Frontier Investing: A Mongolian Adventure
Sometimes primary search requires late nights reading, grinding away on a spreadsheet or digging through mountains of data...and sometimes the search takes you to Ulaanbaatar, Mongolia.
It’s all about primary research my friends. Primary research makes or breaks the best investment ideas. Finding the puzzle piece that, when dropped into the mosaic, makes the picture clear is what it’s all about for an analyst. Sometimes the search requires late nights reading, significant time grinding away on a spreadsheet or digging through mountains of data...and sometimes the search takes you to Ulaanbaatar, Mongolia.
My search for one puzzle piece took me from Singapore to “UB” (as the locals call it) in 2013. More specifically, I was there to meet with the management team of Mongolian Mining (“MONMIN” because I talk in tickers). MONMIN was unusual in that it had issued a rather large USD denominated high-yield bond a few years earlier, a feat for which its advisors won numerous awards. The Company was in the process of developing mining operations that, according to its forecasts, would make it a significant supplier of metallurgical coal to China. Met coal, as it’s known in the business, is used in the steel manufacturing process and, at the time, Chinese demand for steel was massive.
Like most mining businesses, MONMIN’s initial plans had proven ambitious. They were behind schedule with the mine development and also faced some unforeseen and lesser understood/appreciated logistical issues in getting product from the mine to the Chinese end users. I was in UB to talk to management about these issues. If they were short-term issues, MONMIN’s bonds were a screaming buy. If these issues were insurmountable, shorting the bonds would make me a legend at my firm. I decided to spend a few days traveling to UB as part of an investor trip sponsored by a large investment bank to try to figure it out firsthand.
UB was designed to handle a population of around 400,000 people. When I arrived, the conservative estimate put the number of habitants closer to 1,200,000. Needless to say, its infrastructure was taxed. UB’s climate is similar to my home city, Minneapolis, save for having winters that are far far colder. In addition, the city’s air quality in the winter is among the worst in the world as its then source of electrical power, a large coal fired generation plant, was built directly downwind of UB. Residents also rely on charcoal fired personal heating units in some cases, adding to the thick smog during the coldest months.
Foreign money flowed into the economy given the abundance of natural resources including coal, iron ore/taconite and gold. I counted ~50 Mercedes G-series vehicles during the one hour drive from the airport to the city center. My hotel, the Blue Sky Hotel and Tower, stood as a shining symbol of the recent economic boom. At night the buildings in the city center were lit beautifully.
The meeting with MONMIN was the last on the schedule for my two-day trip. Before the main event, I was to meet with a few local banks, a local telecom company, and also the Minister of Finance and his team.
The bank meetings were eye opening. Loan growth exceeded 30% and write-offs were extremely low...much like subprime in the U.S. during the glory days. Loan growth of that magnitude can hide a lot of problems. Bank executives told of making loans against everything from mining vehicles to livestock, the latter being completely untraceable and payments for which were made at landmarks instead of addresses as the borrowers were nomadic. Another group spoke of their desire to start securitizing residential mortgages and create a market like we have in the US. A major US-based investment bank had recently purchased a minority stake in a local bank and other banks were trying to catch up and also find a way into this growth market.
The telecom meeting was similar. The company’s management team was proud of having rolled out what was then fairly basic tech and coverage based on western standards. After their official remarks they were hounded by other investors who wanted to know about the 3G/4G roadmap. The bankers in the room could sense the tension and obviously were underwhelmed, hoping for better news to carry back to their clients whom they had hoped to pitch as potential buyers for the local mobile service provider.
Next was the meeting with the Minister of Finance. The Ministry of Finance is housed in a crumbling Soviet era building. Think massive doors, thick walls...function over form all the way. As we entered the meeting room, we were greeted by a group of photographers. The Minister joined shortly thereafter and stopped for a photo while shaking everyone’s hand. As the meeting began, we were told how appreciative the Minister was for our interest in investing in Mongolia. No doubt photos of this meeting were used later for some sort of Ministry public relations.
Time for dinner. Fried starches, deep fried goat head (full head, eyes included), soup of ghee and yak milk. The latter must be consumed quickly while the ghee is warm, least you end up with significant solids in your soup. And vodka...lots and lots of Russian vodka.
Then the fun began. The local sponsor was excited to take us to his club. The group piled into a school bus and drove across town in the dark. For some reason I felt it important to try to remember the directions back to the hotel, in case I ended up walking back alone later in the evening. After paying the $10 cover, we found ourselves alone in a three-level club-setting venue sponsored by Johnny Walker. The whiskey started to flow and the club began to fill. A cover band from Manila began their set with “Underneath it All” by No Doubt. A “Top Gun” themed laser show was projected onto a large screen behind the band and featured F-14s flying back and forth. After the first song, the lead singer stopped and asked me (specifically me) for a request...that’s when I lost it. We had reached a level of absurdity that even I couldn’t handle. After another hour of clubbing, we headed back to the hotel, thankfully together...in the bus...not on foot.
I awoke at 4am for my fantasy football draft. Again, completely absurd.
The meeting with MONMIN went well. Among other things, I learned that the logistics problems were due to rail issues. Mongolia used Russian gauge rail in their railroad system, which was incompatible with the Chinese system. The Russians worried that China would invade via rail and purposefully created an incompatible system. Coal needed to travel from the mine to the Chinese border on Mongolian rail and then transfer to a Chinese train for transport to end users. Not perfect, but not the end of the world. Plans were being developed to build compatible rail from the mine to interface with the Chinese system. Management also suggested delays in ramping volumes were normal growing pains and would correct in a matter of quarters. This would leave the company in a better cash flow situation.
My flight back from UB took me through Beijing. I was delayed at customs for over an hour and asked repeatedly if I was really Russian or if I had been to Russia despite the lack of passport stamps to support any of these assertions/questions. Apparently all bald, tall white males are Russian. Perhaps the amazing walet I purchased at the UB airport gave the Chinese customs agents some heartburn?
Over the next year I would trade MONMIN bonds successfully both long and short. In the end, MONMIN ended up going through a restructuring as its plans ultimately ended up being too ambitious.
I was proud of myself. I had done the work and the primary research had led to successful trades. At my company’s end-of-the-year party, the head of our office brought up my trip to Mongolia...and then, unjokingly, asked “why?” I was not a legend...I was an analyst who had gone to extreme for the sake of extreme.
And “why” indeed, dear reader? While the story will live with me forever, all of this was over the top, too much, too far. Surely I could have spent my time on another idea, something that didn’t require such extreme. The point of the story...
If you find yourself drawn to your “Mongolia,” stop.
Yes, you might end up with a fun story, maybe even a trade, but you shouldn’t have to go so far to find investable ideas.
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