A rare insight into potential mining powerhouse, Mongolia...
ERIC ZURRIN is director general of Resource Investment Capital, living and working primarily in Mongolia where he believes a copper and Gold Mining boom is now underway.
Responsible for ResCap's operations in Mongolia – and coordinating capital sourcing through partner distribution networks in the international markets – Zurrin joined the firm in 2010 after gaining nearly 10 years of investment banking experience with UBS Investment Bank's Global Industrial Group in London, as well as BMO Capital Markets in Toronto and London.
Here Zurrin gives his insider's view of copper, Gold Mining and other Mongolian opportunities to The Gold Report, showing how Mongolia, which has a land area one-sixth that of the US, but a population of less than three million, holds the potential for developing into a major minerals producer.
The Gold Report: Thanks for joining us today, Eric. Most investors don't really have Mongolia on their radar. Why do you think they should and how did you happen to become involved in that country's investment markets?
Eric Zurrin: Mongolia will be one of the key global mining stories for the next 20 years. It's a simple story driven by emerging market demand for resources, primarily from China, which accounts for 90% of Mongolia's exports. The importance for investors is the speed of the country's growth and how to get exposure to it. In the first quarter of 2012, gross domestic product grew by 17% real, 30% nominal year-on-year Q1 growth. For 2011, real growth was 8%, but we're expecting to see real growth of 15% in 2012. So as an investment destination, particularly in today's climate of lower global growth, Mongolia is extremely attractive.
I found myself in Mongolia due to my mining background in investment banking going back for the last 10 years in North America and Europe. I came out of the UBS mining team in London and have been backed by a private equity group.
TGR: It seems that Mongolia first got on the horizon when our old friend, Bob Friedland, became involved there over 10 years ago. He was probably one of the early pioneers in getting Western companies to exploit Mongolia's natural resources. What's happening there?
Eric Zurrin: Friedland has been involved in Mongolia for about 15 years, and he is undoubtedly one of the early visionaries for frontier resource investors. Oyu Tolgoi in Mongolia is the world's second largest, undeveloped copper-gold asset. It is the backbone of the Mongolian economy and will be for the next 50-60 years. The capital expenditure bill at Oyu Tolgoi is $7 billion, of which 80% has already been spent.
In its first 10 years, Oyu Tolgoi will produce 650,000 ounces gold and 600,000 tons copper annually, and, importantly for Mongolia, will result in billions of dollars of royalties and taxes for Mongolia.
TGR: It seems as if there was a little finagling last year between Mongolia and this project over how much Mongolia was going to end up getting out of it.
Eric Zurrin: That is correct. Last October, headlines coming out of Mongolia talked about the Oyu Tolgoi interest increasing to the Mongolian government. A new foreign investment law has been passed, after considerable watering down by local and foreign businesses. A former prime minister and president has been arrested and is on trial. These are important domestic political issues in the context of a national election that takes place June 28. This will be one of the most important events in Mongolian history. It will set the government up for the next four years and, likely, for the next two to three terms of government, as the incumbents ride the tide of what will be incredible growth in one of the fastest-growing countries in the world. This is a fiercely competed election.
TGR: What's at stake? Are there competing factions that have some drastically different ideas? Or is it just about who gets to pull the strings?
Eric Zurrin: There are two leading parties, the Democratic Party and the Mongolian People's Party. Both are pro-business; both share very similar ideologies and a similar mandate. Three of the last four governments became coalitions, despite one of the parties typically having a majority. At the last election, the coalition controlled 90% of the Parliament and set out a framework with consensus decision makers. Although it takes a lot longer to get things done in Mongolia because of this process, it does set out widely adopted and endorsed policies that guide the country forward.
TGR: What's the level of corruption or lack of corruption in Mongolia? How straightforward is its system?
Eric Zurrin: In any frontier market, you're always going to see some issues around corruption. Mongolia's democracy is only 20 years old and is going through growing pains. It's setting out rules and being increasingly strict to the letter of the law around keeping all businesses and politicians in line with Western standards. As more foreign investors and money come into the country, those are subject to rules in the US, the UK and Australia, which have their own corruption standards and bribery acts. These are now being brought into Mongolia as adopted standards.
TGR: It sounds as if Mongolia actually had an opportunity to build a system from the ground up without decades or centuries of corruption in place.
Eric Zurrin: It's obviously a sensitive topic and one that we've seen across Africa, Russia, China and Kazakhstan. Because of the size and scale of some of these mining projects, the incentives just become far too distant from the reality of the people setting up policy and rules. What you have are these massive projects being governed by individuals who are sometimes being paid $800 per month, and signing off on $1 billion checks. There's a massive disconnect there, which is coming into line in Mongolia. The rules being put into place are all great steps forward for the country.
TGR: How strong is China's influence on what's going on in Mongolia as far as the development and maybe even the government?
Eric Zurrin: Mongolia's lifeblood is essentially China – 90% of the exports last year were China-bound, but China is also Mongolia's Achilles' heel. Mongolia finds itself land-locked between two of the biggest political giants in the world, Russia and China. To the south, the Chinese share nearly a 5,000 kilometer (km) border with Mongolia and have the strongest hand of anyone because the Chinese are the only consumers at the moment, and likely to be for a while, of Mongolia's exports. Mongolia is 1,500km from the nearest seaport, which is in China.
To the north is Russia. Ulaanbaatar, Mongolia's capital, literally means red hero. The Great Wall of China was built centuries ago to keep Mongolia's national hero, Genghis Khan, out of China. So there's a long history between the three countries. Unfortunately, China is essentially calling the shots on some of Mongolia's commodities pricing. Mongolia is a price-taker to the Chinese who pay about $0.50 on the dollar for coking and thermal coal versus what it would pay to the Australians or Canadians for the same seaborne coal delivered to the ports on the Eastern Chinese Coast.
TGR: So China really calls the shots, because it's the only reasonable buyer in sight at this point.
Eric Zurrin: It is. Mongolia will finally begin building 5,000km of rail that will provide an alternative route for Mongolian commodities up through the far eastern Russian ports in Vladivostok and Vostochny. When that day comes, the valuation argument on many of the Mongolian commodity companies will be incredible because it will essentially reset the selling price of what they're producing to a much higher level.
TGR: Are you seeing much investor interest in Mongolian resources from around the world? Or is it still not that high profile?
Eric Zurrin: No, it is. We've been on the ground floor for the past two years and we see investors who actually want to be there and come and kick the tires on their own. We've seen a cross-section of private family offices, high net worth individuals, commodity traders, big and small companies and sovereign wealth funds coming through the office on a regular basis, looking for opportunities firsthand. Some of these individuals and family offices you never knew even existed. You can't Google these investors. These are very sophisticated people who understand the risks of frontier markets and are very open to taking that risk on and looking for exceptional returns. Last summer, we had six of the world's top 250 billionaires literally come through our office.
That shows that Mongolia is on the radar of some of the big investors, and they're coming to take a look for themselves. Some are leaving frustrated because they know something is going to happen but they just can't quite figure out how to get involved. The smart money investors are finding a way in the end.
TGR: How does the average Mongolian feel about all of this influx of capital and interest?
Eric Zurrin: Most Mongolians understand the value of foreign investment. There was $5 billion of foreign direct investment last year versus a GDP of only $8 billion. Mongolians are seeing their lives change. They are seeing roads and apartments being either built, fixed or completely overhauled. They are seeing the value of wages increase and the ability to travel abroad. Improvements in medical standards and social programs will take longer. But these are all improvements that are well applauded domestically. There is always a small minority of disinterested locals who think foreign investors have no business in their country. Sometimes that becomes the more vocal view, but it's not the case in Mongolia.
TGR: Can you leave us with some parting thoughts on the investment opportunities in Mongolia and what our readers ought to consider if they decide they want to get involved in the region?
Eric Zurrin: Mongolia is an investment destination that is too good to be overlooked. It should be a piece of any emerging market investment portfolio, providing exposure to a growth story that has 30% nominal growth and 16-17% real growth, at a time when much of the world is in a very fragile state.
There are a number of ways to get that exposure with varying degrees of risk. You can go as far as being a direct investor in the asset. I personally own real estate in Mongolia. You can do it through listed companies. You can do it through private funds. You can do it by holding cash in a high, 12% deposit rate bank account in some of the most secure banks in Mongolia, which are well-applauded by foreign investors and something we do through the the fund that I co-manage with Luke Leslie and have seen eight consecutive months of positive investment returns since inception at an annualized rate of 20% to investors.
We think listed companies are interesting. They're the safest and most liquid. They are obviously further down the chain in that other investors have participated ahead of the listing. Direct investing comes with its own inherent risk of due diligence, property diligence and illiquidity. The various alternatives are really dependent on individual investor appetites.
TGR: It seems the easiest way for most North American investors would be to invest in US or Canadian companies that have projects going on there. I suppose they can also try to buy things that are listed on the Mongolian Stock Exchange, which we really didn't get into.
Eric Zurrin: We're also putting together private domestic bespoke deals that we're immediately taking public on the MSE and are just completing our first listing. This is another way for investors to participate. Ultimately, it comes down to the individual risk profile, the need for liquidity and taking a long-term view of Mongolia.
Cut away the headlines, the rhetoric and the news ahead of the election, and simply look at the growth and the fantastic tier 1 mines in Mongolia that have already caught the attention of some of the best global mining companies. Look at what this is going to do to a population of 2.8 million people with a GDP of only $8 billion. It's incredible for a small democracy where the rule of law stands, where there are no religious sectarian views and there's a very young, ambitious population, with a free-flowing currency and market economy. The recipe doesn't get much better than that for frontier investing, in my view.
TGR: It is a very interesting situation. Thanks a lot for joining us today.
Eric Zurrin: I appreciate you having me.
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