Congolia

Capitalist Exploits's picture

Originally posted at http://capitalistexploits.at/

By: Chris Tell

In 1997 the Congo, known formerly as Zaire, was in the midst of an all-out blood spilling, slaughtering, raping, no-holds-barred war. Few investors were brave enough to put not only their capital on the line but certainly their own precious selves too. In May of that same year Laurent Kabila rolled into Kinshasa and declared himself president.


The Congo, or Democratic Republic of the Congo (DRC) as it has since been named, is one of the most resource rich countries on the planet.

An intrepid investor by the name of Dan Gertler hit town shortly after Laurent Kabila's taking of Kinshasa. Gertler swiftly embedded himself with the young army general Joseph Kabila, Laurents son.

Gertler took his personal fortune, apparently made from trading diamonds, and invested it in the country. Specifically, he outlayed $20m in cash to obtain a monopoly on the DRC's diamond mines. Pretty ballsy considering that the country had just experienced the world's deadliest conflict since WWII.

Fast-forward a bit, and after doing deal upon deal in the country Gertler's fortune is estimated to be $2.5 billion today.

Sweetheart deals? Sure you bet. Nobody else was there to make them, so it's not like he was fighting tooth and nail amongst a group of NY hedge funds or TA guys who thought the squiggles on the chart looked good.

Dirty? Probably, I mean who wants to finance child soldiers, ethnic genocide and butchering of innocents?

(Side note: Our good friend Harris Kupperman wrote a great article on the subject of investing in Africa here. Having grown up in Africa and understanding what he went through it made me laugh. In any event his conclusion was that no investment is worth dying for. Instead Harris is hunkered down in...you guessed it, Mongolia.)

So what's the take-away?

I love history, and this is history...it shows us a path to fortune and/or poverty. In the midst of it our task is to seek the former and avoid the latter. An important take-away from this story is that when circumstances of deep value present themselves the fortunes go to the bold. Stupendous fortunes in the case of Dan Gertler.

Mongolia - On the other side of the world and endowed with similarly vast resources.

Right now the Mongolian government has just completed elections bringing a certain level of closure to a group of posturing politicians (are their any other kind?)

I think that capital will begin returning to Mongolia again. Remember that in late 2012, while political uncertainty was high the government managed to close on a bond issuance which, I dare say made no sense to me. Investors were 10 times oversubscribed and bought a US$500 million five year tranche for 4.125% and $1 billion tranche yielding 5.125%. It just goes to show how yield hungry investors really are to take such risks. Nuts in my book, but hey what do I know?

As long as QE remains...and lets face it the good Chairman and his ilk at the BOJ and ECB can't stop feeding the junkie now that he's hooked. Withdrawal will be too painful, and political will and pain don't really go hand in hand now do they?

The Mongolian stock market has been under pressure most of the last 6 months and the tugrik has cooled.

Excellent we say...it can't go straight up forever. Let's not forget that 2010 saw the MSE lock in 121%; 2011 saw it up 73%. This is of course nothing compared to some of the gains in individual stocks.

Looking at the fundamentals in the country and its history of political flip-flopping over investor issues, I have to say that this smells of opportunity to me.

Let's make a few comparison between the aforementioned DRC and Mongolia...

DRC

  • Widely considered to be the richest country in the world in natural resources. Estimates of its untapped bounty run to around US$24 trillion.
  • Per capita income $120.
  • Ethnically fractured, with over 250 identified ethnic groups.
  • Population - 71 million.
  • The political and legal infrastructure is in disarray.
  • The country is still at war in various regions.
  • A long and unhappy history of war and brutal dictatorships.
  • Unhappy and unfriendly neighbours.

Mongolia

  • Resources...yeah, they have them too... Ooh boy do they have them. We've discussed this before, here, here and of course here. We even enlisted a young graduate to come cut his teeth in the place.
  • Per capita income $3,100 (2011).
  • Ethnically homogenous.
  • Population - 2.8 million.
  • a much more developed financial economy.
  • 20+ years of stable democratic government.
  • a functioning political and legal system.
  • Good relations with neighbours.

Mongolia isn't the DRC to be sure, however there are some similarities. it's resource rich beyond measure, and it poses some risks. Mark and I've made a bunch of money by buying when perception doesn't meet reality. Read through any history book, look at the charts and the valuations and you'll see that this clearly is the way to make a fortune.

It's why we're in Fiji right now, and its why Mongolia is even more exciting to us today, because of and despite the turmoil, than at this time last year. Fundamentals are in fact better today while valuations are lower.

Back to the Democratic Republic of the Congo for a second...

First, it's far from democratic, nor is it a republic. I've argued before in these musing that democracy is not what is needed for prosperity. There are fundamental reasons that some countries are prospering while others are blowing up, and these fundamentals have little to do with political freedom.

Mongolia, the DRC or any country for that matter doesn't need a democracy to prosper. Democracy may be a better political framework than some others, but the nuances are so varied that using the term broadly typically leads to confusion. Should we really compare India's political democracy with that of Switzerland? I think not.

A year ago Mongolia was hot. Today it's Myanmar. Scott wrote about this in "Mongolia - Where did everybody go?" We really don't want to be buying when Tom, Dick, and Harry are buying, or when Hillary Clinton is making the rounds. At the same time you don't want to be catching falling knives.

The question is therefore, this: are we catching a falling knife by buying into Mongolia right now?

Nobody knows for certain and those who say they do are liars, charlatans or politicians, but I repeat myself. In fact, any time I read an analysts opinion loaded with certainty, especially those on the sell side I just think "wow what an intellectual dimwit".

The fact is one needs to research diligently, look at valuations and play the risk/reward game intelligently. We're personally stepping up our hunt for deals...hopefully our timing is right. We'll just have to see.

I needn't point out that nobody pays us to be bullish or bearish on anything; we get paid when we're right.

Oh, one last thing...

I know I just spent a well of ink telling you about the resources in the DRC, Mongolia and a bit about Myanmar, but these are not resource economies.

"Of course they're resource economies Chris...what are they putting in your oatmeal?"

I don't think so! They are foreign capital inflow economies. Foreign capital comes flooding in, in anticipation of them becoming fully-fledged resource economies.

Consider that OT has yet to really begin full blown production. Ditto hundreds of other current projects in Mongolia. Myanmar - no different. It will be some years before production of many projects either begins or scales up to a stage where it becomes meaningful. Australia, Canada...now those are resource economies.

Nevertheless, Mongolia for our money is a speculation worth making


- Chris

They need people like us, who come and put billions in the ground. Without this, the resources are worth nothing." - Dan Gertler