Diesel, Dust and Dreams : The Triple “D” New Frontier Markets

Kazakhstan and Mongolia : hit two birds with one stone

Most investors have refrained from investing in frontier markets because of the perceived risks. However, I do not believe that the level of risk is necessarily higher as compared to emerging markets. Frontier markets generally share the same political and economic issues as emerging markets, but their valuations may be more attractive as a result of this perception. At the end of the day, it all boils down to picking the right company or stock. This was just one of the business opportunities we explored in Mongolia and Kasakhstan, and there are many reasons for us to return to the land of Genghis Khan. . If global economic recovery continues on track, I expect frontier markets, like Mongolia and Kasakhstan, will continue to have very compelling investment opportunities over the next year and beyond.

Premium Reco : Central Asia Metal (LSE:CAML) 

Let’s take a closer look at CAML, one of the lucky companies that are actually producing in Kazakhstan with a government-approved license for extraction. Its Kounrad copper project was commissioned in March 2012, and the operation started producing copper by the end of April. In the last eight months of 2012, the company produced 6,586 tons of copper. Its Mongolian asset, Alag Bayan, is a copper development project with similarities to the big Oyu Tolgoi project, which is only 100 kilometers to the west. If the new drilling program pans out, this could be a major asset for CAML.

Right now, CAML is producing copper at a low cost of 48 cents per pound. The spot price for March copper futures is $3.73 per pound. That means, at today’s price, CAML’s eight months of production are worth $49.13 million. And that means the project generated revenues of $10.5 million for the first six months of 2012. Considering that production started in April 2012, the full-year results are going to really hit home CAML’s potential. Cash flow turned positive, and the company has no debt.

With a footprint in both Kazakhstan and Mongolia, CAML is in the right place at the right time. And it’s showing in share prices. Over the past year, CAML has jumped nearly 25%.

As Mongolia is preparing to draft some new regulations which could impact the minerals industry and damage all other sectors of supply, including but not limited to the construction and real estate sectors, imposing a significant chain-reaction burden on the banking and financial institutions which they may not be able to withstand and leading to a deepening crisis, (see The Office of the President of Mongolia published a draft revised Minerals Law ). The Governement is planning to ease a key restriction on foreign investment by raising by tenfold the size of deals that must be approved by parliament, the nation’s foreign minister said in an interview. The threshold will be raised to 1 trillion tugrik ($715 million) from 100 billion tugrik. The decision would please foreign investors hoping to do business in Mongolia.

For more stories see our blog

As for Kazakhstan, over the past two decades, it has moved from a planned economy to a market economy. Industries across the spectrum benefited from this shift. Foreign companies interested in setting up shop in K-stan are mainly oil and gas companies, though other targeted industries are business services, telecom and electrical energy sectors.

The economy has seen production and growth boom in nearly every sector. Despite these movements, less than 15% of the country’s explored reserves have been put into production. Reuters notes there are “only 75 of 282 identified gold deposits and 19 of 55 iron ore deposits in operation. That could all change very soon, some months ago, Kazakhstan’s president, Nursultan Nazarbayev, told his government to lift a four-year ban on issuing new mineral exploration licenses. It could open up a massive amount of investment potential in the country. Big and small names will be clamoring to start exploring. But one industry isn’t getting the attention it deserves. The mining industry.

Some traction is being made.

• Central Asia Metal (CAML:London), one junior mining company,  a copper production, precious and base metals exploration and development company with majority stakes in copper, gold and molybdenum projects in Kazakhstan and Mongolia.has set up a $47 million copper mining project and could move up to 10,000 metric tons of output a year.
• Frontier Mining (FML:London), another junior miner, plans to produce up to 30,000 tons a year by 2016.
• Eurasian Natural Resources Corp. (ENRC:London) like some bigger fish in the pond, too, like with operations in aluminum, coal, manganese, iron, chrome and other mineral operations in K-stan.
• Turquoise Hill Resources (NYSE:TRQ): an international mining company focused on copper, gold and coal mining in the Asia Pacific region. However TRQ company was selling its 50% stake in Altynalmas Gold for $300 million in order to shift its focus to the development of its massive Oyu Tolgoi copper-gold project in Mongolia. That takes TRQ out of Kazakhstan altogether.
• Rio Tinto (RIO:NYSE) wants to invest $100 million in a copper project with state-owned Tau-Ken Samruk. The two signed an agreement back in April 2012 for a 50-50 joint venture for exploring prospects in the Kostanai region in northern Kazakhstan. But until now, Rio only “spent two years roaming our government offices,” Nazarbayev said because of red tape and the moratorium. And Mongolia, in the midst of a dispute with Rio Tinto Group over control of the $6.6 billion Oyu Tolgoi copper and gold project, passed a law last May to restrict foreign companies from buying control of assets in industries including mining, telecommunications, media and financial services. The law was created in part as a response to Aluminum Corp. of China Ltd.’s plan to buy coal miner South Gobi Resources Ltd.