Photograph by Max Sher for Bloomberg Businessweek
The Mongolian Stock Exchange occupies a single room inside a gray building that once housed a children’s movie theater, just off Sükhbaatar Square in the capital city of Ulaanbaatar. On any given day, it’s quieter than the nearby National Library, as 20 or so traders in cubicles click away softly on their laptops. This muted bourse hardly seems a place to make a fortune, but James Passin, who needs no prompting to declare that he’s “super bullish on Mongolia,” swears it is. Passin, who’s just flown across 12 time zones from New York City, has as much reason to promote Mongolia’s potential as any foreign investor in the country. His future is riding on it.
Passin, 41, has at least $130 million in three funds that he oversees for his employer, Firebird Management, a Manhattan firm that specializes in emerging markets. Passin controls four companies listed on the Mongolian Stock Exchange—in coal, fluorite, and real estate—as well as an undisclosed number of private enterprises. His placements make Firebird one of Mongolia’s largest and most diversified foreign private equity funds.
Until a few months ago, many other international investors shared Passin’s enthusiasm for the Mongolian market. The country, with a 17.3 percent growth rate in 2011, had the fastest-growing economy in the world. A sparsely populated nation of 3.2 million run by communists until 1990, Mongolia has discovered a bounty of natural resources. Lying on an ancient seabed, where sedimentary basins cooked carbon for millennia, the country has about 130 billion tons of coal. Iron, copper, uranium, silver, fluorite, and many other minerals are also in abundance. The estimated value of it all runs into the trillions of dollars.
In the last year, however, the Mongolian government decided to redraw its policies on mining and foreign investment. The Strategic Entities Foreign Investment Law, which the Mongolian Parliament passed last May, dictated, among other things, that any transaction of more than $75 million involving a foreign entity was subject to government approval. In December the president’s office released the draft version of a minerals law that would introduce tougher regulations and higher taxes while giving the government free stakes in many mines. Among Mongolians, the new laws reflect a fateful debate: Are foreign companies and investors grabbing too much, swiping the nation’s birthright? At what price growth?
The new restrictions have halted the development of Oyu Tolgoi, Mongolia’s biggest industrial project and the largest untapped copper-gold mine on earth. Rio Tinto (RIO), the world’s second-largest mining company, has sunk $6.6 billion into its development. Oyu Tolgoi was scheduled to begin production this year, but the project is now in limbo. Many who recognized Mongolia’s potential have quickly retreated, unsure of how the country wants to proceed.
Yet here’s Passin, confidently strolling the floor of the exchange, predicting a boom. As the traders stare blankly into their monitors, where the odd transaction registers now and then, Passin looks on with a smile. “I think a multiyear bull market is starting,” he says.
The Soviets engineered Ulaanbaatar for a population of 400,000. Now the city holds three times that number. On the streets, you spend half your day in traffic. There are few stoplights. Cars crawl past crumbling Chinese and Russian buildings, which are reflected in the glassed facades of several new office towers. Although Ulaanbaatar lies 800 miles from the sea, a skyscraper in the shape of a sail sits in the middle of the city, as in most every other aspirational metropolis in the world.
Passin favors a restaurant in the city center called Modern Mongol. In a private room on the second floor, he’s joined by Batbaatar Badan, a director of one of Firebird’s holding companies. Over a variety of meats and dumplings, Passin explains how he ended up Mongolia’s die-hard bull.
After earning a philosophy degree from St. John’s College, he joined Firebird in 1999, specializing in acquiring equity in natural resources, particularly in Africa. He worked in the Democratic Republic of Congo, Kenya, Rwanda, and Somalia. “We identified underperforming companies and became aggressive,” he says. In 2005, Passin’s friend Asashoryu Akinori, a Mongolian sumo champion, invited him to Ulaanbaatar. “It was very sleepy,” Passin recalls. “The market was primitive. But I sensed the changes that were coming.” He speaks quickly, rattling off figures and data. Keeping up with him requires considerable energy.
During Passin’s early visits to Mongolia, he befriended Robert Friedland, the founder of Vancouver-based Ivanhoe Mines, now called Turquoise Hill Resources (TRQ), who was negotiating with the government for the right to develop Oyu Tolgoi in the Gobi Desert. “I saw that OT would transform the economy and mark a great boom,” Passin says. “I saw that it was going to go from an economy dominated by meat and cashmere to an economy dominated by the mining business and financing.”
He focused on Mongolia’s immature stock exchange. It was a repository of insider deals—the maximum penalty for violating the securities law was less than $1,000—and on many days, saw no trading at all. When there was action, buyers often unloaded shares immediately upon purchase, feeding volatility. Fearing taxation, companies preferred not to disclose financial information; nor were they compelled to do so, meaning that all growth was speculative. Yet where others saw a den of thieves, Passin recognized an opportunity, believing many listed firms were undervalued.
Through a series of holding companies, Passin and Firebird began buying significant numbers of shares. They faced no regulatory resistance. “It was very easy for them to acquire shares block by block,” says Saruul Ganbaatar, the chief regulatory officer of the Mongolian Stock Exchange. Eventually Passin amassed majority stakes in several companies—“Carl Icahn-style,” as he says. Passin followed a simple formula: “Take control. Purge the board. Inject capital.”
This approach bore fruit with Sharyn Gol, a major open-pit coal mine near the Russian border. When Passin took control, the mine was valued at $8 million. In 12 months, its value had soared to $280 million. This legitimized the exchange. “Firebird’s involvement helped guide other foreign investors to the market,” Ganbaatar says. “That drew interest generally.” Firebird’s companies became the first in Mongolia to bring in international auditing firms to examine their books.
The Mongols had never encountered anyone like Passin. Infected with the fatalism of the previous communist regime, they were only just learning the ways of modern industrial development. Although Passin’s results spoke for themselves, not everyone was pleased with the way he achieved them. “People take what he says personally,” one Ulaanbaatar investment professional told me. “He says, ‘You’re wrong,’ and people don’t like to hear that they’re wrong. But he has a lot of experience in emerging markets, so he knows what he’s doing.”
Passin wasn’t the only foreigner with capital who identified Mongolia’s promise. Locked away in pastoral isolation for centuries, its infrastructure a testament to neglect, Mongolia was just beginning to locate the treasure hidden beneath its rolling, empty plains. A democratically elected government gave investors confidence in the institutions that would protect their stakes. Foreign investment poured in, boosting the economy, until the government hit the brakes, stopping many second-wave investors in their tracks.
Larry Ewers, the owner of the Energy Group of South Texas, in Corpus Christi, is one. At the urging of his attorney, Houston lawyer Robert Painter, who also represents Mongolian President Tsakhiagiin Elbegdorj, Ewers visited Ulaanbaatar in 2011. “I was tremendously impressed with the Mongolian people,” he says. “They are eager to do business.” Upon returning to Texas, Ewers recruited about 20 investors and signed letters of intent with the Bodi Group, one of Mongolia’s largest consortiums. They’ve forged an agreement to fund a coal mine, four power plants, and a coal-to-diesel operation. Ewers is also considering deals in rare-earth minerals, gold, and copper, as well as a development to export coking coal to China and Japan. Ewers says his group is prepared to invest roughly $1 billion. “We think the opportunities are unbelievable,” he says. “We think it is an opportunity that comes around very seldom. We’re very serious about it. But we’re in a holding pattern. We can’t move forward without knowing the outcome of the mining law.”
While others wait and see, Passin has barreled ahead. Under license, Firebird’s Mongolian mining companies have already drilled 100,000 meters (328,084 feet) in exploration, hoping to repeat the success of Sharyn Gol. Since it opened in 1965 under Mongolia’s command economy, Sharyn Gol has been the major supplier of thermal coal for Mongolia’s north and central regions. During the transition to a market economy in the 1990s, Mongolia fell on hard times, the population in jeopardy of freezing through the winters. The state pushed Sharyn Gol’s directors to produce more coal. Reserves dwindled, and many at the mine feared it had given all it could. “The government thought it was dying,” Batmunkh Batkhuu, Sharyn Gol’s chairman, told me. “The company was in survival mode.”
In 2010, Passin and Firebird took it over, amassing a controlling stake through the Mongolian Stock Exchange, where Sharyn Gol had ended up after state privatization in the ’90s. “James was very brave,” Batkhuu said. “We didn’t have the money to put into coal exploration.” Firebird raised a $6 million bridge loan, which funded 17,000 meters of exploratory drilling. Passin’s geologists discovered a cache of 330 million tons of coal, 300 million tons more than the company’s previously known reserves.
The snow-driven journey from Ulanbaatar to the Sharyn Gol pit takes five hours along a barely navigable road. In time, Sharyn Gol appears on the horizon. Pinched by a series of peaks, several smokestacks pump tumbling black clouds into the sky.
Jim Goldie, the mine’s chief operating officer and a native of Queensland, Australia, lights up when I hand him the bottle of Johnnie Walker Black he’d requested over the phone. “The carrot that got me here was developing this into a superpit,” he says. “We’re planning on doing 1 million tons this year.” Goldie has worked in mines for 30 years, in copper, gold, and coal in New Guinea, Indonesia, Laos, and Kyrgyzstan. Nothing prepared him for this ruggedness and isolation.
Outside his office, in the cold, he points to a tumbledown building nearby. “There was a huge coal dust explosion there,” he says. “It blew the top eight stories off the building.” Snow flurries are falling lightly upon our hair and clothes. As is coal dust. It is hard to tell one from the other.
We hop in Goldie’s jeep. He gestures to his driver. “Tugi’s learning some English,” he says. We embark on a tour of the mine and an explanation of how Passin’s efforts have saved it. Tugi guides the jeep down into the pit. It’s about a kilometer from one end to the other. Goldie says he will tap into Sharyn Gol’s newly discovered reserves next year and points to a 40-meter seam of coal, a rich, clearly defined deposit in the wall of the pit. “I’ve been to 100 mines,” he says, “and I’ve seen that maybe two, three times. We’re doing about 3,000 tons a day now. I want to do 15,000 a day. And we can do it.”
It’s not clear how much all this effort will ultimately earn Sharyn Gol’s investors. A depressed international coal market and a slowing economy in China, Mongolia’s main trade partner, have eroded Passin’s portfolio. From a high of $280 million, Sharyn Gol’s market cap has fallen to $60 million in two years. “We’re looking at someone who has already taken a chance on the country and has taken a very substantial hit,” says Jackson Cox, chief executive officer of Woodmont International, a consulting firm with offices in Ulaanbaatar. “I’m sure this has not been the best 12 months for James.”
“I don’t have worried investors,” Passin says, but he acknowledges “there is some concern. They read the papers.”
As Tugi drives out of the pit, Goldie talks about Passin. “In my long career,” Goldie says, “he’s up there with the best small investors I’ve ever seen.” Privateers line the road leading to the front gate. They’re waiting to buy coal at the spot-market price, peering onto the territory of Sharyn Gol with hollowed, darkened faces. A cow moves down the road behind them. Goldie exhales. “I came here for the great weather, the clean air, and the beautiful town,” he quips. He claps Tugi on the shoulder. “What do I always say?” Tugi speaks his English now, in unison with Goldie, as the two men draw out the words: “Beautiful Sharyn Gol.”
On the plains 30 miles east of Ulaanbaatar stands a 250-ton steel statue of Genghis Khan on horseback, 15 stories high. For many Mongolians, this statue, just a few years old, has become a pilgrimage site. In trying and changing times, Genghis Khan provides a reminder of what a Mongol is: a warrior, fiercely independent.
Passin regards the statue from a less epic perspective. Squinting up at it, he says, “I see this as a dividend play.” In 2009 the company charged with building the monument floated around 30 percent of its value on the Mongolian Stock Exchange. Passin snapped up almost the entire initial public offering, providing the capital necessary for construction.
We enter the base of the statue. “We’re not going to make 10 times the stock on this,” he says. “I hold the shares because I’m bullish on Mongolia generally.” So bullish, in fact, that he plans to raise an army. The statue’s management company is building 10,000 soldiers, a life-sized force in the spirit of Qin Shi Huang’s terra cotta warriors, to be arrayed around the pedestal of the monument. Tourists can pay to have soldiers carved with their own likeness. Passin is considering ordering soldiers molded after him and his employees, a Firebird battalion. “It seems a little grandiose,” he says. “But I’ve been thinking about it.”
Passin’s abiding confidence in Mongolia continues to set him apart. Share prices of Mongolian companies have fallen roughly 70 percent in the last year. Cox estimates that Mongolia’s political maneuvering is responsible for at least an extra 30 percent devaluation. “That equates to between $2 and $3 billion,” Cox says. “That’s money that was in this market and is now gone. The markets are pricing at a risk premium in Mongolia.”
With foreign direct investment down more than 50 percent in the initial months of 2013, the government is taking steps to reverse the trend. The presidential Cabinet has floated a proposed law that would erase the need for private companies to petition for state approval of investments. The Mongolian deputy minister of development, Chuluunbat Ochirbat, has announced a plan to submit this legislation to Parliament by the close of the current session on July 10. Another law under consideration would allow for the dual listings of international companies with operations in Mongolia. And the president’s controversial draft mining legislation now appears unlikely to reach the Parliament floor.
Passin believes much of the country’s wealth remains untapped. He enthuses about a drilling operation that’s exploring the Gobi Desert’s copper belt. The Oyu Tolgoi gold-copper mine, whose development remains on hold, “is just the beginning,” he says. “I think there could be three, four OTs just waiting to be discovered in the desert.”
He climbs the stairwell up through the statue, reaching the top floor. We pass through a door and walk out onto the observation deck, a recessed platform carved into the horse’s mane. The stern face of Genghis Khan, in immense proportion, looms over us. Over dinner three nights before, Passin compared himself to the Mongol warrior. “Genghis Khan was able to build an empire by not imposing a foreign culture. It was not built on his iron will but on astute politics. … He didn’t impose religion, diet. He imposed law; he imposed taxation. He understood their social needs. He instituted a meritocracy.”
Passin adds, “I think what I’m doing is inherently Mongolian. The essence of what I’m doing is nomadic, the ability to rapidly increase equity value. I can’t think of a place with more opportunities. I’ll be here until I’m dead or no longer interested in continuing to invest.”