Hong Kong-listed Companies as Major Acquirers of Resource Assets in Mongolia. Over the last 12 months, Mongolia has become an attractive investment destination for the companies listed on the Hong Kong Stock Exchange (HKEx). Attracted by the country’s huge mineral resources, the HKEx-listed companies have become the biggest acquirers of Mongolia resource assets since the second half of 2009 ($966mn worth of M&A deals or over 90% of total).

Asset Injections

All recent Mongolia M&A deals in which Hong Kong companies were involved have been completed through injections of resource assets into the existing publicly listed companies. Before acquisitions, these companies engaged in a diverse range of activities and industries including agriculture, waterworks, IT, clean tech, plastic products and even manufacturing of toys and gifts.  Following acquisitions, these below HKEx-listed  companies are now primarily Mongolia-focused resource companies:

• Bestway International Holdings (0718:HK), an investment holding company engaged in trading of plastic products, has acquired two tungsten mines in Mongolia for HK$940mn (US$121mn) in July 2009
• North Asia Resources Honldings Ltd (0061:HK), formerly known as Green Global Resources Ltd. acquired 100% of North Asia Resources Group Ltd., a private resource company in Mongolia, for HK$1.76bn (US$227mn) in December 2009
• Kiu Hung Energy Holdings Ltd (0381:HK), an investment holding company with businesses in energy, gift and toy industries, acquired coal assets in Mongolia from First Dean Holdings Ltd for HK$1.4bn (US$180mn) in March 2010
• Solartech International Holdings Ltd (1166:HK), a manufacturer of cables, wires, connectors and terminals, has acquired a 87.9% stake in Sun Progress Ltd which owns copper-gold-silver mine in Mongolia for US$193mn in May 2010
• Ming Hing Waterworks Holdings Ltd (402:HK), engaged in waterworks, technology, engineering acquired a number of coal, gold and copper mining and exploration licenses in Mongolia for HK$1.94bn (US$245mn) in June 2010
• Mongolia Energy Corp (0276:HK), formally New World CyberBase Ltd was the first HKEx-listed company to acquire a resource asset in Mongolia through asset injection. It paid HK$1.2bn (over US$150mn) for a coal mine in January 2007.

Overpaid Deals

In our view, most of these companies have overpaid for these earlier stage resource assets. Poor post-acquisition share price performance only underscores investor concerns (Solartech is down 75% since May 2010 deal announcement). Owners of target companies with Mongolian assets (primarily mainland Chinese and Hong Kong private investors) are clear winners as they have disproportionally benefited from these deals.

More asset injections to come amid zeal for “Mongolia resource play”.

We expect more Hong Kong-listed companies to pursue M&A deals in Mongolia through asset injections in a quest to transform into “resource play”. Some small-cap companies may find too tempting to acquire resource assets in Mongolia in order to revive their sagging fortunes and join the growing league of Mongolia-focused resource companies at the HKEx. At the same time, the private owners of resource companies in Mongolia would target small-sized HKEx-listed companies in their effort to seek “back-door listing” through lucrative reverse takeovers.

To read full research note in English and Chinese please visit www.eurasiac.com

US Embassy seeks Mongolian applicants for Humphrey Fellowships and Fulbright Foreign Language Teaching Assistant Program for 2010-2012; application deadline is July 19.

The US Embassy in UB invites any interested Mongolian citizen living in Mongolia to apply for two available grant programs that provide up to one year study and professional experience in the US. The Hubert Humphrey Fellowship is a one-year, non-degree professional exchange program that brings mid-career professionals to the US. For further information, including application and eligibility requirements, go to http://mongolia.usembassy.gov/sholarship_announcements/test.html

The Fulbright Foreign Language Teaching Assistant Program (FLTA) for 2011-2012 brings Mongolian teachers of English, and other foreign English teachers, to the US for the 2011-12 academic years to strengthen foreign language instruction at US colleges and universities while providing foreign teachers of English with the opportunity to refine their skills, increase their English language proficiency and expand their knowledge of American culture and customs .The grant is for one academic year and is non-renewable.  For further information, including application and eligibility requirements, go to http://mongolia.usembassy.gov/flta_announcement.html

Application deadline for both programs is 12 noon on July 19, 2010. Both programs are administered by the Public Affairs Section of the US Embassy,  Big Ring Road, XI  Microdistrict, Ulaanbaatar, UB – 13, P/O Box 1021, Telephone: 312372 or 329095 ext 4424 or 4729.

Source: NAMBC Newsletter May 11, 2010.  Visit NAMBC website here: North America Mongolia Business Council.

President Ts.Elbegdorj’s meeting last week with the citizens of Erdenet turned into an indictment of the way legal and judicial organizations worked in the province of Orkhon.

A woman said she had been practically living in courts trying to get the truth established after the court ordered her son to 8 years’ imprisonment for theft of two mobile phones. Many at the meeting sympathized with her, saying they, too, “knew how judges treat poor people and how they please those with money and power”. The audience urged the President to boldly carry on with his plans to reform the judiciary so that reliable justice was available to all.

After listening to numerous cases of abuse of law and power in the judiciary, the President explained the core tenets of his judicial reforms agenda and assured citizens that “I do have the strong will and I am committed to fulfilling my pledge”.  However, he cautioned of problems on the way. “Frankly speaking, I am not fully convinced that authorities of some organizations share the same belief and conviction. Those who acted irresponsibly are protected by legal provisions, and their wrong actions are concealed from scrutiny. A thorough overhaul is needed, not patchwork corrections and we are working on our draft law,” he said, urging legal and judicial officers to respect human rights in the discharge of their duties.

Source: Montsame; highlighted in the BCM Newswire by Business Council of Mongolia

Goldman Sachs is believed to have filed a case against Mongolia in an international arbitration court in matters relating to Mongol Gazar and the Olon Ovoot mines.  This news comes in the wake of unconfirmed but strong reports that the Mongolian Government has lost the case against the Russian-owned Altan Dornod.

Mr. B.Lhagvasuren, director of the Inspection Department at the Central Bank, has denied any information about Goldman Sachs filing any case
Mr. Ts. Myanganbayar, a business magnate, mortgaged the Olon Ovoot gold mine license to several banks and to Goldman Sachs to borrow a total of MNT 210 billion. Of this, Zoos Bank, now known as State Bank, gave him MNT 60 billion, Anod MNT 30 billion, and Goldman Sachs MNT 15 billion.

Goldman Sachs is a global investment banking and securities firm but is not registered in Mongolia, nor does it have any accredited representative here. Accordingly, it may not have the legal right to enter into any commercial transaction in the country.  A man with only a visiting card is said to have been representing the company to meet Mongolian officials.  Nobody knows anything more about him, or what position, if any, he holds at the company.

It is believed that the Olon-Ovoot license was mortgaged to a company calling itself Goldman Sachs International.  The Mineral Department agreed to the mortgage but this is now being contested as mining licenses can be mortgaged only to banks or non-banking financial organizations and they have to be legal entities in Mongolia.

Source: Ardin Erkh newspaper; translated and delivered via the BCM Newswire by Mongolia Business Council

Overview: Mongolia has a developing judicial system, sometimes even described as “rotten to the core”.  People need to do due diligence before coming to Mongolia to do business.  Following the law to your best ability from the beginning will help prevent issues later.

For business news, the state budget containing 76 Billion tugrugs or 1 billion tugrug per each MP, has been passed, even after a veto by the President of Mongolia.  Millennium Challenge Account is investing more than hundred million USD for clean air and road infrastructure projects.  Boroo Gold mining company has agreed to donate 1 million USD for new national park being developed in Ulaanbaatar.

For “Mongolia Business” podcast update, we received some recommendations from one of our listeners.  We also received a five star review on iTunes.

Podcast can be downloaded from iTunes or from our website.  For directions, visit: Mongolia Business podcast

This week’s podcast talk show was recorded on December 18, 2009 and published on December 20, 2009.  Below are highlights, not a verbatim transcript, of the recording.

Mongolia Business Blog PODCAST update

• We received a suggestion for improvement from one of our listeners.  Bachi Nyangar mentioned that we should have a starting and ending music and maybe a female co-host.  He also suggested that we start covering mining stock prices and getting sponsorships for the show.
• We also received our first five-star review on iTunes.  Mendorshikh, young Mongolian studying computers in the US, is a big fan of our show and mentioned that our podcast is THE FIRST EVER Mongolian podcast in the world.

Some business & mining news from last week:

• There was a big news event over the past week with the 76 billion tugrugs in the state budget.  This 76 billion was to be 1 billion per each parliamentary member to spend on their own districts.  This portion of the state budget received quite a lot criticism as being a “pork barrel” spending.  Media outlets pointed out that the spending of 1 billion by each MP is going to lack transparency and that the funding would have been much better spent on larger national issues such as healthcare, education, and infrastructure.  Mongolian President Elbegdorj used his veto powers to veto this bill.  Some MP’s joined in on the call and refused to support the bill.  However, in the end, it was approved with 40+ MP’s voting for their rights to receive 1 billion each.
• Boroo Gold mining company agreed to invest $1,000,000 for the new National Park Project for Ulaanbaatar.  The public and media have been questioning the 76 billion tugrugs that was approved as part of state budget and why we Mongolians cannot ourselves spend the money on important matters such as healthcare and education.
• Millennium Challenge Account is going to invest in two new projects: Clean Air Project ($127 million) and Road Project (road between Choir & Sainshand City and road to Nalaikh due in about three years).   MCC is chaired by US Secretary Hillary Clinton.
• Ivanhoe Mines announced it will spend $786 million this year on ramp-up for mining the Oyu Tolgoi mine site
• H1N1 curfew ended few weeks ago.  Minister of Health announced it doesn’t know what to do with all of the Swine Flu vaccines.  They arrived late, but now that they are here… nobody wants them now.  Just a few weeks ago, people could not walk into buildings without a mask
• Because of the H1N1, there will be no state funded New Year’s party.  Maybe we can get the MP’s to pitch in from the
• Lots of foreign aid to Mongolia, but what is Mongolia itself doing?  Maybe we need to be more responsible and take matters into our own hands?

“Mongolian Law and Legal Environment”

Interview with guest speaker James Liotta, Managing Director of Lehman, Lee, & Xu.  Below is an abridged highlight of what was discussed.  It is not verbatim.

MONGOLIA BUSINESS BLOG: Can you briefly describe Lehman Lee & Xu and what it does?

• JAMES LIOTTA: Lehman Lee & Xu is a Mongolian firm with networks throughout Asia and has been in Mongolia for about seven years.  Company focuses mainly on mining and private sector, but it also works with NGO’s and governmental organizations as well.  Over the past seven years, there has been a growing need for development of rule of law.

MONGOLIA BUSINESS BLOG: Can you describe the legal environment of Mongolia for people looking to do business & invest in Mongolia?

• JAMES LIOTTA: #1 thing I recommend to anyone is to do “due diligence”.  There are a lot of cowboys that come here and think they can do anything they want.  There is a lot of law out there, and when implanted, it can cause some headaches if you are ill prepared.  It is a civil law system.  There is more help to develop the Mongolian legal system.  There is regression in rule of law in Mongolia.  There was a recently published review which called the Mongolian judicial system as “Rotten to the Core”.

MONGOLIA BUSINESS BLOG: What are the major challenges for your clients?

• JAMES LIOTTA: We have a diverse group of clients.  The biggest problem is that they can’t count on the judiciary here.   The courts do not appear to be separated from politics entirely.  The courts do not seem to be using or importing sophisticated concepts of law.  For instance, if there is a complex commercial matter, the judge who has opened the case is not going to be equipped to properly handle the case.  The problem is not that always it is the case of corruption, but clients need to understand that they are entering into a developing judicial system.  And, their best defense is to comply with the law as best as possible…

MONGOLIA BUSINESS BLOG: So what happens that when clients do end up in courts?

• JAMES LIOTTA: I think it is pretty obvious that courts do have preference to Mongolian companies and individuals… I think I should divide it up here.  There are those who are “cowboys” who have not made any efforts to comply with the law.  They often do get slapped with fines, and they probably should be fined.  The clients I feel sorry for are ones that do everything they should and still get fined.  There is sometimes a notion that “foreign entities have the money; why not fine them?”  What we recommend to our clients is to try and take the arbitration outside of Mongolia…
• …

To get the full interview, you will need to either listen or download the podcast.  Please visit our podcast page: Mongolia Business podcast

Other topics covered with James Liotta:

• Rates of law firms… Some are very expensive… Lehman’s rates are often lower than other Mongolian firms and quality is one of best.
• Jay first came to Mongolia in 2000 as a Peace Corps volunteer.  Has been in Mongolia for 6 years during past 9 years.
• Working on a manuscript “Rule of Law and Legal Culture of Mongolia” due to be published in the next few months… Incorporates things such as “How Chinggis Khaan (Gengis Khan) used rule of law to rule Mongolia…
• Access to Mongolian law has improved
• #1 advise: Do your due diligence
• Likes seeing students grow develop… Practicing law in Mongolia is extremely frustrating, but also extremely exciting… The book on rule of law in Mongolia with Professor Lundendorj…
• I love Mongolia and Mongolians, but have zero sympathy… Buck up Mongolia!  Instead of making excuses or going in the wrong direction, work together as a team and make it happen.  I’ve seen firsthand that when Mongolians work together, there are some pretty amazing results that can happen.

To listen, to download, or to subscribe to the podcast, please visit: Mongolia Business podcast

To contact us with questions, comments, & suggestions, please email us at MongoliaBusinessBlog (at) gmail (dot) com.  You can also follow us on twitter: @MongoliaBiz.

Today, while going through some articles on Mongolia, I ran across an article that happened to cover the Mongolian stock market by a stock market guru named James Passin.  It was a lucky find as the article mostly talked about Berrylium.  Anyway, please read on.

As you will find, James is very bullish on the local Mongolian stock market.

Source:

• The Energy Report (TER), interviewed by Karen Roche, Publisher  11/19/2009
• http://www.theenergyreport.com/pub/na_u/1214

Mongolian Stock Market Overview

TER: Any other regional international plays that you can discuss with us?

JP: Ivanhoe Mines Ltd. (NYSE:IVN, TSX:IVN) , the Canadian exploration company, finally executed an agreement with the Mongolian government with respect to the development of Oyu Tolgoi, the world’s largest undeveloped copper mine. This is a massive mine that will generate $5 billion of revenue per year for over 50 years. While this is a positive development of Ivanhoe, a stock that we’ve been trading from the long side all year, it will be much bigger story for the Mongolian stock market.

Mongolia GDP is only about $5 billion, so Oyu Tolgoi, or OT as the mine is called, will transform the prospects for employment and per capita GDP growth. A great wall of domestic liquidity will support the local stock market, creating a new bull market which will last for decades. The local stock market currently has depressed valuation and almost zero liquidity. Mongolia has structural similarities to other emerging markets that started out with very low market capitalizations, such Vietnam or the smaller Gulf states. There are 24 mineral projects that have been deemed strategic by the Mongolian government and that represent potential sources of commodity exports. The Ivanhoe deal marks the beginning of the Mongolian mining boom and I think the most leveraged long-term way to play this mining boom is through the local stock market.

TER: How does an individual investor play the boom through the Mongolian stock market?

JP: There are no restrictions on foreign ownership of stock and the currency is freely exchangeable. It’s easy to open up a fund brokerage account. The hard part is finding shares to buy because the market is very thinly traded. It’s possible to get a small amount of stock from time to time, although the entire market capitalization is only $500 million and the free float is much smaller. I think that it’s certainly worth taking time to do a little bit of research and look at some of the larger stocks that are listed on the Mongolian stock exchange.

TER: You mentioned there are 24 mineral projects and the big one is Ivanhoe with copper. With the recession worldwide, would we expect to see any return from anything in Mongolia for the next five years?

JP: The copper prices had a massive recovery. OT would be profitable at current copper prices. And Mongolia has other commodities, including coal, uranium, and iron ore.

TER: Thanks James. Interesting to talk with you, as always.

Describing him as “the Indiana Jones of frontier stock markets,” the Financial Times praises James Passin for visiting “rough, difficult places…rather than swanning around the more comfortable nightclubs…” A graduate of St. John’s College, James majored in philosophy and classical literature. He is a former editor and research director at investment newsletter Taipan. Passin co-founded and manages Firebird Global Fund and Firebird Global Fund II. James serves on the Board of Directors of National Investment Bank of Mongolia; Vangold Resources, Ltd., a company listed on the Toronto Venture Exchange; Sharyn Gol, a coal producer listed on the Mongolian Stock Exchange; and Maghreb Minerals PLC, a mineral exploration company listed on AIM. He also serves as a director of several private, venture-stage international resource companies.

DISCLOSURE:
1) Karen Roche, of The Gold Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Mega Uranium (TSX:MGA), Vangold Resources Ltd. (VAN:TSX.V)
3) James Passin – I personally and/or my family have direct or indirect exposure to the following companies mentioned in this interview: UEX Corp., Mega Uranium Ltd., IBC Advanced Alloys.