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

March, 25 2013

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.

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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.

From Reuters: “Kazakhstan’s uranium reserves are second only to Australia’s. The former Soviet republic, Central Asia’s biggest economy, also holds the world’s largest chromium reserves and substantial copper, zinc, iron ore and bauxite deposits.”

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.
Mongolia is in the process of emerging as the Saudi Arabia of coal. It’s on the verge of turn- ing a nation of poor nomads into a super-rich nation of wealthy former-nomads … all because of the commodity wealth lying beneath the land. Mongolia’s leaders, and the business elite know this, and they are not going to allow a nationalist movement to derail the country’s progress. They know that would crimp off the flow of foreign investment that is necessary for the country to exploit its riches and to grow the economy into one of the wealthiest and most vibrant in Asia.


Never-the-less, Mongolia Mining (Hong Kong: 975) is among the most-painfully hit companies. The miner of high-quality coking coal is down about 42%. A large part of that reflects investor uncertainty about Mongolian politics. The fear that Mongolia might nationalize the coal industry has weighed heavily on Mongolian mining stocks. That fear is misplaced.


Patience is required, but buying Mongolian Mining at today’s prices — anywhere up to HK$4 — will be a winning a strategy.


New Oil Hub in… Asia? Malaysia and Indonesia 
In mid-March, Abu Dhabi’s crown prince Sheikh Mohammed bin Zayed signed a $7 billion deal with Prime Minister Najib Razak in Malaysia. The deal would construct a 60 million-barrel oil storage facility. This is a very strategic move for Abu Dhabi. Add that $7 billion deal to the $5.8 billion deal that Abu Dhabi’s Aaba Investments and state-owned Malaysia Development inked to focus on important projects that will impact economic and social growth in Malaysia, and you’ve got nearly $13 billion in investments with two swipes of a pen.


Indonesia is a natural partner for Malaysia.Indonesia’s publicly traded oil and gas company Medco Energi Internasional has signed a memorandum of understanding with Malaysian upstream contractor GOM Resources to cooperate on oil and gas development in Malaysia, Medco said in a statement end of March. This will be Medco’s first foray into Indonesia. But it could be the first of many.


But this interest from OPEC nations and other oil industry players could be just the boost Malaysia needs : For investors, Malaysia is not a simple transaction, unless you grab a position in the iShares MSCI Malaysia Index ETF (NYSE:EWM). This ETF is pretty heavily weighted toward financials, as many ETFs are. The iShares MSCI Philippines ETF has done well , but that doesn’t necessarily mean that EWM is right for our portfolio.Targeting a specific trend or shift, requires we must be as close as possible to it. The more pure the play, the less influence outside factors have on our thesis : EWM just isn’t close enough.But the trend bears watching. If one country is pouring $13 billion into another, then more might follow.
Until that time, though, the direct opportunities don’t exist.