One hundred and ten per cent is the gain this
year in the Mongolia Stock Exchange Top 20. It is a stellar index of companies
that you”ve almost certainly never heard of and which mostly have something to
do with coal. The story behind this breathless advance is one of depth and
proximity, of mammoth metal and energy reserves sitting on the doorstep of
mineral-hungry China. If you believe that China”s appetite will only swell from
here, runs the argument, Mongolia should be a sure thing.

Chinese imports of coking coal more than quadrupled in
2009 from a year earlier. Much of that came from Australia: Mongolia”s promise
lies in being the nearer, cheaper supplier of choice in the future. Quoted with
all the excitable touting of Mongolia is its exposure to “a world where
China is growing at 8 per cent a year”. Recently in Hong Kong, a gathering
of the world”s biggest investors was encouraged to relish the
“monster” prospects of Mongolian shares listed on the exchange that
will be celebrating only its twentieth birthday next year and is run from a
pink, recently refurbished children”s cinema in Ulaanbaatar.

But the rise in Mongolia”s stocks is as deceptive as
it is impressive, says a report in The Australian. Despite owning 10,000 years
of coal (based on current output), rich seams of gold and uranium and copper
reserves to rival Chile”s, the investment and infrastructure to make it boom
remains elusive. The combined market value of all companies listed on the
Mongolian Exchange is just over AUD800 million, and outside Ulaanbaatar,
investment views on Mongolia”s prospects are mixed.

Low price and proximity to China is no advantage so
long as transport links remain feebly financed and rife with bottlenecks. The
mines need huge capital expenditure before they start producing the goods. The
big 20 Mongolian companies may be enjoying their domestic rally now, but know
that they need to raise billions to set the right projects in motion, and they
will not find those billions at home. The bid for investment has recently taken
several Mongolian companies – or companies with exposure to its fortunes – to
Hong Kong and into a more severe market environment.