Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.
Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.
While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.
Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.
Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.
In this week’s edition of the WOW we’re covering an update to a “freebie” I sent out a couple months ago
Like my beautiful wife, this one is going to be short and sweet.
Early September I threw out a “freebie”, partly to reward long-term readers and partly to provide a heads up and a sampling of the kind of product I was polishing, shining, and packaging up into the awesomest, shiniest independent investment service I could be proud of and one dedicated to investing in asymmetric investment. Ok, it’s not really shiny. I mean, it’s a publication, not bloody silverware.
The alert, which I sent out to everyone on our email list can be found here. This week’s WOW won’t make a whole lot of sense until you’ve read the alert so go read it now if you are new or haven’t read it for whatever reason and then come back….
Read it? Ok.
I received a lot of thank you comments after sending that out but in the melee was one from a subscriber:
“This is disgusting. Politics is dirty and I prefer to invest in non-political investments. This isn’t for me and I’m not sure I want to even read your stuff anymore”
Listen snowflake, there is no such thing as “non-political investments”.
Maybe if you’ve grown up in a cotton wool environment, spoon-fed Barney the Dinosaur as a kid, which then morphed into Hollywood sitcoms as an adult, and your idea of a “tough” world is when some pimply faced middle class pot smoking teenager gets kicked of the stage at X Factor because he cracked under the pressure, then maybe this all makes sense. But if that’s indeed the case you need to put down the scissors before you hurt yourself.
Politics matters. Deal with it. Understand it. Baseball has a hard ball. If you cock it up you get a black eye or worse. Actions have consequences. A reason not to play baseball? Hardly.
This deal is all about politics and far less about anything else. Yes, the economics matters in the long run, and fortunately it has sound math on its side here but trust me when I say that sound math on its own in opposition to political pressure rarely wins the day.
Fast forward to a meeting that just went down in Ulaanbaatar. CNBC just reported on it:
“The development of Tavan Tolgoi, which contains 7.4 billion ton of coking and thermal coal deposits and is largely untapped, hit a series of political and economic roadblocks over the past few years, but the July election of the Mongolian People’s Party is expected to ease the way forward.”
Political roadblocks? Hmmm…
And then this is what was written in the Insider alert:
“Adding insult to injury, the government owns the TT deposit and has consistently produced and sold coal for less than market prices, effectively undercutting MMC (Mongolian Mining Corporation) coal—while also creating a glut at the border and largely bankrupting the government’s coal company (ETT) in the process. Mongolian Mining Corporation stopped production, but the government’s ETT continues to produce at massive losses for no logical reason.”
Yep. Politics matters, all right?
The CNBC article goes on to state the following:
“Mongolia’s government on Friday held an initial meeting with a private consortium, led by Shenhua, which is in talks to take over development of the Tavan Tolgoi mine from the Mongolian state-owned company Erdenes Tavan Tolgoi JSC (ETT).”
Now, as soon as Shenhua agreed to come to town the probabilities for the one company that’s not even mentioned anywhere in the media to be one of the topics of discussion just got a whole lot better.
In the alert you’ll recall the one major accelerant needed is the railroad. Here’s what we said:
“In 2015, Mongolian Mining Corporation was able to put together a consortium of leading Chinese and Japanese firms (including Shenhua Energy and Sumitomo) that would pay to build a railroad to the border, build a power plant and then operate the TT mine so that the government of Mongolia would no longer be in the coal business.
Instead, the government was to earn royalties and taxes. Mongolian Mining Corporation would benefit as project operator, but more importantly, they would get access to the new railroad that would make their coal cheaper than Australian coal and let them once again ramp up production from almost nothing to nearly 10 million tons a year without substantial additional capital investment as all mining is done by a contractor.
It was a brilliant deal for all involved, but the DP government was so focused on destroying Mongolian Mining Corporation that they refused a deal that would have improved the government’s own finances.”
And we followed on with:
“It seems preby obvious that the consortium deal is back on the table and will probably become sweeter for MMC than the prior version. In addition, there’s also a strong likelihood that MMC’s 18 million ton wash plant will be used to wash ETT coal in a toll milling situation.
The new railroad, a toll washing agreement on ETT coal, management of the ETT mine will all create huge value. No one knows the terms yet, but people are throwing around cash flow estimates to Mongolian Mining Corporation in the hundreds of millions (possibly even a billion) annually.”
Now from CNBC:
“It would also lead to infrastructure investments in Mongolia, including the development of a railway that could link into the Chinese rail network and deliver coal to destinations throughout China.”
That, folks, is the same railroad.
Here’s the bottom line. Politics always matters and the politics in Mongolia changed recently. You’d be well served to understand who is in power and what their motivations may be.
As Mark Yusko, the brilliant mind behind Morgan Creek Capital, remarked to me: “You can make a lot of money when things go from awful to merely bad.”
Oh, and before you ask… Yes, I’m fully aware it’s up 3x but if you’re buying a bankrupt Mongolian miner with a reward potential of only 3x you need your head examined.
Mongolia has a huge amount of problems ahead of them. They’ll probably default on their debt, be bailed out by the IMF, and who knows what else but things just went from goddamned awful to less bad and the political motivations favour one company right now.