Going public: Mongolian IPOs could stand out in a lagging global economy

Though 2012 looks like a breakout year for Mongolia, the economic outlook for much of the rest of the world seems to be dull at best. One of the key questions for Ulaanbaatar’s investment community is how much foreign interest there will be in 2012, and whether Mongolia will stand out as a good investment option or be dragged down by outside factors.

On the surface, Mongolia looks poised to serve as a strong option for portfolio investors in search of good value and counter-cyclical opportunities. GDP is expected to increase significantly in the next few years as receipts from Oyu Tolgoi and other large-scale mining projects flood the treasury and ripple through the economy. Even though the economy’s exposure to softening commodity prices is a factor, the new mining production should be an overwhelming positive.

ON THE HORIZON: Planned initial public offerings (IPOs), such as that of the state mining company, Erdenes-Tavan Tolgoi, should serve as an invitation for foreign investors to familiarise themselves with the Mongolia narrative. While the outlook on the Mongolia Stock Exchange is positive, sentiment in traditional financial centres like London and New York is distinctly negative. Many foreign investors will see better opportunities for profit in Mongolia than at home, but fear often trumps fundamentals and money can end up staying close to the source, even at lower returns.

This mix of market factors was on display in a December 19, 2011 statement by global ratings firm Standard & Poor’s (S&P), which boosted its outlook on the country to positive from stable. S&P said it was watching the country with a view to a sovereign rating increase, but reliance on commodities was acting as a constraint.

It appears that the cost of Mongolian stocks will be considered to be good value, particularly when compared to their underlying worth. Opportunities such as the Erdenes-Tavan Tolgoi stock sale will come cheaper when commodities prices are on a downward trend.

MINING INTERESTS: Erdenes-Tavan Tolgoi is not the only one likely to come to market. A study by the Trade and Development Bank (TBD), the country’s largest lender, estimates that local mining interests are expected to raise between $10bn and $20bn in the coming years. Foreign mining companies with local interests are encouraged to list in Mongolia as well, which is expected to add to the total. For domestic firms, the temptation to wait until the market would be willing to pay a higher price is less than in a typical situation because Mongolia is eager for its mines to start producing.

The Erdenes-Tavan Tolgoi IPO, now planned to take place in early 2012, before the June 2012 elections is expected to be the highlight of the year for Mongolia’s capital markets. The firm will list both domestically and on the London bourse simultaneously as the local market lacks the size to provide the company with the capital it needs. As much as 30% of the stake is designated for foreign investors, with another 10% for local companies. About 10% will be given to Mongolian citizens, as required by law, with the government holding on to 50%. A $2-3bn result from fundraising could value Tavan Tolgoi at about $10bn and double the market capitalisation of the Ulaanbaatar stock exchange, The Wall Street Journal reported in January 2012.

LIQUID STRENGTH: The IPO is expected to increase Mongolia’s investment appeal for global investors, at least some of whom will view the opportunity as a more attractive one than the defensive stock-market plays available in their home countries or other developing markets suffering from the shaky global economy.

The market remains among the world’s smallest and least active, and that is a significant disincentive to invest. However an investment now, if held for a year or two, seems certain to be sold in a more liquid market. New listings will not come exclusively from the mining sector – local companies in other sectors will likely come to market for between $3bn and $5bn in the coming years, the TDB study projected. Mergers and acquisitions will also play a role. Companies listed in Mongolia, but also on some of the other major mining-focused stock exchanges are all potential candidates.