Cook Up 7.5% Yields With Short 4-Year Mongolian Mining Bonds

This week we return to the far eastern country of Mongolia to find what we believe are excellent short-term, high-yielding U.S. dollar corporate bonds relative to the amount of risk that investors typically find in much more common or more popular domestic U.S. corporate bonds. Increasingly known for its vast mineral resources, Mongolia is the fastest growing country in the world with an amazing 17%-a-year growth rate. As the Mongolian economy transitions away from a long history of oppression and into free markets, the sheer abundance of its very low cost resources has unlocked great market opportunities for their county.

One of the companies leading this charge is Mongolian Mining Corporation, a high-quality hard coking coal producer and exporter. Although the currently indicated 7.5% yield to maturity of this bond is lower than some of the double-digit yields that we have presented recently, the following review shows why we believe adding these short four-year, 8.875% high coupon Yankee bonds from Mongolian Mining to our Foreign and Global Fixed Income Portfolio offers great cash flow and helps to lower overall portfolio risk through a broad and diverse investment strategy.

An Updated Look at the Issuer

Cayman Islands based Mongolian Mining Corporation (MMC) is the largest producer and exporter of high-quality coking (metallurgical) coal in Mongolia. Metallurgical coal is a fuel with few impurities and high carbon content, and 60- 70% of the steel produced today uses metallurgical coal. Its two large open pit mines enable MMC to be one of the lowest costs, high quality metallurgical coal producers in the world at around USD23.9 per ton.

In an effort to improve coal quality, Mongolian Mining Corp has invested in building a coal handling and preparation plant (CHPP) that will allow it to process and wash coal. The CHPP Module II came to full operation in 2H 2012, increasing its total processing capability to 10Mtpa. CHPP product tonnage for 2012 increased 175% over 2011. The CHPP Module III has been completed, and its commissioning is expected in 1H 2013. This will increase the total processing capacity to 15Mtpa starting in 2H 2013.

Randy Durig