Copper And Gold Flowing From Turquoise Hill Part I

A few weeks ago, “one of the largest and highest-grade copper and gold mines in the world” started production.

At short-term production goals, this mine will produce a mind-blowing 1.2 billion pounds of copper and 650,000 ounces of gold a year.

The wealth is starting to flow out of the ground and now’s the time to look for profit opportunities…

The mining project – a huge copper and gold play called Oyu Tolgoi or “Turquoise Hill” – is located in Mongolia, a frontier market ripe for the picking.

Surprisingly though, today I don’t want to look at the miners or the “picks and shovels” plays. After taking a look at the investment climate there’s a better way to play this immense, country-altering boom.

That’s why I called up a guy that’s muddied his boots in Mongolia’s frontier market, the CEO of Mongolia Growth Group (MNGGF), Harris Kupperman.

For a close look at this booming market, and why copper and gold are just the beginning, read below…

Frontier Market Opportunities…From Mongolia!

 An Interview With Harris Kupperman, the CEO of Mongolia Growth Group

Matt Insley, Daily Resource Hunter:Harris you’ve had your boots on the ground, can you just give us an idea of the investment climate in Mongolia?  Also, for my sake, can you give us the basics, where Mongolia is and what the payoff to investors might be?

Harris Kupperman, Mongolia Growth Group: Sure thing, Mongolia is situated right between Russia and China.  It’s a small population, with about 2.9 million people, but from an investment standpoint, it’s a really interesting place because it’s one of the quickest growing economies in the world, and there’s high reason to believe that it’ll be one of the quickest growing economies in the next decade or two.

The reason for this is simple: the country is sitting on approximately $2 trillion (with a T) worth of resources in the ground.  Copper, gold, silver, coal, oil and more — it’s all going to come out of the ground over the next couple of decades, and I think Mongolia — and Mongolians in particular — will very much benefit from this boom.

The big mine that’s driving this growth is a mine called Oyu Tolgoi, and it’s being built by Rio Tinto.  To put this mining play in perspective, last year the GDP of Mongolia was $10 billion U.S. dollars — but on this one mine alone, there’s already been over $7 billion spent.  Not to mention, they’re in the process of raising another four billion to invest, so this one mine in terms of CapEx is bigger than the whole economy.

When Oyu Tolgoi starts full production in 2016 it’s going to be producing roughly $8 billion dollars a year of copper. When you account for the ancillary economic activities this mine alone will almost double the GDP in roughly a three-year period.  And that’s just amazing to think that the GDP of a country can double.  That’s why I’m so focused on the place.

Matt: That’s the typical resource story, too.  When there’s that much value in the ground, it’s bound to get developed.  And when it does, watch out!  Developments like that can almost turn a city around, or in this case an entire country.

 So back to the Oyu Tolgoi copper mine, I’ve heard on a yearly basis this mine will represent 30 percent of the GDP for Mongolia. That’s an astounding statistic.  Can you give us a little more insight as to where this money is starting to flow?

Harris: The whole country is basically a boomtown.  It’s one of these funny places where you really need to be on the ground to understand it.

So you have a country that five, ten years ago didn’t have that much in the way of wealth, and the average citizen wasn’t making that much money.  And suddenly they’ve gotten really high paying jobs in the mining sector, and they’re making a few thousand U.S. dollars a month. Prior to this mining project, some of them weren’t making that much in a whole year.

All of this newfound wealth is entering the economy. It’s creating a middle class. It’s creating a booming economy.  For example, the IMF says that Mongolia will grow at 14% this year. Just think about it, that’s more than 1 percent a month – I don’t know if the U.S. will do that all year!

You just need to understand what that means to a country.  Until you’ve been on the ground in a place like this, it’s just hard to understand and comprehend just what it all means.  But it’s creating a lot of very wealthy people also, and they have money to spend.

Matt: Would you consider this boom to be similar to China or is this an altogether different story?

Harris: You need to put Mongolia in the category of other resource-rich countries.  I mean, think what happened in Abu Dhabior Qatar or Saudi Arabia.  In those countries you have a small population and a lot of resources. There’s not that many people to spread the wealth around with, so it makes everyone very rich.  I mean Qatar right now is the richest country in the world in terms of disposable income power.

You look at other places…think of Fort McMurray in Alberta, Canada or what’s happening in the North Dakota in terms of the oil booms.  These are all booms that are happening with lots of resources, not a lot of people, and it’s creating a lot of wealth in a very small concentrated area.  With Mongolia’s large land mass and small population you’re having the same effect.  And it’s really getting concentrated into Ulaanbaatar, the capital city of Mongolia.


Matt: Sticking with Mongolia’s resource potential, is there any other angle to look for in Mongolia?  Does the country have anything other than this huge copper deposit?

Harris: They have a lot of resources, to be sure.  I think investors are too focused on what happens with this Oyu Tolgoi copper mine.  But that’s not all that’s happening.  Mongolia’s a very large country, land mass wise, and they really haven’t done that much exploration.  It seems that whenever they go drilling they find something.  Mongolia is very rich in coking coal, which is a huge export.  Copper, gold, iron ore, fluorspar; they’ve found silver. Plus, they’ve found lots and lots of other things.  They recently found coalbed methane, which is going to be very interesting in that China obviously needs sources of energy.  They’ve also found some oil.

It’s one of these situations where they find something, but there isn’t the investment capital available to really develop it yet.  Right now all the development money is going towards the copper mine.

Over time though, development will proceed beyond copper and that’s why I think Mongolia will be a very robust and diversified boom.  Not just depending on any one mine or commodity, but really depending on the view that China is right next door.

China is the biggest consumer of copper, coal and other commodities. Mongolia has the distinction of being right next door to their biggest customer, which obviously is going to be good, particularly when you have bulk commodities, which are all based on transport cost.

Matt: So from an investment standpoint my tendencies would be to look at who’s mining and we know we’ve got the big name there, Rio Tinto (RIO).  They’re working with the Mongolian government.  I know Turquoise Hill Resources (TRQ) is there as well, but from your standpoint is that the best way to play this situation or do you have a different angle on it?

Harris: Well, the problem with investing in mining — and unfortunately I’ve invested in a lot of mining and not done that well – is that you’re at the mercy of commodity prices, geology and management. You have financing risks, completion risks, you have all these risks, and it makes it really hard for people to invest in… unless you’re a real specialist at this stuff.

My view of the mining in Mongolia is that these mines will get built.  I can’t tell you if they meet their budgets or not, but they get built and they create a whole lot of jobs.  When you look at the country there’s only about half a million working age men in the country.  It doesn’t take that many jobs to really change the numbers.

If you look at the Oyu Tolgoi mine you have 13,000 people working at that mine.  You have another 10 or 20,000 somewhere in the supply chain.  So really you’re looking at about 5 or 6 percent of the whole working age male population in one mine, and these are jobs that are paying a few thousand dollars a month compared to a few thousand dollars a year previously.

So, the way I’m thinking of playing this resource boom is through the consumer, and the best way to access the consumer is retail space on the main streets.

Take a storefront, for example.  What was originally a noodle shop (when we bought it) could be an Armani store in five years. Of course, rent is going to go up accordingly.

I think real estate is the most leveraged and ideal way to play Mongolia’s boom.  You don’t have to care what the price of copper does or what the tax regime is going to be.  All you know is that people are getting great jobs and they have money to spend.

Matt: Yeah, I completely agree.  Recently I visited an oil boomtown, Williston, North Dakota. And although I love looking at oil producers and service companies, even I’d have to admit there’s huge opportunity in real estate.  After all, while I was there I stayed in a chain hotel and it was about the price of five-star place in New York. So if you own the pre-boom real estate and sell to the hotel company or any of the other retail spaces, you can do very well.It’s all part of the resource boom trickle-down effect.

Harris: The trickle-down is really the place to be.  You get the leverage and you get the optionality of what happens, what stuff they find in the ground.  It doesn’t take the individual resource risk of any one country or any one commodity or company. It’s much lower risk—but the returns might actually be much better.

I think what’s really interesting, and we looked at lots of these frontier economies is that real estate in general is a good place to be in a frontier economy.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter