybdenium Other
China 86.83%
China Canada Russia Others
China: Key Export Market
7
Ratings 2012 2013
Standard & Poor’s
BB BB-
Moody’s B1 B1
Fitch BB- B+
Ratings 2013
Mongolian Mining Corporation
Caa2 (Moody’s), CCC+ (S&P)
Development Bank of Mongolia Bond B1 (Moody’s)
Trade & Development Bank of Mongolia B2 (Moody’s)
Mongolian Sovereign Rating
Corporate Bond Rating
Fitch downgraded its rating on Mongolia to B+ in December 2013. The agency pointed out following factors as its basis on the evaluation:
Fiscal deficit climbed to MNT1.5 tn in 2013, accounting 12% of the GDP, fueled by off-budget channels such as Chinggis Bond commitments and the Central Bank injection to construction and infrastructure sectors.
According to the Fitch projections, Mongolian foreign debt would reach US$13.5 bn or 120% of the GDP in 2013. Khan bank and XacBank, two big retail banks
in Mongolia also downgraded by Fitch.
Due to decrease in commodity exports, MMC, only private sector corporate bond issuer, is experiencing drop in bond prices and increase in yield on its US$600m 2017 notes.
Mongolia Mining Corp Bond yield, %
Source:Bloomberg
Ratings Downgraded
China Prime Coking Coal Yinchuan Price
8
Seaborne Hard Coking Coal Price
Source: Bloomberg
Mining Stocks: Overreaction?
Mongolian Mining Corporation SouthGobi Resources
-33% in 2 years -43% in 2 years
-90% in 2 years -91% in 2 years
9
Mongolia Energy Corporation Aspire Mining
Source: Bloomberg
Mining Stocks: Oversold?
Draig Resources Tavan Tolgoi
-74% in 2 years -86% in 2 years
-94% in 2 years -50% in 2 years
Massive resources, high quality minerals and proximity to main consumer market such as China and Russia.
The development of the Oyu Tolgoi and Tavan Tolgoi mines are expected to further transform Mongolia
Only 9.1% of Mongolia’s huge landmass is covered under existing exploration licenses*
10
Unexplored Mining Sector
Boroo (gold)
Dornod Mardai Gurvan Bulag
Tavan Tolgoi (coking coal)
Oyu Tolgoi (copper, gold)
Nariin Sukhait (coal)
Shivee Ovoo (brown coal)
Baganuur (brown coal)
Tumurtein Ovoo (iron ore)
Erdenet (copper, molybdenium)
Tumurtei (zinc, lead)
Burenkhaan (phosphorite)
Asgat (silver)
Tsagaan Suvarga (copper, molybdenium)
Russia
China
(uranium deposits)
*Source: The Ministry of Mining of Mongolia, 2014
Private Equity: Much-Needed Financing
Most of the Mongolian companies are private, not listed
Many dynamically growing Mongolian business groups with interests across various industries (mining, property, construction, trade, consumer goods, retail)
Substantial pre-IPOs opportunities emerging with Mongolian companies, especially in non-resource sectors
Relatively small, under-capitalized banking sector unable to meet the rapidly growing demand for services (13 banks with only $853mn in equity)
Non-resource private equity opportunities for early investors:
• financial services (banking, insurance, leasing),
• agriculture, manufacturing, media, IT
• property, tourism and hospitality sectors
11
Property Slow economic growth, lower FDI inflows, currency
depreciation are negatively impacting property market
Mongolian banking sector has expanded but mortgage loan penetration remains to be insignificant at below 10%, suggesting upside potential
Support for the first-time homebuyers (mortgages at 6%) boosted the residential market and resulted in increased supply.
Office and commercial property market growth has cooled due to increase in supply as well as exit of some foreign companies
Number of tourist arrivals dropped 12.2% to 417,815 tourists, from 475,892 a year earlier
Mongolian property market possesses significant growth potential, however risk factors, supply and demand trends should be watched
12
Source: Bank of Mongolia
Construction by property type, MNT bn
0
100
200
300
400
500
600
700
800
2008 2009 2010 2011 2012 2013
Residential IndustrialTrade & service Hospitals, schools & culturalOther
Source: National Statistical Office of Mongolia
13
MSE market capitalization dropped to US$1,007mn in 2013 from US$1,553mn (-35%)
In our estimates, Mongolia MCap/GDP ratio will reach 18% by 2017 from 12% in 2014.
MCap/GDP ratio will increase along with strong expected GDP growth in 2014-2017
Based on our assumptions, MSE market capitalization may reach US$1,447mn by the end of 2014 and increase up to US$2,803mn by 2017, representing strong upside
Source: MSE, Eurasia Capital Holding estimation Source: Bloomberg, IMF, Eurasia Capital Holding estimation, NSO
Local Equities: Rebound Expected
Mongolian GDP (US$ mn ) and MCap/GDP ratio, (%)
1,104
1,553
1,293
1,007
1,447
1,839
2,240
2,803
0
500
1,000
1,500
2,000
2,500
3,000
2010 2011 2012 2013 2014 2015 2016 2017
Market Capitalization, US$ mn
6,244
8,709 10,258
10,600 12,057
13,135 13,998
15,570
18% 18%
13%
10%
12% 14%
16% 18%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
0%2%4%6%8%
10%12%14%16%18%20%
2010 2011 2012 2013 2014 2015 2016 2017
GDP, US$ mn (right)
MarCap/GDP ratio, % (left)
MarCap/GDP ratio, %, Eurasia Capital Estimation
GDP Projection by IMF, US$mn
14
Emerging and Frontier Markets: Comparables
172%
90%
240%
66%
10% 0%
50%
100%
150%
200%
250%
300%
Malaysia Thailand SouthAfrica
Chile Mongolia
59%
40%
23% 28%
10%
0%
10%
20%
30%
40%
50%
60%
70%
Kuwait Kenya Vietnam Argentina Mongolia
Source: Bloomberg,
Mongolia compared to emerging markets, MCap/GDP ratio (%,) 2013)
Mongolia compared to frontier markets MCap/GDP ratio (%), 2013
Mongolian MCap/GDP ratio (10%), one of the lowest in the world, is low even by frontier markets standards
This reflect both 1) low percentage of public companies among Mongolian banks and corporates and 2) Mongolian equities being undervalued
Very strong growth potential in Mongolian equities in 2014-2020
Source: MSE (2014), Bloomberg (2014) 15
MSE Top 20 Index
Name Symbol Market Cap, US$mn
Performance since January
2012, % Sector
APU APU 158.4 ‐25% Food & Beverage s Tavan Tolgoi TTL 153.7 ‐61% Coal Mining Sharyn Gol SHG 47.1 ‐43% Coal Mining Shivee Ovoo SHV 45.6 ‐69% Coal Mining Baganuur BAN 43.7 ‐77% Coal Mining Gobi GOV 28.9 2% Textile Mongolian Telecom MCH 22.5 ‐55% Telecom Suu SUU 20.3 27% Food & Beverage UB Hotel ULN 19.3 79% Hospitality BDSec BDS 16.6 ‐40% Financials State Department Store UID 12.2 ‐23% Retail Bayangol Hotel BNG 12.1 12% Hospitality Talkh Chikher TCK 9 10% Food & Beverage Mogoin Gol BDL 8 ‐58% Coal Mining Khukh Gan HGN 6.7 ‐54% Metals Remicon RMC 6.6 ‐33% Construction materials Silikat SIL 5.5 ‐26% Construction materials Genco Tour Bureau JTB 5.3 ‐25% Hospitality Hotel Mongolia MSH 5.3 ‐18% Hospitality
SILK ROAD MONGOLIA INDEX: A Country Proxy
Source: MSE , Bloomberg as of March 31, 2014
№ Company Name Ticker Exchange % since
01.01.2012 MktCap, US$mn Sector1 TURQUOISE HILL RESOURCES TRQ:US New York ‐48% 6881.9 Metals & Mining 2 CENTERRA GOLD CG:CN Canada ‐73% 1137.3 Mining 3 MONGOLIAN MINING CORP 975:HK Hong Kong ‐88% 343.9 Mining 4 CENTRAL ASIA METALS CAML:LN London 214% 238.8 Mining 5 MONGOLIA ENERGY CORP 276:HK Hong Kong ‐67% 187.3 Mining 6 WINSWAY COKING COAL HOLDINGS 1733:HK Hong Kong ‐84% 180.0 Mining 7 APU JSC APU:MO Mongolia ‐19% 171.6 Beverages8 TAVANTOLGOI JSC TTL:MO Mongolia ‐61% 154.2 Mining 9 SOUTHGOBI RESOURCES 1878:HK Hong Kong ‐89% 116.9 Mining 10 MONGOLIA GROWTH GROUP YAK:CN Canada n/a 80.6 Property 11 GUILDFORD COAL GUF:AU Australia ‐78% 57.8 Mining 12 NORTH ASIA RESOURCES HOLDING 61:HK Hong Kong 68% 54.7 Mining 13 ENTREE GOLD ETG:CN Canada ‐66% 52.4 Mining 14 SHIVEE OVOO JSC SHV:MO Mongolia ‐66% 50.2 Mining 15 SHARYN GOL JSC SHG:MO Mongolia ‐44% 46.6 Mining 16 BAGANUUR JSC BAN:MO Mongolia ‐65% 46.0 Mining 17 ORIGO PARTNERS PLC OPP:LN London ‐76% 46.0 Investments 18 BERKH UUL JSC BEU:MO Mongolia ‐24% 39.7 Mining 19 PETRO MATAD MATD:LN London ‐66% 23.8 Oil & Gas 20 Mongolian Telecom MCH:MO Mongolia ‐56% 22.0 Telecom21 FEORE FEO:AU Australia ‐77% 21.5 Metals & Mining 22 ASPIRE MINING AKM:AU Australia ‐80% 19.5 Mining 23 PROPHECY COAL CORP PCY:CN Canada ‐82% 14.7 Mining 24 HARANGA RESOURCES HAR:AU Australia ‐75% 14.5 Metals & Mining 25 KINCORA COPPER KCC:CN Canada ‐69% 13.1 Mining 26 ERDENE RESOURCE DEVELOPMENT ERD:CN Canada ‐82% 10.2 Mining 27 XANADU MINES XAM:AU Australia ‐75% 9.5 Mining 28 EAST ASIA MINERALS CORP EAS:CN Canada ‐94% 5.5 Mining 29 VOYAGER RESOURCES VOR:AU Australia ‐84% 4.3 Mining 30 MODUN RESOURCES MOU:AU Australia ‐81% 2.0 Mining Total 10,046.5
17
MSETOP Index MSCI Frontier Index SILKMN Index
-25%
-78%
160
140
120
100
80
60
40
20
0
Source: MSE (2014), Bloomberg (2014)
+34%
Mongolian Int’l Equities: Time to Buy?
Mongolia-focused Stocks vs Frontier Peers
MSCI Frontier
MSE Top-20
SILKMN
18
Highly correlated to resources exports (copper, gold, and coal) In last two years, MNT depreciated 35% due to increase in current account deficits,
declining commodity prices, and lower foreign investment inflows While MNT may depreciate even further, there is a contrarian case for the
Mongolian currency appreciation in the next 3-4 years
Source: Bank of Mongolia
1,200
1,300
1,400
1,500
1,600
1,700
1,800 US$-MNT rate (March 2012 – March 2014)
MN
T/U
S$
MNT: Contrarian View
Eurasia Capital is a leading Mongolia-focused investment banking and brokerage firm • Launched its operations in September 2008
• Raised over $200m in equity financing for international and local clients
Strong local presence with experienced team of professionals based in Ulaanbaatar Provides full-fledged advisory, brokerage and research services to local and international
companies, private equity groups and hedge funds Advises on strategic and portfolio investments, cross-border M&As and capital raising Advised on deals in Myanmar, Mozambique and other frontier markets Eurasia Capital is the multi-award winning firm, recognized by leading finance publications:
Best Investment Bank Awards by Euromoney, EMEA Finance, Global Finance, FinanceAsia, World Finance and Business New Europe
19
Eurasia Capital
20
EURASIA CAPITAL Ulaanbaatar Suite 301, Regency Olympic-16 Ulaanbaatar Tel: +976 77119799 www.eurasiac.com
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