Achit-Erdene Darambazar is a pioneer in Mongolia’s financial sector and is the founder and President of Mongolia’s first Investment firm, Mongolia International Capital Corporation. Fluent in many languages, he has facilitated Mongolian cross-border deals and raised hundreds of millions of dollars for his clients.
In this interview, Achit-Erdene looks retroactively at Mongolia’s mining industry and forward to agricultural. He also shares his experiences with Mongolia’s stock market and the prospects for Mongolia’s leading public listed companies.
Enkhzul Orgodol: Mr. Achit-Erdene is the president of Mongolian International Capital Corporation offering comprehensive inbound and outbound investment, brokerage, and research services. We will focus our discussion on the past, the present, and the future trends of Mongolian investment climate. So Mr. Archit-Erdene, welcome.
Enkhzul Orgodol: Although mining sector has been the low-hanging fruit or the cash cow for Mongolian economy to leverage since 2000, because of not only its internal politics, but world commodity price fluctuation. We have been forced to start making the country’s other economic sectors more attractive. Which other sectors have the biggest potentials of attracting foreign investors to Mongolia based on your observations and predictions?
Achit-Erdene Darambazar: Yes, the mining has been, really, the growth engine of Mongolian economy for the last 10 years. If you look at the historical data on the exports. For example, in 2005, the Mongolian commodity export was only half a billion dollars. Today it’s over 5 billion dollars more, exactly 5.8 billion dollars. And you could really say that Mongolia opened its treasure chest. We were exporting only copper ten years ago. Now we export coal, iron ore, and lots of other minerals. So I think this has been really success story of Mongolia.
What I see in the next ten years is kind of similar. Big growth in the agricultural industry of Mongolia, because like other countries with the big land and fewer people like Canada and Australia and New Zealand, Mongolia has good potential for the agriculture. Both growing crops and also exporting meat.
Enkhzul Orgodol: Animal Husbandry.
Achit-Erdene Darambazar: Animal Husbandry. Of course many things need to be done, especially on the government’s side, there needs to be right policies and also the, maybe on animal husbandry more like the …
Enkhzul Orgodol: Hygiene and more standards, right?
Achit-Erdene Darambazar: Yeah, veterinary, yeah. But I think there is a huge potential and I think you already can see that the agricultural industry in the last two, three years picked up, because we are also next to a very big market.
Enkhzul Orgodol: China.
Achit-Erdene Darambazar: China. And that imports the crops and even hay from America and Canada. So I think there could be just matter of time before Mongolia starts exporting these huge commodities. Agricultural commodities, volumes, to China.
Enkhzul Orgodol: But with regard to mining sector, in spite the abundant resource, there has been lots of challenges with regard to infrastructure development as well as not having the right policies in place as a precedent to investment, etc. Do you think similar kind of challenges can be faced for investors interested in agricultural sector as well?
Achit-Erdene Darambazar: Yes. Like you said, I believe the government policy is quite important, I think. So if you look at New Zealand, we recently did a research on this industry, if you look at New Zealand, New Zealand has a similar number of sheep and cattle. So 33 million. Mongolia has 32 million, and New Zealand exports about 3.8 billion USD worth of meat all over the world including and probably mainly to China. Whereas Mongolia is exporting only 17 million dollars worth of meat. So if you look at it, I think the main bottleneck is the dangerous, contagious diseases like foot and mouth disease and other diseases that are kind of , that prevents it. Because there is a worldwide ban on importing from these countries where there is a FMD outbreak.
So Mongolia needs to government, probably it can be done only through the public sector that we need to introduce good hygiene standard as well as introduce the big vaccination program all over the country.
Enkhzul Orgodol: Which is already in place though, right? It’s certain amount. Probably not fully implemented, but still on the way.
Achit-Erdene Darambazar: Yes. So I think this needs to be done systematically like it’s done in other countries like Turkey in the last 10 years. And I think it needs to be country-wide and systematic and over three to four years. And Mongolia, the meat industry can export after that.
But it’s like, in mining, it’s more in the infrastructure issue, but there is big demand on the other hand so it justifies this investment.
Enkhzul Orgodol: What else can you say about Mongolian investment environment? Especially in terms of legal and maybe even taxation aspects?
Achit-Erdene Darambazar: Right. So, Mongolia has one of the lowest corporate income tax rate in the region. It’s 10% if your revenue is less than 1 million dollars but 25% after that. And also personal income tax is about 10%. And I think Mongolian company law and investment laws are quite well-drafted and so I believe there is a general.
Enkhzul Orgodol: It’s generally welcoming or favorable to the investors. And I think because of this economic downturn we’ve experienced over the past few years, now the new government or the newly-established government is trying harder than ever to make the investment environment or climate even more favorable. Do you agree with that?
Achit-Erdene Darambazar: Yes, I agree with that. I think in the past that Mongolia introduced some controversial laws limiting investment in strategic sectors such as mining. But since, like I said, we’re a very vibrant democracy, so we learned from that mistake and changed that investment law again. And now there’s no more limitation in strategic sectors except for the foreign government-owned institutions. I think it’s kind of similar to when you invest in Australia, you have to get an approval from the investment board. So if you were a state-owned company, there will be similar process, but for other private investors, it’s a quite easy process. You don’t need special approval from anyone to make an investment.
Enkhzul Orgodol: It’s not only applicable to strategic sectors, but also to the other sectors, isn’t it? Could you share some of the projects you’re currently working on? Which sectors are they mostly from? Where are they headed to?
Achit-Erdene Darambazar: Yeah. So, the deals we have done, the transactions we have done, kind of reflective of the Mongolian economy and foreign investment trend, you could say, so, we started doing a lot of mining sector deals and up until 2012 there were lot of new mines starting, new exploration companies starting and listing in Australia and Hong Kong and Toronto stocks exchange. These were really interesting, exciting times.
Then you could say that because of, maybe, commodity downturn and also government policy of that strategy investment law I mentioned that mining became less attractive for foreign investors. So you see more decreased activity in the mining. But nevertheless, I mean, just in terms of investment, but also, Then in the last four years, you can see a lot of investment in agricultural sector, so we have, for example, we have Worked on expansion of the largest chicken farm in Mongolia. Where they had about 100,000 chickens and they expanded to include 300,000 more chickens, so becoming almost half a million chicken farm.
Enkhzul Orgodol: Right, right. Yeah, that’s quite a rapid expansion.
Achit-Erdene Darambazar: Right. Expansion. But still they cannot supply . They will supply only 30% of the Mongolia’s total consumption, so I think there is lot of potential in this sector for import substitution but also for export. But also, now we’re working with cashmere company to expand its production line, but also to attract strategic investors into the sector. So offering equity sales. also, we work, it’s our principal investment, but we built a successful farming company in eastern Mongolia, so we see a lot of deals in agriculture sector through recently, but also starting this year, late last year, the mining sector is picking up again. So again we’re working with mining entrepreneurs starting new companies, maybe listing on Toronto.
Enkhzul Orgodol: Besides agriculture and mining sector, which other sectors do you think have the biggest potential so far catching up with these sectors, mining and agriculture and others that you just mentioned.
Achit-Erdene Darambazar: So we have, again, I forgot to mention we work with a lot of mining service companies because as you noted Rio Tinto is the largest investor in Mongolia. So they’re investing last four years about 5 billion dollars and investing 5 billion dollars more in the next five years. So there is lot of opportunity to supply materials, goods, and services to this big mine. And that’s just one mine. Then there’s lot of other coal mine and small-scale gold mine starting. So we see a trend in the mining service industry that first it was focused mostly in exploration services. It was geophysics, initial stage, drilling companies, but it’s more like, now, more stable business like catering services and also the machinery. And then there are so many things that you can supply to the big mines that can be produced in Mongolia so more and more entrepreneurs find these opportunities and then come to us to raise money so that’s quite interesting sector.
Enkhzul Orgodol: Yeah, sounds like we might be able to see similar trend happening in the agricultural sector in the next few years as well, because you just mentioned that agriculture sector is trying to catch up with mining sector, but they’re still in the initial stage in terms of becoming or meeting international standards, etc. So maybe after several years, they would be also requiring supplementary services like the mining services you just mentioned. Would you agree?
Achit-Erdene Darambazar: Yes. I would agree. I think once you started producing big volumes of agriculture products, there would be, necessarily,. They will require logistics services and marketing and trading and there will be a lot of other opportunities.
Enkhzul Orgodol: Your company provides multiple services besides the capital financing … Corporate financing. Could you share your typical revenue structure so that we can see which kind of services are more popular among the corporations interested in Mongolia and also upgrading in Mongolia?
Achit-Erdene Darambazar: So we are like a small investment banking firm. So our main businesses is our corporate finance advisory. So we advice companies in debt and equity raising. And also their foreign inve, like you said, the inbound investment when foreign investors want to come in, they require due diligence services, et cetera, so these are primarily ourr,maybe, 70-80% of our revenue comes from this. And then we have a small brokerage arm that is mostly outbound Mongolian people wanting to buy shares outside. And because the Mongolian capital market is still very very small but still, we’re working on that. We’re trying to find new companies to list so over time I think this brokerage will pick up.
Enkhzul Orgodol: Speaking of the immaturity of Mongolian stock market. In 2011, as it 2011 when the Mongolian stock exchange started working with the London stock exchange? Yes. 2011, right?
Achit-Erdene Darambazar: Mm-hmm.
Enkhzul Orgodol: How much has this partnership helped in terms of the growth of MSE, you think?
Achit-Erdene Darambazar: So, it was both good time and bad timing for that initiative. It was good time that we were able to attract London Stock Exchange and many other exchanges offered their services to cooperate with Mongolian stock exchange, but we chose London Stock Exchange and brought in new IT software system and I think people, officials got training in abroad and even brokerage, our companies and people to train in London.
So there was some, lot of improvement, but again the commodity market kind of went down again starting 2012, so lot of the expected IPOs in the market didn’t happen. But again as I said, we’re seeing, again, renewed activity in the mining sector. Commodity prices going up. And lot of the biggest companies in the future, that will be listed will be state-owned and also mining companies, we believe so.
For example, there is a ET-,Erdenes Talvan Tolgoi, we just call it ETT, I think eventually when it lists, it will be, like I said, worth several billion dollars. But I think it’s kind of a early stage of development. And we’ll see listing of this and other companies on the stock exchange in the coming years.
Enkhzul Orgodol: I see. In one of your interviews back in 2011, you said many Mongolians with significant savings are interested in investing but feel uneasy because they can’t easily find quality information on investment ideas. Has it changed?
Achit-Erdene Darambazar: I think, still, in the Mongolian Stock Exchange, there are not too many qualified companies for investment. And Mongolian stock exchange market capitalization is still very low. Several hundred million dollars. So people with significant savings want to invest in stock market, but they would investing in abroad. So mostly they would follow the Mongolian companies but listed in Toronto and Hong Kong and also in Australia, so we offer these services facilitating this investment.
Enkhzul Orgodol: Right. You also train your clients or the public as well, right, in this regard?
Achit-Erdene Darambazar: Yes. One of the things we do is we organize this event with the mining companies or other listed companies and invite our clients. And they introduce their plans and activities for the next year. So that’s, yeah, has been quite popular, useful, for our clients.
Enkhzul Orgodol: Right. Based on your client portfolio, you mostly consulted for major companies and investors. But I think you know among other viewers, there are different sizes of companies or even individual entrepreneurs who are looking at Mongolia and thinking “what kind of investment I can do that can bring me my money back in the short term, mid term?” What is your advice for them?
Achit-Erdene Darambazar: Yeah, for any good investor, you need to do a lot of studying. Read about it. The country and economy and talk to the people and investment firms like ours are very good source of information and we have a good network in the business community and I think will be good start to start talking to us.
Enkhzul Orgodol: Right. Right. If they could not, have the accessibility to talk to you directly, they could at least access the reports, market reports, or some of your intelligence services online, can they?
Achit-Erdene Darambazar: Yes. That’s correct. We do provide monthly industry intelligence reports. And the purpose of these reports are to identify the opportunities and challenges in the sectors, so we have done an energy sector report and we are now doing an agriculture ,just published agriculture sector report, of course, so. And along that, we also do company-specific reports. Like a quarterly research reports, so focusing mostly on Mongolian stock exchange listed companies. But I would be also good start to look at, understand the financials of the companies and network in Mongolia.
Enkhzul Orgodol: Are they accessible online for free? Or do they … Can they be?
Achit-Erdene Darambazar: Yeah, I think we publish some parts of it,excerpts. But you can email us and get the full content.
Enkhzul Orgodol: Okay. That’s great. That’s great to know. MICC created the Mongolian Mining Index back in 2005 and was informed to be picked up by Bloomberg and the writer’s knowledge, is it still available?
Achit-Erdene Darambazar: Thanks, that’s very good point. I think it’s been ten years we’ve published this report, so we’re going to update and do a major update and publish a whole report on this mining. And I think you could see, really, the trend, if you compare this mining index in 2005 and 2016. You could really see what has happened in the last 10 years. So …
Enkhzul Orgodol: And have you already updated, or, sorry, Or are you still working on this?
Achit-Erdene Darambazar: Yeah. So you should, yeah, keep an eye for this. We will be publishing very soon and it will be quite interesting.
Enkhzul Orgodol: So, though you’re an investment banker, I would like to hear your opinion on development of commercial banking in Mongolia. Do you think Mongolian banking and financial sector have the infrastructure development required for international businesses that would require transactions swiftly … Swift transactions, online payment across borders, etc. Do you think we do have the sufficient infrastructure already developed for such kind of banking and financial duties?
Achit-Erdene Darambazar: Yes, I think the commercial banking sector is well-developed in Mongolia. Where you’ll have no problem in transferring money and doing transactions online or in person. Some services, what we do in the for big funds buying Mongolian shares, we’ll sometimes need, It looks like we’ll need to have in foreign big-name custodian banks. But I think the government is acceptable, willing to bring and welcoming foreign banks to establish branches and I think it will be even more developed after that.
I should also …
Enkhzul Orgodol: That’s one of the hottest topics at the moment, right? Which banks to welcome, whether we should welcome at all, or not?
Achit-Erdene Darambazar: I think it also helps the over-all development of the financial industry. So once you have a foreign bank, there will be more competition and also the foreign businesses, the big companies that are coming in, they also always look for their partner banks in the country, so I think it will be helpful for the overall economy and us brokerages when we try to bring big hedge funds and big funds to invest in Mongolia.
Enkhzul Orgodol: Okay, Mr. Archit-Erdene, thank you very much for your discussion and all the best to you and hope to see you again.
Achit-Erdene Darambazar: Thank you.