Source: Financial Post                  Date: 30 September, 2010

Outside Mongolia’s Government Palace, a massive statue of Genghis Khan looms over the city’s central square. It is a symbol of the days in the 13th and 14th centuries when the Mongol Empire conquered its neighbors and became one of the most powerful in the history of the world. Inside the palace today, Prime Minister S. Batbold is dealing with a much more modest but equally imposing challenge: raising the standard of living for his tiny population of three million people.

Unlike many of his predecessors, he is turning to the capital markets, and partners that include Canada, to do it. In a wide-ranging interview in his office, Mr. Batbold talked about the need to introduce more tools of a market economy to his country, including a truly international stock exchange. He also sees Canada, which is the second-biggest investor in Mongolia after China, as “a crucial player in the country’s development”.

“I think Canada is a good example, and could even be a model for Mongolia. There are a lot of natural similarities between our two countries,” he said, pointing out that both are cold, sparsely populated and have extremely powerful neighbors on their borders. Mr. Batbold, 47, is now in Canada for his first official visit to the country, and the first by a Mongolian leader since 2004. He went to Ottawa after a visit last week to New York, where he addressed the United Nations and reportedly met with Wall Street investors.

Mongolia has done almost everything possible to open its doors to outside investment in recent years, but Mr. Batbold is aware that a lot more needs to be done. The country is only 20 years removed from the days of Soviet control, and is still finding its feet as an established democracy. Relics of the Soviet era can be found everywhere, including a surreal statue of Lenin in front of Ulaanbaatar’s most famous hotel.

As Canadian mining companies in Mongolia know well, breaking free of that legacy has been a challenge, with rapid progress but occasional missteps along the way. Like many developing nations, Mongolia is massively rich in natural resources, but does not have enough to show for it. Its unemployment rate has remained well above 30% for years, and has remained high despite the rapid development of its resources in recent years.

Mr. Batbold, an entrepreneur with a successful business background who became prime minister last year, believes that something as simple as a functioning stock market would allow Mongolians to benefit from the billions of dollars of investments being made in the country. Mongolia has had a stock exchange since 1991, and while it lists many domestic companies, liquidity is extremely poor. It is open for less than two hours a day and does not have the standards needed to attract any international companies. “It doesn’t really operate as a capital market,” Mr. Batbold said.

By the end of the year, he hopes to open a proper international exchange managed by a leading global player. While the choice has not been made, the London Stock Exchange Group PLC is the frontrunner. To help kickstart the exchange into relevancy, Mongolia is planning an initial public offering of Tavan Tolgoi, a large government-owned coal mine, as well as other state assets that should be attractive to domestic and foreign investors. Mr. Batbold wants foreign players with Mongolian business interests to list as well, but that could be tougher: They remain wary of the lack of international standards and the general lack of demand from the Mongolian market.

But as least one Canadian company is eager to take the plunge. SouthGobi Resources Ltd., the coal-mining spinoff of Vancouver-based Ivanhoe Mines Ltd., hopes to be the first international company with a Mongolian listing. It has already hired an armada of lawyers to help the government deal with the impediments to foreign listings, from the proper defining of a security to putting in limitations on directors’ liabilities.

“The government says it wants [foreign companies] to list on the Mongolian Stock Exchange. Everyone else says ‘that’s stupid, there’s no rules for foreign companies, blah blah blah,’ ” said Alex Molyneux, SouthGobi’s chief executive. “But we want to list there because we want the Mongolian public to participate in this creation of value. And it’s much easier for them if they have a market at home for the stock.”

While it may seem far-fetched to investors today, Mr. Molyneux envisions a day when Mongolia is a source of capital along the lines of Dubai, with a powerful sovereign wealth fund and massive resource-related revenue as it realizes the wealth from its mineral deposits.

He wants to get in early. “Maybe we can only do USD10 million [on the Mongolian exchange] at first. So what? In Kazakhstan, the stock market increased 1,000% in size in the space of about six years. It’s going to happen in Mongolia,” he said.

Of course, Mongolia’s biggest source of wealth in coming years will be Oyu Tolgoi, the massive copper-gold deposit being developed in the Gobi Desert by Ivanhoe Mines and its partner Rio Tinto Ltd. They continue to co-operate despite an ongoing spat at the corporate level. After years of tense negotiations, an investment agreement on the project was reached between the government and Ivanhoe last year. Mine construction is now moving quickly, with about 4,500 people at the site. By the time full production is reached, expected by 2018, Oyu Tolgoi should make up an astonishing 30% of Mongolia’s gross domestic product on its own.

Mr. Batbold visited the site with his Cabinet in August and was amazed at what he saw. “It’s something really astonishing,” Mr. Batbold said. “I have never seen such a sophisticated underground operation. Probably this is even unique on a world scale.” He views Oyu Tolgoi as just one example of what can happen when companies from Canada and elsewhere invest in Mongolia, and he hopes it is a catalyst for more Canadian investment in the country, and closer links between the two nations across a number of sectors.

“We see that Canada has made great success in many areas, and we think it’s interesting to learn from the Canadian experience. Free trade, technology transfer, mining, agriculture and infrastructure, are all very important,” he said. “We need to make a more sophisticated institutionalized society here, so we need to learn from your experience.”