The worst you can do in this country is make 28%

October 24, 2011
Ulan Bator, Mongolia

“As rich as a Mongolian.”

Get used to hearing that expression, because it will have entered our lexicon in 10-years time.  I’ll explain–

Mongolia is a sizeable country blessed with unimaginable resource wealth. It almost seems that just about every other Tuesday brings another major resource discovery. Oil. Coal. Gold. Copper. Rare earths. Iron ore. Molybdenum. Uranium. You get the idea.

These deposits are substantial… in many instances, world class. Mongolia’s copper reserves alone rival those of Chile. Its oil wealth is in the same class as Angola. Its coal deposits blow Australia’s out of the water. And yet, the vast majority of this country is still unexplored. We can (and should) expect more discoveries in the months and years to come.

I’m not telling you this so that you’ll buy shares in every junior resource company with Mongolia exposure that you can find. Even with all of this mineral wealth, a lot of mining companies (and their shareholders) are going to lose their shirts.  Drilling holes in the earth is expensive, risky business.

The knock-on effect to Mongolia’s population, however, will be of historic proportions. There are only three million people in this country. Trillions of dollars of resource wealth divided by a few million people is exceptionally high per-capita wealth… and it’s all going to happen in less than a generation.

Perhaps the best example of this in history is the United Arab Emirates. Like the Mongols, these people were just nomadic tribesmen roaming the desert for hundreds of years. Oil was discovered in the early 1960s, and within a generation, people in Abu Dhabi were among the wealthiest in the world.

But I think it can happen even faster in Mongolia; much of the world has a vested interest in pulling Mongolia’s resources out of the ground as quickly as possible. The Middle East is destabilizing quickly, China has nearly monopolistic control over rare earth minerals, and demand for physical gold is skyrocketing.

All of these projects will also require substantial infrastructure investment before any extraction takes place, and billions of dollars are already being invested in the country to this end. You can imagine the economic effect when a $6 billion infrastructure investment is made in a $5 billion economy.

I saw similar effects in Panama years ago– in 2005, Panama’s GDP was roughly $15 billion.  After several years of substantial foreign investment (including tranches of the multi-billion dollar Panama Canal expansion project), GDP is now $27 billion. Perhaps more importantly, a strong middle class emerged in Panama as a result. It wasn’t just 5 guys getting rich.

I suspect the same thing will happen in Mongolia; the government is already handing out shares of mining concessions to the population, and in the long run, this society is probably going to look a lot like Kuwait: every native born into a life of privilege and state-sponsored welfare in the form of ridiculously overpaid “government jobs”.

This is the much safer bet– investing in Mongolia’s rising economy, and by consequence, the rising per capita income of the local population. Acknowledging the possibility for short-term fluctuations, I think it’s going to be very hard to get hurt with this investment thesis.

Put it this way: you know you can make some serious money in a country where the absolute -worst- that you can do is open a savings account yielding 13% interest, denominated in a currency that gained 15% against the US dollar last year.

More to follow.