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Source: Brian Sylvester of The Critical Metals Report (7/17/12)
Nervous investors are waiting on the sidelines, but the biggest risk is to miss out on the great bull markets where fortunes are made: So says James Passin, hedge fund manager with Firebird Management. Passin likes to get the jump on mainstream analysts on emerging bullish plays, and right now he has his sights set on Mongolia. In this exclusive Critical Metals Report interview, discover which critical elements are being unearthed in the developing country and how technology is playing a crucial role.
The Critical Metals Report: James, in your last interview with The Critical Metals Report in February, you believed that there would be a large number of mergers and acquisitions (M&A) this year. We have seen some activity, but nothing unprecedented. Is that investment thesis still intact?
James Passin: The European sovereign fiscal crisis, which has raised questions about the liquidity and solvency of some of the largest banks in the world, has delayed any merger wave. The availability of credit to fund corporate acquisitions is certainly tighter than it would be otherwise, and this has led to a level of defensiveness by cash-generating mining companies. However, at the end of the day, interest rates are low, there is credit available for the larger companies and equity valuations are cheap.
TCMR: Which commodities sectors show the most M&A potential?
JP: There should continue to be a lot of M&A among mid- and small-cap oil companies. There have been some coal mergers that didn't really work from a capital markets perspective, and weakness in coal prices has slowed everything down, but the coal M&A story should eventually rebound. Consolidation will continue in the more obscure commodities as well.
TCMR: Firebird manages a portfolio of private equity funds that invest in Mongolia. How is the Mongolian government handling the country's growth?
JP: Regardless of any political theatrics, my expectation is that the Mongolian government will continue to create and implement policies that support growth and long-term stability in the country. It is critical that Mongolia continues to build the physical infrastructure, financial institutions, human resources and legal framework necessary to unlock the almost unfathomable immensity of its full economic potential. We think the relative political merits of Mongolia compared to other resource-rich frontier markets will become even clearer over time.
TCMR: Some investors will get skittish when they hear the words "investing" and "Mongolia" in the same sentence. How would you assuage their concerns?
JP: Frankly, it's hard for me to fathom why somebody would not want to make investments in Mongolia. The biggest risk, in my view, is to miss out on the great bull markets, where real wealth is generated. It's very clear that a long-term secular bull market started in Mongolia in 2006. I believe that this bull market will last for decades.
Compared to many other frontier markets, the political risk in Mongolia is less extreme. Mongolia has an ethnically cohesive society and a strong democratic political institution. Mongolia's young population is hungry for growth and entrepreneurial opportunities; the nation's vast untapped natural resources serve as a means to those ends.
At the height of the Mongolian Empire's historical power, Mongolia effectively dominated the entire world economy. In my view, it is irrational not to risk at least some capital in the new, emerging Mongolia-the world's fastest-growing economy.
TCMR: Firebird started in 1994 by investing in publicly traded companies in Russia. It later followed a similar strategy in the Baltic states. How did those experiences shape your current investing strategy in Mongolia?
JP: My partners started investing in Russia right after privatization. That strategy proved to be brilliant in that environment: They would get in early and acquire shares while capital markets were still in a state of chaos. Anyone that was able to get exposure early and hold it made fortunes. The key was to get in before there was enough transparency to enable high-quality research from brokers, pipelines of investment banking products and all of the sell-side information that's available in developed markets. When that is absent, it creates the opportunity for those willing to risk capital to get cheap exposure to securities. Eventually, as the transparency increases, research increases and the ability of investors to properly value securities increases. That results in increased liquidity and M&A from international companies, while international listings create exits for early investors.
TCMR: What role is technology playing in creating investment opportunities there?
JP: We find that automating more processes results in huge increases in efficiency and reduces waste. New technology in mineral exploration increases the likelihood of success, decreases cost and results in a higher return on invested capital. The application of technology will continue to have a transformative effect on Mongolia.
TCMR: Russia, the Baltic states, Mongolia-what's next?
JP: North Korea. It's no secret that Firebird Global II, which is one of the funds I manage, has investments there. North Korea is a very interesting country with a much larger population than Mongolia. It has huge known, but undeveloped, mineral deposits. It has a strategic location with deepwater ports and sophisticated manufacturing and technology emanating out of the military-industrial complex. The nation has the potential to be an economic tiger.