Mongolia: The Ultimate Frontier Market Investment Opportunity

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THE ULTIMATE FRONTIER MARKET INVESTMENT OPPORTUNITY
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Introduction
We must say that sitting down to pen this report was one of the more difcult tasks weve undertaken in the last couple of years. Its not that the story is obscure. By now many have heard about Mongolias incredible boom, to be sure. Weve discussed it almost ad-nausea in the pages of our blog, www.capitalistexploits.com. Its clear that we believe in the opportunity to invest in the countrys growth. Pinning down the people that we needed to talk to wasnt easy to coordinate. These guys are the movers and shakers of Mongolia, and frankly they are busy creating their fortunes. Alas, your editors dont give up that easy. Over the course of the last couple of months weve strung together phone interviews, emails, personal conversations and on-the-ground intelligence from some of the most well-connected players in Mongolias ongoing re-formation. From our research and conversations with residents of Mongolia, its certainly true that the country is as close to the Wild West as an entrepreneur can hope for these days. Those that have dared to lay their claim are nothing short of modern-day 49ers, armed not with pick axes, but rather a boat-load of capital and a battle plan that is textbook, post-Soviet satellite state free-market reform. Before we get into the interviews well give you a brief overview of where Mongolia has been, and where its likely headed. Feel free to skip this part and jump right to the interviews if you think you already have a grasp of the story.
Mongolian History The Cliff Notes Version

Mongolia is a fascinating country with a rich and ancient history. Humans have inhabited this land for over 800,000 years, modern humans about 40,000. Yet it is only in very recent times that Mongolias true riches have been discovered.
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Its hard to think about Mongolia without immediately envisioning its ancient leader, Chinggis Khan. Genghis Khan, as he is known in the West, was born in 1162. His birth name was Temujin. Mongols refer to him as Chinggis Khan (Universal King). Temujin took the title of Chinggis Khan in 1189, and spent the next 6 years uniting the nomadic Mongol tribes. In 1206 he declared himself ruler of the new Mongol Empire. Khan and his hordes conquered most of Asia and European Russia. Their armies extended their reach into Southeast Asia and into central Europe. In 1215 Beijing was conquered by the Mongols. Later China itself would be taken by Khans grandson, Kublai Khan, who established the Yuan dynasty (1279-1368). All dynasties inevitably collapse. The Yuan dynastys eventual demise returned the Mongols to their earlier ways, which included a lot of internal feuding and strife. By the end of the 17th century most of Mongolia was under the rule of the Qing dynasty. This lasted until 1911, when the Qing dynasty collapsed and Mongolia declared its independence. Although declared, de-facto independence was not established until 1921, ten years later. The international community did not recognize Mongolia as an independent nation until 1945. Due to its proximity to communist Soviet Russia, the political system of Mongolia was strongly inuenced by its neighbor. As a result it endured 70 years of one-party communist rule until economic reforms were embraced in 1990, after the fall of communism in Eastern Europe. One of the benets of the Soviets tutelage, so to speak, which is being realized now, was the build-out of Mongolias industries and infrastructure. This also included exploration of natural resources in the 1960s and 1970s, complete with extensive mapping and reconnaissance. The country embraced democracy after the fall, however, losing the support of its communist neighbors led to an economic collapse, poverty and widespread unemployment. Despite the introduction of a new constitution, a multi-party system and privatization moves, Mongolia would remain stuck in a malaise until very recently.
Fast Forward to 1990 and Beyond...

During the last 10 years or so, Mongolias economy has beneted from high commodity prices globally. GDP grew around 9% per annum from 2004 to 2008, and the IMF estimates Mongolias economy will be the fourth fastest growing in the world over the next four years in terms of dollar GDP, expanding by 80% over that period, with an expected GDP growth of 23% in 2013. Mongolia today, for our money, is one of the most promising economies on the planet. Its revenue is mainly derived from the production and export of natural resources, accounting in fact for over 80% of total exports. As you might guess, China is the main market for Mongolias exports, responsible for over 70%. Estimates are that approximately 75% of Chinas imports from Mongolia are natural resource based. In fact, Mongolia exports to China all of its coal, zinc, copper concentrate, oil and most of its molybdenum. Mongolia, although larger than all of Western Europe, is a country of only 3 million people (The CIA Fact Book and the UN differ in their estimates), most of which live in the capital city of Ulaanbaatar. It hosts some of the worlds largest resource deposits, yet it remains virtually ignored by retail investors, who until recently lacked vehicles to invest directly in Mongolias growth. Well introduce you to some of the people that can help you create a Mongolian portfolio.
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While its mineral deposits likely rival those of Australia, most of its people live in abject poverty, with 20% of the working population earning less than US$ 1.25 per day! Dirt roads are the norm, the kilometers of paved roads are less than that of many larger European towns, and youll nd more open space here than in any other place in the world. Despite the poverty and the relatively young free-market, Mongolia will likely be the fastest-growing economy in the world for the next 10-15 years. The GDP will soar, as will asset prices. Proting from this inevitable boom is not as difcult as one would think. The Transition Dig Baby, Dig! Mongolia boasts literally thousands of mineral deposits, most of which have never been properly explored or tested. More than 80 different types of minerals lie in wait, the most prolic being coal, copper, uranium and gold. Even the rare earths are present in economic quantities. Mongolias transition from mineral wealth to real wealth began with a joint venture agreement between mining powerhouse Rio Tinto, Ivanhoe Mines and the Mongolian government. The focus of the joint venture is the Oyu Tolgoi copper mine, which is scheduled to begin production in 2013, with a 27-year estimated mine life. A total investment of close to US$ 5 billion is expected over about ten years to get the estimated US$ 300 billion of mineral wealth out of the ground. That singular investment alone is roughly equivalent to Mongolias GDP in 2009. Think about that, and its only ONE of the many projects slated to come on-line over the next few years. The Tavan Tolgoi project is another that will come into production in 2013. Its the worlds largest undeveloped coking coal mine, with total reserves of 6.4 billion tons. Annual coal output of 30 million tons is expected over the mine lifetime. Mongolias resource potential at todays values is estimated to be in excess of US$ 1.3 trillion! Think about an economy with a GDP of about US$6 billion controlling that kind of mineral wealth. What do you think is going to happen to real estate, nancial services, basic services, retail, etc.? We have a pretty good idea of whats coming. The government is focusing on Foreign Direct Investment (FDI) to bring in the roughly US$25 billion needed to build out the mining infrastructure necessary to develop the top 10 projects on its list, and its not looking solely to China and Russia. In fact, the government is encouraging FDI from elsewhere so as not to paint itself into a corner, and it is pouring in, with no signs of abating. In 2008 FDI was about US$ 685 million. By 2009 FDI exceed US$ 800 million. 2010 topped a billion, and 2011 is on course to continue the trend. Over 60% of the FDI goes into the mining sector. Global mining powerhouses like Shenhua, Peabody, Vale, Xstrata, BHP Billiton, and a number of Russian, South Korean and Japanese consortia are all interested in contract mining opportunities within the country. Indeed, according to ofcial estimates, over the next ve years, production of coal will double, gold production will triple and copper output will quadruple. No wonder these international companies all want a piece of the action.
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Yahoo! is currently bigger than the country of Mongolia!
Mongolias GDP: US$ ~6.13B Yahoos Revenue: US$ 6.32B Source: Fortune/CNN Money, IMF If the FDI continues, and the projects come to fruition, Mongolias economy could average as much as 20% growth per annum for the next decade. If additional deposits continue to be found (likely), and Mongolias infrastructure and services keep pace, that growth could extend longer. We could see the GDP tripling within the next 5 years, with some forecasts seeing it reach in excess of US$ 60 billion by 2025.
Politics The Business of Managing Growth

We focus on management when we invest in a business. When investing in a country you need to understand the political environment (the countrys management) and quantify the risks as best you can. The past twenty years have been explosive for Mongolias economy. The political system has fared well, considering the challenges. Two parties share power in Mongolia, the ex-Communist Mongolian Peoples Revolutionary Party and the Democratic Union Coalition. Although it has the word Communist in it, the CMPRP has embraced free-market principles and has been instrumental in the privatization of state-owned enterprises. Mongolia is very, very different from its neighbors (Russia and China, namely). Mongolia has a free press and open elections. The World Bank ranks Mongolia in the top third of countries in terms of ease of doing business. Thats higher than any of the BRIC countries that are so popular with international investors these days. However, the bureaucracy is indeed intense, and many of the business owners we spoke with for this report cited challenges in this area. The Australian recently posted an article by Paul Garvey entitled Mineral riches drive Mongolias dream transformation. One of the comments that stuck out was from Peter Akerley, the CEO of Erdene Resources, who said, Bureaucracy has been the biggest hurdle; its the biggest issue you face. Regardless, he went on to say that, On the positive side, Im not sure theres anywhere else in the world where you can go out and nd world-class deposits just outcropping from the terrain. Corruption, while not as bad as in many emerging and frontier markets does exist. In 2010 Transparency International ranked Mongolia 116th. That ranking needs to improve if the country is going to truly capitalize on its potential. Turnover in top government posts can be frequent as well, which leads to the perception of instability. Nationalism and populist rhetoric often times accompany leadership changes, which have as its undertones talk of the State controlling more and more of the countries resources and parsing it out as it sees t.
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There is a growing wealth chasm between the average Mongolian and those coming to capitalize on the boom. Growing discontent has caused an increase of political rhetoric around the taxation of mining in the country. Investors are watching with a keen eye to see if the countrys edgling democratic government can do what it needs to do, mainly build out the infrastructure required for growth, improve the laws, encourage and maintain stability and navigate the murky geopolitical waters. This may be Mongolias single biggest challenge! Mongolias politicians also have to dance with their neighbors, the aforementioned Russia and China, both of which dwarf Mongolia in terms of land mass and population. As we stated earlier, this is one of the main reasons the country is encouraging FDI from outside those two countries. Stability will be the primary concern, followed by regulatory reform and geopolitical issues. As Mongolias economy grows, so too the divide between classes will likely increase. The majority of Mongolians are poor and live a rural, nomadic lifestyle. Harsh weather in the last few years has led to the death of livestock and people, resulting in an exodus into the cities and towns. How the government deals with job creation, or employing these new city/town folk, will be crucial. Along these lines, immigration, especially from China, could cause friction in the future if Chinese mining interests take a larger role in exploiting the resources, and Chinese workers take jobs that could go to Mongolians. As it stands, Chinese immigrant workers already make up a large part of the unskilled workforce. Finally, as mentioned several times before, geopolitical pressures will continue. How the government deals with its much larger neighbors is crucial. China and Russia arent known to play nicely. Its no secret that both want access to Mongolias vast resources, either in partnership with Mongolian enterprises, or on their own. Russia has been vocal about its interest in the countrys uranium deposits. Joint venture talks between the two governments are ongoing. How this plays out will be of interest to investors and also to the Chinese, who have made no secret of their plans to continue developing their nuclear energy industry, despite the ongoing Fukushima disaster in Japan and the European move away from nuclear.
Privatization The Road to Prosperity

Not unlike its neighbor Russia, Mongolia privatized many of its assets after communism (1990) by distributing vouchers directly to the people of Mongolia, which could be exchanged for shares. Every citizen over the age of 1 year received the vouchers. At its peak there were an estimated 1 million individual shareholders, 43% of the population, between 475 companies worth MNT17.33 billion. It wasnt a perfect system, but it was remarkable in that it was implemented quickly and effectively. Privatization is usually a divisive issue. In Mongolias case, the countrys constitution was based on state ownership of assets. The new democratically elected leadership was socialist, and the thought of privatization was very new indeed. Despite the government controlling all aspects of the economy, making privatization a difcult proposition, the Prime Minister at the time committed the country to a privatization program. For a very good overview of Mongolias privatization we would refer you to a paper prepared by Georges Korsun and Peter Murrell, both from the University of Maryland. You can read the report in full here.
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The Stock Market
The Mongolian Stock Exchange (MSE) was formed in January of 1991 by a Harvard educated, 27-year old Mongolian entrepreneur named Naidansurengiin Zolzhargal. The initial impetus for its formation was the privatization of Mongolias state-owned assets. As of 2010, the MSE had 336 companies listed. The total market capitalization was around US$1 billion, which was a doubling from 2008s US$406 million. It was the worlds best-performing equity market in 2010. Opening a brokerage account to trade MSE-listed stocks is very straightforward, and it can be done from your country of residence, with no need to travel to Mongolia. We discussed this in a recent issue of Sovereign Man Condential, and we will review a few of the rms we recommend again later in this report. Before you run to open an account lets discuss the reality of the situation. As it stands today, the MSE is wholly-inefcient and ripe for an overhaul. According to Lee Cashell, CEO of Asia Pacic Investment Partners (later interviewed in this report), The market is currently only open for 2 hours per day of trading, between 11 AM and 1 PM weekdays. There is no virtual or remote trading. Traders have to physically come to the oor to input the orders on exchange computers, and access the order book via the Exchanges intranet. Although the last trade can be seen on the MSEs website, the information is displayed with 5 minute delays and the order book is not accessible to non-dealers at all. Such a system creates a major inefciency in trading, as well as difculty managing the execution of trades. To give our readers an idea of a typical days trading, we cut this from the September 21st, , 2011 edition of the www.business-mongolia.com Daily Stock Exchange News page: 31.4 thousand shares of 24 JSCs were traded at the Mongolian Stock Exchange yesterday, totaling MNT 35.0 million. Of them, rates of 10 shares were increased, 12 shares were decreased, and two shares were stable. The total market capitalization was set at MNT two trillion and 11.6 billion. Thirty one thousand shares traded in 24 companies..?! We know of penny stocks that are more liquid than the entire MSE. As far as US$ values for the above mentioned, the current MNT/USD exchange rate is roughly 1265:1 as of the date of this report. That was just over US$ 27,675 worth of stock changing hands on September 21, 2011! Cashell added this, There have been no IPOs since the end of 2007 and, out of more than 300 listed companies, and only 40-50 of them are traded on a regular basis. With such slim selection and lack of reporting and news from these companies, it is difcult to expect a constant ow of trades. These trades need to be pre-nanced to be able to execute in the Mongolian market, whereas most other major markets are settled on T+3 basis, which allows timely reaction for an investor on an opportunity. Finally - larger stocks tend to have less than a 10 percent free oat in the market. These shares also tend to be highly concentrated to only a small number of long-term investors, mostly insiders.
The good news!

A new partnership with the London Stock Exchange (LSE) promises to modernize the MSE and bring it up to snuff with the very latest in trading technology. According to Cashell, it is the priority of the LSE to address the above mentioned issues.
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Altai Khangai, CEO of the Mongolian stock exchange has said that daily management of the exchange, implementation of technology and formulation of rules and regulations will be managed in a broad strategic partnership with the LSE. We would argue that if Mongolia hopes to attract anywhere close to the additional US $45 billion in listings it aspires to over the next 10 years, this partnership has to succeed. Well discuss more on this topic in our premium report on investment opportunities.
Visiting Mongolia
Should you decide to visit Mongolia there are a few things to be aware of. First, and most important, Mongolia allows visitors to stay up to 90 days without a visa. Some countries residents (namely Hong Kong and Singapore) are limited to 14 days. Check with the Mongolian embassy or consulate nearest you to verify your requirements. Visitors from any country planning to stay in Mongolia for more than 30 days must register with the Mongolia Immigration Agency in Ulaanbaatar within the rst 7 days of arrival. If you stay longer than your allotted time, visa-free, and you failed to register, even for reasons beyond your control, you may be stopped at departure, temporarily denied exit, and/or ned. Also realize that Mongolia isnt a temperate country. The winter is long and hard, it would be best to travel in the summer, unless you have a penchant for extreme cold. The city is still mostly heated by coalred boilers, which leads to a lot of air pollution in the winter months. In fact Ulaanbaatars air quality is among the worst in the world. Flights to Mongolia usually transit through Tokyo or Hong Kong. Europeans can come through via Berlin. There are a couple of domestic carriers that cater mostly to the mining companies nowadays. Once youre on the ground, local transportation is a challenge. Paved roads dont really exist outside of the capital city, and trafc within the capital is nightmarish. Hiring a driver for longer stays seems to be the standard advice. For shorter trips either walk or take a taxi. There are several good hotels in the city, but dont expect the level of service you are used to in Europe or North America. In the next section well talk to the guys on the ground. Youll get a good grasp of whats happening in Mongolia and how you can get involved. Well also provide you with contact information for our preferred contact, someone who can help you with everything youll need in the country.
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The Interviews: Our On-The-Ground Network

The best way to get to know a place is to go there and see it yourself, there is no substitute. However we realize that most people dont have the luxury of just jetting off to exotic places like Mongolia on a whim. To help you grasp the opportunities available to investors in Mongolia without actually going there, we interviewed some of the most dialed-in players we could nd. Enjoy!
JAMES PASSIN Firebird Management

James is one of Mongolias shrewdest investors. Having identied the opportunities early, he positioned Firebird to invest directly into the countrys growth. Within the last 6 years James has grown Firebird into a regional powerhouse, with signicant equity and management stakes in many of Mongolias most important companies. Unfortunately you cant participate in Firebird at this time, as the fund is closed to new investors. However, James is involved in a new public company listed in Canada that can provide investors with exposure to his resource-based investment ideas in Mongolia. Well tell you more about it below. Mark: James, tell us a little bit about your background. You were a philosophy major in University. Did that inuence your world view? James: Absolutely. Majoring in philosophy and classical literature inuenced my investment decision making process in a profound way. Mark: How would you classify or categorize that? What would you say would be the most dramatic way that that background has impacted what youre doing and maybe specically your investments in Mongolia? James: The essence of the philosophical approach is to ask questions about underlying forces, underlying processes and underlying meaning. You try to get behind supercial perception. That sort of philosophical process is something that Ive never let go of since graduating from school. Mark: Okay and specically with Mongolia - youve been on the ground there for some time now. Youve seen a lot of changes in the economy and the political climate during that time, and the changes are ongoing. As those changes relate to the markets in Mongolia, what is your mid-term outlook? James: In terms of changes I would talk about two specic types. The rst is quantitative and the second is qualitative. From a quantitative perspective, the most dramatic change is the increased level of liquidity and capital owing around the Mongolian capital markets. This is evident through a lot of different data points, one of which would be the trading volume on the Mongolian Stock Exchange in 2010 versus 2006. The trading volume is up about 12 times.
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In terms of M&A, there is a lot of activity in terms of internationally listed companies with assets predominantly in Mongolia. There is a lot of capital manifesting in high-rise construction and new buildings. Wealth is exploding. The cars that you see on the road, ve years ago you never saw Bentleys on the road here. Now theres not only Bentleys, but Ive even seen a Lamborghini. Anecdotally, were hearing that local brokers are getting thousands, if not tens of thousands of accounts per month, from Mongolian citizens and legal persons that are opening accounts - stock market accounts. I think its important to recognize that theres an intervening crisis. The global nancial crisis in 2008 and the Mongolian banking crisis in 2009 was a real setback to development in Mongolia capital markets and to development in general. All of this growth is in spite of the dramatic setback in 2008 and 2009. Had that setback not happened the actual increase in all of these things would probably be a magnitude higher. In terms of qualitative changes, what Im observing is just the level of excitement and interest in the capital markets and optimism about the economy. Young people are interested in getting jobs in nancial services and the new aspects of the Mongolian economy. The popularity of MBA, business, nance and economics courses of study is exploding. Mongolia is really starting to wake up to, and embrace, the capitalist era. The culture is evolving from a nomadic-dominated society to a mining and money driven economy. A third of the population are still nomadic. Agriculture and livestock are important pillars of the Mongolian economy, but youre having this rapid evolution of the economy which is evidenced in these quantitative and qualitative changes. Overall what were seeing is exponential growth in the Mongolian economy and capital market. This exponential growth is really expressed in numerous different industries. My view is that this exponential rate, in the absence of another global nancial crisis, is going to continue to accelerate. There is a stunning level of compounding growth in spending power and other economic metrics that has the potential to radically increase the price of all assets. Mark: Right, including real estate obviously, and land and businesses. Touching on a couple things you just mentioned - Mongolian Nationals themselves are opening up brokerage accounts at an incredible pace. Mongolia operates similar to other resource-rich jurisdictions like Alaska, and Chile, where the government makes payments to citizens from the resource revenue thats collected. Mongolia has awarded citizens with shares in Mongolian state-owned enterprises as well. Are the Mongolians opening these accounts to continue trading these, to liquidate some of their positions, or to accumulate more? Whats your overall take on that? James: I think that partially its in preparation for the liquidation of some shares that were distributed that were restricted and could not be resold for a period of time. I think its also to sort of play the market. Any type of free training course on investing in the stock market is completely lled to capacity when offered here. Theres a lot of interest in stocks. My view is that there is a huge amount of interest in investing in the stock market from Mongolian individuals. Currently the Mongolian institutions - Mongolian pension funds and insurance companies - dont hold any Mongolian shares at all. Theres some discussion about these institutions holding more shares in the future, but just generally I have to say from both the retail and institutional perspective, Mongolian shares are hugely underweighted here. Theres a strong and growing level of interest in buying and trading in the domestic Mongolian market.
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Mark: Liquidity is obviously the number one problem, right? I was interviewing another gentleman that runs a small fund in Mongolia, a small hedge fund. He was talking about the fact that he was only able to buy 14 shares of one of the larger coal companies. When it takes you a week to buy 14 shares, thats an issue. What do you see as the catalytic event thats going to change that? How do they x the liquidity issue? James: I think rstly if youre involved in the Mongolian market long enough you can start guring out how to buy and sell larger quantities of shares. Liquidity is important and one of the ways that is going to be addressed is, rstly, when Mongolian citizens start disposing of the shares that they received for free, or start buying additional shares. Secondly, the London Stock Exchange, which is managing the MSE under a three year contract, is pushing changes to make the stock market function better. The current market architecture acts as a deterrent to serious international investors. My view is that if the LSE will be successful at pushing forward with the changes, which will help to improve liquidity. Also, theres a concern about lack of transparency and poor corporate governance in a lot of the Mongolian companies, which is an understandable concern. One thing that Firebird has been trying to do is champion more transparency and better corporate governance. An example of this is Sharyn Gol, which is a company controlled by Firebird Funds - it was awarded the most transparent company on the Mongolian Stock Exchange. A lot of the things the company did, including bringing in a top auditor to audit its nancial statements, helped. I think that there needs to be greater investor condence in the integrity of the nancial system, the integrity of the companies that they would potentially be trading shares in. Mongolia has the possibility to have a greater degree of condence and transparency in corporate governance because it is not a dictatorship. It is a multi-party democracy. I think that if you contrast it with other Central Asian countries, which have a lot of issues with religious and tribal issues and lack of political transparency, that Mongolia has the preconditions for having an increased level of condence in its nancial markets and companies, and therefore in the stocks that represent the companies. Mark: Give us an idea where youre currently focusing your capital resources in Mongolia. James: Were focused on the Mongolian Stock Exchange and listed companies. Were very bullish on Mongolian assets and we want to hold as many assets as we can for as long as possible. Firebird also has a private equity arm which controls some unlisted assets in Mongolia. Internationally, we have some investments outside of Mongolia as well. Mark: The majority of the activity is focused on Mongolia, though, right? James: Well there are other parts of Firebird, but in terms of my personal business activity, yes. Mark: Okay. Recently you got involved with a company called Undur Tolgoi Minerals (UTMI) which did a reverse takeover of a Canadian company called Wedge Energy. Can you tell us a bit about UTMI? (Disclosure: Your editors have purchased shares in the UTMI private placement) James: I can talk about it briey. UTMI holds, through its subsidiaries, a 100% interest in a 9,620 hectare exploration license in Mongolia. That license is located 100 kilometers from OT, Ivanhoes property. The property is interesting. Theres copper and gold mineralization at surface, which Ive seen personally when Ive visited the property. Its in a highly prospective region, given the huge copper/gold deposits that exist in the area.
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We acquired control of the asset and then we decided to take it public to help nance exploration and development. We thought the Canadian market would be the best market for that asset. We think theres a lot of potential in copper/gold and other precious metals. I wanted to create a company that could also look at other opportunities in that space. Obviously wed like to get lucky on exploration. Were in the copper belt. Were in the zone that created OT. If our property is anything like OT... If we do hit big at UT, were only 100 kilometers from all the OT infrastructure, so I think were well-positioned to leverage off of that infrastructure. Mark: Switching gears a bit, I wanted to ask a question about M&A. You mentioned theres a lot of M&A going on. Weve spoken to Eric Zurrin at Rescap, who actually introduced us to the UTMI deal. A lot of that M&A is going on in the coal sector of course and recently QGX Holdings got taken out by Mongolia Mining Corp. for like $460+ million. Do you see that M&A activity increasing, and do you see some of these larger companies continuing to take over these smaller ones, or taking over some of these concessions that are oating out there? In general, how do you see the whole M&A landscape evolving over the next 12-18 months? James: Thats a great question. I think on the negative side you have the European crisis and concerns about a slowdown in China, and very volatile capital markets. On the positive side, the wagon is being driven by Asian strategics and they have very strong balance sheets, generally. Also, I think that these strategics are looking at volatility in the stock market and European banks as really being irrelevant to their decision making process. I think the M&A wave is going to continue. The deals that you brought up are in the coal space, and we certainly believe that the M&A in the coal sector is going to continue. I think that a lot of strategics have been mandated to acquire assets in Mongolia. Mongolia has vast amounts of coal. Recently Bloomberg ran a piece on thermal coal prices. The outlook over the next few years is very positive according to their sources. China wants to hold on to some of its thermal coal instead of developing it to keep that as a reserve. The ination in China is at the marginal cost of production. Its very hard to expand production, so it just makes the import story quite attractive. I think on the coal side Japan, post Fukushima, is going to have to continue to be a huge importer of coal. These are long term forces that are driving the M&A. Outside of coal I think there absolutely will continue to be more M&A also. The Mongolian currency is freely-exchangeable. Youve got very progressive policies in terms of tax and regulations. Dealing with the Parliament is a bit tricky for large projects, but compared to other potential places for investment I think Mongolia is very attractive. Mark: So I have two nal questions for you. The rst is about the global nancial crisis. A lot of people (including us) believe that 2008 was just a warm-up and we havent seen anything yet. The global nancial system could actually end up locking up here if we dont get resolution to the European situation. These things just seem to be like dominoes falling one after the other. Obviously frontier and emerging markets are affected the most when something like that happens, and Mongolia, as you pointed out, was no exception in 2008. If we have another 2011-2012 Lehman style event, being that Mongolia is further along than it was then, how will it fare next time around? James: Well rstly the Central Bank, Mongol Bank, is in a very strong position with a lot of foreign currency reserves. Secondly, theres very little government debt outstanding, so the balance sheet in Mongolia is quite strong. Thirdly, I think the Mongolian banks are a lot stronger than they were in
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2008/2009. Of course if there is such a crisis, its going to affect Mongolia, which is very much dependent upon commodity prices and commodity demand. Its geared to cyclical global demand, and if Chinese demand in particular falls its going to impact Mongolia disproportionately. Most of the liquidity coming into the country is to fund mining related/ infrastructure related investments. If there is such a global crisis of that magnitude then Mongolia absolutely will be affected. Ill say two things. One is that its not just Mongolia thats going to be affected. Everythings going to be affected; every asset class in the world, so its not just going to be a Mongolian story. Secondly, in terms of Firebird, historically we were able to acquire assets during the nancial crisis, the last one. Anybody that is in the game and has funding available will be in a very strong position to acquire assets during another crisis. I think such a crisis would be a temporary setback. I dont see that that is going to fundamentally undermine the long term development prospects for Mongolia. It will just maybe slow down some of the short term growth. Mark: So my take away from that is that as an investor, if you were anticipating another economic blip per se, youd be sitting on a decent cash position to be able to take advantage of that. That would be a smart posture to take. James: Yes, and my view is looking out 20-30 years from now. Not that most investors care about such a long term perspective, but looking out 20-30 years, I think Mongolia has the potential to be a Kuwait or a Qatar in terms of GDP per capita. With similar population basics - they have huge resource-driven economies and governments with policies that have enabled building up huge reserves, and building up funds and creating sustainable policies for developing the capital market. My view is that Mongolia, in its government, has enough support in its major political parties to take the political leap for that vision in Mongolia. If you had the opportunity to acquire any kind of assets in a country like Kuwait at the very beginning of the oil boom and you could have held onto those assets, youd be in a huge position to benet from the growth and volume of those assets. I think that is the inevitable destiny of Mongolia whether or not theres a hard landing in China for a few quarters, whether or not theres a Lehman style run in the nancial system. These are ultimately just going to be distant memories when compared to what Mongolias going to look like in the future. Mark: OK, last question. If you had to pick a new career in Mongolia, pretend you werent involved in Firebird, you were just looking at Mongolia. You were a young guy looking to make your mark. Forget about running a hedge fund, forget about M&A, broker stuff. What other things are attractive within the Mongolia economy? What other businesses would you get involved in if you couldnt do what youre doing now? James: Any young person that has the energy and the sense of adventure to try something new, I would recommend moving to Mongolia. The opportunities for wealth creation are so vast that I think its crazy not to get involved in the game in Mongolia. Even beyond capital theres a need for human capital. If somebody has specic skills, training, expertise - somebody like that, theres an upside for them in Mongolia. I think its going to be hard to lose over time if somebody can execute well on any kind of business plan, any kind of investment. But it is a difcult country with a lot of nuances, so one of the key things is to develop the cultural, political and legal contacts to understand the reality of the investment requirement.
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If somebodys able to get up the learning curve then its one of the most exciting countries in the world. A lot of Mongolian expats that live overseas are coming back to Mongolia now. I meet them all the time. The younger generation that had comfortable lives in Europe, in the United States, elsewhere in Asia - theyre coming back to Mongolia to get involved in the opportunities. That also, by the way, is going to help propel the economy even further because these people generally are educated and have experience in other environments and can bring a lot of wisdom and expertise back to Mongolia. Mark: We were talking to Chris de Gruben from M.A.D. He was mentioning anything from a sandwich shop to a wine store, basically you name it, a guy that can run around and help people and navigate the city, concierge type services - almost anything you can imagine. I compare it to Deadwood. Make your mark, set up shop, learn the ways and its pretty hard to strike out unless youre completely missing the boat. James: Yeah, I mean look at the high-end shops like the Louis Vutton store. I think its the most protable Louis Vutton store per square meter in the world. The Mongolians love to shop. I think Deadwood is a great analogy. Its just a matter of knowing what youre doing, but again, I think providing services, getting involved in anything that is of value to other people is going to make sense. Mark: I want to thank you for your time James. Well meet in Mongolia soon hopefully. James: Youre welcome. Any time you want to come out, great. Contact Information for Firebird Management http://www.fbird.com Firebird Managements funds are currently closed to new investors.
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LEE CASHELL CEO, APIP

Formerly a private equity fund manager in Hong Kong, Lee Cashell has been living and working in Asia for 16 years, where he has held various positions within the investment banking industry including China economist, nancial analyst, and corporate nance manager. Lee has acted as an adviser to numerous technology rms, investment funds and government agencies throughout the region. Prior to founding Asia Pacic Investment Partners he served as a private equity fund manager for JAFCO Investments Asia, one of the largest private equity groups in the region with over US$3 billion under management. At JAFCO, Lee was responsible for investments in the Greater China region where he focused on valuation arbitrage opportunities, Internet technologies, construction materials and infrastructure opportunities. Lee is also a founder of The Mongolian Institute for Sustainable Economic Development as well as Zero2IPO, a China-based technology conference organizer. He has been a contributor to publications including Business China, The China Financial Report, The Economist Intelligence Unit, the Mongolia Real Estate Guide and the Mongolian Financial Report. Lee is a member of the Pan Asia Chapter of the Young Presidents Organization. Lee received his undergraduate degree from the University of Delaware with a dual major in economics and political science, and received his masters degree in international business from The American Graduate School of International Management (Thunderbird). Lee wrote his thesis on Emerging Market Portfolio Management with special emphasis on the emerging nancial markets of the Peoples Republic of China. Mark: Youve been in Mongolia for about 10 years now. What were your impressions when you rst arrived in Mongolia a decade ago, and how has it evolved over the last 10 years? Lee: When I rst arrived the city reminded me a lot of Shenzhen, China during the 1993-1994 period. There was a lot of migration from the countryside coming into Ulaanbaatar, in particular. I remember when I was in Shenzhen I had just gotten out of school and I had $70,000 in debt so I had no money to invest. I kind of thought Ulaanbaatar was take two of Shenzhen, China. Just like Shenzhen, there was a fairly good setup with regards to the policies that had been put in place to make it successful. There were very low income taxes and the corporate taxes were around 10%, which in fact is lower than either Hong Kong or Singapore. Theres no capital gains tax - very similar to Hong Kong and Singapore. I think they did this to attract a lot of foreign investment. It certainly attracted me; thats for sure. I just simply found that there were a lot of things that were missing, including a real estate agency, including Western restaurants, including properly run guest houses. There were just so many little opportunities. It was really fantastic. Then the interesting thing was they started discovering the minerals. I would say that the rst eight years that I was in the country - they were going through what Id call the exploration phase, during which time they actually discovered a lot. About 18 months ago we entered into the extraction or mining phase. Thats when we saw the jump. They were drilling from 6.5% and 9.5% during those rst eight years and now were rolling at 15% and next year probably 20+% . That kind of marks the difference between extraction and exploration. That migration has continued very rapidly and now its kind of a crowded city. Its gone from being a fairly
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sleepy, not crowded city to one with extreme trafc jams.
Mark: You decided to focus yourself on the infrastructure side - providing infrastructure for mining and getting involved in mining, getting involved in real estate - kind of the nuts and bolts of what will be Mongolias future growth. You began, if Im not mistaken, focusing on real estate, correct? Lee: Exactly. Mark: And then expanded from there in a vertical fashion, and now you own a cement quarry, a cement company, a trucking company, several different mining interests, concessions, etc. Are any of your current projects shovel-ready? Lee: For the mining were still mostly in the exploration phase but with regards to the cement and the trucking and the construction that I do - really that was to try to defend my prot margin and to defend the quality of the product that we were producing. I had to do it. It was a defensive move. We had construction companies stealing a hell of a lot of money from us and so we had to re them and take over our own projects. We bought a bankrupt construction company to get the license. Then the construction material prices started to double in 2007, so as a defensive move rather than an offensive move, we actually went and bought the cement factory, but we also found that if we hired somebody to deliver the cement for us, we would lose half of the cement off the back of the truck. We vertically integrated in that sense to protect our prot margins and the quality of our product and the timeliness of the products that we wanted to deliver to the market. With regards to the mining, we took more of a venture capital portfolio approach to that because we had very good relationships and we had deal ow in the exploration industry. We went in with a certain amount of money and we bought up these exploration licenses with the intent to go out and explore all of them. As we were exploring them, kind of ranking them, determining which ones we thought had the best potential and harvesting the ones that we didnt really want to focus on - the ones that we thought maybe would be less economic but would maybe be more benecial for someone else to take a look at, we sold one coal license to an Australian company and weve also sold one tungsten license to a company in exchange for 28% of their shares. That company is about to be listed on the Australian Stock Exchange. We bought our portfolio for a couple million dollars and were looking at extracting anything between $30 and $100 million USD from that portfolio as we sell them off. We have one we recently discovered - silver, gold, copper, lead and molybdenum. So thats the one out of the nine licenses that we acquired that were actually going to keep and hopefully actually put the shovel in the ground. Mark: So that will be done more as a joint venture or considered more of a project generator? Lee: Yeah, like a project generator. Either well do a joint venture or well just hire a company to mine it out for us and certainly helping where we can with our team of geologists, as well as our transportation company, as well as the whole entire process of getting approvals for mining licenses. Well be very active in that, but the physical designing of the mine and the digging the stuff out of the ground and the processing of it - I think were going to have to hand that over to somebody. Mark: Understood. I want to go back for a second. Youve been on the ground in Mongolia for a decade. Like you just pointed out, there are quite a few people piling into Ulaanbaatar looking to make their fortune in everything from real estate to mining. You hear some arguments that Mongolia has
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kind of been happening for awhile and if youre not on the ground yet its almost too late. Whats your perspective on that and can you contrast what you said in the beginning about what Mongolia and Ulaanbaatar was like 10 years ago, versus the opportunities for someone just getting on the ground there at this point in time? Lee: Well, I think anytime a country is growing at 15+% theres going to be plenty of opportunity. What were seeing is the evolution of this economy and an increasing depth of products that are available and services that are needed. I think there are a lot of opportunities. There are just not necessarily the same opportunities that were there 10 years ago. To try to come in and become a property developer right now would be very difcult. To try to come in and become a cement manufacturer right now would be very difcult. To come in and provide a service, like maybe evaluation services on real estate assets, thats a eld thats wide open. Youre basically talking about moving a little bit downstream and into the service economy. Thats really where were seeing the new opportunities. A lot of the assets in the country, including the mining licenses and the land licenses and these things, are much more difcult to get. You have to pay a serious premium to come into that market. Its not the case where somebody can jump off of a train with $30,000 in their pocket. Youve got to jump off a train with $30 million in your pocket these days. Its a little bit more of a sophisticated market and a more expensive one. Mark: Right, thats on the real estate side. If youre looking for opportunities more in the service sector or support type services - thats a different story, correct? Lee: Exactly. One small change has been that you used to be able to start a company in Mongolia as a foreign investor with $10,000 USD. I think pretty much every French backpacker that came across the Tran-Siberian railway wanted to start a restaurant or what have you. They raised that hurdle rate to around $100,000 USD now, so its a little more difcult. It weeds out the really, really small entrepreneurs. Still, if you can provide a service and you have some sort of an accredited skill then its denitely a place where theres a lot of opportunity. Price water house Coopers opened up their ofce a year ago. Their business is booming. They just cant nd enough people to work for them. Theyre bringing in people from all their other ofces. Thats just one example. Now that were getting into the nancial and capital markets, theres really a lot of opportunity in that. The capital markets are now developing along with the maturation of the economy as a whole. The bigger the economy, the more nancial services they need. Mark: Right. Going back again just for a second. You mentioned China earlier. You spent a lot of time in China and you know it quite well. Mongolia is not China, but people inevitably make comparisons between the two. We read about Mongolias concern about being overwhelmed culturally by China, which I would imagine is a real threat. Just the neighboring border provinces of China are 10x the total Mongolian population. Youve got a lot of integration between China and Mongolia with migrant workers coming over all the time. There are a lot of differences between Mongolia and China, though. You pointed out some of them. What do you think are the key differences that you need to be aware of as an investor? What makes Mongolia a stronger opportunity at this point than China, other than the fact that China is much more mature as far as its capital markets are concerned? Lee: I think with regard to the cultural issue, there seems to be very little cultural inuence from China into Mongolia. Its just simply the economic domination of having to negotiate with one big, gigantic buyer. We were just discussing this on the coal side of things. The international spot price for cooking
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coal is something like $250 and yet there are traders at the border in China buying it from Mongolian coal mines for $80-$100 simply because they dont have enough buyers out there to create a competitive market. Thats probably the biggest fear. Theres not that much migration coming in from China and when they do come in, a lot of times theyre basically kept on a construction site or on a mining site. You dont really see them walking around the streets at all. The main difference for me is - it really comes down to the economic policies that were setup by the government. Its low taxes. Its a free repatriation of your prots. Most importantly, its a convertible currency. If you would invest into China and you make some money - theres very high taxes and a very complicated process of actually trying to get it outside of China. Theres also enormous competition. If there were Chinese cement producers in Mongolia I probably wouldnt be in business. To compete against Chinese property developers in Mongolia, if they were swarming all over the place, I also would have a very difcult time competing. Theres not that much competition in Mongolia. Its easy to do business and the taxes are not high and you can take your money out of the country any time you want. For me, having been a private equity fund manager in China; you just cant even compare the two countries. I would never invest in China when I have the opportunity to invest in Mongolia. Mark: You mentioned a little about the equity market. The MSE has taken the bull by the horns announcing a deal with the LSE, which is old news now but should help to streamline the exchange quite a bit and increase liquidity - I guess thats the big hope. Getting an order lled if youre just a regular retail investor can be tough. Whats your take on this partnership with the LSE and what do you think its going to take to really increase the liquidity and make this market accessible to the average retail investor as opposed to just the institutional guys like yourself, who can work deals with companies and get blocks from larger investors? Lee: I think really what were waiting for is a trigger mechanism. Right now theres no stock out there with good liquidity or very good research and a market maker standing behind it. Thats it. All they really need to do is start issuing IPOs and there will be some sort of trigger mechanism that kicks it off the same way there was a couple years ago when we had that 500% run up. Were just really waiting for some event and Im not sure what that event is. It could be a very exciting IPO where everybody that invests into the IPO ends up making 200-300% on their money. Thats all that itll take. Its just waiting for the magic ingredient. Right now with the stocks as they are, theres just really not a lot of liquidity because everybodys prots are growing. The people that own the majority of those companies - they just really dont want to do any rights issues, they really dont want to do any secondary offerings. The money is there. Theres denitely demand in Mongolia - out of Hong Kong and Singapore and London and a few other places. Im very optimistic that this market is going to take off. We just recently took over a company on the Mongolian Stock Exchange. We went through the three month tendering process and now we are selling some assets to that company so that it has some businesses to grow. If we didnt think the Mongolian Stock Exchange had a future, we would never do that. Mark: Right. What sector is that company in? Can you talk about it?
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Lee: Real estate. Its called Asia Pacic Properties. We just got permission from the Financial Regulatory Committee to change the name, although I dont think the Mongolian Stock Exchange has received the letter yet from the FRC so the ticker hasnt been changed yet. It will very soon. Our main property developer, Asia Pacic Land, is going to continue to develop very large luxury condominiums. Asia Pacic Properties is going to start to develop just the small, 10 story apartment buildings. Its also going to continue to build stores and buy stores down in the Gobi Desert, next to where the mining towns are. Were able to get up to 40% rental yields on some of these commercial properties. Those are going to be the two main lines of business for this company. Were hoping that it becomes the largest real estate company on the Mongolian Stock Exchange. Were quite hopeful that its also going to enjoy P/E ratios of around 40-50x like some of the other companies on the Exchange. Mark: Is it currently listed then? Is it currently trading? Lee: It is currently trading, yes. It nally was released from the tender process and it has just started trading as APP. Mark: APP, okay. Hows the liquidity? We just talked about liquidity issues with most of the stocks trading. Do you envision you guys having the same difculties in the beginning with selling shares? What if an investor wants to buy 1,000 shares - is it going to be a two month process? Lee: Were going to manage that process because were doing our own securities rm so that securities rm has signed up to become the market maker and we currently own like 90% of the shares. So we are going to sell some percentage of shares to our employees as a sort of stock option plan and then we have over 100 people that have signed up to buy shares. We are essentially going to sell down from 90% down to 70% and then sometime around 90 days were going to do a rights issue and then another 90 days after that were going to do a secondary offering. Were going to become the market maker and were going to make liquidity in that share. We feel that if it has enough liquidity, research reports and its making good prots that its not only going to become one of the biggest real estate companies on the Exchange, but it could become one of the top two or three largest stocks on the MSE. Mark: Interesting, okay. Thats good to know. Most of the people that we talk to are interested in getting exposure to two things: The MSE and the currency. I get some conicting information on this - is it possible for a non-resident of Mongolia, whos not on the ground there, to open a bank account virtually in Mongolia? Is that something that you have to be on the ground to do? Lee: It is possible. It just takes some cajoling with the banks. We do that for our property customers. Because Mongolian Properties has been a long time client and very respectable client of a couple of the large banks, then as long as we vouch for those customers then they are able to setup accounts. Mark: So its a service you provide for people who are going to be involved in purchasing real estate through the company, who are working with you in that capacity and not something you do just as a side service in a concierge type capacity? Thats not your business model. Lee: Exactly, but we also do have a lending business. Its called Asia Pacic Finance. We are a borrower ourselves so its possible to setup an account with us and we also give around 12% interest rate as well.
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Some of our clients have done that. Some people, of course, prefer going with one of the three large banks in the country. We have facilitated that in the past but primarily for our real estate customers. Mark: Okay, understood. I want to focus a little bit on this; the majority of your experience lies in the Mongolian property market. I would consider you one of the top two guys as far as people Id like to talk to and get your opinion on this market. Mongolia is receiving massive cash injections here - a lot of this coming from and into the resources sector. Some people are concerned that the banking sector is going to become overwhelmed. What are they going to do with all this capital? How are they going to manage this? Allocating the investment funds coming into the country is going to be a big challenge. Then you hear about, like you just pointed out, real estate investors coming into the country and wanting to raise potentially billions of dollars to invest and purchase Mongolian real estate, most of it in Ulaanbaatar. That capital is going to be like trying to attach a re hose to a straw. Wheres that capital going to go? Sam Zells coming into the country, wanting to participate. Are they going to participate, do you think, through guys like yourself and through guys like Harris Kupperman at Mongolia Growth Group? You guys are already there doing this. Do you envision partnerships or do you think theres room for guys like Zell to come in and compete in the market? It just doesnt seem like theres enough. Lee: We have seen people coming in trying to buy land, but just like every real estate market in every large city, similar to New York, its when you actually try to go get the permissions where you really run into the barriers of entry. Some people will try, sure. Large hotel groups and real estate groups are offering partnerships. Even small private investors are offering to put up the equity to build serviced apartments. Its denitely coming but its very similar to what weve seen in the Stock Market. A Sam Zell would never get enough stock or real estate to be able to satisfy his order. He cant put $100-$200 million into the market very easily. It would be very, very difcult. So James Passin is going to continue to raise funds and so is Harris Kupperman. I suppose when we eventually list on the Hong Kong Stock Exchange, because we represent so many parts of the Mongolian economy, we sort of see ourselves as a way for them to get into everything - into all of the growth of all the various industries in the country. We hope were going to have a very high P/E ratio because of that but well just have to wait and see. With regards to the banks, whats going to happen is if they dont want the money theyre going to continue to lower their interest rate. If they keep lowering their interest rate it just means that the protability of companies that are borrowing is going to increase tremendously. One of the things theyre doing is setting up a development bank. If you have that much money coming into the country you need to make sure that youre deploying it into the companies that can help increase the factors of productivity of the country to keep the ination down. For example, the construction materials industry - if not enough investment goes into that then were going to have very aggressive ination in that particular market. Also in agriculture - if they dont use the development bank to lend money to increase their factors of production and to get fertilizer plants going then food prices are going to double and triple. I think right now allocating that money to bottleneck situations in the country, situations that could produce a hell of a lot ination which obviously could be devastating to a young economy like Mongolia, is the most important thing.
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Mark: Speaking of agriculture and food - whats the situation like there? A lot of the foods imported, obviously. Mongolia experiences a long and brutal winter. Everyone knows what happened a few years ago with the livestock that died off in an exceptionally cold winter. How does Mongolia deal with food security? Do you envision or do you see opportunities for small scale agriculture entrepreneurs who have experience in that area? Lee: Interestingly, there are opportunities for entrepreneurs who have experience in that area and even guys that dont have experience. I have friends that are now storing carrots during the winter and they can make double their money on bringing their carrots out of hiding during the wintertime. Theres actually one company in particular, this is the guy that pioneered the agricultural industry in Mongolia from a private perspective. He brought the rst irrigation system for Mongolia and he is minting it. He is really making a lot of money. Hes growing and growing and growing. Hes denitely going to be the Cargill of Mongolia; thats for sure. There are also these NGO projects and private entrepreneurs that are experimenting with agriculture. Mongolia has only about 3-4 inches of topsoil. What that means is that youre basically going to burn out your soil fairly rapidly. It just so happens that they have all the ingredients for fertilizer. I think pretty soon were going to start to see the fertilizer industry take off in Mongolia as the yields come crashing down with all the nutrients being sucked out of the topsoil. Mark: Right, interesting. So right now the large-scale stuff is mostly the staples? Lee: Yeah, the guy I mentioned earlier is doing wheat. On the livestock side of things, I cant remember who it is but somebody just brought in 200 French cows or French bulls to mix with the local population. Mark: These are dairy or beef animals? Lee: Theyre beef cows. Mark: Okay, interesting. My next question is related to your involvement in the Mongolia Institute for Sustainable Economic Development, which you founded. Whats the mission there and how does it inuence your activities in Mongolia? Lee: It was really an internal decision. With all the industries were in - I told somebody to go research the cement price, and told somebody else to go research construction prices and somebody else to go research property prices, the Stock Market, etc. I was having difculty with oversight of all of these people. Also from time to time Ive been an adviser to the government in relation to building technologies, energy conservation and how to utilize passive solar housing technologies in a country that has minus 40 degree weather. I was spending a lot of time on that trying to manage these various people and also helping the government that I thought maybe we would consolidate everything and bring everybody together. I could give it a little bit of funding and wed bring in interns. Last year we had three architects come in that were specialized in sustainable economic development. That was very good for us. We havent done that much with it right now but essentially it was to try to increase our productivity internally. We cant own an NGO with a company. It has to be owned by persons, or not even owned at all; lets say administrated. Thats essentially what weve done. This year were concentrating a lot on the master planning of the city. We just took somebody from the mayors ofce over to visit a couple of malls in North America - Canada and US - and also to meet with master planning architects out of San Francisco so that the new satellite cities theyre putting in to
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Ulaanbaatar, that those can be managed well and they have a master plan done by planners that have done several cities around the world. Thats kind of what were using it for. Mark: Okay, you bring up an interesting point there. We talked with a few people who have commented just how crowded Ulaanbaatar has become and how the infrastructure just cant handle the growth in the city. The roads are terrible, trafc is ridiculous. Is it xable or is downtown just going to have to deal with the hand its been dealt? Youre talking about new things being put in a master plan. Do you see Ulaanbaatar expanding outwards in that capacity? Lee: Theres very few ways to x what has already been done. The best thing that can be done now is to alleviate the trafc in the old city by building new satellite cities, and basically getting rid of bottlenecks by building new bridges and new roads. The main problem in the past has been a lack of planning but more so the lack of money. Now the Mongolian governments starting to get a lot of money. Only some portion of that is allocated to the city but, still, the coffers are increasing. So we are seeing a lot of construction. Its a democracy so you see politicians competing to try to create situations that will alleviate and increase the quality of living inside of the city. Democracy is a competitive pressure and it seems to be working in my opinion. Mark: Right. Lee: Somebody asked me to help them get a master plan so that they could alleviate the citys constraints - thats a very good sign. Mark: Along those lines again, what about the shanty towns and the poor areas just on the outskirts of the city itself? How do you see the government dealing with that and improving that situation as the city expands and inevitably the population explodes? More people are going to want to come to the city for work and to participate. Lee: I could have bought one of those plots of land for about wait, let me clarify, I couldnt buy the land, but I could have bought the lease on the land for around US$ 15,000 not long ago. Now theyre up to around US$ 45,000. A poor local living with his family in a ger or small structure on that land, if he can now sell that land for US$ 45,000 hell do it. He can then move to the outskirts of the city where the land is free, and he basically has a good US$ 45,000 of seed capital for whatever he wants to do next. In that sense its a perfectly functioning market. A property developer can come along and buy up a few of these pieces of land to sow it together to make it a big enough piece to build an apartment building on. Still, even when the prices have risen to US$ 45,000 and multiplied by putting 10 of these things together, its only US$ 450,000. You might make US$ 5 million on building a building on that site. Market forces are at work; thats for sure. Mark: Question on bureaucracy - weve heard that the Mongolian bureaucracy is somewhat typical. There are still some bottlenecks. Do you nd it easy to navigate, or is it burdened with the same issues that face most of the emerging market economies? Do you nd it a little better, a little worse? Where does it fall in your experience? Lee: I think the bureaucracy is what you would expect in the emerging markets. The difference in Mongolia is you can avoid the bureaucracy. When I go to get permissions to build a building, yes, I have to go through the bureaucracy and its very painful and you need to build up expertise in that particular
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area. Aside from that, I dont need any permission to run my cement factory or my real estate agency or any of my other businesses so I have nothing to do with them. There was a time in Mongolia when it just seemed like I could just continue growing and growing and growing and never have to interact with the government at all. Its just remarkable, absolutely remarkable with the only exception being permissions to do property development. You really need to have it there because property developers around the world are known to be cost saving, and sometimes cost cutting through quality, which is really not good for the safety of the citizens. Mark: So in that regard mining/resources and real estate development are the two areas where youre going to have to navigate bureaucracy. Otherwise its kind of a Wild West system. If you wanted to go in, for example, to open a restaurant - youd lease a space, nd your suppliers, hire your employees, things like liquor licenses. I live in Uruguay and liquor licenses dont exist. You want to sell liquor, you open a restaurant and you buy liquor and you sell it. What a concept. I imagine its the same there. Lee: You do have to get a restaurant license and you do have to get the liquor license. Aside from that theres very little interaction with the government unless they really need money then they send the health inspectors around to your door. Mark: That happens everywhere. How about leasing commercial property? If someone wanted to lease a small warehouse, are those types of properties still available? I imagine, like everything, theyre increasing in value but small commercial space or small warehouse space - whats the situation like, not necessarily in the city, but on the outskirts? I know there are industrial areas just outside the city that are more warehouse oriented areas. Hows that sector? Lee: Its just that its a very tight market and its just a supply and demand situation again. Theres an unproductive construction sector because of the amount of time you can pour concrete and also because theres no access to lending from the banks for property developers so theres very few warehouse spaces available. To rent or buy them has gone up tremendously since the nancial crisis ended. Mark: Do you nd people building those types of spaces going a little further outside the city, getting some cheap land and throwing these types of facilities up? Lee: Its just starting but you have to be careful because whatever you put inside will freeze in the Mongolian winter. You still need to be somewhere near the heating infrastructure so that you can heat whatevers going to go inside that building. Mark: Correct, and heat is mostly coal generated, right? Lee: Correct, or steam. Mark: Okay, two more questions. I know youre busy and weve talked for awhile. Aid from the West is still a big piece of the GDP in Mongolia. Thats likely going to decrease as Mongolia grows. With all the issues occurring globally - North America and Europe have their problems. It might be reasonable to expect some of that foreign aid to decrease sooner than later. How do you see that impacting Mongolia, if at all? I imagine that type of investment or support would be replaced by just the organic growth of the economy over time. Lee: Id be quite happy to see that, frankly, because theyve been soaking up a lot of the best talent in Mongolia. They go in to work for an NGO and they just sit on their butts and they dont actually have to do very much. Over a period of years they take somebody who had tremendous potential and they
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turn them into a walking mummy. We need to seed those people back into the capitalist workforce, working and helping to grow the country and being productive with their idea generation rather than just administrating welfare, essentially. Ill be happy to see them go. Mark: Agreed. This is a question I should have asked in the very beginning. Give us a real quick overview of APIP and kind of the vertical integration of the company. You talked a little bit about what you guys were doing but give us a synopsis of your mid and long term goals for the company and its various subsidiaries. Lee: APIP is incorporated in Hong Kong and it has 10 operating subsidiaries in Mongolia. We just turned 10 years old in April of this year. Were one of the only private companies in Mongolia to be audited by Price Waterhouse Coopers and were one of the fastest growing companies in Mongolia. Our goal is to become the largest or one of the largest conglomerates in the country through continuous real estate development, and also by becoming the largest cement factory in the country. We currently have around 300 people and wed like to increase that up to 2,000-3,000 people over the coming years. I think within the next year we will try to list ourselves on the Hong Kong Stock Exchange and then also start participating in the International Bond Markets to bring more credit into Mongolia. Mark: And are you guys actively hiring, looking for English speakers with various skill sets or are you focusing on Mongolian Nationals as the basis? Lee: Im focusing on both. On the piece of paper right next to me I have my ve next target expatriates - some of them speak uent Mongolian but I also have a team of people that are scouring the globe for Mongolian potential repats. Then we also are always looking in the local market as well because weve grown by a combination of training the people that have come in from the ground up in Mongolia, and supplementing them with expats that come into the country, both young/inexperienced as well as experienced people. Mark: In our blog weve written a lot about Mongolia. Ive known Harris Kupperman now for a couple of years, and I participated in Mongolia Growth Group. For a college graduate coming out of the states with any kind of a business background, the job market in North America and Europe is pretty iffy. Weve been encouraging people to take a look at Mongolia and even just jump on a plane. Weve got a kid whos about to graduate, who writes a little nancial letter himself as part of his undergrad. I think hes going to be taking a tour of Asia later in the North American spring and looking for opportunities as well. It seems like theres quite a bit to be had in Mongolia for these types of people, and especially if they can learn the language, which is easier when youre young, obviously. Lee: Exactly. Mark: Outside of working for a company like APIP or a Mongolian company - you mentioned some opportunities. How do you view opportunities for entrepreneurs who just want to do something on their own? If youre a young guy with a little bit of money in your pocket, some patience and a little bit of time on your side - Mongolia seems like THE place to be. Can you give us a summary on how you view those types of opportunities? Lee: All of my ex-employees seem to be starting companies, and theyre all doing pretty darn well. Mark: Chris de Gruben from M.A.D. being an example of that. Lee: Precisely.
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Mark: I guess in a way, though, thats got to make you proud. Its kind of like a proud papa in a sense. Imitation is the sincerest form of attery, right? Lee: Exactly, there are just huge opportunities here for everyone. If I was a guy looking for a job as a Chief Technology Ofcer, I would actually just come to Mongolia and setup a consulting company because youd have about 15 clients in the rst 5 days of opening your business. Graphic arts, law lawyers Its like you come here as a lawyer and you can get 10 clients in your rst 10 days of being in business here. Mark: Thats knowing nothing about Mongolian law. Youre talking about legal skills from North America, Europe? Lee: Exactly, what does it take? It takes three months of studying Mongolian law to be well-versed in how things work. So its really no problem at all. A lot of times Mongolian companies, including myself, are doing contracts with companies that are outside of Mongolia, its basically international commercial law and you need help with the various legal and commercial terms of that agreement and also the template format, and just at least being able to look at other contracts in that particular area. Mongolians and expat locals, including myself, have just spent the last 5-6 years learning about what an off-take agreement is and how theyre structured. Its best not to learn the hard way by somebody fooling you. Its best to have a good lawyer on your side to tell you about that in the rst place. Mark: So especially guys who have any kind of experience in real estate law or resources law, I imagine. Lee: Precisely, or at least the ambition to learn about that kind of law. It doesnt take that long if youre hungry. Mark: Right, exactly. Last question - we talked a little bit before about Chinese investment in the country; theyre the biggest customer at this point. How important is it going to be going forward for FDI from other countries? Is Mongolia putting policies in place to foster that? Lee: Yeah, I think their policy is they travel the world a lot and they go on investment trips to places like the UK and the United States and Hong Kong. They participate in these conferences and theyre actively encouraging investment from other countries. Theyre cultivating their relationship with Germany. The Mongolians really respect the country of Germany, and what theyre really trying to do is bring in the best of class from whatever category theyre looking for. I think youre going to see a broad diversication because they really are going to have money to be able to cooperate with and hire some of the worlds best companies. Mark: Right, understood. I appreciate your time Lee. I know our readers are going to get a lot out of this discussion. Lee: Thanks, its been great speaking to you as well.
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ERIC ZURRIN Resource Investment Capital Ltd.

Eric Zurrin is currently Director General of ResCap LLC, responsible for ResCaps operations in Mongolia and coordinating capital sourcing through partner distribution networks in the international markets. Eric joined ResCap in 2010 with nearly ten years of investment banking experience most recently from UBS Investment Banks Global Industrial Group in London where he worked in Corporate Finance, advising companies in the Metals and Mining and Paper and Packaging sectors in Europe, Middle East and Africa for nearly ve years. Prior to joining UBS, Eric worked for BMO Capital Markets in Toronto and London in the rms Mining and Diversied Industries teams covering corporate clients in mergers and acquisitions and capital raising functions across the Americas, Europe and Africa. Eric is a Director of ResCap LLC, a Canadian national and holds a Bachelor of Commerce degree from the University of Manitoba in Canada. Luke Leslie is Head of Origo Partners Metals & Mining, Portfolio Manager of the China Commodities Absolute Return Fund, Executive Director of Origo Partners MGL, Origo Partners Exploration and Origo Resources International. Luke was formerly Executive Chairman of Kincora Group in Mongolia and has 10 years of transaction experience in Metals and Mining, including the Metals and Mining team at UBS Investment Bank and the Natural Resources team at Accenture. Luke is a member of the Board of Directors of Gobi Coal & Energy, Kincora Copper (KCC:TSE), Moly World, China Commodities Absolute Return Fund, Huremintiin Hyar and Resource Investment Capital Ltd. Mark: We read about your background a bit in the introduction, but talk to us about why a young guy like yourself decided to take off for Mongolia and setup a boutique investment bank? Eric: The decision to relocate to Mongolia and establish a boutique investment bank was highly strategic. I have been in the investment banking space for nearly 10 years and covering the natural resources sector for about 7 of those 10 years. The fundamentals behind Mongolias growth are highly compelling and a key driver supporting my decision. As the exploration and development of new mines globally continues to increase in competitiveness, mining companies are continuously seeking new geographies with highly prospective mining areas combined with favourable and accommodating governments/operating bases. Mongolia ranks near the top of that requirement. Moreover, the competitive advantage of entering Mongolia as one of the few western trained expats from an international tier one investment banking background presents considerable opportunity. Backed by London listed Origo Partners for 35%, our local partner Monnis Group for 20% interest, we strategically timed an entry point into Mongolia around the tremendous growth in resources that is underway. Mark: Tell us more about how the rm came about and who is involved. Eric: We believe there are signicant growth opportunities for a corporate advisory business such as ResCap in Mongolia, particularly in the natural resource and related sectors. ResCap is a corporate nance boutique advisory service that will focus on strategic transactions such as mergers, acquisitions,
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restructurings and other nancial matters. The Mongolian government has recently announced a series of policy measures and infrastructure initiatives designed to unlock the value from their vast reserves of bulk commodities and base metals, including support for both government and private enterprises looking to access international capital markets to meet funding requirements estimated to be in excess of US$25 billion. We currently have 8 employees. Eric Zurrin will be heading up the team, supported by Chairman Jigjid Unenbat, the former Governor of the Bank of Mongolia from 1996 to 2000. Mark: How important has it been to have Mongolian nationals on your team? How hard is it to nd good talent? Are you actively hiring? Eric: The ResCap team comprises experienced foreign investment banking professionals, who have already spent a signicant amount of time getting to know Mongolia, and Mongolian nationals with international training and experience. In addition our Chairman was Governor of the Bank of Mongolia for four years and has extensive contacts in Mongolia. Our strategic partners (Origo and Monnis International) also bring familiarity with the Mongolian landscape. In 2009, Origo made its rst investment into Mongolia and later commissioned the Origo Mongolia ofce in Ulaanbaatar followed by another three investments in the Mongolian natural resources sector. We are always seeking to expand our team of local talent. It is increasingly difcult to nd local talent as the international mining companies continue to bid prices higher for Mongolian nationals. However, we offer a climate of international investors coming to Mongolia and internationally trained individuals on our team which brings a different quality of job satisfaction that mining companies do not deliver. Mark: What is the typical deal size your rm gets involved with; whats the sweet spot? Eric: We focus on transactions below the radar of typical large investment banks. The likes of the tier 1 global banks have minimum fee requirements that essentially price themselves out of the market. Given our small size, we work with early stage companies as well as very large conglomerates in Mongolia all seeking the assistance of domestic based investment banking needs sourcing international capital from top global investors. Mark: How tough is it to raise capital for Mongolian businesses? What are the challenges? How are you overcoming them? Eric: The fundamentals of natural resources projects in Mongolia speak for themselves. Mongolia is a country of only 20 years old following the peaceful revolution in 1991 when the Soviets departed and Mongolia became a democracy. The challenges are educating investors that Mongolia is a fully functioning democracy where the rule of law stands, there are no currency controls for repatriating money, and doing business in Mongolia is actually ranked easier than China, Russia and India according to the World Bank. Raising capital typically comes down to the merits of the investment case: prospectivity, growth, potential upside, and of course all balanced against price. We point to the fundamentals in projects we bring to investors as well as the notion that we are highly selective in the work we do in Mongolia. We work with some of the best management teams in Mongolia on many of the best assets in the country. Mark: Can you give us a few examples of deals the rm has participated in recently? Eric: We recently participated as Mongolian placement agent for the reverse listing of Kincora Copper Limited onto the TSXV. We raised $9 million of the overall $12.1 million offering, leading the nancing effort of syndicated investment banks given our direct reach to investors seeking Mongolian
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opportunities. Kincora Copper is an advanced stage exploration company in the Oyu Tolgoi copper belt, 140km NW of Ivanhoes OT. It is backed by a well known international management with in the copper space with the head geologist spending the last 15 years as BHPs head of copper in Chile, a board member with over 28 years experience at Rio Tinto, and the Chairman who is well known in the mining circles globally. Mark: The MSE is a edgling market with very little liquidity. Many of the transactions get done privately. Can you tell us a bit about how this grey market works? Is this a niche area for the rm? (maybe give the example of Mongolians holding shares for 20 years with no buyers, and how you match buyers/ sellers...) Eric: The MSE is undergoing a transformational rejuvenation with the cooperation of the London Stock Exchange for at least the next 3 years. The MSE was the second best performing index globally in 2010 up 174% in USD terms. Given the framework for the securities law has not been changed in nearly 20 years, it is natural that the MSE struggles in terms of comparability to other international exchanges that have continually been upgraded. In the past, very few transactions have taken place largely because of a system of laws that was outdated, limited investor condence in the exchange and marginal liquidity. This is all set to change with the LSE Management Contract, new Securities Law, and increasing interest from foreign investors. We know of Mongolian nationals who have been sitting on shares since the original privatization in 1991 and have not seen a liquidity event in 20 years. We opportunistically approach these situations in the event to unlock signicant value while providing the much desired liquidity event for these shareholders. Mark: The MSE recently partnered with the LSE to help modernize and regulate the exchange. This should bring increased transparency, better liquidity and state-of-the-art technology. How will this impact your rm, both positively and negatively (if at all)? Eric: The spotlight is on Mongolia and investors are taking careful watch. In the past 3 months, we have had account opening requests from over two dozen of the top institutional money managers in London, New York, HK and Sydney. Some have begun to take very careful early steps in gaining access while others are still circling, readying for an entry point. With the electronic trading platform called Millennium IT being installed by the LSE, over $15 million of technological and physical upgrades to the exchange, we expect capital ows to increase substantially into the MSE from foreign investors. The increased capital ows must be balanced with the readiness of the exchange to accept new money to avoid potential negative consequences. Mark: Real estate in UB gets a lot of attention and some spectacular appreciation has already occurred, but the party is just really getting started. Youre involved in a company called Real Estate Mongolia Ltd that is looking to raise capital and list its shares on the MSE. As an investment banker, concentrating on equity and banking deals, whats your outsiders take on Mongolian real estate in general, and why is it better to participate in a vehicle like REM as opposed to buying an apartment or two and hanging onto them? Whos involved? Eric: Real Estate Mongolia (REM) is an investment company (not fund) that will provide direct exposure to the Mongolian real estate market, both in UB and in regional strategic tier-2 cities, as well as fully exposure to the Mongolian currency. The initial round of nancing is private investors followed by a capital raising on an internationally listed stock exchange globally (venue to be decided in the future). REM is an opportunity to invest alongside the management team of the company. The managers are expatriates, have been in Mongolia for over 8 years, have completed over 1,500 agency and direct
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investment transactions, and have achieved an average IRR of over 250% on their own portfolio. They simply know the market better than anyone else. The company is based in the Cayman Islands and open to investors to participate without ever having to be in Mongolia to source, execute and manage their own real estate portfolio. Combined with the management who are subscribing for 10% of the company in cash representing over 90% of their net worth, we feel that new investors and management are completely aligned. Rea estate is the natural offshoot of a natural resources expansion. Increased circulation of wealth in Mongolia promotes a phase of gentrication of the exist population seeking improved living standards, substantial increases in foreign direct investment (i.e. FDI will be 45% of GDP in 2011), and arrival of international management teams and employees seeking western style living, hotel, ofce conditions in Mongolia and the most prospective regional cities. Mark: Where are you living in UB? Did you rent or buy your apartment? Eric: I am living in the centre of UB right next to the State Department Store off of the largest street Peace Avenue. When I arrived in Mongolia, I quickly realized that being short of real estate and long the country did not make intuitive sense. I was also taken aback by the 50% increases in rent over the rst four month period and concluded ownership over the long term was a much better investment. This investment has increased 50% since initial purchase in April 2011. Mark: Getting exposure to the Mongolian currency is important to some overseas investors (especially those holding Euros and Dollars lately). You starting a fund called the MSE Liquidity Fund. Its a product that we think a lot of foreign investors will nd attractive. Can you tell us a bit about it? Eric: The fund is a vehicle to invest in the Mongolia Stock Exchange in select positions that we have identied as highly attractive given our access and permanent base on the ground in Ulaanbaatar, access to yield product in top commercial banks with above average deposit rates of 16% that we have negotiated as +350 basis points over the posted rates, and exposure to one of the best performing currencies in the world (Mongolian Tugrik). The funds scale in Mongolia has allowed it to position for better negotiated savings rates and compelling entry prices on select MSE listed equities which we believe are particularly interesting given the volatility and uncertainty in the capital markets across Europe, North America and other developed countries. The feedback on the fund has been great. Its a very straightforward concept to understand and you dont need to break the bank to get in with minimum investment of US$10,000 for qualied investors! The fund is based in Bermuda and reports NAV monthly, with monthly subscriptions and quarterly redemptions. Mark: How difcult has it been to navigate the bureaucracy in Mongolia? Eric: With much of the business environment operating in English, we have been able to quickly work our way through the government and business systems. The Mongolian team in place provides very good support for navigation. Mark: Whats your take on the next 5 years for Mongolias growth? Where do you think investors will see the most appreciation? Real estate? Stocks? Currency? Owning a business? Eric: On a risk adjusted return, I expect real estate to do exceptionally well. Owning ones own business always can provide innite returns but not without the risks involved. Investing in hard assets such as real estate is a straightforward prospect: scarcity of supply, infrastructure constraints in new developments, and increasing demand coming especially from a population seeking gentrication of their existing
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environment and fantastic fundamentals supporting long term value creation. Mongolia is coming off of a low base and open to exceptional returns. If you are backed by the right management team, the prospects are very attractive. In terms of currency, the underlying factor is the government policy that cannot be predicting. While the government increased money supply by 67% already in 2011, limiting the currency to only a 2% gain YTD, Mongolia is still currently a net importer which will change sharply in 2012 when Oyu Tolgoi and Tavan Tolgoi mines come on line and exports increase substantially with direct appreciating consequences for the Mongolia Tugrik. Mark: Finally, what is it like to live in UB? Eric: Raw. An extreme climate with incredibly raw living conditions from food, to housing, to simply getting around. Unfortunately, UB is labeled as the coldest and most-polluted capital city in the world, which makes for challenging conditions on the ground. Mark: Thanks Eric, that was fantastic! Eric: Youre welcome Mark, speak with you again soon.
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HARRIS KUPPERMAN Mongolia Growth Group

We really like Harris. Hes the quintessential frontier capitalist. A no-nonsense guy with an incredible knack for picking winning investments. When we were rst introduced to him by another associate of ours, also a frontier capitalist of the rst order, we jumped at the chance to participate in what was to become Mongolia Growth Group. Thats been a fantastic decision for us. Harris is a prodigy, having started his rst hedge fund in university, he never looked back. Hes a man of few words, so the following interview will be short in comparison to the last few. It would be a mistake to interpret that in any way as a lack of understanding about what is going on in Mongolia. To the contrary, Harris is a force to be reckoned with after less than 1 year in the country! We have our eyes on him, and our money invested in his company. Were pretty happy with the results so far. Chris: In our last post I gave a little overview of why Mark and I like Mongolia so that readers have a basic background to the story. Can you tell us why you like it so much (so much so in fact that you moved there!), and not just from the standpoint of a capitalist and investor, but also as a global citizen. Whats so great? Harris: To start with, the weather Just kidding. But where else do you have a 150 degree swing from summer to winter? Everything in Mongolia is so unique, its like no other place and thats why I enjoy it so much. No other country has gone from half nomad to wealthiest per capita in a decade. I want to be here and see it happen. I enjoy the intellectual factors at play in building a business in a country like this. Every day is just fascinating. Besides, I really do enjoy living here. It is one of the most open and free countries in the world, the people are friendly and Im having a great time. Chris: When did Mongolia rst come to your attention and under what circumstances? What were you up to at the time? Harris: Ive managed a hedge fund since 2003 and through that I have always been looking for interesting opportunities. I rst learned the Mongolia story in 2005, but I was too busy with other things to really gure it out other than sending some Emails. I kept it on my radar though. A very good friend of mine in Hong Kong had been telling me for ages that we needed to go take a look and then nally in August of 2010, I arrived in Mongolia. Once you are here, you realize that the Western investment media has it all wrong, the growth is much stronger than what you hear about and it is the reason that I have pretty much dedicated my time to Mongolia ever since. There is no other story like it in the investment world. Chris: I know weve discussed this before, but can you tell our readers how whats taking place in Mongolia compares on a historical basis to previous booms if at all? Harris: There is no historical precedent. You are looking at an economy that might literally double each year for the next decade. I cannot think of anything like this in history. Basically, mineral exports are going to go from 2 billion in 2010 to some number around 20-80 billion by 2017 and continue growing from there. Its just never happened before. Chris: What type of government do you have in Mongolia and whats the basic structure?
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Harris: Mongolia has a fully democratic government with regular elections that see the ruling party change. It is a very Western-style government that is very much free. Chris: What type of economic regime is in operation? Is it liberalized trade and free market, socialist, Chinese style communism or something else? What is the economic and political leaning of government ofcials? Is the idea of a free market present? Harris: It is the best free market country that I know of. Theres a bit of bureaucracy left over from Soviet days, but the government understands growth and they want the country to be successful. Remember that the guys in politics tend to be the richest citizens and they want to make sure that they become wealthier. They are doing everything possible to promote growth. Taxes are minimal, regulation barely exists and bureaucracy is slowly being tamed. Its paradise for investors. Chris: What do you see as the biggest risk to investing in Mongolia? Is it the government, who might do something stupid along the way, or is there anything else? Harris: Like most countries, as an investor, the government is usually the biggest risk. I think the current government is smarter than most. They know they need foreign investors in order to develop the mineral resources as Mongolia doesnt have billions to spend on the necessary infrastructure. More importantly, they already stubbed their toe badly a few years back with an excess prots tax which has now been repealed. I do not think they will try something like this again. The other risk is a global slowdown as you have a country that is a major commodity exporter. Im less worried about this risk however. Chris: How about the security and crime situation in the country in terms of both personal safety and business security? Harris: There is essentially no crime. I feel perfectly safe walking by myself at 2 am. Business security is the same. I feel safer here than in Manhattan doing business, and we all know that Manhattan has been sterilized to the point that its like Disneyland. Chris: Harris, youve said that you wanted to invest in Mongolia but couldnt nd a suitable vehicle to do so. Like a true capitalist, you created your own! For our readers benet, please tell us more about Mongolia Growth Group (Editors note: Mongolia Growth Group is traded on the Canadian exchange under the ticker symbol YAK. Investors in the US can nd it listed over the counter as MNGGF). Harris: Were a company focused on real estate and nancial services. Those are the two sectors that should be most leveraged to the growth of the economy and GDP. From a historical perspective, real estate in the downtown of the capital city of a country seeing a boom has always gone parabolic. We think a similar thing will happen here. We were recently granted an insurance license and are now the best capitalized insurance company in Mongolia. Finally, we are actively investigating other sectors of the nancial services market to enter. Chris: Investing privately is one thing, but you went the public vehicle route, which is a bit more complex at best. How did you go about creating the company? Harris: When I rst visited Mongolia, I saw the opportunity, but like you say, I couldnt nd a way to get appropriate exposure. I also couldnt get comfortable with corporate governance and the accounting at the various public companies. I gured that my only viable alternative was to build it myself. I built MGG because I wanted to invest my own money in Mongolia, as did some friends. No matter what happens in our business we can be condent that our accounting is done right. I couldnt invest the sort of money that Ive invested without that knowledge. Chris: Mongolia Growth Group is a bit different from most other public companies in terms of compensation. Can you explain?
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Harris: The company started with me asking friends to invest alongside me in Mongolia. I wanted a diversied company that would have adequate exposure to the Mongolian economy. I simply didnt have the resources to do that myself. I felt funny asking my friends to invest in my company and then tell them that I was going to take a salary and dilute them through stock options or any other scheme like that. Instead, I have decided to take no salary, stock options, performance allocation, bonus or anything else. Im here in Mongolia because Ive invested my own money in the company. My Co-Pilot in this venture, Jordan Calonego feels the same way. Besides, weve been investors for over a decade now and have been disgusted to learn that the CEO always seems to do better than the shareholders. Now that our roles are reversed and we are management, it would be wrong of us to do what we have always criticized. Investors need to think of this company as a business created by a bunch of very successful hedge fund guys who want to invest their own money in Mongolia. Minority shareholders can come along for the ride if they want without any of the onerous fees normally associated with hedge funds. It is the only company that I know of like this. I hope we can use this as a template for the next time that I complain that some Management team is overpaid, but thats a different story! Chris: Investing in foreign emerging markets entails a certain amount of risk for us foreign devils. Tell me about your local partners in Mongolia and how youre mitigating risk by partnering locally. Harris: I think you have an inaccurate impression about Mongolia. People are very happy to have us investing in the country and helping the economy to grow. A stronger country means they can stand up to the Chinese better. Of course, our local partners help us navigate business relationships and that is critical. Think of it this way, Im from New York. If I moved to Boston, I could do business just ne. Of course it helps if you have friends in Boston, but youd do just ne without any relationships. Thats how Mongolia appears to me. That said, we have amazing partners and they have made everything signicantly more successful for us at MGG. We couldnt have gotten this far this fast without them. Chris: Even though you are focusing on the FIRE sectors (Finance, Insurance, & Real Estate), was this driven by a natural resource thesis? [i.e. in the context of economic growth derived from the natural resource sectors?] Harris: Yes. We want leverage to the growth of Mongolia. These three sectors are very closely tied to economic growth which we think is about to signicantly accelerate as new mines come online. Chris: For our readers benet can you tell us what minerals and resources are found in Mongolia? Harris: We are learning that Mongolia has everything. Just a few months ago, we learned that Mongolia may also be a signicant oil exporter. Theyve already found coal, copper, iron ore, gold, uranium, rare earth elements and pretty much everything else. Chris: We all remember the Levi Strauss story back from the California Gold Rush. Along those lines have you thought of jumping into the mining camp support business? Harris: We are looking at everything. However, for now at least, we see the biggest opportunities in real estate. There are hundreds of millions being raised for Mongolia focused real estate funds. Prices will go simply nutty as they try to put that capital to work, and we want to get positioned before that happens. Chris: Regulations, taxes and other such government ahem initiatives can, and often do, make enormous differences to investments. Currently agriculture is favored and doesnt pay VAT or import taxes on farming equipment and supplies. This is because the Mongolian government wants food costs low. Normally this would allow fatter margins for farmers. Is this something of interest, and do you see any other opportunities arising due to government mandates and tax incentives/breaks? Harris: We have looked at agriculture and have a joint venture with a Mongolian to nance the
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expansion of his potato patch; however this is quite small in terms of our company. In general, we want to focus on businesses tied to the growth of the broader economy and agriculture doesnt t that bill, at least for now. Chris: You and I have previously discussed infrastructure in Asia, and agreed as to why neither of us would invest in early stage infrastructure. At the same time we both know that infrastructure is absolutely critical to growth. Where do you think Mongolia is at with the critical infrastructure that is being built now, and needs building to enable the sustainable growth we expect? Harris: Infrastructure is the main thing holding back the economy. As soon as you build a railroad, all these stranded mineral assets suddenly become economic. The same goes for road infrastructure, power, and water transport. Really everything needs investment, thats the reason that I feel so condent that the government wont do anything to hurt foreign investors, it would simply derail growth. Chris: Heres a problem Ive been thinking of lately. Its fair to say that since listing its shares publicly, MGG has experienced periods where the market clearly overvalued the company. This should be obvious to any investor performing some back of the napkin math. When insiders of a company see the market value of their company trading below their best estimates of fair market value they buy back stock. When the opposite happens its natural to ofoad stock. This is easy for me as a pure capital provider, and one not involved in strategic decisions or management. But, I wonder how Id deal with this situation where its my own company Im running. How do you deal with this conundrum, given that I think were likely to see some extreme over-valuations at some point as the Mongolia story begins to unfold and the world wakes up to the opportunities? Harris: Im a long term investor. I have absolutely no intention of selling any of my shares. NONE. If our shares are undervalued, it would be great to be able to buy back shares. If we are overvalued, we just ignore it. Remember, that when an economy grows as fast as Mongolias, its very easy for our company to simply grow into the valuation. For instance, in the past four months, real estate prices are up between 20 and 50%. It doesnt take many more months like that for a business to grow into and then exceed a current valuation.
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WILL TINDALL APIP

Will is Lee Cashells right-hand man. We cant think of a better guy to shadow, but certainly Will can stand on his own. He is the Chief Communications Ofcer for Asia Pacic Investment Partners and is accountable for all of the public relations, marketing and investor relations within the Group. Most recently he co-founded a public relations company in London, where he developed corporate communication services for investment banks, private banks, wealth managers, family ofces and asset managers. Prior to this he worked at a leading investor relations and nancial public relations agency and managed the accounts of companies across a broad range of industries; from major airlines to newly established niche hedge funds. He was responsible for guiding a signicant number of these clients through a selection of M&A transactions, including dual listings and IPOs. Will began his career as a private banker/wealth manager for one of the major private banks in the City of London. He moved internally from this role into a business development and marketing manager position and developed a number of key initiatives at an important growth phase for the bank. Mr. Tindall received his bachelor degree in Economics and Finance from Exeter University and holds a number of FSA qualications. He shared some specics about the Mongolian Stock Exchange with us. Mark: Mongolias stock market is relatively young. Liquidity is a major problem and investors often have to wait for days and sometimes weeks to get orders lled. What changes are necessary to improve this situation? Will: Currently, the Mongolian Stock Exchange has only two hours of trading between 11am and 1pm every weekday, except for major holidays. In doing so, the traders have to physically come to the trading oor to input the orders on provided computers and access the order book via the intranet. Although the last trade can be seen on the stock exchanges website, the information is displayed with 5 minute delays and the order book is not accessible to non-dealers at all. Such a system creates a major inefciency in trading as well as difculty managing the execution of trades. All major exchanges have adopted electronic trading together with live feeds of last trade information, and a whole day of trading hours. In addition there have been no IPOs since the end of 2007 and, out of more than of 300 listed companies, only 40-50 of them are traded on a regular basis. With such slim selection and lack of reporting and news from these companies, it is difcult to expect a constant ow of trades. These trades need to be pre-nanced to be able to execute in the Mongolian market, whereas any other major markets are settled on T+3 basis, which allows timely reaction for an investor on an opportunity. Finally - larger stocks tend to have less than a 10 percent free oat in the market. These shares also tend to be highly concentrated to only a small number of long-term investors, mostly insiders. The priority of the LSE is to address these issues. Mark: With liquidity so scarce, how do large institutional investors get lled on orders? Are they buying
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blocks directly from the companies themselves or from insiders when there isnt enough on offer on the exchange? Will: There are only a handful of large institutional investors active on the Mongolian Stock Exchange. The largest and most active of them is Firebird; a New York based emerging markets hedge fund. They came to the market in 2008 with 50 million USD and became the largest investors in the market. Firebirds main strategy is to negotiate directly with the companies to acquire a signicant stake and play an active role in managing the company, an example being SharynGol JSC (SHG). Other larger investors ll their orders by way of block trading with a holder of a large stake in stocks, often an insider of the company. These deals are usually sourced and executed by a nominated local broker. Mark: Recently the MSE signed a deal with the London Stock Exchange. Can you tell us how this will positively impact the MSE going forward? Will: By having such an established institution backing such a tiny bourse as the MSE, we are expecting a higher level of condence from the international institutional and retail investors as well as increased condence from the local side of the investors pool. Other benets include harmonization of Mongolian legal framework on securities to that of an international standard, making it easier for local listed companies to access other markets and raise additional funds. It will also allow foreign listed companies to easily dual list on the MSE. The LSE is also installing the Millennium IT platform, which is considered to be the best market platform currently used in the world. The LSE will also bring with them a wealth of knowledge, expertise and contacts from the second largest nancial hub in the world. Mark: Lately weve heard rumblings about Mongolian companies wanting to list in places like Hong Kong. Do you see a robust market for dual-listing of Mongolian equities? Are there any government requirements that mandate listing of a Mongolian company on the MSE if it is public? In other words, could a Mongolian company list in Hong Kong or Singapore and bypass the Mongolian market altogether? Will: Mongolian Mining Corporation (MMC), or better known as Energy Resources in Mongolia, is listed on the Hong Kong Exchange. This company is majority owned by a local conglomerate MSC Holdings Ltd. and is considered one of the jewels of Mongolian business. There are many other companies listed on foreign markets with most or all operations situated in Mongolia - examples include Southgobi Energy Resources (HK), Petromatad (AIM), Hunnu Coal (ASX), Erdene Resources (TSX) and APIP looks set to oat on the main board of the HKSE next year. The mature Mongolian companies generally regard the Hong Kong market as the place where they can reach the maximum potential valuation because of the investors familiarity and general higher interest in Mongolia, as well as the ease of having geographical proximity and the same time zones. Australian and Canadian exchanges are also becoming favorable destinations for junior mining, mainly exploration, companies to raise funds. The only law requiring listing on the MSE are with strategically important deposits. The law states that at least 10% of a company with strategically important deposits needs to be listed on the local exchange and it can then also be listed on any other foreign exchanges. Erdenes Tavan Tolgoi, a segment of the Tavan Tolgoi deposit, is planning on listing on three exchanges: Mongolian, London and Hong Kong. We expect Oyu Tolgoi LLC, majority owned by Ivanhoe Mines, will be requested to list on the MSE. Other internationally listed companies are likely to seek local listing too, as soon as the legal frameworks
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are xed to accommodate this. There are legal stipulations in current Mongolian securities law and regulations that are either contradictory or make it difcult to accommodate international rules. When these dual listings begin happening, the Mongolian Stock Exchange will see a substantial boost in its market capitalization and activities. Mark: How would you measure the interest from overseas retail investors in opening accounts to trade MSE stocks locally? Will: The interest is denitely there, especially after the market reported such high growth last year and continues to thrive this year. However, as there is no international custodian and the trades are prenanced it discourages a number of international retail investors. The interest continues to grow and we think the rate of growth will increase rapidly in the next 12 months. Mark: How about the interest level from institutional investors wanting to work with your rm? Will: The majority of risks lie in the Mongolian Securities Clearing House & Central Depository Co. (MSCH&CD), who handle the custodianship, clearing and settlement of transactions, than on a brokerage house, which functions as liaison between the investor and the MSCH&CD. This allows investors to safely hold their portfolio even when the brokerage house becomes insolvent. Nevertheless, institutional investors nd it difcult to process this and it often takes a lot of explaining on how risk is diverted from the brokerage houses to the government of Mongolia, owner and operator of the MSCH&CD. We have had a number of international brokerages approach us over the past 18 months wanting to initiate a JV to gain access to the MSE for their clients. They tend to not feel condent enough to do it by themselves and therefore want an established partner on the ground. Mark: Is the IPO market strong? Can retail investors participate in the IPO rounds of Mongolian companies through your rm? Will: As I said earlier, there have been no IPOs for the past 3 - 4 years, however there are several IPOs in the pipeline at the end of this or the beginning of next year. Since the market is so small, in other to ll the book, the book runners have to offer the placements via other brokers, consequently we will be able to offer to our clients access to IPO rounds when they happen. Mark: How many deals has your rm participated in on the MSE? Will: Asia Pacic Securities has successfully co-underwritten the IPO of Hotel Mongolia JSC (MSH) in 2005. Asia Pacic Securities advised and assisted APIP in acquiring listed Sudut JSC (UNH) on the MSE. We are currently in the process of back-door listing one of APIPs subsidiaries on the MSE. APS, also, owns 22 percent of MSE-listed Olloo JSC (OLL). Other deals we have successfully completed on the MSE are related to sourcing and matching numerous block trades for our institutional and wealthy individual investors. Mark: Does your rm provide research on MSE-listed equities? Will: We provide a daily brieng which is a brief overview on the equities on the MSE. We do also provide research on individual equities although to date this has not been very regular. We intend on ramping this up over the next few months. Mark: What about corporate bond offerings, are they open to retail investors through your rm?
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Will: There has been only one successful corporate bond offering in the history of the MSE. Currently Agro LLC is attempting to raise funds through a bond offering, this can be purchased through our rm as well. Every Tuesday there is an additional hour for trading government bonds that also can be accessed through our rm. Mark: What is the account opening procedure for foreigners? Do you need to be physically present to open an account with your rm? Will: No, you do not have to be physically present to open an account. The account opening application, which explains the steps, is attached. Mark: For foreigners, what documents do you provide for end-of-year accounting for their home country? Will: We provide Portfolio Reports (sample attached) every week and at the end of the month if requested. We do not provide different reports at the year end. Mark: Capital ows into Mongolia have been very strong. Is it difcult for the bank to utilize this capital? Is the lending environment strong? Will: With the policy rate in excess of 11 percent, deposit rate of more than 14 percent in local currencies and loan rate in excess 16 percent per annum, it is difcult to market such a high cost of borrowing. Mark: Would you describe Mongolian banks as being well-capitalized? Will: At the start of the year, Khan Bank (one of the largest) had 90 million USD in capital. The banks remain severely under-capitalized. Mark: Is there any form of deposit insurance in Mongolia? Will: There is currently blanket deposit insurance backed by the government for all retail savings. This was established after two banks, Anod and Zoos, collapsed in 2008. However, the guarantee is scheduled to expire next year. Mark: Can foreigners open an account with your bank? What is the account opening procedure? Will: As a general rule, Mongolian banks are not allowed to open accounts for foreigners with no physical presence in the country for less than 30 days, as part of the Know Your Clients rule. However, Golomt Bank offers Certicate of Deposit accounts to be opened online and remotely, but with only limited service. The process is explained at www.egolomt.mn. Mark: Do you need to be physically present to open an account with your bank? Can you assign a nominee with POA? Will: In order to access and benet from a full array of banking services, the account opener has to be physically present in Mongolia for no less than 30 days. Once opened, the account holder can assign a nominee with POA, which need to be properly notarized. Mark: Do you offer time deposits in addition to current accounts and savings accounts? Will: Banks do offer time-deposits. Mark: What are the interest rates offered on time deposits and savings accounts?
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Will: Savings accounts can accumulate as much as 2.3% for USD and 6% for MNT yearly, whereas timedeposits can be as high as 6% for USD and 14% for MNT for 12 months CDs. Mark: Mongolian banks offer multiple currencies to their customers. Can a customer switch freely between currencies in their accounts? Will: Yes, absolutely. Mark: Can you access your account online and use ATMs globally? Are they linked together? Will: The credit and debit cards are offered by all major banks and can be used internationally. Online access is granted by all major banks too, however savings account are not linked to your credit or debit account. Mark: Does Mongolia have information exchange agreements or treaties with the United States or the European Union? Will: There are double taxation treaties with a number of European countries, not sure about information exchange agreements. Mark: Do you provide small business loans to those wishing to start a business in Mongolia? Will: Banks do provide these although at prohibitive rates. A subsidiary of APIP called Asia Finance also has a non-banking lending license which allows it to lend to SMEs. Mark: Do you offer property mortgages, either commercial or residential? Will: Yes, but rates remain as high as 1.2% per month for residential mortgages with an initial down payment of as high as 30%. Asia Finance is set to help open up the mortgage market by offering debt on more favourable terms. There are also various government initiatives to try and open up the market. Mark: Do you extend personal credit to foreigners? Will: It is possible as long as the foreigner have stayed in Mongolia for no less than 30 days. Mark: Thanks Will, that was informative! Will: You are welcome, and were glad to speak to any of your readers who have further questions.
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DAYANBILGUUN DANZAN BDSec

Mr. Dayanbilguun Danzan is one of the founders of BDSec Joint Stock Company, and during his career in the capital markets he served as a Board Director of the Mongolian Stock Exchange. Since 1999, he has been Executive Director of BDSec, a market leading Brokerage Company in Mongolia specializing in providing domestic securities execution, investment advisory, underwriting, and custodian services. It has largest client base and activities among all other brokers. He started his capital markets career from broker to branch manager at the Bayandukhum brokerage rm, which is now BDSec Joint Stock Company. Prior to that, he worked for the administration department of the State Parliament of Mongolia. He also worked for one of Mongolias commercial banks as an operations accountant. He is a graduate of the University of Finance and Economics of Mongolia, holding an MBA. In 2007, he received recognition from the Mongolian Ministry of Finance as an expert in the Mongolian banking and nance industry. Mr. Dayanbilguun Danzan speaks Russian and English. Mark: Mongolias stock market is relatively young. Liquidity is a major problem and investors often have to wait for days and sometimes weeks to get orders lled. What changes are necessary to improve this situation? DD: I think the most important thing to improve liquidity in the market is to have more new products available for investors. We have over 300 stocks listed on the MSE, but most of them have relatively poor transparency that makes them a difcult investment choice for investors. At the same time it seems reasonable because these companies have automatically listed during the privatization period back in 90s. However, there are still 30 to 50 stocks that have normal corporate governance, transparency and of course better operations than the rest. So they are traded actively on a daily basis. Since 2006, BDSec has introduced the rst ever IPOs to the market and they ultimately become very actively traded stocks given their good corporate governance and transparency. Financial Regulatory Commission of Mongolia, which is the main regulatory body that approves new securities issues, also takes serious care of corporate governance on newly listed companies. Fortunately, we have a better future in terms of liquidity. Companies have become more willing to raise capital to take advantage of the booming economy and the government is very keen to support those who want to raise capital with more favorable infrastructure. In fact, LSE is now working to make MSE more attractive not only to the investor side but to the issuer side. The Mining Law also requires mining companies that hold licenses of the strategic mineral deposits to be listed on MSE at least 10%, and the law is actually proceeding with Erdenes Tavan Tolgoi whose 10% is being distributed to local citizens through MSE. When there is more liquidity in the market there will be more value. Mark: With liquidity so scarce, how do large institutional investors get lled on orders? Are they buying blocks directly from the companies themselves or from insiders when there isnt enough on offer on the exchange?
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DD: Weve gained some experience being a bridge between insiders and institutional investors over the past 10 years. One third of the total domestic account holders are our clients. These accounts range from an ordinary citizen to business people and big conglomerates who can provide liquidity. In this regard, we are quite well known among foreign investors for organizing some block trades. The biggest block trade that we have executed was worth about US$17 million. Also when there are new IPOs or secondary issues investors get more liquidity. Mark: Recently the MSE signed a deal with the London Stock Exchange. Can you tell us how this will positively impact the MSE going forward? DD: Im very delighted about the MSEs agreement with London Stock Exchange because it increases the prole of the market so that more foreign investors will come and feel more comfortable about making investments with internationally qualied trading, settlement and reporting systems, which is the most important issue for foreign investors when it comes to less discovered markets like Mongolia. Mark: Lately weve heard rumblings about Mongolian companies wanting to list in places like Hong Kong. Do you see a robust market for dual-listing of Mongolian equities? Are there any government requirements that mandate listing of a Mongolian company on the MSE if it is public? In other words, could a Mongolian company list in Hong Kong or Singapore and bypass the Mongolian market altogether? DD: Recently I have noticed a few international listings by Mongolian companies, bypassing the Mongolian market. It is true that they can get higher valuation and a wider capital exposure, but in terms of investors perspective I always feel that the local market is the best place to come and get a good valuation. There is less competition and it also very much tracks the real economic growth given that the underlying businesses themselves are listed onshore directly. On the other hand, there are certain advantages that the local market offers to domestic issuers, such as lower expenses, suitable requirements and dedicated investors etc. However, I expect a few more dual-listings to come in the near future, but in my opinion, the local market will always be the best place. Mark: How would you measure the interest from overseas retail investors in opening accounts to trade MSE stocks locally? DD: Most of our foreign clients are individuals and they are getting bigger and bigger every time I look at our clients list. I think we have clients from more than 20 countries. Besides the economic growth and its future prospects, I think the main thing is that Mongolia is a very investor friendly market. If you are an individual investor, it could be the simplest account opening procedures, the most favorable tax environment, and the nicest brokers to talk to. I expect more individual investors will come in the future when there is more liquidity, more listed companies and more institutional investors. Mark: How about the interest level from institutional investors wanting to work with your rm? DD: I think there are far more institutional investors who are interested to invest in Mongolia than those who are already investing. The famous emerging market investor Dr. Mark Mobius came to see us in 2009, and he was desperate to invest but there was no international custodian bank to keep his funds assets in Mongolia. However, it doesnt mean that institutional investors cannot participate in the local market at all
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because we have a state owned Securities Clearing House and Central Depository which provides some necessary custodian services to institutional investors and in fact, we already have a number of international fund clients who are comfortable with our existing system. In general, Im very optimistic that the infrastructure issues are only a matter of time and once they are in place there will be more institutional investors and it will bring large national companies to the stock market, which creates liquidity and the liquidity will attract a large number of foreign investors. Mark: Is the IPO market strong? Can retail investors participate in the IPO rounds of Mongolian companies through your rm? DD: There have been 15 new IPOs and secondary issues on the MSE in total and our company has worked on 10 of them as lead underwriter and book runner. Most of the deals we have worked have proved very successful in terms of raising capital and the aftermarket performances. I think they are all now traded fairly higher than their primary market prices. Yes, retail investors can participate in IPOs through our rm. In fact, our clients enjoy some advantages to be able to get preferable pricing and allocation directly from us on the IPOs we do. Mark: Does your rm provide research on MSE-listed equities? DD: We have a research department with 3 analysts covering most of the blue chip stocks traded on the MSE. Research reports are updated twice a year depending on the frequency of nancial reporting by the companies. We also publish daily, weekly and monthly analytical reports. Mark: What about corporate bond offerings, are they open to retail investors through your rm? DD: We have recently introduced a corporate bond issued by Just Agro LLC and its 1 year bond pays 16.2% of interest. We are offering this corporate bond opportunity to all of our clients and so far there has been a lot of interest from foreign investors. A corporate bond is an opportunity to take advantage of the local currency appreciation plus the higher interest. Mark: What is the account opening procedure for foreigners? Do you need to be physically present to open an account with your rm? DD: As I mentioned before that the account opening procedures are pretty simple and they dont require foreigners to be in the country physically. All you need to do is to ll out the form and send it to us with your passport copy through fax or email. Mark: For foreigners, what documents do you provide for end-of-year accounting for their home country? DD: We provide monthly account statement to our clients and Im sure that the most useful one is the month-end account statement of every December. Mark: Thanks for taking the time to speak to me Dayanbilguun, I know you are busy. DD: My pleasure. We would be happy to answer any questions about opening a Mongolian brokerage account.
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JESS LAMPE APIP/Mongolian Properties

Jess is the manager for Mongolian Properties, an APIP company....... Mark: From our research its obvious that the Mongolian property market is the Wild West. There are very few rms with listings, and seemingly only a few agents worth their salt. Give us an overview of the RE business in Mongolia. Jess: The past twenty years have seen an increase in new developments and a migration of Mongolians to Ulaanbaatar. Ill cover the various areas/aspects below: GER DISTRICTS Most recent immigrants reside in the Ger districts located on the northern periphery of the city. While the size of lands make the area more livable than slums in other developing countries, the air quality in these areas are perhaps the worst in the world due to the constant burning of wood, coal, trash, and tires in the middle of winter. SOVIET APARTMENTS Soviet Apartments dominate the center of the city. These buildings are over 40 years old and tend to have 4 oors. Post transition, many of the bottom oors have been converted into retail and commercial spaces. Few companies or individuals have succeeded in acquiring entire buildings in order to repurpose, the notable exception being Urgoo Hotel, as property rights prohibit buyers from acquiring a majority of the building and forcing the hold outs to sell. The fate of Soviet Apartments is an unknown as perceptions of the apartments is mixed by Mongolian leaders. Many see opportunities in leveling the apartments and creating new developments. NEW LUXURY BUILDS Several new builds have been going up in recent years. Notable developments include Seoul Building, Temple View, Brau Haus, Regency Residence, Greenvilla, Bella Vista, Dreamlands, and more. These developments have offered attractive rental yields to investors. CAPITAL MARKETS Capital Markets are underdeveloped in Mongolia, both in terms of providing developers with nancing for builds and in terms of providing end buyers with sufcient loans to acquire properties. As a result, many companies over the years have sold off plan and used the proceeds to nance construction. These models likely contributed to the ts and starts of construction projects in recent years, though new inows of investment cash have led to smoother construction seasons. Mark: Although prices for real estate in Ulaanbaatar have risen sharply, they are still far below where most experts are predicting their headed over the next ve years. What is your macro view of Mongolian real estate, specically in the capital city? Weve heard comparisons to Kazakhstan 5 or 10 years ago. Would you say that is a fair comparison of where things are at?
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MONGOLIA
Jess: I think that is a fair comparison. Average property prices in UB are below where Kazakhstan fell to post bubble. I think it reasonable to assume that UB has growth ahead of it. Mark: Does the Mongolian property market work similarly to other frontier markets, where there is one price for the locals and another for the foreign buyer? Jess: In practice, yes. Local owners will attempt to charge foreigners a higher price. However, working with locals it is possible to get around this barrier. Mark: Can foreigners buy property in Mongolia? What is the typical procedure for someone wanting to buy an apartment for example? Jess: Foreigners can buy Immovable Property. Immovable Property includes houses, apartments, ofce buildings, warehouse space, and any building that is xed. Mark: How about management of that apartment for investors, is that service available, and for how much? Jess: There are few companies that provide reliable property management services. Mongolian Properties is one such company. Fees are 5% of rental income. Landlords will also need to pay for Homeowners Association Fees ( Fees) Mark: What are the yields investors can expect on residential RE? Jess: The glory days of USD 5,000 purchase price for a soviet apartment, ROI in 10 months time, and rental yields of 50% are long gone. In our major rental properties, we still see rental yields of 10-12% based on current actual sales prices and current actual rental prices. Mark: Must you be physically present in the country, or can you have a nominee or give a POA to a trusted individual? Jess: POA can be arranged, though generally it is more efcient to prepare a POA in Mongolia as the procedure for getting a POA varies depending on the country you are in, whether or not there is a Mongolian Embassy in that country, whether or not the country you are in was a signatory of the Hague Convention, whether or not the Mongolian Embassy views its responsibilities as including approval of POAs. Mark: Is commercial property readily available? Jess: Commercial property is available although prices are increasing. Mark: What about building new construction. For developers, is Mongolia a Friendly place to do business? Is the permitting difcult? Jess: Mongolia is reasonably friendly compared to other frontier markets.
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MONGOLIA
Mark: What professionals are necessary to close a RE transaction? Notaries? Lawyers? How is title held? Jess: The process for closing a contract is as follows: 1. 2. 3. 4. 1. 2. 3. 4. 5. 5. Buyer and seller (or their legal representatives) must meet at a notary and sign the contract. The notary fee is traditionally paid by the buyer and is based on the purchase price of the property. Buyer and seller must then go to a local bank and pay the 2% sales tax. This tax is levied against the seller. Buyer should then transfer all of the funds for the property. In practice, this can either be done in an escrow account set up at local banks (fee 20,000 MNT per party), or funds are paid in part. Buyer and seller must go to the Immovable Property Ofce and submit the following: - a form requesting transfer of the immovable property certicate - The immovable property certicate - Proof of the 2% tax payment - A notarized copy of the sales and purchase agreement -A statement from the seller that they have received payment for the property Certicate should be ready in 3-5 business days.
Mark: How would you assess the business environment in general? Is it easy to do business in Mongolia, or is it difcult? Jess: Relatively straight forward in terms of wiring money in and out of the country. Approvals are generally straight forward. Mark: Thanks Jess. Jess: Youre welcome. Please let your readers know that they can contact me directly with any questions.
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MONGOLIA
Conclusion
As you have probably learned after making it this far, Mongolia is a land of opportunity. Chances to participate in the growth of a new economy dont come that often! You might not have the gumption, or even the ability to drop everything and head to new lands to create your fortune. Theres no need to do that, weve identied the leaders of the pack for you, and you just heard it straight from their mouths. You can participate alongside these guys as they continue to buy up assets and position themselves and their investors over the next few years to prot. In an upcoming report well detail some of the investments that you can make in your own portfolio. Well provide contact information for the brokers, banks and money managers we think are the best of the bunch. Well even give you our select on-the-ground contact who can help you with everything from opening a bank account to buying an apartment in the capital city or elsewhere. Meanwhile, keep reading CapitalistExploits.com. Every week we scour the globe and our network of contacts in far-ung places to bring you opportunities you just wont nd anywhere else. We think youll nd it a fun read, and hopefully a protable one as well! To your happiness, health and wealth.
MARK WALLACE AND CHRIS TELL
So I jump ship in Hong Kong and make my way over to Tibet, and I get on as a looper at a course over in the Himalayas. A looper, you know, a caddy, a looper, a jock. So, I tell them Im a pro jock, and who do you think they give me? The Dalai Lama, himself. Twelfth son of the Lama. The owing robes, the grace, bald striking. So, Im on the rst tee with him. I give him the driver. He hauls off and whacks onebig hitter, the Lamalong, into a ten-thousand foot crevasse, right at the base of this glacier. Do you know what the Lama says? Gunga galunga gunga, gunga-galunga. So we nish the eighteenth and hes gonna stiff me. And I say, Hey, Lama, hey, how about a little something, you know, for the effort, you know. And he says, Oh, uh, there wont be any money, but when you die, on your deathbed, you will receive total consiousness. So I got that goin for me, which is nice.
CARL SPACKLER, PRO CADDY
46

Mongolia: The Ultimate Frontier Market Investment Opportunity

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