October 16, 2012 - 8:05pm EST by
2012 2013
Price: 3.68 EPS $0.00 $0.00
Shares Out. (in M): 34 P/E 0.0x 0.0x
Market Cap (in $M): 126 P/FCF 0.0x 0.0x
Net Debt (in $M): 6 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • China Exposure
  • Emerging Markets
  • Micro Cap


“The power of value investing flies in the face of anything taught in academics. Value is the way stocks are eventually priced. It requires the perspective of patience because the market will eventually gravitate toward value.”

– Joel Greenblatt

"Coming from such a low base-level any incremental improvements in standards of living can lead to incalculable gains for investors."

- Harris Kupperman, CEO Mongolia Growth Group


Mongolian Growth Group is an obscure, underappreciated, micro-cap franchise with an attractive, highly skewed risk/reward equation.

Investment Highlights:

An investment in Mongolian Growth Group at or around the currentprice possesses nearly all the qualities we look for in a great long-term investment. In particular (1) an unsustainably low valuation (both absolute and relative to peers) (2) a good, fully incentivized management team backed by a savvy board (3) near to medium-term operating momentum (4) a highly attractive long-term business model and (5) multiple internal and external high probability catalysts which we expect will drive substantial near to medium-term upside.

Other attractive attributes of MGG include…

  • A simple, relatively predictable business with an unlevered balance sheet and easy to understand tangible assets
  • A dominant competitive position in a rapidly appreciating niche market
  • Improving economics on an attractive and fast growing asset base
  • A high likelihood of experiencing meaningful improvements in near term profitability and cash flow
  • A natural inflation hedge/low risk way to leverage exponential growth in Mongolian Economy 
  • Very low correlation to the general market
  • Opportunity to invest capital at (1) a very high rate and (2) for a very long time

Basically (i) investors are buying a real estate company that owns city-center assets in Ulaanbaatar, Mongolia, (ii) Mongolia is about to be awash with capital, (iii) it’s about to be awash in capital because of mining and capital market related factors, both of which will have a very large effect on per capita income - which drives real estate prices, (iv) you are buying MGG at 1.25x book value, where book value is compounding at 30-50% a year with a relatively high degree of predictability (v) investing in MGG is a great way to “front run” the aforementioned liquidity because property yields and prices tend to grow at a rate of 2-4x - what is an already rapidly growing - GDP and (vi) you get to do it with a very good, highly incentivized management team with a long paper trail of success and intelligent capital allocation.

The opportunity has arisen because of various misconceptions surrounding both the risks associated with investing within the Mongolian economy writ large and because book value understates the market-clearing value of MGG's RE assets (due to IFRS). While perceived as inordinately risky, Mongolian fundamentals are strong and getter stronger and paradoxically, we believe offers investors an ideal vantage point for capital to weather any oncoming economic storm…a way to "dance in the rain" so to speak.  

Additionally, there are many ways to win with a) Mongolian Real estate and b) MGG in particular. As a friend put, "Cash is raining from the sky, per capita income growth is wild.  The average age is around 26, so lots of new household formation.  People are having lots of babies and need housing.  Half the people in the capital live in tents (ger), they’ll want homes too.  Mortgages hardly exist.  The downtown is very tiny and nestled between mountains, which make it easy to identify the “money zone”, and helps mitigate the risk that the city “grows away from you”.  Infrastructure can mostly only reach this downtown core as well.  Even if the government redistributes wealth; that won’t be too big of a hindrance on increasing Real Estate prices (because there is SOO much money and SOO few people).  The government is distributing stock in tt (one of largest coal mines in world) to every Mongolian citizen; they can sell their shares back to government for a nice big payment.  This increases income.  I believe OT had to hire 90% locals for the mine (might want to fact check); this leads to exponential income growth in a country where most people were herding not too long ago." 

Overblown Macro Concerns Regarding Economic Sensitivity

Given various recent data points from the first couple of quarters this year, fear surrounding Mongolia's vulnerability to commodity prices and a Chinese hard landing seem overblown in our opinion, especially given the imminent ramp of Oyi Tolgoi, the primary driver of Mongolia’s near to medium-term economic growth outlook. To be clear, OT is a game changer, 100% financed and given its abundant level of gold byproduct, actually has negative cash costs on its copper production (yes, read that twice).

OT as well as most of the other larger tier 1 projects set to come online within the near to medium-term are all low cost producers with dominant competitive positions driven by a structural cost advantage relative to traditional sources of Chinese supply. This reality should all but ensure that they continue to take a larger and larger share of existing Chinese demand through time.

Understated Book Value

With a stated BV of ~$1.63/share the company doesn't appear statistically cheap upon first glance, certainly not cheap enough to look particularly interesting in the world we live in and/or without digging a bit deeper. Yet for various reasons we believe that true economic BV by YE '12 is easily north of ~3/share and set to appreciate rapidly. In other words, what appears to be trading at something closer to 2x BV is in reality trading at a depressed multiple approximating 1.25x.

A small premium to BV (all things considered) is simply way too cheap in our opinion making MGG one of the more remarkably mis-priced investments we’ve come across in some time and considering 1) the company has been compounding BV at a run rate approaching 50% and 2) the fact that a basket of less attractive emerging market RE focused comps trade anywhere between 4-5x.  

IFRS numbers vastly understate reality here. Confidence in this assessment is derived through IFRS numbers being naturally backward looking and calculated based on yields and subjective cap rates. Notably, MGG's assets have extremely depressed yields (they were booked at below market rates) and because the most valuable piece of the property portfolio is the land making up MGG's redevelopment parcels naturally it does not generate any current income. That said, over half of their property contracts are set to rollover at rates on average 50% higher over the next 12 months which obviously distorts the calculation even further but again, because more than half of value here lies with a redevelopment portfolio that doesn’t generate any income such a method makes little sense. 

For what its worth we’ve also had talks with a multiple independent sources that we trust, all of which have spent significant amounts of time with boots on the ground verifying this claim. Each has personally crosschecked MGG's listings with present valuations of comparable assets – so they’ve built estimates on the ground through a property-by-property build-out from the bottom up.

Long story short, we are comfortable that the business is both misunderstood and significantly mis-priced.

Mongolia: A Unique Set Up

The Situation

Rich in untapped mineral wealth and on the cusp of an epic boom, we believe Mongolia is only ~2-3 years into what will be a 10-20 year secular bull market sustained by positive structural change and a diversified set of stable, competitively advantaged mineral based "exponential growth engines." 

Critically, these growth engines are poised to benefit from a multitude of durable multi year tailwinds and an uncommon stability derived through a combination of diversity (gold, oil, copper, uranium, coal, natural gas, rare earth's, etc.), natural counter-cyclicality (base commodities vs. precious metals), long lives and the spoils of a structural cost advantage, a function of its geographic proximity to China. Together they provide the Mongolian economy with the capability to drive sustained periods of exponential growth in GDP and per capita incomes. 

Why Mongolia?

  • Tiny population rich in mineral wealth
  • Construction of world class mines (on the cusp of commercial production) 
  • Proximity to China results in a structural cost advantage
  • Experiencing a high teens annual GDP growth rate
  • Anticipate near-term growth to accelerate
  • Hard Working and ambitious pro western culture

Other interesting data points on the question of "why Mongolia" include Mongolia's Doing Business Ranking:  Mongolia is #29 in the world in “protecting investors” (ahead of, for example, Australia or France) and #33 in the world in “enforcing contracts” (between Denmark and Japan).

Also noteworthy is that there are multiple historical comps where the transition to an open economy resulted in a similar, multi-year period marked by vast wealth creation - so there are various road maps to help investors think about the second order effects of what’s in store for the Mongolian economy in the futrue. Regardless, all of the above points are worthy of internalizing.

At the end of the day, we think the combination of low population density, trillions in "in ground" resource wealth, proximity to China/the Asia Pacific, and the fact that tens of billions are being spent on capital projects in planning, development, and production phases over the next five years - all in a tiny economy with run rate GDP a mere fraction of that size - has created a set up where all the stars are aligning to generate a potentially staggering level of wealth with unusually low risk. As mines turn on and the capital that follows tries to squeeze itself into Mongolia's tiny economy, a boom of epic proportions is all but certain. We think investing in MGG is a strategy tailor made to optimize the above dynamic. 

MGG: Perfectly Positioned on the Eve of the a Historic Boom

Enter Mongolian Growth Group (MNGGF.PK), a Mongolia based diversified investment company run by fellow VIC'ster, adventure capitalist, founder of Praetorian Capital, and CEO, Harris Kupperman. As we mentioned, MGG's focus is on real estate and financial services or put a bit differently, the two sectors with the most embedded leverage to the growth of the economy and GDP. 

Again, we think an investment in MGG is a strategy tailor made to optimize the above dynamic, and at approximately 1.25x "true" BV (where that BV is poised to compound at approximately 3x an exponentially growing GDP) investors are getting a highly asymmetric investment opportunity with fairly predictable upside of 5-10x in 5 years and minimal probability of permanent loss.

Opportunity Overview

Keenly aware of the short window available to them given 1) poorly functioning capital markets temporarily holding back institutional capital flows and 2) the historic tendency for downtown real estate located in the capital city of countries undergoing historic booms to accrue value to its owners in parabolic fashion, Harris (and co-pilot Jordan Calonego) wisely set about gobbling up as much prime real estate in downtown Ulaanbaatar's (UB) as possible in anticipation of it closing. Realizing that 1) an expanding and rapidly growing real estate market causes step change rises in property prices and rents, which acts as a multiplier on valuations - typically to the tune of 2-4x the growth experienced within the general economy and 2) real estate in a rapidly expanding economy offers arguably the best leveraged risk/reward set up to take advantage of that growth, the two set out building an enviable market position in the heart of downtown and succeeded.

Luckily, MGG managed to get in early enough to compile what is an utterly amazing property and land package that includes an extensive list of city-center real estate located directly on, or immediately adjacent to, Peace Avenue, Mongolia's main (and only) street. MGG's property and land package consists of a diversified collection of prime class A/B office property, residential apartments, and retail space. Notably, prime locations are now long gone or vey expensive so the timing on this was a thing of beauty.

So why now? 

  • Recent government election and foreign direct investment related political reforms aimed at welcoming the worlds capital with open arms have removed a material overhang/associated political uncertainty for at least the next 4 years
  • Billions in new government related infrastructure spending coming down the pipe
  • The receipt of full financing for a game changing, world class mineral asset Oyi Tolgoi (OT) currently on the cusp of commercial production - essentially investors are investing in Mongolia at a major inflection point that will drive an exponential increase in GDP and per capita income growth
  • Recent announcement of QE to infinity - western central bank money printing and presence of negative real rates across the global financial markets should support hard asset prices and hence ongoing development of Mongolia's vast natural resource base. 

Ultimately we think a better, more unique set of circumstances to get exposure to Mongolian economy than on the eve of the turn is unlikely, given the above factors, rapidly improving fundamentals and the presence of external near-term catalysts set to kick start the second wave of what may very well turn out to be one of the greatest economic growth miracles in history. 

As far as MGG specifically, well, basically we have premier real estate assets with massive gearing on the eve of a historic boom, which again, provides an ideal set up where investors have what we think is a relatively predictable outcome, a hugely asymmetric risk/reward equation, and various near to medium-term hard catalysts to bring about the realization of value. I'm sure all of us can appreciate that getting leverage to a specific outcome at the right time, in the right market, through the right vehicle can be incredibly rewarding. I think that's exactly what we have here.

A Boom for the History Books 

Sparsely populated with only 3m people, Mongolia is a former soviet satellite that is 1) geographically well positioned to benefit from free trade and 2) naturally endowed with bountiful resources to the tune of trillions. In fact, Mongolia has enough below ground mineral wealth to make every Mongolian man, women, and child a theoretical millionaire, a data point that in and of itself helps paint a pretty clear picture that Mongolia isn't your average commodity driven emerging market or secular growth story - but something unique with extraordinary potential over the fullness of time.

To highlight this point, we are talking about a people that could go from half nomad to the wealthiest in the world on a per capita basis within the span of a roughly a decade. I mean holy sh%t!! Perhaps there is a historical precedent, but I've certainly never come across a country that has the potential in ~10 years time to go from one of the poorest to the richest simply by unlocking the embedded value beneath their feet through changing a few laws and signing a few JV's. Clearly that's an oversimplification but with avg GDP per capita of only ~$3,000 and a present run rate of ~$8.6B in GDP in a country sitting on a trillion + in embedded asset value and the potential to generate “normalized” GDP of 40B+ over the next 5 years, clearly the runway is massive and the countries present run-rate represents a mere fraction of its ultimate potential.   

So we think the seeds are currently being sown for an epic wave of wealth creation unlike any other nation on earth that I'm aware of at the moment - a story that's still in the very early innings and likely to accelerate substantially in the months and years ahead and that should (in all probability) continue pretty much irrespective of global economic conditions or turmoil within the western world.

I'm not talking about GDP + type of growth, which while respectable enough in the current environment isn't it. I'm talking about an economy that's capable of creating EXPONENTIAL increases in economic growth and the average earnings power (standard of living) of its people on a sustained mulit-year basis. Pretty sexy stuff all things considered. In fact, if most estimates are to be believed Mongolia is poised to compound GDP by a factor of four over the next 5-10 years - and if things go smoothly near-term, nominal GDP could actually double in just over two.

Inline image 5 

A Quick Word on OT & TT

With two of the largest development projects in the world in Oyi Tolgoi (OT) and Tavan Tolgoi (TT) commencing production over the next couple of years (TT won't really get started until next year) its easy to imagine how things could get downright silly on the growth front given the amount of latent, embedded growth in export capacity held within these two assets. It's nuts, but these two projects alone looking out over the next five years have combined (committed) levels of Cap-ex approximating ~$12B, so close to 2x run rate GDP.

To give a better idea of the scope of these near, medium and long-term growth drivers, these two mines presently sit on ~81 B pounds of copper, ~46M ounces of gold, and ~6B tons of coal (so big boys clearly). 

Initial production capacity is looking at annual production rates of ~1.2B pounds of copper worth an estimated $4.6B, 650,000 ounces of gold worth an estimated $1.1B, and ~3m tons of coal worth an estimated $100m or taken together, ~ $5.7B - and remember this $ amount consists of ongoing (recurring) export capacity and hence stands to be a gift that will keep on giving for an estimated 60-70 years (Good lord!).

Of course none of that discusses any of what I'm sure is a very real, near certain pathway to expand the resource and in turn, to grow OT or TT's ultimate steady state production levels materially above initial expectations.

Inline image 6 

So things could get a bit nutty in the blue sky scenario and again, were talking about only two mines, so none of the above includes any additional growth potential that will be driven by the 25 or so additional projects in the pipe, each of which is expected to represent ~5% GDP on average. Nor does it speak to the ripple effects and positive feedback loops that all of this investment will spur throughout the various other facets of the economy. 

Real Estate Portfolio (Portfolio Composition, Valuation, & Strategy):

Property Strategy

  • Buy top quality properties along Peace Avenue 
  • Focus on leasable retail and office property
  • Focus on redevelopment opportunities with sizable value uplift through redevelopment

Property Portfolio

  • 28 Residential Units
  • 6,081 meters of Retail Space
  • 5,361 meters of Office Space
  • 13,800 meters of Redevelopment Opportunities 

Portfolio Composition and Valuation

Inline image 2 

 Inline image 3

See Graph posted in questions - formatting wouldn't work - Fwiw, this is only one of a couple of different ways one can triangulate the present valuation. Current BV/share appears to be anywhere between $3 and $3.50. 

Brief Primer on Downtown Ulaanbaatar:

MGG currently owns 28 residential units, 6081 meters of retail space, 5,312 meters of office space and the crown jewel, 13,800 meters of redevelopment property all strategically positioned within a prime 3 kilometer stretch in downtown. That said, one of the most important aspects of this thesis is to understand the geography of Ulaanbaatar and the nature of downtown. 

Inline image 10 

Inline image 11 

UB is landlocked and runs east west as its constrained to the north and south given its wedged directly between two mountains - so its much more comparable to a place like Hong Kong than it is to your average city. Also, and this is equally as critical, there is only 1 main street in downtown UB, the aforementioned Peace Avenue. So when thinking about MGG's property and land package its important to grasp that there is really only 1 area with a distinct financial and residential presence downtown where everyone wants to be located and its extremely small - this is a function of both nature and the fact that UB was originally constructed for only 300k people by the soviets.

Considering this reality then, its probably no surprise to anyone that downtown UB is currently facing a drastic shortage of Class A&B office space and this shortage is getting more acute day be day as more and more of the worlds corporations and various expats are arriving in UB to set up operations. The shortage of residential apartments is even worse, which are highly desirable to wealthy locals not only for status reasons but also because of basic logistics given that traffic getting in and out of downtown is notoriously awful - commutes on average take about an hour and a half to two hours both ways.  So the takeaway as far as the structural shortage puzzle is it’s a certainty that their is only one way to go downtown to help alleviate these bottlenecks and that’s up - meaning the construction of office and residential towers.

Understanding this inevitable reality is a big part of connecting the dots in our mind as well as the sheer genius of how Kuppy went about acquiring MGG's existing property package (the specifics will become readily apparent shortly), not to mention where a big part of MGG's ultimate upside will come from. To be clear, by upside I mean big time, many many multiples of the current stock price type of upside.

Also, with 40% of Mongolian citizens (~1.2m) living in a city built for a population a mere fraction of that (~300k), its not surprising that the infrastructure of the city is in dire shape and in critical need of repair and expansion. Why this is relevant to property prices is because any land outside of the city is essentially worthless because it has no infrastructure attached to it (so their is no water, sewers, electricity, etc.). This in turn drives up the price of the land within city limits because it’s the only land with working infrastructure in place. This dynamic naturally provides a huge tailwind to property investments within the city center.

A Roadmap for the Future: Thinking about Valuation & the Kazakhstan Boom (2002-2008)

While by no means a perfect comparison, in fact we would argue on a variety of levels that the unique nature of the Mongolian situation makes it substantially more attractive, the Kazakhstan example is a useful case study in a multitude of meaningful ways and it makes sense on a high level to use it as a blueprint for thinking about how an investment in MGG will unfold over the next 5-10 years. 

As far as the specifics that make Mongolia materially more attractive, the quick and dirty outline includes 1) Almaty isn't land locked and therefore suffers from no shortage of land with ~200 sq. kilometers (big difference) 2) UB has only one premier shopping street (Peace Avenue) where Almaty has 5, all substantially developed (another huge difference) and 3) while technically a democracy, its been ruled by the same leader for ~20 years and our read is that its generally understood that its a pretty good idea to keep ones business small enough to keep it out of sight from the authority's. In other words, capital apparently flows out of Kazakhstan like bees to honey when it can (big big difference). In Mongolia and UB, free enterprise is a big part of their national character and property rights are well respected, a point of pride amongst the vast majority of the population, so its very likely that the wealth of the country will stay within its borders and reinvested back in the economy. At the margin all of the above should intuitively make any investor more bullish on Mongolia relative to Almaty.

That being said, there are many critical similarities that make the comparison apt and at the end of the day, a solid roadmap to use for thinking about how all this plays out. Both countries are resource based economies, both came across massive resource discovery's and grew rapidly due to large step change increases in production derived from them, both are former soviet satellites, both share similar cultures, architecture, initial infrastructure etc. - and so the primary difference (outside of those already noted), is that Kazakhstan is 10 years farther along in its boom than Mongolia, so we think comparing the two helps MGG investors see around the corner of the oncoming mining boom (remember, historically these booms tend to last 15-20 years before prices normalize within the ballpark of developed nations and the evolution of these situations are broadly predictable as far as the general impact on the economy). 

Kazakhstan's statistics over its 2002-2008 boom can be seen in the chart below (per MGG's presentation)

Inline image 8 

Not bad by any means, but its much more interesting to compare present Prices in Ulaanbaatar today to get an idea where they may end up tomorrow. Odds are Mongolians have seen anything yet... 

Inline image 9 

What the above comparison makes clear then is that on an apples to apples basis prices per meter in Almaty are about 3-5x those in UB, which for reasons already noted we think is the absolute low end of where they will end up at in UB 5-10 years from now.

In dollar terms then, high end rents are ~$20-40 per square foot and we think Mongolian prices should balance out (at minimum) around ~$125 per square foot - which just for comparisons sake stand at about $500-$700 per square foot on Michigan Avenue in Chicago and almost ~$3000 per square foot on Fifth Avenue in NYC.

While we don't think Mongolian prices will ever come close to U.S. levels, it does help to get a feel for the magnitude of the gap and how much money will be made as that spread starts to close to a more reasonable differential as the country continues on its path of resource development and modernization. 

If one is willing to factor in cap rate compression over time, a fair assumption we think, then MGG's existing property will be worth something approximating 5-10x its present value within 5-10 years. Not bad for a small premium to BV today no?

Value Creation Strategies:

Pillars of Strategy, per the presentation 

  • High rents in downtown lead to property values that are many times the replacement costs of completed structures
  • The economic returns from development are abnormally high due to scarcity of high quality land on main streets
  • MGG recognized this early and has a very attractive redevelopment pipeline

As a quick aside, one of the many aspects of this idea that is so attractive is having Kupperman and his ability to utilize a multi-tooled value creation toolbox if you will for the benefit of MGG shareholders in a variety of dynamic and opportunistic ways.

We think the examples below make clear just how valuable having a smart, hungry owner operator with a value-centric mindset at the helm truly is. There are just so many ways to win with MGG.

Special Situations

Now for some insight into Harris’s value creation strategy, and again, this is just one of many special situations within the larger property portfolio that illustrate the value of a mind set focused on the right things. We think it’s illustrative of the type of value that is accruing to MGG shareholders above and beyond the pricing and rent tailwinds (which are already enormous) but I digress.

A colleague put it like this... 

"MGG recently purchased a ground floor retail space that's tenant was an ethnic restaurant on a side street of Peace Avenue. MGG purchased this property for $1.6m at a mid-teens cap rate from a forced seller. MGG is now beginning construction on an extension to the property that will increase the property's rentable area by 60% at a cost of about $300k, effectively creating a low 20's cap rate at today's yields. In a few years we expect 10 caps or less to be the norm in central UB, and rents to be 2-3x higher than today's on this property - effectively 5-7x upside on the purchase, not counting the interim yield."

In a nutshell then, get paid 20% a year with rock solid downside protection and a high probability you'll make 5x your money in 3-5. Yeeeehaww!! Got to love that.

Resource Conversion - Monetizing the Redevelopment Portfolio 

The biggest opportunity for shareholders at this point lies in the redevelopment portfolio. To understand why we think this, lets take a step back a bit and remember the underlying reality in downtown UB and how alleviating the bottleneck as far as supply/demand is concerned is a function of building out office and residential apartment towers. This is the future, of that I am all but certain. Remember UB is landlocked (sandwiched) in a valley between two mountains, so think of it like Hong Kong. There is nowhere to build but up.

Also, the genius I referred to earlier requires a bit of explanation in that as a former Soviet satellite, most property ownership was a function of the government privatizing its (real estate) assets, and unsurprisingly, it did it in a (incredibly inefficient) way which effectively resulted in lots of tiny land parcels (one for each man, women and child presumably). Obviously having ~3m people each own some tiny parcel of land doesn't do much for property values or for businesses looking to redevelop downtown by adding say a "top of the line" new office tower. But as often happens this problem was an opportunity, and MGG capitalized on it by exploiting its first mover advantage and quickly aggregating multiple small, adjacent land parcels along Peace Avenue into a handful of large blocks.

So, as the dominant player with an unrivaled market position in downtown UB real estate thanks to there ownership of multiple large land parcels in prime locations, to say MGG’s assets are valuable or that they’re in a position to create value over time is quite the understatement, as high rents in downtown UB result in property values that are several times there replacement costs. Luckily, owners of existing land and property can arbitrage the difference and convert land/existing structures towards their "highest and best use." As an example, assuming current building costs of 1,200 to 1,500 meters property owners are looking at paybacks on investment of between 2 to 5 years. ROIC here is tremendous.

That in mind, lets take a look and see just how tremendous by reviewing just 1 of MGG’s land packages, which possesses a total size of ~2200 meters as it stands today. 2200 meters translates into (roughly) 1500 meters of sellable land space per floor (if we assume the remainder is used as space for general utility (think recreational area for businesses and residents). If we then assume the tower in question being built has 20 floors (entirely reasonable if not conservative) and use current costs and values for class a residential located in the heart of downtown according to local broker BDSec's latest report, this development would create an incremental $75m (or ~2.20/share) in value! That's 2.20/share in value vs. a current stock price of $3.68, and that's just 1 of MGG's 6 land parcels. Disclaimer: I had to lay down the first time I realized this.

So the math looks like this: $4000 in sales per square foot * 30, 000 square feet of residential sellable space (1500 square meters per floor * 20 floors) equals $120m less cost of $45m ($1500 meters in cost per square foot * 30,000 square feet) which equals ~$75m in total profit ($120m - $45m = $75m). 

Granted, the example above assumes MGG were to do the redeveloping themselves, which isn't going to happen given the companies preferred strategy of entering into a JV with experienced developers and contributing the land and retaining some % of the building while taking the property management rights, so that $75m in profit wouldn't accrue solely to MGG but that's not the point. The point is to illustrate the incredible value creation that MGG can deliver to shareholders over time by entering into select deals on land packages with the right partners - of course its also too illustrate that MGG is dramatically undervalued at today's quote (or relative to its existing asset base assuming no additional accretion of value through rising rents and property values). Also, with each monetization MGG would retain a high margin recurring revenue stream approximating ~100k a year. Not game changing by any means but its an asset worth at least a million bucks (i.e. 10x) so a nice little kicker for playing. 

We think finding the right JV partners should be a relatively simple and painless process given the extremely high quality of the asset. As far as financing, we're looking at 50% down payments on construction that is pre-funded - with the JV partner fronting that bill. 

Bottom line, MGG has the ability to unlock value worth several times its present price within the existing asset base and again, this is assuming no additional price increases on property values/rents.

One last recap of the redevelopment strategy before we move on, per the company presentation... 

  • Partner with experienced developers 
  • Contribute Land and local experience to a prospective JV
  • Manage the property afterwards which leads to high margin, recurring revenues
  • Avoid outsized financial commitments
  • Avoid completion risk
  • Avoid budgeting risk
  • Retain high returns on capital with reduced risk

Management Quality:

As I mentioned last time with my write-up in reference to SND’s CEO Nolan Watson, we think Harris also possesses that “…passion, the magic if you will, that is the hallmark of all truly great business leaders and entrepeneurs – “what he does mixes with who he is, which is cooked and propelled by what he believes.”

The following profiles and interviews should help paint the picture as far as sizing up the caliber of the individual leading MGG’s charge.

Lets start with one on compensation and incentive alignment....

"Chris: Mongolia Growth Group is a bit different from most other public companies in terms of compensation. Can you explain?

Harris: the Company started with me asking friends to invest alongside me in Mongolia. I wanted a diversified company that would have adequate exposure to the Mongolian economy. I simply didn’t have the resources to do that myself.  I felt funny asking my friends to invest in my company and then tell them that I was going to take a salary and dilute them through stock options or any other scheme like that. Instead, I have decided to take no salary, stock options, performance allocation, bonus or anything else. I’m here in Mongolia because I’ve invested my own money in the company.  My Co-Pilot in this venture, Jordan Calonego feels the same way.  Besides, we’ve been investors for over a decade now and have been disgusted to learn that the CEO always seems to do better than the shareholders. Now that our roles are reversed and we are management, it would be wrong of us to do what we have always criticized. Investors need to think of this company as a business created by a bunch of very successful hedge fund guys who want to invest their own money in Mongolia. Minority shareholders can come along for the ride if they want without any of the onerous fees normally associated with hedge funds. It is the only company that I know of like this. I hope we can use this as a template for the next time that I complain that some Management team is overpaid, but that’s a different story!"

Shareholder Letters -



Geopolitical Tensions with China and/or Russia (Sovereign Risks)

To paraphrase Harris, there's always a chance China and/or Russia decide to "bring the tanks in," and while not likely it should be noted as a risk.

Corporate Governance

With 1) a sole mandate to create shareholder value 2) a 33% ownership stake 3) full transparency, accountability to investors and an impressive BOD 4) independent verification that all of MGG's property titles are clean 5) Price Waterhouse Coopers doing the books 6) Cushman Wakefield taking care of the property appraisals etc. etc., we think its clear we are in good hands.

Resource Nationalism/Government Related Issues

Additional government regulation/bureaucracy could affect the cost and pace of development, but recent political reforms and changes to the countries policies regarding foreign direct investment make us think this risk is minimal for at least the next 4 years. See the commentary I’ve posted below in the questions thread on cheap tuition and resource nationalism. 

Also, we've mentioned the ambitious, pro western nature of its people but we wanted to add that both major political parties are pro-business and that the more classically liberal of the two was elected a few months back in the quadrennial elections. To get an idea of the character of the Mongolian people, this is a country that went on a hunger strike in order to achieve democracy, so belief in the rightness of a democratic system of government isn't just a phase, its fair to say its in their blood. 

We should also quickly mention that we think this article on rising taxes for OT posted a few days ago significantly overstates the risks, lacking context in terms of the larger picture. Perhaps we’re wrong but we certainly don’t think it’s much of a threat as the headline implies. Glad to answer any questions on this topic in the thread below.

Development/Production Delays at OT/TT

Closely related to the above, there is a chance that the final piece of the OT production puzzle - namely the ability of Rio Tinto to hook the mine up to nearby Chinese power lines, gets scuffled somehow. Given what's at stake, various tea leaves, etc. we doubt a mutually acceptable agreement won't be reached near-term but even in the worst case scenario, all this would do is delay the commencement of commercial production by ~6 months or so as Rio would need to build the power capacity themselves. So a slight kick in the balls perhaps but nothing game changing.

Commodity Risk

As with any country where the economy is commodity driven, Mongolia is to a certain degree affected by commodity prices and a sustained collapse in pricing obviously wouldn't be a great thing. Given the countries structural cost advantage though, prices don't need to improve or even stay at current levels for the thesis to work. See our section on Mongolia being a shelter amongst the storm below in the misc. section for more of our thoughts here.

Also, the macro shock risk is real and while I think MGG weathers the storm much better than most, a systematic financial crisis wouldn't be a good thing as far as FDI/capital flows are concerned. Capital flight would temporarily delay the day Mongolia realizes its full potential.



As discussed throughout this thesis, as Mongolian mines begin turn on, GDP will grow (fast) and hence the value of MGG's RE assets will as well (even faster). 

These fundamental improvements should drive a substantial re-rate in the value of MGG's properties, and these improvements are by and large immune to cyclical swings in commodity demand - as Mongolia's status as a low cost producer and structural cost advantage will in all probability ensure Mongolian production continues to displace foreign resource demand and hence grow exports for the near, medium and long-term future.

Capital Markets

As noted, Mongolia's capital markets do not function and any improvement on this front would be a huge positive for economic growth - in particular the creation of a mortgage market and a liquid, fully functioning modern stock market. See section on the Lollapalooza effects in the question thread for more of our thoughts here as well as the various BDSec pieces. 

Exchange Up list(s)

Lastly, we expect MGG to up list to both the TSX-V and the Mongolian Stock Exchange in the near-term. These are big/hard catalysts as presently MGG is only listed on the Canadian National Stock Exchange (huh?) or the "CNSX" - a tiny exchange for emerging companies. Basically the worst exchange in Canada.

This is critical because this listing has heretofore prevented large amounts of capital (read a long list of institutions) from investing in the company despite their best efforts due to mandate/liquidity restrictions. This dynamic will change shortly. 

As far as the MSE up listing, it may take a bit longer than the TSX-V up list, but eventually we think this will be a substantial catalyst as FDI in the Mongolian economy gains steam and because MGG is the best positioned and really the only company that will be listed that provides institutions with a vehicle to play the multi year growth wave in Premier downtown UB RE. Can’t imagine Asian sovereign wealth funds not wanting a piece of this action.

Anyhow, we see these events having a high probability of driving a material re-rate and in the process pushing MGG's valuation more in line with intrinsic value and that of its global peers.        

Helpful Documents:

BDSec Report: The Heavy Hand of Government Lightens Up

BDSec Report: New Securities/Market Law Draft A Potential Game Changer for Mongolian Capital Markets

BDSec Report: Mongolian Portfolio Strategy

Solid Mongolian Overview:

MGG Corporate Presentation

MGG Property Presentation

Capitalist Exploits (Mongolia related posts & Kupperman interview)

Adventures in Capitalism Mongolia Related Blog Posts:

Business Week Article


Historic Window of Opportunity in Mongolia:

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Mines turning on
Capital Market improvements
Exchange Up Listing(s)
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