South Gobi On The Move

I’m travelling south from Erdenet back to Ulaanbaatar. The scenery here is incredible. Every valley has something different to take in. I travelled part of this route just six weeks ago, but the change is stunning. Six weeks ago, everything was cloaked in a verdant green. It was the height of the short summer here in Mongolia. Now, the cold has come and green has been replaced by brown. There are already traces of snow which make a stunning counterpoint to the dead grasses.

Everywhere you turn, you see animals. You cannot miss them. In order to stop ice from building up on the roads, susceptible locations are heavily salted. This may be good for the cars, but the livestock also appreciate the salt licks. It’s amusing at first, but then you realize just how dangerous it is. You round a corner and there are yaks, camels and horses clustered around a puddle in the road. When you’re not dodging those, you must look out for the wily herder who chooses to use the road to transport livestock through the mountains. Fortunately, we have an excellent driver.

Until recently, livestock was the bedrock of the economy here, now their place is being supplanted by mining. I spent most of last week trying to understand the ramifications of the coming boom in mining. It is impossible to even track the number of mines being planned. Every day, I learn of another giant cap-ex plan on an asset that I had never heard of. Clearly, this will create a serious uplift in the national economy, but regional economies will be where the real action is. If you want to invest in locally, you have to guess correctly. What industries and what cities benefit? This is the reason I headed to Erdenet.

You can look at a dusty hamlet next to a planned mine but have a difficult time visualizing the future. You can meet the local mayor and review his grandiose new town plan—there are museums, cultural centers and housing for 40,000 new citizens. Then you look out the window at the location of the new town and see a few goats grazing. How do you get from point A to B? How fast will it happen? Will a village of 1,500 really become 50,000 in two years or twenty? I had to see a success story.

The Erdenet mine was designed and built by the Soviets over 30 years ago. It is now one of the largest copper producers in the world. What started as a planned Soviet city has burst beyond the block housing structures originally envisioned. Erdenet is now a thriving city of 90,000. The mine is clearly the driving force in the economy.

Erdenet city view taken from the top of the haul ramp.

The Erdenet mine employs 5,000. A very rough rule of thumb is that for every person directly employed by a mine, there are four more in the supply chain and in logistics. That gets you to a total of 25,000 jobs created either directly or indirectly by the mine. Add in families and you are pushing up against the current city population. Finally, you need to add in bankers, restaurants, hotels and all the accoutrements of modern city living. One mine, 90,000 people living off its production. The math is imprecise, but it’s amazing to contemplate what percentage of these people are here only because of the mine. Forty years ago, Erdenet was barely existed, now it is the third largest city in Mongolia.

You need to visualize Erdenet to understand Khanbogd the planned city next to Ivanhoe’s massive Oyu Tolgoi mine. Erdenet currently mines 22 million tonnes of ore a year. Ivanhoe estimates that Oyu Tolgoi will mine 58 million tonnes a year and be three percent of world copper production. If it’s twice as big, will the surrounding town also be twice as big? Who knows. I spent a day there and am no closer to the truth, but after having seen Erdenet, the new town plans are suddenly plausible.

Khanbogd from above.

The problem is that you need to guess correctly. I have spent enough time in the ghost towns of Nevada to know that a stranded asset is worthless. If you chose the wrong town to build in, there is little recovery. You also need to build the right asset. What will these new mining towns need?

Khanbogd desperately needs a new hotel. The ‘hotel’ I stayed in had neither heat nor running water. It was the only one in town and I got the last room. There was no food in town, only a small convenience store where 80% of the SKUs were vodka related. I lived on Pringles, diet coke and a jar of unknown pickled vegetables. You can’t have 50,000 people without a supermarket. A good restaurant would do well, as would retail stores, office buildings, warehouses and machine shops. These cities are total speculations. People are scared to put the capital in—that creates the opportunity if you can understand the future in a way that they do not. It’s risky, but the upside is immense. Property in the downtown of a thriving city is worth millions an acre. To entice people to build, Khanbogd will currently give you the land for free. They will cooperate to ensure that bureaucracy is minimal. They want infrastructure. They know they desperately need infrastructure. Two years from now, if the city is a success, it will be too expensive to build. Huge upside, but it could be sagebrush if you are wrong.

Downtown Khanbogd

Then there’s Dalanzadgad, capital of the South Gobi Aimag or province where Khanbogd is located. It has nearly 20,000 people and an international airport. It is the administrative hub of the region with two massive planned mines, Oyu Tolgoi (already mentioned), Tavan Tolgoi (Coking Coal), and dozens of interesting mineral prospects. Quite a few of them will become mines. Will the mines put infrastructure in Dalanzadgad, or will they do everything on site? Right now, land in Dalanzadgad is cheap and the governor is keen for investment in the local community. Will it be the Nevada model? In Nevada, Reno is the hub for everything from Elko to Winnemucca to Carlin and everything in-between. The big upside could be in the hub. There are just so many variables to contemplate. Like everything else, it’s all about location.

I’m a realist. As much as I want to put a hotel or office building in each location, I can’t exactly run them from Miami. If I could find the right guy to run these, I’d seriously consider it—first I need the right guy. Unfortunately, that’s the problem with all of these investments that I’ve discovered. There’s huge upside, but you need to be in Mongolia to manage it. You can delegate parts to others, but you need to run the company yourself. That company must be run from Ulaanbaatar—not Miami. That’s the conclusion from this trip. Everywhere I look, I find interesting ideas. Investing in Mongolia itself is fascinating. It is the quickest growing emerging market. The growth pace will only accelerate from here as Oyu Tolgoi and Tavan Tolgoi come on line. There is just so much upside potential. It may be the only country to register higher than 20% GDP growth for the next decade. Those are huge numbers. Even if you make mistakes, the rapid growth will bail you out. I’ve always believed that you go where the bull markets are. Mongolia is the bull market. Unfortunately, right now, private assets are the only game in town. By the time the Mongolian Stock Exchange is mature enough to put big money to work, a lot of the upside will be gone. If you want to invest, you need to be here. Am I ready to move to Mongolia? It sure is tempting. Then I realize its two dozen degrees below freezing and it’s only October. There’s a reason why I currently live in Miami….

 

 

I had a few extra pictures that I just had to use. Forgive me.

If you are going to do business in Mongolia, do not even try to compete with these two. The smoked fish market is theirs. They stand out by the road 10 hours a day in subzero cold. They got our driver for at least a dozen fish. They are truely dedicated entrepeneurs (like most Mongolians we met).

Don’t get in the way of Russian Haul Trucks (Erdenet Mine).

 

My new wheels…. We had two flats driving 250km from Dalanzadgad to Khanbogd. Clearly a Toyota RAV4 is not cut out for rugged terrain. This guy is.

Ever wondered where cashmere comes from? (South Gobi)

Supply your own caption…..

Categories: Travels
Positions Mentioned: none

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