Mongolian Hoard
Mongolia's little-noticed evolution from khans to capitalism is about to come to fruition.
After decades of struggle with Russia to the north and China to the south, east and west, Mongolia adopted a market economy in 1992. Now, just before the 20th anniversary of its newest constitution, comes Wall Street's ultimate acknowledgment: an exchange-traded fund.
We all should have seen this coming. It's the natural extension of the financial industry's two hottest obsessions, China and ETFs. Van Eck will be first out of the gate with its Market Vectors Mongolia ETF—and in the company of 258 other assorted ETFs already launched this year—making investing in the country best-known for Genghis Khan finally available to the hordes.
As eye-rollingly speculative as this product might seem, its investment philosophy does have some merit. Mongolia's vast desert and grasslands cover everything developing economies crave—massive deposits of coal, copper, gold and other industrial materials that are only starting to be exploited. "The country is entirely untapped," says Michael Johns-ton, the chief market analyst for ETF Database, a research firm that covers the ETF industry. "Mongolia will need just about everything, from a lot of companies, just to become an emerging market."
Mongolia's two treasure troves are both buried deep in the Gobi Desert near China. The Oyu Tolgoi (Turquoise Hill) gold and copper mine is a joint development of Canada's Ivanhoe Mines (ticker: IVN) and Brazilian giant Rio Tinto (RIO). Though the site is said to have been mined 800 years ago under Genghis Khan's rule, large-scale mining won't begin until 2012. At that point, however, Oyu Tolgoi alone is expected to fuel double-digit growth in the Mongolian economy, which last year had a gross domestic product of $6 billion and a 6% growth rate.
Less developed is Tavan Tolgoi, believed to be one of the world's largest untapped coal reserves. About 25% of the "Five Hills" mine, which has a total of six billion tons, is the coking coal prized by Asian steel makers. The rest is thermal coal, sorely needed by China's many coal-fired power plants.
Investing in Mongolia, however, is no easier than traveling in Mongolia. The country's sparse network of roads and railways needs a multi-year upgrade. And mining laws allow the government to expropriate up to 50% of any deposit it deems of "strategic importance," which it did with Tavan Tolgoi in 2008. What's more, the Mongolian legislature is arguing for a larger share of Oyu Tolgoi than the 34% stated in its initial deal with Ivanhoe and Rio Tinto, a move both firms are strongly resisting.
Perhaps even more to the point, there aren't any Mongolian companies listed on a U.S. exchange. As for the country's own tiny, $1 billion stock market? It's open just an hour or two a day.
The SEC registration Van Eck filed in May didn't list specific investments, but Johnston says it could include some of the 10 firms in the Solactive Mongolia index like Ivanhoe Mines and Hong Kong-listed SouthGobi Resources (1878.Hong Kong). ETF Database's Country Exposure tool shows other Asian ETFs, like IQ Hong Kong Small Cap ETF (HKK), have tiny Mongolian exposure, though "that will change as Mongolia grows," Johnston says. "But it's likely to be a long road, fraught with systemic and idiosyncratic risks."
E-mail: editors@barrons.com
After decades of struggle with Russia to the north and China to the south, east and west, Mongolia adopted a market economy in 1992. Now, just before the 20th anniversary of its newest constitution, comes Wall Street's ultimate acknowledgment: an exchange-traded fund.
We all should have seen this coming. It's the natural extension of the financial industry's two hottest obsessions, China and ETFs. Van Eck will be first out of the gate with its Market Vectors Mongolia ETF—and in the company of 258 other assorted ETFs already launched this year—making investing in the country best-known for Genghis Khan finally available to the hordes.
As eye-rollingly speculative as this product might seem, its investment philosophy does have some merit. Mongolia's vast desert and grasslands cover everything developing economies crave—massive deposits of coal, copper, gold and other industrial materials that are only starting to be exploited. "The country is entirely untapped," says Michael Johns-ton, the chief market analyst for ETF Database, a research firm that covers the ETF industry. "Mongolia will need just about everything, from a lot of companies, just to become an emerging market."
Mongolia's two treasure troves are both buried deep in the Gobi Desert near China. The Oyu Tolgoi (Turquoise Hill) gold and copper mine is a joint development of Canada's Ivanhoe Mines (ticker: IVN) and Brazilian giant Rio Tinto (RIO). Though the site is said to have been mined 800 years ago under Genghis Khan's rule, large-scale mining won't begin until 2012. At that point, however, Oyu Tolgoi alone is expected to fuel double-digit growth in the Mongolian economy, which last year had a gross domestic product of $6 billion and a 6% growth rate.
Less developed is Tavan Tolgoi, believed to be one of the world's largest untapped coal reserves. About 25% of the "Five Hills" mine, which has a total of six billion tons, is the coking coal prized by Asian steel makers. The rest is thermal coal, sorely needed by China's many coal-fired power plants.
Investing in Mongolia, however, is no easier than traveling in Mongolia. The country's sparse network of roads and railways needs a multi-year upgrade. And mining laws allow the government to expropriate up to 50% of any deposit it deems of "strategic importance," which it did with Tavan Tolgoi in 2008. What's more, the Mongolian legislature is arguing for a larger share of Oyu Tolgoi than the 34% stated in its initial deal with Ivanhoe and Rio Tinto, a move both firms are strongly resisting.
Perhaps even more to the point, there aren't any Mongolian companies listed on a U.S. exchange. As for the country's own tiny, $1 billion stock market? It's open just an hour or two a day.
The SEC registration Van Eck filed in May didn't list specific investments, but Johnston says it could include some of the 10 firms in the Solactive Mongolia index like Ivanhoe Mines and Hong Kong-listed SouthGobi Resources (1878.Hong Kong). ETF Database's Country Exposure tool shows other Asian ETFs, like IQ Hong Kong Small Cap ETF (HKK), have tiny Mongolian exposure, though "that will change as Mongolia grows," Johnston says. "But it's likely to be a long road, fraught with systemic and idiosyncratic risks."
E-mail: editors@barrons.com
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