The Second Month in A Row Of Positive Double Digit Returns For KMEF

Khan Investment Management (Khan) is pleased to report that August performance for the Khan Mongolia Equity Fund (KMEF) was +14.77% – the second month in a row of positive double digit returns (following +11.39% for July).

Several years of economic headwinds compounded by previous political missteps, falling commodity prices, and negative investor sentiment appear to be coming to an end. With commitments of increased trade and investment made by the Heads of State of both China and Russia during recent official visits, coupled with renewed vigor by the Government of Mongolia (GOM) to resolve outstanding issues with Rio Tinto, Mongolia finally appears set for a rebound.

Mongolia Update

As previously reported, the GOM’s necessity to increase foreign investment has involved significant legislative reform and increased efforts to boost foreign trade relations with neighboring China and Russia as well as regional partners Japan and Korea. Mongolia’s first Free Trade Agreement (FTA), executed with Japan, represents the country’s official entry into East Asia’s proliferation of trade agreements. Not surprisingly, Ulaanbaatar is apparently also studying proposed agreements with South Korea and China.

More recently however, Mongolia has set its sights on economic policy reform concerning trilateral cooperation with its two neighbours, leveraging off improved relations with and between Russia and China, and connecting the two economic giants it borders.

In what was a highly anticipated visit, the first by a Chinese leader in over a decade, President Xi Jinping’s visit to Mongolia in August was a significant step towards improved economic ties between Beijing and Ulaanbaatar. Numerous agreements were signed and pledges made with leaders of both countries jointly declaring to strengthen cooperation in areas crucial to economic development such as mining and energy. During the visit, the two nations also pledged to increase annual bilateral trade by almost 100% to USD 10 billion by 2020.

Two weeks after the Chinese delegation, Russian President Vladimir Putin visited Mongolia for the 3rd time during his tenure in Government. Similar to China’s initiative, Russia is looking to strengthen its strategic partnership with its southern neighbours. China’s dominance in the commodities trade has provided a tactical relationship considering Russia’s complementing dominance in the energy industry. A strong relationship with Mongolia will clearly allow Russia to more seamlessly trade with the world’s leading commodities buyer.

Following official visits to Mongolia by both China and Russia, Mongolia’s President Elbegdorj was invited to attend the recent Shanghai Cooperation Organisation (SCO) summit and take part in a trilateral summit meeting with both Xi Jinping and Vladimir Putin. During the meeting, Xi proposed the three countries create a trilateral “Economic Corridor” that would serve as a modern-day Silk Road. Xi called on the three sides to strengthen traffic interconnectivity, facilitate cargo clearance and transportation, and study the feasibility of building a transnational power grid. Putin further called for increased trilateral cooperation on joint projects in infrastructure, mining and energy. Specifically, Putin said “The natural geographic proximity of Mongolia, Russia and China makes it possible for us to implement good long-term projects in infrastructure, the power sector and the mining industry.”

The development of a greatly expanded north-south railroad connecting Russia and China through Mongolia as well as a proposed north-south gas pipeline will drastically benefit the Mongolian economy.

More than ever, Mongolia is poised to benefit from strengthening relations with and between Russia and China.

KMEF Performance Figures

The Khan Mongolia Equity Fund performance for month of August was UP 14.77%.

The Net Asset Value as at 31 August 2014 was USD 33.57.

KMEF Portfolio Update

Xanadu Mines Limited (XAM:AU) continued to rally throughout the month on the back of further encouraging results from the ongoing exploration program at its flagship and highly prospective Kharmagtai copper-gold project. The stock price nearly doubled again from last month’s close reaching AUD 0.16 at the end of August. We expect further announcements from Xanadu over the coming weeks until completion of its scheduled summer drilling campaign.

Aspire Mining Ltd. (AKM:AU) rallied 37.50% off recent lows to AUD 0.055. Importantly for Aspire, Railway Development agreements signed with Russia during President Putin’s visit will provide much anticipated access to Aspire’s Ovoot, Jijigbulag and Nuurstei mines situated in the north of Mongolia. Not only does the proposed rail line link to the Russian border at Arts Suuri, but also connects to the Chinese border in the south at Zamyn Uud via the Trans-Mongolian railway. Aspire is also set to benefit from bilateral agreements struck earlier in August to allow Mongolia access to Chinese seaports (via Zamyn Uud) for export to seaborne markets. It is noteworthy to remind investors that Aspire’s 100% owned flagship Ovoot coking coal deposit contains 255Mt JORC compliant reserves, the second largest proven coking coal reserve in Mongolia after the massive Tavan Tolgoi coal basin.

Aspire successfully raised AUD 2.2M earlier this month in a share placement issue which the KMEF participated in.

Mongolian Mining Corporation (MMC) (975:HK) maintained its leading position as the country’s largest coal exporter for the first half of 2014. MMC continues to be the only major washed coal producer and exporter from Mongolia. The company’s share price has now rallied 80% since June lows.

Turquoise Hill Resources Ltd (TRQ:US) slid -2.31% to USD 3.38 per share by the end of August amidst growing concern about the looming deadline this month of the Phase Two financing at Oyu Tolgoi (OT). However, significant progress has been made more recently, specifically with regards to the company’s outstanding tax bill which was officially cut from USD 130M to USD 30M last week. Importantly, this signifies great progress in the resolution of outstanding issues between the GOM and Rio Tinto and is representative of a clearly renewed effort on behalf of the GOM, seemingly more than ever, to resolve outstanding issues and pave the way for OT Phase Two development. Recent optimism over the seemingly improved relations has seen the TRQ share price rally over 20% this month.

Mongolia Outlook

Through increasing trade and strengthening bilateral relationships with both Russia and China, Mongolia is making positive progress to underpin continued economic growth and once again establish itself as a prospective investment destination for a wider range of investors. As one of the most active investors in the market we are excited by the prospects that increased investment flows will bring. Increasing investment flows are not only expected to result in further support for our current portfolio companies but we also expect to observe and participate in the expansion of the current Mongolian investment universe with additional opportunities foreseeably coming to market in the months ahead.

Concluding Comments

I’m extremely excited to be flying on MIAT Mongolian Airlines’ inaugural flight from Singapore to Ulaanbaatar on Wednesday 24th September. The purpose of my upcoming trip is to undertake further due diligence on several opportunities we are currently reviewing.

The KMEF continues to attract new investors and grow assets under management on a monthly basis. We have already made capital allocation commitments to a number of opportunities in October, including the Tian Poh Resources Limited (TPO:AU) initial public offering in Australia.

As mentioned, Mongolia has never been better placed to benefit from strengthening relations with and between Russia and China and we firmly believe that the country is set for a rebound.

Should you have any interest to discuss our Mongolian outlook and expectations further, please don’t hesitate to contact me.

I thank our investors for their continued support and I look forward to updating you further next month.

Best regards,
Travis Hamilton