“GOIN’ to OT?” drawls Andy, a burly tattooed man with that worldly air common to those who have done time in the American army. The gate at Incheon airport in South Korea is packed with travellers, mainly Mongolian expatriates on their way home, waiting to board a flight to Ulaanbaatar. Andy’s is a fair guess as to the destination of one of the few other Western passengers. “OT”—Oyu Tolgoi, or “Turquoise Hill”—is in the middle of nowhere, a desolate spot in the Gobi desert, another hour-and-a-half’s flight south of Ulaanbaatar (inevitably, “UB”). But it is the site of the biggest foreign-investment project in Mongolia, a copper-and-gold mine that is springing up at a remarkable speed and is expected, by 2020, to account for one-third of Mongolia’s GDP.

For Andy, who normally “does security” in places such as Afghanistan, Nigeria and Somalia, OT is a rest cure. Conditions are comfortable, the locals are a delight, and nobody tries to shoot him. And there are the transits through UB, a veritable Bangkok of the steppes—at least if your comparators are Kabul and Mogadishu. In the OT bus from UB airport into town, Andy is on tenterhooks waiting for the overnight hotel allocation. He is delighted with his billet—one where overnight guests are readily tolerated. The other news is less cheery: the airport bus will leave at four in the morning.

UB is a boom town on the frontier of global mining. Hotels are bursting; the Irish pubs, of which there are several, are heaving with foreign miners, investment bankers and young local women with very long legs and very short skirts. French bistros serve steaks the size of tabloid newspapers. Dozens of cranes punctuate the skyline. The streets, empty 20 years ago, are now clogged. It is hard to believe on the clear sunny mornings the city enjoys much of the year, but UB’s air is now as polluted as anywhere—second only to the Iranian city of Ahwaz, according to a recent study by the World Health Organisation. In the winter, when temperatures average from -10 to -30 centigrade, and often fall to -40 at night, UB burns a lot of coal.

Another sign of a boom is the effort to keep the city functioning through these crippling winters. When a Singaporean firm was building a joint-venture brewery to make Tiger beer, it was so anxious to finish in time for the summer-drinking high season that it hired patio heaters the size of jet engines for the construction site. Without such aids, building stops in the Mongolian winter. It is too cold to pour concrete.

A glitzy mall on the corner of the main Sukhbaatar Square houses the sort of establishments you come across in the better class of airport: chic boutiques, pricey restaurants, expensive-watch shops and, of course, an outlet of Louis Vuitton, which sells posh luggage. The shops usually look empty, which is reassuring for those nostalgic for the UB of the recent past—small, drab and poor, and offering its visitors, as one unhappily put it, a choice of “mutton, mutton and mutton”, but at least refreshingly different from other capitals.

Central Tower, as it is known, is a new ornament to downtown Ulaanbaatar. It is built next door to the lot where once stood the former headquarters of the former Mongolian People’s Revolutionary Party, the MPRP (it has since dropped the “R” word), which for seven decades until 1990 ruled Mongolia as a one-party state and rock-solid Soviet satellite. The building was burned down in rioting in 2008 after a disputed election. The use to which the site has now been put is as good a symbol as any of the new aspirations of Mongolia’s ruling class.

Dreams under your feet

To pay for these dreams, Mongolia is being dug up and sold to China. Already, more than 80% of its exports are minerals, a proportion expected to rise in a few years to 95%. Mongolia makes mining geologists salivate over its known riches and unexplored potential—for copper, coal, gold, silver, uranium, molybdenum, and on and on. Some 3,000 mining licences have been issued.

It is not just that Mongolia is a treasure-chest of geological wealth. It is slap-bang next to the world’s biggest and fastest-growing market for most minerals. Put together Mongolian supply and Chinese demand, and Mongolia will be rich beyond the wildest dreams of a population many of whom, a generation ago, saw themselves as nomadic herders. With just under 3m people, Mongolia has a chance of becoming a Qatar or a Brunei: a country that has only a small population but almost all of it, in global terms, loaded. Brian Fisher, an Australian economist who has conducted a study of the economic impact of OT, says Mongolia “sounds like Australia in 1930″.

In the third quarter of 2011 Mongolia’s economy grew by 21% compared with the same period in 2010. Even sober economists think the country is going to have to get used to this sort of thing. The IMF expects growth to average 14% a year between 2012 and 2016. In 2013, the year production is due to begin in earnest at OT, it is forecast to reach 22.9%. Others think it will be at least twice that.

Indeed, OT is the force driving many of these short-term projections towards the sky. Its construction is a big factor in this year’s boom. From 2013 its sales will start adding an average of about five percentage points a year to the national growth rate up to 2020, when its impact on the economy will peak. By November last year over $3 billion had already been spent on OT, a figure that will rise to $6 billion by 2013 and $10 billion by 2020. For Mongolia, a $6 billion economy, this is enormous.

So is the scale of the logistical challenge of building one of the world’s biggest copper mines in the middle of the desert. All supplies have to be brought in by road, from China to the south. Some 18,000 workers, including about 10,000 Mongolians and 6,000 Chinese, have to be housed and fed. Water had to be found, and is to be piped from an underground aquifer over 50km (32 miles) away. Electricity is to be provided first from China, then by a purpose-built power plant. And local people have to be compensated, coaxed and cajoled into believing that the mine is in their interests, not just those of the foreigners who are running it.

The project is a joint venture between the Mongolian government (34%) and Ivanhoe Mines of Canada (66%), which is in turn 49% owned by Rio Tinto, the mining giant that is managing OT and has put up most of the money. Already the Turquoise Hill, where the colour of the soil first betrayed the presence of copper to prospectors decades ago, has vanished. A huge pit is opening up for the first phase of the mine. Two shafts have been sunk for the second, underground, phase. On top of one, a tower is soaring. It will be the tallest structure in the Gobi, and perhaps in Mongolia. The workers are housed in long prefabricated buildings or, for the luckier ones, traditional gers, circular felt tents (equipped with untraditional en suite facilities, TV and Ethernet cables).

All this is justified commercially by the expectation that this mine will produce 450,000 tonnes of copper a year, making it one of the world’s five biggest mines, as well as being a big gold producer. And it will have a life of at least 50 years. The more they look, the more potential geologists find in the area. It will be what Rio calls a “first-quartile” mine in terms of costs—ie, among the cheapest. And its proximity to China means that the cost of transport should not be prohibitive. The price of copper is especially vulnerable to swings in market sentiment. But global supply is constrained, and barring global economic Armageddon, demand is not going to collapse.

Yurts revisited

OT, however, matters not just in itself, but as a test of Mongolia’s ability to work with foreign investors to pull off such mammoth undertakings. Next in line is Tavan Tolgoi (Five Hills), the world’s biggest untapped coal deposit, also in South Gobi province. Notional shares in this project have already been distributed (electronically) to every Mongolian born before March 31st 2011. With a general election due in 2012, this adds political urgency to an ambitious scheme to raise billions of dollars for the mine through an initial public offering of shares in Ulaanbaatar and London. This will double the market capitalisation of the sleepy UB stock exchange.

Mongolian coal production is expected to increase from about 16m tonnes a year now to 40m by 2020 and 240m by 2040. Again China provides a ready market, but the mining boom has exacerbated Mongolian fears of a Chinese takeover by commercial stealth. So feasibility studies are under way on the costly options of building railways to take coal to Russia, and thence out to Korea and Japan via Vladivostok, or to Dandong on the Chinese-North Korea border and thence by sea to South Korea.

A touch of Dutch on the steppes

Not everyone in Mongolia looks at the growth projections and goes giddy with delight. Many worry about the economic, environmental, social and strategic costs of becoming “Minegolia”. Economists fret about a “resource curse”, or “Dutch disease”. If even the Netherlands can be vulnerable to this—whereby wealth floods in as natural resources are exploited, pushes up the exchange rate, inflation, or both, and renders other industries uncompetitive—how is poor Mongolia to cope? And the Netherlands never had a year like the one Mongolia can expect in 2013, when the economy will grow by a quarter and the current-account balance will lurch from a deficit of 14% of GDP into surplus.

Furthermore, Mongolia, a 20-year-old democracy, is prone to populist policymaking. Even as the economy is booming, political parties are tempted to promise handouts. After pledges made at the previous election, every Mongolian, rich or poor, gets 21,000 togrogs ($16) on the 15th of every month. The big parties have declared a no-handout pact ahead of the next election, and the government has set up a “fiscal-stability fund” to smooth the commodity cycle. But the temptation to dip into the till will mount as voting nears.

For economists, the resource curse is a risk Mongolia has little option but to take. As Mr Fisher, the Australian economist, puts it, its comparative advantage is in commodities and mining services. There is no point in trying to compete in manufacturing with “the biggest factory on the planet” next door in China.

Mongolia is still a desperately poor country. It has just graduated, in development-bank speak, to “lower-middle-income” status, with a GDP of around $2,000 per head. The population of UB has expanded by 70% in the past few years, to about 1.2m now. Some poor people still spend the winter nights beneath the streets (open manholes are a pedestrian hazard), huddling near the pipes for warmth. The city is sprawling outward through valleys in all directions along dirt roads lined with clapboard fences, behind which former herders live in gers.

One such herder, given the name Igor by Russians he knew in his youth, describes a common life path. A few years ago, herding in Central province, he lost many of his sheep to a dzud, one of the periodic climatic disasters that hit Mongolia—a summer drought that results in too little pasture and too little hay for the winter, followed by heavy winter snow and colder-than-usual temperatures. Igor sold the rest of his livestock to pay for his children’s schooling, bought a pickup truck and moved to UB, where he makes a living hiring it out. He finds UB going from bad to worse, as more people come to town and scramble to earn money. All there is to look forward to is the summer pilgrimage home, to drink airag (fermented mare’s milk) with his friends in a ger.

It is not just the weather that drives herders into town. Some are mining refugees, fleeing environmental devastation. Besides the licence-holders Mongolia has tens of thousands of illegal gold prospectors, known as “ninja” miners because the green plastic bowls they carry on their backs to sift for specks of the metal make them look like mutant turtles. Their use of mercury and cyanide has poisoned rivers.

Mongolia’s most flamboyant environmental campaigner is a former herder called Tsetsegee Munkhbayar. He made his name helping clean up the Onggi river, and then for his extreme forms of protest, involving shooting at mining equipment or vehicles. In April 2011 he led a group of supporters into Sukhbaatar Square on horseback to demand talks with the government. Mr Munkhbayar, a grim-faced man looking out of place behind a desk in his UB office in knee-length boots and traditional jacket, believes that if Mongolians exploit the mines, “we will never develop.” He suggests an alternative future of herding, dairy-farming and tourism. As he talks he is interrupted by a loud blare of traditional Mongolian music. It is the ringtone on his mobile.

And not a drop to drink

One UB resident, visiting the OT site as an interpreter for a foreign journalist, cannot stop herself from weeping at what is being done to the area and to her country. For the outsider, the bleak brown desolation of the Gobi is not a landscape that evokes sympathy. And it needs an awful lot of Gobi to sustain a flock of goats and camels, so, vast though the OT project is, the number of herders directly affected is small. But the translator sees ruin: “You can’t drink copper; you can’t drink gold.”

In fact, the aquifer tapped for OT is too deep to affect surface water, too saline to pass human-consumption standards and so big it will be no more than one-third depleted after 50 years of the project. The big danger environmentalists see from its use is that even a future natural drought may be blamed on OT. It will be hard for the project to deny water to distressed local herders. That might lead to overgrazing.

The way it was

Such a massive undertaking is bound to distort the local economy and disrupt the environment. Compared with the ninjas, the multinationals and the development banks that will help raise the largest-ever project financing for mining can at least claim to be part of the solution. They are conducting impact assessments and bio diversity studies. The project is also providing jobs, and creating more employment for locals through subcontracts.

But it will struggle to be popular. Oyun Sanjasuuren, an independent member of parliament, says mining is bound to be political because it is “the main thing in the country”. And the face of Mongolian mining over the past 15 years has been “mostly ugly”. Miss Oyun says she entered parliament as a centrist, but now finds herself on the right as the main parties have shifted steadily to the left. OT has not been helped by tactless remarks made in the past by Robert Friedland, Ivanhoe’s boss, about “the cash machine we intend to build”, and how nice it was to have so few people around and “no NGOs”.

The wealth generated by the miners is an obvious target. And the militant Mr Munkhbayar has many fans even among young urban Mongolians who moan that development is arriving too slowly. Like him, they wish it could come from some other industry. Every herder, says one environmentalist, hopes that at least one person in his family will carry on the life. But that may be changing. Twenty years ago it was hard to meet anyone in UB who identified with the city. Even if they were born there, they saw “home” as the “aimag“, or province, from which their parents came. Now a new generation of city-dwellers feels less attached to the countryside and to nomadic herding traditions. Their numbers are swollen by young people returning from an overseas education to chase the new opportunities the mining boom is throwing up.

One such, a young man called Damdin, is finding life difficult. After 15 years in Fairfax, Virginia, he has forgotten most of his Mongolian. He left Mongolia with his mother, who was fleeing his alcoholic father. At school in America the other Asian students were scared of him, despite his short stature; Mongolians, he says, have the reputation of being psychos. Now back in UB, living in a ger with his father who spends his time playing games on Facebook, his ambition is to open UB’s first skateboard shop.

When The Economist encountered him, outside a derelict Buddhist temple in a ger district in the middle of the afternoon, and later at the nearby police station, he had just been punched and robbed of his phone by friends of the friend he had lent it to (“It was 4G, man!”). He was drunk, despite saying he is always teased as a wuss for sticking to beer when real men drink vodka. He was cradling a little street-puppy he had rescued from his muggers, knowing his grandmother would not let him take it home. He presented as forlorn a picture as could be imagined of the pain and dislocation of being caught between two worlds. But he said he had no intention of going back to Virginia.

Over the last several months we’ve gotten to know a few of Mongolia’s brightest entrepreneurs. Real estate has been a big focus for most of them. Without a doubt, one of the most successful has been Lee Cashell. You can read an extensive interview that I conducted with Lee in our special report onInvesting in Mongolia. If you don’t have it you can download it here.

I also interviewed Lee last week, but I focused more directly on the floating of APP, his Mongolian-listed property play. APP is the newest issue on the Mongolian Stock Exchange, so it’s generating a lot of excitement. The price is rapidly appreciating, and we wanted to catch up with Lee before the rest of the herd.

Mark: Lee we’ve spoken a few times about Mongolia with you, and you’re featured prominently in our special report on Mongolia. Today I want to ask you more specifically about APP, the company you just floated on the Mongolian exchange. But first, you run quite a few businesses in Mongolia, give us an overview.

Lee: Asia Pacific Investment Partners is a ten year old company incorporated in Hong Kong which owns and operates ten companies inside of Mongolia. The companies are in the real estate, mining and financial services industries and the largest of the ten companies are the property development company and Central Asian Cement, which is a cement producer. The company has about 200 employees and is currently planning a listing of the entire group on the Hong Kong stock exchange in late 2012 or early 2013.

Mark: Ok, so what’s the deal with APP? Is it an asset gathering play?

Lee: Asia Pacific Properties is a new company that was formed to hold several of our real estate businesses and also give APIP a representative listing on the Mongolian stock exchange. As one of the largest integrated real estate companies in Mongolia we feel that it is important for us to have a company on the Mongolian stock exchange which offers investors access to one of the most active real estate companies in the country.

The businesses we have decided to inject into APP are the Rural Development Corporation, the Property Trading business, and the Property Development Division that specializes in “smaller boutique residential buildings”. The larger condominium and mixed use developments will continue to stay underneath Asia Pacific Land and the main developer of the group.

The Rural Development Corporation was an idea we had about four years ago to leverage off of the growth of the mining activity that was happening in the Gobi Desert. As many people have heard, two of the largest mining deposits in the world are both located about 100 kilomters of each other in the Gobi Desert. This of course has spurred economic growth in the area. We decided to make a number of investments there into the small commercial buildings that can be rented out as stores, restaurants and various other small businesses that one generally finds when you have a mining boom. Our inspiration is the old saying that the people who really made the money in the San Francisco gold boom were the people selling picks and shovels, as well as real-life examples includig Levi’s jeans and Folger’s Coffee. In this case, we are really standing by our competitive advantage of buying and renting real estate. If Levi’s was participating in the Mongolian gold boom they would probably be renting one of our stores.

Mark: You’ve mentioned before that you’re working towards a US$50 million market cap for APP. What sort of PE would we be looking at with that valuation, and what sort of PE are we looking at now?

Lee: The income for this, since we just started, is expected to be quite modest, but the good news is that the first property development we are doing inside the company, which is called The Oasis Residence, is currently about 40% sold. We expect to be 100% sold over the next 6 months. This building should bring about US$4 million in profit to the company, and the other two businesses should add about another US$1 million, bringing us up to US$5 million for next year. The average PE ratio now on the exchange is around 30X, although because of the illiquidity it is difficult to get a good average figure. In any case, we will be happy with anything between a 20x and 30X PE ratio.

Mark: Liquidity is a major issue on the Mongolian exchange. You also own a Mongolian broker/dealer. First, what’s it like operating a broker/dealer in such a fledgling market?

Lee: Well, it has really been a game of patience since we have been waiting for five years for the liquidity to increase. We have had a couple of liquidity spurts but we are still expecting a normalization of the exchange with increased investment, trading hours, IPO’s and of course liquidity. Of course with low liquidity brokers can make a lot of money, so we haven’t built up a large infrastructure within the company yet, and are planning to expand the brokerage, called Asia Pacific Securities, in line with the growth of the turnover of the market.

Mark: And, how does owning your own broker/dealer help you create liquidity for APP and your investors?

Lee: Well, it helps alot, we are the main market maker for the company and the main broker to the parent company, Asia Pacific Investment Partners, which is the largest shareholder of APP. The brokerage arm will of course remain the most active market maker for the stock, but it is clear that other brokerage firms are excited about participating since this is one of the only new issues to hit the market this year.

Mark: We’ve heard that Sam Zell and others are now seriously looking at Mongolia, and we’ve even spoken to one of our contacts that has already had a meeting with Zell. What’s going to happen when all that capital (billions) tries to find a home in Mongolia? Where is it going to go and how are you positioning ahead of it?

Lee: It will be difficult for Sam Zell or any other large real estate players to come in and invest large sums of money in the Mongolian real estate market right away because there are very few strata title buildings available for sale in the country. That means they will be forced into trying to get involved in property development, which significantly increases their execution risk as well as requires on the ground management of projects. In either case, more money is definitely coming into the property market, and as one of the leading developers in the city we are definitely well-positioned to continue to sell property. However, perhaps more importantly we hold the largest land bank of any developer in the country and therefore have the ability to sell out land should we choose to, or else continue to develop top-quality buildings over the next ten years.

Mark: Outside of APP, what’s the best way for small individual investors to approach the Mongolian investment opportunity, longer term?

Lee: Well, within our group we offer numerous ways for people to participate. Firstly, people can invest into the stock market, including APP, through our brokerage arm called Asia Pacific Securities; secondly, they can invest into real estate, either into one of our developments or through the dozens of opportunities we have through our real estate agency Mongolian Properties. We were the first real estate agency in the country and remain the largest by far. We have a successful record of serving international clientele for ten years. We currently have about fifteen agents and I have trained them all myself, so they provide excellent service.

In addition, investors could consider putting some funds into a bank account in Mongolia that is generally yielding above ten perent for Mongolian currency deposits. We also have a lending arm called Asia Pacific Finance, and we regularly borrow funds from our circle of investors, offering them 10% interst on USD or MNT for credit lines spanning anywhere from 6 months to 3 years.

Mark: If you were just coming to Mongolia for the first time, capital in hand, what would you focus on today?

Lee: Like everywhere one should consider diversification, so I would put some money into the stock market, some into property and some into a bank account in Mongolian Tugriks in order to get both the interest rate, as well as any possible currency appreciation.

Mark: There are enormous opportunities in Mongolia, on that I think we agree. During every bull market you’ll still find guys who manage to lose their shirts. With that in mind what sectors in Mongolia do you think pose the greatest risks to investors?

Lee: Probably mining is the biggest risk because there are constant discussions within the Mongolian government about amending laws, increasing taxes and forbidding investment into this sector, or that specific geography of Mongolia. The other industry that I have seen take a hit is construction. When the last financial crisis hit all of the banks pulled their loans from construction companies and a number of projects were stopped half-way finished.

Lastly, investing directly into a private company in Mongolia without a very good legal contract, a strong presence on the ground in Mongolia and a clear path to an exit is also a no-no. Our main company, Asia Pacific Investment Partners (APIP), is currently private and headed towards an IPO on the Hong Kong stock exchange. We have a ten-year track record of growing profits and excellent corporate governance, yet we would only extend the invitation to invest into our company to very savvy, experienced international investors that qualify as high-net worth sophisticated investors. Although private company investments sometimes have outsized returns, they also have significant execution and liquidity risks, especially in the emerging markets. I know you guys focus on this area, so you know what I’m talking about.

Mark: Absolutely, we do… That being said, the “risk off” trade that has dominated global capital markets for the last few months has to a large extent side-stepped the MSE. Can you give us your views on this?

Lee: Well, during 2008 Mongolia was still booming from its previous year of 2007 which saw a growth rate of 9.5%. As the world was reeling from the Global Financial Crisis (GFC) everything seemed peachy in Mongolia until 2009 came around, and that’s when we saw the effects of the GFC hit Mongolia. I therefore expect some modest slow down in Mongolia for next year, which quite frankly I welcome because things are growing a bit too fast for the infrastructure of Mongolia to keep up. I would prefer Mongolia grows at 10% a year for the next ten years, rather than at 30% for the next three years.

Mark: Does a lack of liquidity in the event of a downturn bolster the market due to investors preferring to hold rather than sell, knowing that the lack of liquidity could work adversely for them in such a market environment?

Lee: Well, frankly the lack of liquidity gets worse when the economy slows down and there is a perceived “crisis” somewhere around the world, but that also needs to be juxtaposed against an increasing knowledge and interest in Mongolia, and the lack of investment opportunities in general, which keeps the overall investment into the Mongolian stock exchange increasing slowly but surely.

When I look at the decreasing interest rates of savings deposits (They used to be 20% per year and now are down to 10% or 11%) I can see the right ingredients for a surge in the Mongolian stock exchange. Lowering interest rates, increased awareness and investment, new technologies and cooperation with the LSE and most importantly strong growth in corporate profits, points to a very promising year for the MSE.

Mark: Thanks Lee, that was great information for our subscribers.

Lee: My pleasure.
Mark again… Clearly Mongolia could provide investors with the proper perspective and time horizon immense opportunity. We recommend you listen to experts like Lee, who are on the ground, hacking it out day in and day out. We’ll continue to bring you updates and opportunities as they present themselves.

- Mark

“Wherever you see a successful business, someone once made a courageous decision.” – Peter Drucker

During the meeting the shareholders also unanimously approved the injection of a 100% interest in the
Rural Development Corporation LLC (“RDC”) and the Oasis luxury residential development project into
the newly named company, both of which were acquired from Asia Pacific Investment Partners (“APIP”).

Rural Development Corporation is a real estate development company focused on developing and
commercializing residential and commercial real estate projects in 2nd and 3rd tier cities in Mongolia,
which are in close proximity to the mining boom-towns in the Gobi Desert. RDC’s portfolio currently
includes 13 properties in locations characterized by high levels of excess demand for quality residential
and commercial real estate assets combined with low levels of competition and land construction
prices. RDC’s existing portfolio enjoys very high levels of capital appreciation and yields of up to 40% per
annum. The management team behind RDC has extensive experience in renovation and construction
and a expertise in property acquisition, ownership procedures, laws, and regulations in Mongolia. RDC
has surveyed numerous key cities along the mining supply chain and has a strong pipeline of acquisition
opportunities. RDC’s value is estimated at circa US$6 million, all of which will accrue to APP shareholders
without dilution, as a consequence of RDC being gifted by APIP to APP in order to build value.

The Oasis luxury residential development is currently in its final stages of planning and will commence
construction in early spring. Pre-sales are already extremely strong and it is anticipated that the whole
building will be fully sold prior to construction beginning. The building will be located off Seoul Street in
the heart of Ulaanbaatar’s entertainment district. It will comprise of circa 30 luxury residential units with
a total saleable area of approximately SQM 3,600. The development is expected to be completed in Q1
2013, with profits of circa US$4 million, all of which will accrue to APP shareholders.

Lee Cashell, Chairman of Asia Pacific Properties, commented:

“With the solid asset base and profitable businesses being injected into APP, we expect to see a
strong surge in APP’s share price over the next six to twelve months. This will be further accentuated
with the high earnings multiples on offer on the Mongolian Stock Exchange.”

Asia Pacific Properties will remain majority owned by Asia Pacific Investment Partners. APIP is a leading
Mongolia focused operating company that is primarily engaged in property, cement, financial services
and natural resources.

For further information on APIP and APP please refer to www.apipcorp.com and www.apip-
properties.com or contact:

Will Tindall
Chief Communications Officer
will@apipcorp.com
Tel: +44 77 7619 5209

With resource-needy neighbor China to the south, it is inevitable and predictable that Mongolia’s natural resources will be developed and profitably exported thus creating an economic boom. One copper-gold mine is going to add 25% or more to GDP, and there is more copper, more gold, uranium, molybdenum, limestone, oil, gas, the second largest deposit of coal in the world, and many tons more coal in smaller mines around the country.

The real estate investors often emphasize that the mining industry has a lot of risks. It is hard to predict which mine will be the most profitable and which mining company’s stock price will rise the most. However, it is knowable that mining, will bring a ramp up in GDP and  a ramp up in wage growth, and that this will have a wealth effect on the 2.7 to 3.1 million people living in the country which will lead to higher real estate prices. The news that the government is considering raising state employee wages 53%, doubling state employee wages from 2008 in 4 years time, does not discourage this thesis.

All parties investing in real estate in Mongolia do so using a varying degree of shell companies, some more complex than others. They all have trusted local Mongolian employees in the field looking for assets to purchase. As one noted, “if the white guy shows up, the price goes up 30%.” These are barriers to other speculators entering the real estate market. Yet, there are economic tourists and private equity investors daily trying to meet with the below professionals to pick their brains on how to invest in Mongolia.

Each of these real estate investors – Mr. Cashell, Mr. de Gruben, and Mr. Kupperman – and their staffs strongly believe that in real estate they have the investment edge on Mongolia’s mining boom.

Asia Pacific Investment Partners (APIP)

Lee Cashell is famed for showing up in Ulan Bator, Mongolia, with $30,000 and becoming a multi-millionaire. He bought three apartments for $10,000 each in 2001 and rented them out for $600 per month to United Nations employees. At a yield of 60% (a $10,000 apartment renting for $7,200/year), he was off to a good start building a real estate empire that is now diversifying into integrated businesses from property development to cement to brokerage services. When I met with him on September 21, 2011, he was transacting an international business deal to secure his place as the largest cement producer in Mongolia. At the same time, he was preparing a celebration for concluding selling the first 25-unit tranche of his Olympic Luxury Residence apartments at up to $3,200 per square meter and commencing sales of the second tranche at higher prices in line with Mongolia’s inflating property values.

APIP is Lee Cashell’s corporate umbrella. While their website shows 11 subsidiaries, management confirms that 80% of profits currently come from property development and cement. In Ulan Bator, Mr. Cashell believes that property values are increasing on average at 3% per month but that land values are increasing by 10% per month. Since entering the property market in 2001, he has seen about a 5-fold increase in the value of property in Ulan Bator’s center.

Mr. Cashell seems relaxed, confident, concerned with increasing his market share and profitability any way he can, but little concerned by competition.  The estimated value of his company’s land bank is currently $150 million, “based on a combination of independent valuation and a very conservative estimate based on market comparables and actual prices offered,” according to APIP Chief Communications Officer Will Tindall. Mr. Cashell believes the land bank is his most valuable asset as Mongolian prices for precious land are at about $1,300 per square meter currently and land prices in Qatar during that country’s boom went to upwards of $10,000 per square meter. Mr. Cashell looks to Kazakhstan and Vietnam, along with Qatar, for a road map on how property prices will rise as Mongolia’s mining industry’s production booms.

(click image above to enlarge it)

Mr. Cashell estimated that margins on their cement business are currently at 50% with local cement prices going from $80 to $160 per ton in the past 3 years. Cement is an important binding product, and a principal ingredient in concrete. Mr. Cashell stated there are 10 limestone deposits with rail access in Mongolia that can be used to make cement and he owns two of them. Two more of these 10 limestone deposits are owned by a Mongolian state-run company. No one else is known to own more than one, and five are not developed. All the construction occurring in Mongolia needs cement for its concrete, and APIP thus has built-in customers in the concrete companies.

Among APIP’s achievements, they are proud to have eked out about a $1 million profit in 2009 when the financial crisis hit Mongolia the hardest. Net income in for 2010 was $7 million and they are forecasting $12 million for this year. If Mr. Cashell is correct and land prices rise at 10% per month, his $150 million land bank alone will double in value every 8 months as long as the property boom continues.

M.A.D. Investment Solutions (M.A.D.)

Christopher de Gruben was formerly employed by Lee Cashell and Joachim “Josh” Bertot worked as a consultant to Lee Cashell on some projects before they started Make A Difference Investment Solutions. I was on day 3 of my visit to Mongolia when I met Mr. de Gruben and he began our conversation by asking, “Can you feel it?”

He was talking about the energy and boomtown feeling that buzzes around the investment community of Mongolia. It is ever-present, much like Mr. de Gruben’s own high-level energy. Mr. Bertot taped our conversation and Mr. de Gruben’s presentation to me as they were practicing for road shows beginning in London in October to raise funds for their private equity offering Real Estate Mongolia fund (R.E.M.).

Mr. de Gruben arrived in Mongolia in late 2003. His first apartment cost $23,000 and now is worth about $148,000, a 3½-fold price rise. Mr. de Gruben, the son of a Belgian diplomat, grew up living in the Soviet Union and other Eastern Bloc countries such as Poland. He whizzes through the history of real estate in Ulan Bator and Mongolia. Mr. de Gruben explains how some of the most valuable communist era apartments today are those from the planned “40,000” project which built between 450 and 500 homes. They are known to be solidly constructed and near the center of Ulan Bator. Next was the “50,000” project that built 500 to 600 apartments in Ulan Bator. The Soviet history lesson rapidly progresses through the Soviets leaving in 1991, taking all their equipment as well as most of the skilled labor.

He rattles off which years foreign direct investment (FDI) and foreign aid were good and bad as rapidly as he details which years were better or worse in the quality of construction, citing 2005 – 2007 as an improvement over the early 2000s. He notes that the financial crisis of 2008 led to a stop in construction and a freeze in real estate prices. Well-located real estate held its value in 2009, but there were no buyers. With the lift of the mining windfall tax and the Oyu Tolgoi copper-gold mine agreement in 2010, property prices returned to their appreciating trajectory.

In pointing out the importance of international aid to Mongolia, Mr. de Gruben lists some of the streets in Ulan Bator sponsored by various countries: Korea (Seoul Street), Japan (the airport road and Millenium Street), India (Gandhi Street), and the U.S. (Denver Street). He is not building his case for international aid, but his case for the scarcity of property. The number of roadways are limited, and thus the desirable properties – linked to the limited roads that get you to the center of Ulan Bator rapidly – are limited as well.

He cites undeveloped land as appreciating at 100% per year for the last 3 years (or roughly 7% per month). One of the driving forces behind property values rising is Mongolia’s laws regarding property rights are very favorable to property owners. The idea of purchasing every apartment in a building so you can tear the building down and put something new up is not viable. For example, if one were to purchase 22 of 25 apartments in a building, each of the last three owners can successively ask for as much money as they want, and more than the last one, and they know this, and they will.

Mr. de Gruben’s accumulated wealth of knowledge from purchasing, holding, and flipping properties both for himself and private investors will is available in a new $1,200 report on the real estate market. He was kind enough to share a draft executive summary of the report (68 pages) with me and the actual report that I saw sitting on his desk (over 450 pages) will indeed provide a lot of data to digest.

Sam Zell and other private equity groups

Sam Zell in an August 30, 2011, interview with Bloomberg TV discussed that he believes Mongolia will be the fastest growing economy in the world for the next 5 years. It’s believed he has been investing in Mongolia real estate since at least 2009. No one knows what he owns, but know Mr. Zell has some investments in Mongolia. As one person I interviewed said, “He’s not lifting up his skirt, and I’m not lifting up mine.” By no means are the three real estate companies discussed the only ways to invest in real estate in Mongolia. The companies discussed offer ways to make plays on Mongolia and Mongolian real estate that are accessible to both retail and private equity investors in some manner.

Mongolia Growth Group (MNGGF.PK)

Unlike Mr. Cashell and Mr. de Gruben who both invest in real estate anywhere in Mongolia, Mr. Kupperman and his staff at Mongolia Growth Group are focused on investing only in real estate in Ulan Bator. They also are different in that they are not looking to sell property anytime in the near future. Their goal is to buy the highest quality properties they can find, rent them, hold them for 5 to 10 years, and then determine an exit strategy as Mongolia’s economic boom unfolds.

Mr. Cashell, Mr. de Gruben, and their teams have been in Mongolia longer than Mr. Kupperman’s team. Mr. Kupperman’s hedge fund staff, who are on board with helping start this company, have a range of experience in developing economies in 5 continents from participating in the best performing economies of a particular year to cutting short an investment junket after negotiating their way out of being held at gunpoint. Staff from Miami’s South Beach to Ontario, Canada, have relocated their lives to Mongolia to invest in their faith both in Mongolia’s economy and Mr. Kupperman.

However, success or failure will hinge on their native Mongolian employees. To successfully invest in Mongolia takes more than investment savvy, it takes having a reliable staff negotiating all the on-the-ground details. As Messrs. Cashell and de Gruben did before they arrived, Messrs. Kupperman and Colanego invest a lot of time and financial capital into vetting and training their local staff, an employee base over 40 and growing monthly.  They do things with an eye to conflating corporate cultures. They hire native Mongolians into management positions from respected local companies. At the same time, they incorporate western team building strategies and send staff members on educational trips, such as a few who were sent to Berkshire Hathaway’s annual general meeting.

I spent more time discussing Mongolia Growth Group’s insurance business in the prior equity investment section. While the insurance business is only one-third of Mongolia Growth Group’s capital investments, it adds a different aspect of risk, or a different opportunity for profit, than the other real estate investment companies have. Mongolia Growth Group’s real estate business plan itself is fairly simple: buy property they believe has the best opportunity for appreciation, rent it out and hold it until management feels the property market is near peak valuation.

Ways to invest in the Real Estate market

If you want to purchase a publicly traded stock

- At this time you are limited to Mongolia Growth Group which is traded in the U.S. (MNGGF.PK) and Canada (YAK).

- Sometime in 2012 or 2013, Mr. de Gruben’s R.E.M. fund should become publicly traded, most likely in Hong Kong and London.

- Asia Pacific Properties is listing on the Mongolia Stock Exchange (you must open a brokerage account in Mongolia to trade this; and an account with Asia Pacific Securities is the best way to trade it). In the end, APIP will own 70% of APP, and 30% of APP will be floated. APP includes APIP’s Rural Development Corporation assets, Ulan Bator based properties, and property development sites that are medium-end and low-end. APIP owned 92% of APP and is floating another 22% of its APP holdings.

- Mr. Cashell’s Asia Pacific Investment Partners (the whole company) should IPO in Hong Kong in 2012 or 2013.

Private Equity

For private equity participation, if you are an accredited investor, you have broader options. (An accredited investor has income greater than $200k individually, greater than $300k jointly with their spouse, or assets greater than $1m.)

- APIP is accepting investors with a minimum investment of $500,000 at this time to raise $20 to $30 million in a private placement prior to its planned Hong Kong IPO. This offering is slated to close by year-end.

-Mr. de Gruben’s Real Estate Mongolia fund (R.E.M.) is currently raising capital. You must be investing at least $100,000. They are seeking to raise $50 million in the first round of the private offering scheduled to be closed by February 2012. R.E.M. principals will put in a total of at least $3 million of their own money into the fund. The fund will have a 2% management fee and a 20% performance fee when returns exceed 5%.

- In the event that Mongolia Growth Group has another private offering round, the way to be aware of this would be to register at the company’s website for company updates.

Buying property

You may also consider purchasing property yourself in Mongolia. For this you can either contact Mr. Cashell’s APIP subsidiary Mongolian Properties or Mr. de Gruben’s M.A.D. Investment Solutions. To purchase real estate in Mongolia you should be investing at least $100,000, and understand that the fees charged will in part be paying to deal with local dynamics that cannot be known if you do not live in Mongolia, and furthermore understand the risk of a property that is paid for in cash and has no insurance. There are no significant restrictions on foreign ownership of property in Mongolia, but without the right team assisting your property purchase, you can get entangled in political and bureaucratic problems.

Contacts (click on links for company websites):

Asia Pacific Investment Partners or contact Will Tindall at will@apipcorp.com.

Asia Pacific Securities (to invest in Asia Pacific Properties on the Mongolia Stock Exchange): contact “Nick” Narantuguldur Saijrakh at nick@apipcorp.com.

M.A.D. Investment Solutions can be contacted here

Mongolia Growth Group

Mongolian Properties

R.E.M. Fund or e-mail david.hanbury@resource-cap.com

Disclosure: I am long Mongolia Growth Group, Origo Partners, and Ivanhoe Mines. I have made no trades or investments in the above listed investments in the week preceding publication of this article and will make no trades in any of the above listed investments in the week after this article’s publication.

Kumai Energy owns a 25% stake in the Nuurst Khotgor coal exploration project in Mongolia. It will earn a stake of up to 60% under an earn-in agreement with its joint venture partner, Asia Pacific Investment Partners. It has also signed an agreement to buy a 51% stake in PT Prima Nusa, which is exploring for coal in central Sumatra in Indonesia.

The company has also agreed to rehabilitate the Arantiga mine in southwestern Sumatra, where it will eventually earn a 60% stake. The mine was started in 2007 but was shut down amid legal disputes with its contractor, according to Kumai Energy’s website.

Kumai Energy’s shareholders include Singapore-based investment firm Redhill Partners.

by Ben Scent

Phase two of the expansion plan is the construction of a parallel factory adjacent to the current operations; the tender process for this piece of work has recently been opened. The final stage will see the assembly of two clinker production facilities which will be located at CAC’s limestone deposits to the north and south of Ulaanbaatar. The clinker factory is predicted to be completed by summer 2014 and this will provide a total production capacity of 1,000,000 tons pa.

Lee Cashell, CEO of APIP, commented:

“The orders have been placed for the renovation of the main plant and we expect these improvements to dramatically increase our capacity within 12 months. CAC plans to make continuous efforts to increase productivity and hold down or reduce costs per ton, conserve energy and improve quality.

“We want to be the number one cement provider in Mongolia in the next eighteen months. The impetus from the government to improve infrastructure, combined with the major real estate construction projects opens up huge opportunities for us.

“This is an exceptionally exciting time for Mongolia and we are pleased to be able to play a pivotal role in improving the living standards of Ulaanbaatar’s citizens. These infrastructure projects are integral to the continued development of the country.”

Mongolia is famous for many things, and being a hotspot of construction activity is not among them – but perhaps it should be. Thanks to a booming economy, the country is developing at a rate of knots. Building finds out why it’s well worth braving the cold

Must be prepared to travel. If you want to find the best emerging property markets in the world, that is. And as you plan your itinerary on the global map, you can firmly put a pin on Mongolia. Yes, Mongolia.

It may sound like a bit of a left field suggestion, but just a little investigation into Mongolia’s resources and the predicted future of its economy and real estate schemes can present an extremely compelling argument.

Lee Cashell, the man behind investment company Asia Pacific Investment Partners (APIP), sets out the situation: “We have been doing business in Mongolia for nine years and started the first real estate business here, called Mongolia Properties. At that time, lots of Canadian companies were setting up shop and looking for mining opportunities. It was just a trickle of interest back then, but as people discovered more minerals and commodities prices rocketed, the trickle has turned into a flood.

“In 2008, things moved from the exploration phase to the mining phase, which means that the economy is now looking at growing 15-25% a year, which could make Mongolia one of the world’s fastest growing economies. Plus it’s a democratic country, with low tax rates, no capital gains tax and no high rental yields – possibly one of the best places to invest in property in the whole world.”

Big UK firms such as Foster + Partners are already persuaded, and the architect is in discussions with APIP about two projects – a 50,000m2 residential and hotel scheme with an anticipated $100m-plus sales revenue, and a 200,000m2 mixed-use complex with expected proceeds of $200m.

So what opportunities might await the adventurous in the country of Genghis Khan?

A gold mine

Mongolia is seen by many as the scene of the next construction rush, according to Cashell. Since the discovery of gold and copper five or six years ago, the country’s GDP has been growing at one of the highest rates in the world. Foreign direct investment has soared from $25m in 1997 to $344m in 2006 and a colossal $1bn (£620m) in 2010. The country has over 8,000 different deposits of 440 minerals, all adding to its financial kudos and stability.

Unlike many emerging markets, where foreign companies must weigh up tempting opportunities against the difficulties of doing business, Mongolia has a stable political system and few problems with corruption. According to the World Bank, Mongolia ranks 73 out of 183 countries in the world for ease of doing business – higher than any of the BRIC countries. It is understood that this stems from the fact that, following a period of Soviet influence up until the early nineties, Mongolia went through a transition period from communist nation to free-market democracy. The current president, Tsakhia Elbegdorj, has pledged to continue fighting corruption and uphold freedom of speech and of religion. And, according to the CIA World Factbook, Mongolia has no “ongoing disputes or conflicts” with any other country.

It’s a democratic country, with low tax rates, no capital gains tax – possibly one of the best places to invest in property in the world

Lee Cashell, APIP

In terms of construction opportunities, property development in Mongolia is expected to be one of the fastest growing sectors over the next three to five years, according to APIP. The price of property in Ulan Bator, Mongolia’s capital, has rocketed, says Cashell, due to an existing shortfall in supply. At an apartment building called The Regency Residence that APIP sold to Property Frontier, a London broker, individual flats that sold for $800/m2 off-plan in 2007 are now being sold for $2,200/m2 in the secondary market to wealthy Mongolians.

Office space is also at a premium. “The arrival of multinational companies such as Ernst & Young and PwC in Mongolia is driving the demand for quality office space,” says a spokesperson for APIP. “Demand for high-end residential units has increased hugely due to the large number of expats arriving in Mongolia in pursuit of mining jobs or other business opportunities associated with the country’s increasingly renowned economic growth. Combine this with very limited supply in the capital, it is expected there will be a severe imbalance between available units and demand in the coming years.”

Career opportunities

So – the work is there. But how easy is it for UK construction workers to join the hordes? Cashell says that he is already having discussions with foreign construction companies and architects and that there are certainly opportunities available – especially given the shortage of construction professionals in Mongolia.

Due to the nature of the work project managers, masterplanners, architects and anyone with legal or accountancy knowledge are in particularly high demand. Also sought after is anyone with experience designing and building condominium-style residential units where there are facilities such as a concierge, lobby, food shop and gym all contained in one space. Temperatures in Mongolia can fall to -30ºC in the winter – and so another area of specialist knowledge that is in demand is of the kind of housing that offers residents everything they need without having to go outside – is another key skill required.

Demand for high-end residential units has increased hugely due to the number of expats arriving in Mongolia in pursuit of mining jobs

APIP spokesperson

The cold is one challenge that has a significant impact on construction companies – it means that there is a short building season in the country. While a development would be completed in 18 months in a warmer climate, it is likely to take nearer two to three years in Mongolia.

That aside, Cashell says that now is a good time for UK firms and individuals to take a trip out east: “We have one of the biggest land banks in the whole country,” he says. “And we are seeking UK construction partners and individuals to work with on this. We have about 10 years’ worth of development projects in our pipeline so there are long-term opportunities. We keep getting larger, which means we are outgrowing the skills in our little construction company.

“And since 1990 there has been very little investment in infrastructure. Now the government is getting richer through the revenue from mining, there will be opportunities here too with roads, airports, power stations. And the school and healthcare facilities need a lot of investment too – which in turn will create yet more construction opportunities. Now is the time.”

A rare opportunity for investors to invest in Mongolia outside its big natural resources companies comes with a foreign-run conglomerate involved in everything from real estate and cement to financial services and transport.

Asia Pacific Investment Partners, controlled by American businessman Lee Cashell, hopes to raise $30m through a placement of stock ahead of an IPO which could come next year.

APIP plans to use the funds raised now from institutional investors in its operations in Mongolia – to expand a fast-expanding property business and boost production at a cement factory:  it intends to invest money from the planned IPO to develop a modest small business loan company and,  later, develop it into a bank.  Big plans, big ambitions.

Speaking to beyondbrics during a visit to London where he was drumming up investor interest, Cashell gives his pitch: Mongolia is a land of opportunities.

Cashell cites his own company’s example: founded in 2001 with starting capital of US $ 30,000, the conglomerate, which is audited by PwC, saw 2009 revenues of US$3.5m and earnings before interest, depreciation, taxes and amortisation (Ebitda) of US$1.2m, 2010 revenues of US$15.3m with an Ebitda of US$7.8m. According to a recent audit revenues for 2011 are expected to be US$25m, with Ebitda of US$20m.

Cashell says much of the growth opportunity for APIP is in its property-related businesses which include a cement factory, real estate agency, and property development company.  A large part of the private investment raised will go towards his cement business, Asian Cement.

He tells beyondbrics he bought the cement factory three years ago for approximately US$3m when the local price of cement was US$60-80/tonne. Today Asian Cement is selling cement at a local market price of US$150/tonne.

The price of property in Ulan Bator has also sky-rocketed, Cashell says. For example, at an apartment building which APIP sold to Property Frontier, a London broker, called The Regency Residence, individual flats which sold for $800 per square metre off-plan in 2007 are now being sold for $2200 a square metre in the secondary market to wealthy Mongolians.

All of which is part of a bigger picture. “Even in stormy markets, if you have a good story, there are firms out there that still see it [the investment] as a good story,” says Cashell. He claims that among frontier markets, Mongolia comes out on top for hedge funds because of its high economic growth (with the IMF forecasting 9.8 per cent GDP growth for 2011), a  favourable tax regime and parliamentarian democracy.

Cashell says he’s received US$10m in commitments to invest in APIP from high net-worth individuals, and APIP is in negotiations with six  hedge funds. His next stops will be New York and San Francisco.

But Mongolia is not for the faint-hearted.

The Mongolian Stock Exchange made headlines among investors last year when it was world’s best-performing equity market with a 121 per cent gain in local currency terms. It climbed a further 55 per cent at the start of the year until the end of February. But since then it is down by 36 per cent.  That  compares with a 16 per cent decline, year-to-date, for the MSCI frontier market index (which does not include Mongolia).

APIP has also outlined several challenges ahead including 2012 elections, inflationary pressures (especially food), and a shortage of skilled labour.

Those joining Cashell in Ulan Bator can expect an unpredictable ride.

APIP is looking to raise USD 30m by offering a 16.7% stake to institutional and experienced investors and already has commitments of over USD 8.5m. The company is also expecting to raise around USD 15m from UK investors.

“Market conditions are less than ideal for a fundraising. Nevertheless investors who understand the Mongolian story are keen to meet and dip their toe in,” Cashell added.

APIP has a pre-money valuation of USD 150m. Renaissance Capital is the lead adviser and broker on the placement. The company is looking to close the private placement in three weeks’ time.

“We are excited about the opportunities for growth the placement will provide. It will enable us to be in an exceptionally strong position come our listing in 12 months and should ensure a great valuation,” Cashell said.

APIP plans to list on the Hong Kong Stock Exchange in 12 – 18 months’ time from the closing of the placement and expects to list a stake worth between USD 700m to USD 1bn, which is 20x – 25x price of earning multiple.

APIP is forecast to report revenues greater than USD 40m EBITDA at the time of listing.

The company is now on its Hong Kong leg of its investor roadshow, having already presented to a number of hedge fund, frontier and emerging funds in the US and the UK.