Mongolia prepares for boom in commodities

Hailed as one of the last frontiers for resources exploration, the central Asian country is thought to have $1.3 trillion in untapped mineral deposits, including coal, copper, iron ore, zinc and gold, beneath its vast deserts and steppes.

Over the past four years, the country’s mining companies have ramped up their output, and foreign resources giants are increasingly investing in the region. This year alone, Mongolia will see gross domestic product growth of 17.2%, according to the International Monetary Fund.

But if Mongolia is to enjoy the spoils of its natural wealth, the country’s capital markets have to be reformed – starting with its fledgling national bourse.

Founded in 1991, the Mongolian Stock Exchange has 336 listings. Many names are inactive and overall trading on the exchange is thin at just two hours a day. With a capitalisation of $2bn (compared with the LSE’s $3.7 trillion) the market is too illiquid to provide a platform for chunky home-grown listings. As a result, several of the country’s commodity giants have had no choice but to seek public offerings abroad, with the Australian Securities Exchange and Canada’s TMX Group the primary beneficiaries.


Altai Khangai, the Mongolian exchange’s 30-year-old chief executive, said: “Because of the lack of sophisticated infrastructure, mining companies haven’t been able to gain exposure locally.”

Modernisation

The Mongolian government intends to change this. Last year the Ulan Bator-based exchange signed an agreement with the LSE to overhaul the Mongolian market. The London exchange beat off rivals Nasdaq OMX, Deutsche Börse and the Korean Stock Exchange to secure a three-year deal under which the LSE will help transform Mongolia’s securities law and regulation, modernise its trading infrastructure, and develop its long-term business strategy.

As part of the deal, the MSE will implement the LSE’s technology platform MillenniumIT at the trading, clearing and settlement levels.


Khangai, who was appointed to the role permanently in January, said: “We are in the final stage of testing and expect the Millennium-IT implementation to go live shortly.”

Mongolia’s parliament is reviewing a draft securities law which, among other things, incorporates elements of the UK’s Financial Services Act listing rules and increases transparency and disclosure requirements. “We are bringing in technical but also conceptual changes,” said Khangai.

The exchanges estimate that the MSE will notch up $45bn in listings during the next 10 years through the privatisation of state-owned companies and other assets – and the LSE hopes it will get a slice of the action.
The spotlight is currently on state-owned miner Erdenes-Tavan Tolgoi, owner of the world’s largest coking coal deposit. The Mongolian company is scheduled to launch a three-pronged $3bn listing – in London, Hong Kong and Ulan Bator – following the passing of the new securities law this year.

Dual listings


Khangai, a former commodities trader and adviser to the Mongolian prime minister, also hopes the government-led reforms will result in several of the nearly 50 foreign-listed international mining companies with assets and operations in Mongolia to seek a dual listing at home. He said: “A dual listing would give these companies exposure to local investors and the local currency. We have had several expressions of interest and a significant potential pipeline. It is also regarded, politically, as the loyal thing to do.”

The development of the local market is even more important for non-mining firms, he said, since domestic Mongolian companies that are not part of the commodities boom find it difficult to gain international exposure.

Tony Weeresinghe, LSE Group director of global development and chief executive of Millennium IT, said: “For Mongolian companies, the chance to develop lasting relationships with some of the world’s largest institutional investors will kick-start their development and help fast-track the country’s already rapid progress.”

Currently the exchange trades stocks and government bonds but it is exploring the introduction of vanilla exchange-traded funds, which are growing popular among emerging market bourses.