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WesBruin Capital

A Leader in Emerging, Pioneer, and Frontier Financial Markets Advisory for More Than Two Decades.

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WesBruin Services

Discover Our Unique Expertise

WesBruin Capital offers a significant range of financial advisory services focused on alternative investment and trading opportunities in emerging, pioneer, and frontier markets/economies.  We provide high value-added financial and socio-economic guidance to a broad variety of domestic and international entities ranging from specialized boutique trading firms to global investment enterprises. Our distinctive analytical approach to developing and less-advanced markets uniquely combines financial, behavioral economic, and anthropological acumen.  We can assist you in calibrating your decision-making calculus to attain higher levels of success through targeted, forward-thinking research, creative risk management, and highly effective out-of-the-box global investment strategies. Contact us today to learn more about WesBruin services and what our specialized expertise can achieve for you.

CORE SERVICES

- Sovereign Debt Advisory -

- Exotic Debt Valuations -

- Exotic Debt Placement -

- Exotic / Impaired Debt Conversion Advisory -

- Exotic Debt Arbitrage Strategies -

- Exotic Debt Pricing Analysis and Historical Tracking -


- Trade-related Alternative Finance Advisory and Placement -

- Pioneer Market Sovereign Bond Analysis -


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Debt Advisory - Sovereign, Impaired / Defaulted and Trade Finance Origin Assets

With over twenty years of specialization in emerging, pioneer, and frontier markets, WesBruin has the capacity to effectively research and target exceptional, less conventional investment and trading occasions that can offer high-yield outcomes, both short and long-term. WesBruin is also well-skilled in the valuation, placement, and conversion (primarily, but not exclusively, debt-for-equity and debt-for-trade structures) of complex, exotic sovereign, trade, and corporate debt. Additionally, the firm is exploring ways of utilizing distressed sovereign debt to encourage the pursuit of environmentally-friendly projects (Green Finance) in a number of select economies, producing beneficial outcomes for both creditors and debtors.

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Alternative Investment and Risk Management Consultation

WesBruin's long experience as a skilled identifier of unique, alternative investment opportunities in highly specialized debt markets can facilitate the generation of more positive portfolio results for clients pursuing enhanced yield scenarios. Our firm's concentration is on the discovery and analysis of extraordinary hidden value in less-orthodox assets while mitigating risk exposure.

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Refined Investment Stratagems for Emerging, Pioneer, and Frontier Markets

Through finely targeted research, exclusive tactical mechanisms and direct access to high-level local government, financial and business networks in a variety of developing and less-developed economies, WesBruin is able to pinpoint uncommon, higher-return assets that other more traditionally driven firms oftentimes fail to properly identify and evaluate.

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Historical Pricing Research and Tracking for Sovereign debt - Emerging, Pioneer, and Frontier Markets

WesBruin Capital is well-known for its historical sovereign debt price tracking and analysis, particularly involving countries with less advanced economies that evince substantial growth potential.  WesBruin covers select performing as well as impaired debt issues.  Our pricing services (The WesBruin Tables) have a wide audience and subscribers range from large multinational hedge funds to niche investors.  Please contact us for subscription rates.

A small sample of recently posted WesBruin INDICATIVE* debt prices is provided below:

ALBANIA 2025 BOND

106.016 bid - 106.062 ask

ANGOLA 2025 BOND

105.625 bid - 105.718 ask 

BELIZE 2038 BOND (defaulted)

45.00 bid - 55.00 ask

BENIN 2026 EUROBOND 

107.362 bid - 107.500 ask

COMORO ISLANDS (defaulted trade-related debt)

1.00 bid - 3.00 ask

ERITREA (judgment debt)

9.00 bid - 12.00 ask

IRAQ PARIS CLUB LOANS (partially performing)

60.00 bid - 80.00 ask

LEBANON 2021 BOND (defaulted)

14.00 bid - 14.50 ask


MONGOLIA (past-due trade-related debt)

27.00 bid - 38.00 ask

MOZAMBIQUE 2031 BOND

83.500 bid - 83.625 ask

PERU 2026 BOND

111.516 bid - 111.531 ask

ZIMBABWE (defaulted trade-related debt)

3.00 bid - 8.00 ask

*NOT a solicitation to buy or sell ANY of the listed assets.  Price listings are for research purposes only.

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Emerging, Pioneer, and Frontier Markets Blog

WesBruin publishes a monthly blog (WesBruin Worlds) that focuses on emerging, pioneer and frontier markets economic and socio-political issues.  Please see our latest articles provided directly below.

 
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WesBruin Worlds

Perspectives on Emerging, Pioneer, and Frontier Markets


5th September 2021 - Approximate reading time, 8 minutes.

Three Problematic Frontier Markets and the Hunt for New Strategic Metals Sources

Strategic metals, oftentimes referred to as technology metals or critical metals, are generally defined as elements that are increasingly vital to a number of advanced industrial and technological processes.  Such metals can be found in a wide array of products, from consumer electronics to medical equipment, semiconductors, clean energy devices, jet aircraft engines and much more.  They also serve as key alloying agents in many standard and specialized metal applications.  What technically comprises "strategically critical metals" (a description sometimes employed by environmental economists) has changed over time, with some overlapping in category types.  Presently, the standard listing of metals deemed "strategic" or "critical number about 70.  However, by and large, those considered as highest in import by government agencies, major industries and scientific and economic research organizations are the following:

1) Copper


2) Lithium


3) Cobalt


4) Nickel


5) Manganese


6) Platinum

Further, there are the rare earth elements (REEs) - particularly cerium, neodymium, lanthanum, praseodymium, yttrium, gallium, and dysprosium; seen as particularly crucial  to environment friendly / green energy technologies, aircraft engines, leading-edge magnet production and semiconductor applications.

Regarding the first grouping, the consensus of mining and economic experts is that demand for copper, lithium, cobalt and platinum will jump significantly throughout the 2020 decade, as the world increasingly moves away from fossil fuel usage and high capacity battery, renewable energy and automation technology development accelerates.  Moreover, sources of supply are expected to diminish.  Needless to say, all these ores play essential roles in country infrastructure, defense and numerous facets of economic growth.  Manganese and nickel will also see greater demand but possibly a bit less than the four other minerals discussed above.

As for rare earth elements - although not necessarily rare in the pure sense of the word - can prove rather complicated in terms of identification and extraction since distribution is sparsely distributed throughout the Earth's crust and usually can only be extricated through the processing of base and precious metals.  There can also be some rather daunting geographical challenges concerning access and retrieval which, at times, necessitates the use of specialized robotics.

The countries currently with the greatest strategic metals potential fall into the frontier markets category, since most metrics indicate they are less developed or economically "primitive" in pace of development.  In this grouping, the three that stand out the most for strategic metals are the Democratic Republic of Congo (DRC), Afghanistan, and Mongolia.  In addition to having severe economic weaknesses, the first two are very high-risk conflict zone countries and the third, although politically stable, has high-order structural economic problems and requires significant sustained levels of external investment in essential industries. 

The DRC has, by far, the most developed mining sector compared to Afghanistan and Mongolia, measuring fifth globally in copper production and first for cobalt.  Furthermore, results from geological research suggests that lithium deposits may be among the highest in the world and actual extraction could initiate as early as 2022.  Chinese companies are the DRC's biggest foreign mining investors, followed by Swiss metals giant Glencore and several Australian entities.

Despite its impressive ranking in the metals tables, it should be noted that the DRC's mining sector is seriously under-performing but, with a more equilibrated political environment and increased targeted investment, output could expand well above current levels.  Quite a tall order as some of the most mineral rich (and less explored) areas of the country are located in the east and northeast (more specifically South Kivu, North Kivu and Ituri provinces) of the country; socially and politically volatile regions that serve as home bases for more than 100 anti-government militias, Muslim fundamentalists (among them ISIS affiliates like the ADF) and assorted tribal gangs.  Many rural areas in the Kivus and Ituri are pretty much no man's lands where federal and regional government controls are virtually non-existent.  In May of this year, DRC president Tshisekedi declared a "state of siege" in North Kivu and Ituri.  Last month, Tshisekedi accepted U.S. special forces assistance to help in combating area insurgents.

Mining operations in the three mentioned provinces have not escaped the steady stream of violence as sporadic attacks on extraction sites over the last few years resulted in loss of life, equipment theft and major damage to facilities.  By United Nations estimates, in the east of the country alone, at least several thousand people have been killed by rebel and tribal / ethnic violence over the past 24 plus months, with perhaps another quarter million displaced (UN NEWS: Armed Group Atrocities Creating Havoc in Eastern DR Congo: UN Refugee Agency.  16th February 2021).

The mining difficulties posed by the DRC pale by comparison to those in Afghanistan, a perpetually failed state with mineral deposits that, by some late 2020 estimates, could amount to as much as USD 3 trillion - everything from copper to rare earths (CNBC: China May Align Itself with Taliban and try to Exploit Afghanistan's Rare Earth Metals, Analyst Warns.  17th August 2021).  Moreover, geological research indicates that Afghanistan may have the world's largest reserves of lithium, as mentioned above, a vital element in green energy technology in addition to other evolved industrial and scientific processes (INDO ASIAN COMMODITIES: How will the Talibans Manage over $3 Trillion Worth Untapped Minerals and Resources in Afghanistan's [Many Trillions] of Minerals.  23rd August 2021).

A long history of nearly non-stop warfare - a combination of tribal conflict, intra-religious hostilities and lengthy fighting against various foreign powers - has resulted in Afghanistan devolving into one of the most backward countries - one might argue that Afghanistan is not, in strict technical terms, a country - in the world.  The recent re-assumption of power by the religiously über-radical Taliban is unlikely to engender peace anytime soon, in fact, just the opposite should be expected.  Already we are seeing growing signs of the Taliban fragmenting into competing factions, meaning that a centralized form of government may not materialize in Afghanistan.  Contributing to the toxic socio-political environment is ISIS-K, a terrorist Islamic group even more extreme than the Taliban.  ISIS-K, an offshoot ISIS, has declared itself "an enemy of the Taliban" and intend to contest them for power.  Moreover, there are numerous war lords competing for territorial advantages and an established Taliban resistance (The Northern Alliance) remains active in the northeast of the country (Panjshir province).  What all this appears to add up to is a classic backdrop for civil war.  Some political experts are already predicting that civil war will eventually break out.  "We have a situation that tells us that it's not a matter of if, but when" (ANI: Afghanistan Likely to Plunge into Civil War after Taliban's Victory.  14th August 2021).  At bottom, any reasonable level of stability is probably not achievable, at least in the short-to-medium-term, keeping most new foreign investment well away.

Despite this extremely somber portrait, China hopes to somehow take advantage economically by "building a pragmatic relationship [with the Taliban]"; securing access to Afghanistan's enormous mineral reserves by providing financing for desperately needed infrastructural modernization primarily through its "Belt and Road" initiative.  Beijing keeps broadcasting an optimistic outlook for Afghanistan, betting that the Taliban will be able to bring together disparate competing tribal / ethnic groups and construct an inclusive government that allows some basic human rights for minorities and women.  The Chinese also seem to believe that the Taliban will commit to combating regional terrorist organizations - perhaps a bit of borderline magical thinking at play here - intent on striking China or other nations.


Beijing's positive Afghanistan vision has little chance of materializing for multifarious reasons but, primarily, due to the profound isolation that the Taliban currently faces from the developed world: IMF financing has been suspended to the country and the U.S. maintains sanctions on the Taliban holistically.  Billions of dollar deposits were recently frozen by Washington and the U.S. also can exercise its veto power if Beijing or Moscow attempt to soften United Nations Security Council restrictions on Afghanistan's militant government.  Additionally, there is growing international pressure on China to provide financial aid to Afghanistan only on strict international terms.

Mongolia, which we recently reviewed (please refer to our 14th July 2021 article presented below), is the least problematic of the three countries in question.  This vast Asian nation by all accounts has very substantial strategic mineral resources (copper and lithium in particular) but is lacking an adequately modernized infrastructure and strong investment capital streams to more fully develop its mining sector.

The country is often referred to as the last frontier for large-scale mineral extraction.  Once agriculturally dominant economically, over the past four decades, the Mongolian government has prioritized mining and embarked on an array of highly ambitious extraction undertakings, partnering with several prominent foreign mineral companies, including Rio Tinto and Turquoise Hill Resources (TQR).  The most notable of these efforts is the Oyu Tolgoi Underground Project (OTUP), considered to be a "high-impact" mining producer, containing some of the largest copper and gold deposits globally.  Rare earths are also thought to be present in exceptionally high levels.

Mongolia certainly has extraordinary possibilities in base and precious metals production but, equally important, the country is sitting on some of the highest unexplored strata of lithium in the world.  Mongolia's lithium deposits are both hard rock and brine, according to results from a series of test drillings.  Extraction activities for the mineral are still in the early stages (CANADIAN DIMENSION: Land Grabs for Rare Earth Metals Continue Outside the South American Lithium Triangle.  26th March 2021).

The countries with the biggest representation in Mongolian mining are China, Russia, Australia and Canada.  The latter has recently played a pivotal advisory role in shaping Mongolia's extraction policy reforms, while Russia and China are big players in direct mining investment and imports (much of it coal).  In actuality, China absorbs approximately 70% of Mongolia's total exports.  The goods are largely raw minerals used in Chinese manufacturing and energy generation. 


Despite enjoying a productive trade relationship with China, Mongolians have centuries long reservations about Chinese regional ambitions and are fearful of becoming economically dependent on its neighbor.  Apparently, the principal reason why Ulan Bator is now actively seeking closer political and economic ties with the U.S. and Europe as a counterbalance.

As the transition to green industry progresses (along with the associated high-tech demands it brings), the search for strategic metals (and REEs) is expected to greatly intensify and the risk assessments for mining concerns will surely become much more complex since, as discussed, some of the richest, most unexploited, highly sought - after mineral deposits are found in countries with serious economic problems, and at least a few of the prime mining candidates present extraordinary security concerns.

In the final analysis, the high levels of planning and investment - just give some thought to the involuted social dynamics in frontier markets that need to be thoroughly studied by anthropologists and other social scientists in order to construct the necessary guideposts so mining operators may avoid potentially disruptive socio-cultural flashpoints - required to maximize yields in less explored, high value strategic metals territories could prove far greater than some mining experts predicted just a few years ago.  In all, a rather difficult landscape that may, in fair part, limit the strategic metals extraction field of play in frontier market countries to a select, well-capitalized, high - tech sophisticated and politically influential club.

Given how important strategic metals have become in a broad variety of industries, one should expect that some western companies in this grouping will receive meaningful exploration and extraction subsidies from their respective governments - and there is little doubt that sufficient access to strategic metals / REEs is a national security issue for the West as a whole - to assist in competing with Chinese miners who, as a matter of course, have historically been buttressed financially and tactically by Beijing in countless international ventures.

WesBruin Capital 5th September 2021

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6th August 2021 - Approximate reading time, 8 minutes.

China's "Debt Trap" Lending to Africa is a Growing Concern

Over the past several years much has been written about the massive level of Chinese state lending to developing economies, particularly in Africa.  However, relatively little reliable information has surfaced with respect to the "onerous and secretive" clauses and "unorthodox parameters" contained in China's loan deals to emerging, pioneer and frontier market countries.  The reality is that we have minimal knowledge when it comes to the specifics (terms, conditions, and legalities) of bilateral public sector Chinese loans. - China simply does not disclose details. Apparently, the same is true for private Chinese lenders.  This lack of transparency should be troubling to anyone holding significant amounts of African bonds or loans, especially when we consider current global economic stresses on less developed nations resulting from Covid -19 pandemic shocks, sociopolitical flash points and prolonged conflicts in some key regions.

China's core investment strategy with respect to Africa has focused primarily on the continent's abundant natural resources.  Under its "Belt and Road Initiative" (BRI), launched in 2013, China has lent billions to developing country governments.  In Africa, a large majority rank as mineral and / or energy rich states, while others are perceived by Beijing to be investment attractive due to geographic and / or political import.  The ambitious program's publicly  communicated aim is to improve global economic links and cooperation.  Some critics see things quite differently and have argued that the BRI's true intention is the creation of a Chinese dominant order in large parts of the developing world - the majority of the countries are sub-Saharan African - potentially leading to high levels of debtor financial dependency over the long-term, while giving China substantial access to an abundance of natural riches, some categorized as strategically vital.

According to the South China Morning Post, China's lending to Africa in the period between 2000 and 2018 totaled at least USD 152 billion (South China Morning Post - China Turns Cautious on Funding in Africa Amid Default Fears - 29th November 2020).  Much of this money has financed a wide assortment of infrastructure projects under the BRI program; which is often referred to as "debt- trap diplomacy", where lending agreements are structured with default provisions containing political or economic compromises.  Under this scheme, inability to service loans could result in the debtor country losing control of major assets.

An example of how consequential loan defaults governed by BRI agreements can be is the 2017 Sri Lanka fiasco, where the government's failure to fully repay harbor modernization debt resulted in a 99-year lease of seaport facilities to Chinese firms.  Western powers now fear that China could, at some point, move to utilize the port as a naval base.  A situation rather similar to what occurred in Sri Lanka may yet develop with one of Djibouti's strategically important ports, as the Horn of Africa nation's Chinese loan responsibilities  - presently, some of the original financing agreement elements concerning concessions may be in dispute - are estimated to be running at over USD two billion and this level of debt appears to be unsustainable, considering current budgetary strains.

The International Assessment and Strategy Center, a think-tank headquartered in Alexandria Virginia, sees China's debt-trap diplomacy as just one component of a far larger undertaking geared to reviving its Middle Kingdom form of global hegemony: to grow influence, accomplish military ingress to strategic locations and generally expand power globally.  In the main, Beijing's developing country calculus seems to be driven by geopolitical ambitions and is designed to accomplish dominant influence in a given nation's security and economic well-being.

Sovereign lending documentation used by Chinese state-owned financial agencies in Africa not only contains political and economic concession clauses, but also prioritize repayment performance ahead of other creditors.  In a study recently completed by AidData, a political and economic research lab at the College of William & Mary, it was revealed that Chinese loan agreements tend to have a number of unusual features that serve to increase repayment chances and stand in conflict with G20 guidelines which require uniform consideration for all creditors, both public and private.  Additionally, the small handful of Chinese / African contracts AidData was able to examine contain language specifically prohibiting a borrower country from equitably restructuring loans, with no allowances made for coordination with non-Chinese creditors.  Moreover, the documentation includes strict confidentiality components forbidding borrowers from revealing loan terms and collateral arrangements (often involving natural resources) that exclusively benefit Chinese entities and allow for wide discretion in loan cancellation and demand for full repayment.  Furthermore, there are no"Paris Club provisions", meaning that Chinese lenders are favored over all other financing institutions and the debt cannot be included in any restructurings. 

Other discovery processes have revealed that much of China's state financing to Africa is founded on the future value of commodities, making it particularly risky for borrowers since any extended drop in commodity prices would require artificial expansion of production in order to satisfy loan obligations.  In a fair percentage of financing arrangements commodities ( in many cases, minerals) are pledged as security and sometimes serve as an alternative form of repayment (Carnegie Endowment for International Peace - What Do We Know About Chinese Lending in Africa? - 2nd June 2021).

The African Exponent. a business and economics news organization, recently listed the African countries with the highest debt loads to China (The African Exponent - The Top Ten African Countries With the Largest Chinese Debt - 31st July 2021).  In order of total amount owed (highest to lowest) the biggest borrowers are as follows:

1) ANGOLA: over USD 25 billion.

2) ETHIOPIA: at least USD 13.5 billion.

3) KENYA: in the range of USD 8 billion.

4) THE REPUBLIC OF CONGO (Congo - Brazzaville): approximately USD 7.3 billion.

5) NORTH SUDAN: around USD 6.4 billion.

6) ZAMBIA: estimated at USD 6 billion.

7) CAMEROON: 5.5 billion.

8) NIGERIA: About USD 5 billion.

9) GHANA: USD 3.5 billion.

10) THE DEMOCRATIC REPUBLIC OF CONGO (DRC): Conservatively estimated at more than USD 3 billion.

NOTE:

It should be mentioned that lending by  Chinese organizations to Africa has declined over the last two years out of fear of default (Bloomberg - Chinese Lending to Africa Down on Loan-Default Fears, Study Says - 29th March 2021).

Other than North Sudan and DRC, each of the above named countries, in addition to large amounts of Chinese debt, have outstanding international bonds with final maturities in the mid-to-long-term range.  One country, Zambia, defaulted on its bond obligations in 2020, and due to a combination of serious economic and political factors, Ethiopia could be next.  What role have Chinese loan agreement structures that are fundamentally antithetical to traditional market norms played in the difficulties currently being experienced by these two countries (and some others in Africa)?  Did prioritization of repayment to Chinese lenders somehow hinder Zambia's ability to honor commitments to its bondholders, causing it to default?  Are similar dynamics now at play in Ethiopia?

Angola has several major bond issues as well as the highest Chinese borrowing numbers in Africa.  About three quarters of the country's debt to China is owed to the China Development Bank (CDB). And what stands as a real concern is that Beijing classes the CBD as a commercial creditor, thus keeping it outside of any potential multilateral rescheduling and debt forgiveness negotiations.  In such a situation, the CDB would be free to unilaterally make payment demands on Angola.  This would present substantial complications for the country, its bondholders and commercial creditors, should comprehensive debt relief be sought.

Country risk analysts are in general agreement that Angola will eventually be forced to reschedule its external debt (perhaps before the end of this year) as oil revenues and hard currency reserves have decreased dramatically, in fair part caused by the impact of Covid-19.  The exigent question, then, is what posture will China assume when Angola requests a general debt restructuring?  How will out-of-the-ordinary, restrictive loan contract clauses - market intelligence indicates they exist in most if not all China / Angola loan documentation - that give preference to Chinese creditors over other lenders affect the debt rescheduling process for Angola - or any economically attenuated bond issuing African country burdened with substantial financial obligations to China?  Will China become a reasonable actor show some flexibility?

Adding to the complexities, a good number of African nations have incurred debt not only to Chinese state-owned banks and companies but also to private firms with operations in the continent.  A research team at Johns Hopkins School of Advanced International Studies (specifically, the SAIS China Africa Initiative) has determined that over thirty non-government banks and corporations hold sovereign loan commitments in Africa.  There is a lack of consensus on total amounts owed as well as loan specifications.  Are the architectures of private Chinese loan agreements as stringent as those of Chinese state financing agencies?  The answer to the question is probably yes.

In sum, China's African lending practices fail to comport with long-accepted market standards and global institutional policies - limited evidence gleaned from reviews of Asian / Balkan / Chinese loan documents suggest that the same holds for many non-African developing economies as well.  As argued, loan contracts place outsized obligations and restrictions on borrowers.  Oftentimes, the collateral particulars in Chinese financing agreements can compromise a debtor country's natural resources.  These are likely part of official lending protocol for both public and private financial entities since, in China, there are usually behavioral consistencies between the two domains - all Chinese enterprises are considered to be representatives of the state apparatus regardless of classification, and they conduct their business in accordance with central government guidelines.  At foundation, China's lending techniques seem designed to cement Chinese creditors as "preferred lenders" with exclusive rights, and exempt from multilateral restructurings.

According to some of the research cited above, Paris Club frameworks are not followed, thus prohibiting borrower countries from restructuring / rescheduling their outstanding loans to China in coordination with other government lending agencies.  In addition to the rigid, less than conventional conditions

imposed on Chinese borrowers, certain contracts may include clauses that give creditors extraordinary discretion in calling for repayment ahead of schedule.  An additional risk consideration for African creditors outside of China since the triggering of early repayment stipulations could result in a weakening of debt servicing capabilities as regards non-Chinese debt.

What has been revealed recently about Chinese creditor tactics in Africa (as well as other less economically advanced regions) should give investors pause.  Holders of African bonds, for instance, may want to consider modifications to their country risk modeling so as to give enhanced weight to the possible pressures of elevated China debt levels (and their putative problematic loan contract structures) on a given country's capacity to adequately perform on non-Chinese debt commitments, adjusting their exposure ranges accordingly.

WesBruin Capital

6th August 2021

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14th July 2021 - Approximate reading time, 8 minutes.

MONGOLIA:

A New Global Metals Giant in the Making?

Mongolia, a vast Asian land with an economy that ranks as underdeveloped may soon blossom into the world's next big industrial and precious metals producer.  Often referred to as the last frontier in extensive mining ventures, Mongolia holds a wealth of mineral resources that is helping to create a pathway for brisk, extended economic growth and social advancement.  The country, beginning in the last decade, has largely moved away from an agriculturally based economy (nearly seven decades in duration) to one which has focused increasingly on mining; with copper and gold production prioritized.


One prime example of this effort is the Oyu Tolgoi Underground Project (OTUP), deemed to be a top-tier mining producer and among the largest copper and gold deposits globally.  By all  professional mining industry accounts, the operation has been decidedly successful thus far.  According to long-term scenario analyses, when fully operational, Oyu Tolgoi is projected to generate approximately 30 percent of Mongolia's GDP.

Faith in the long-term promise of the Oyu Tolgoi project was recently bolstered by the announcement of a AUS dollar 2.3 billion funding agreement between Rio Tinto and Turquoise Hill Resources (TRQ), expanding and replacing their original Memorandum of Understanding (MOU) executed in September of 2020 (www.blobalminingreview.com - Rio Tinto Concludes Agreement with TRQ - 13th April 2021).  Both are major participants in Mongolia's industrial metals arena and, together with Erdenet Mining Corporation (a Mongolian Russian joint venture), account for the largest percentage of mining production in the country.

Over the past few years, the Mongolian government through cross-border partnership pacts has made significant progress in protecting and promoting its emerging mining industries.  The China-Mongolia-Russia Economic Corridor (CMREC), for instance, is structured to boost trade between Mongolia and its immediate neighbors - stressing mineral transactions - while accelerating infrastructural synergies and building integrative, efficient economic strategies.  Once wholly agreed, CMREC will result in Mongolia becoming the principal link in reinforced east / west trade networks, reducing freight delivery times and establishing additional exportation routes.

As recently as the early 1990s, industrialized mining in Mongolia was very minimal.  However, following the loss of economic support from the former Soviet Union the country transitioned to a market economy and, in 1997, passed the Minerals Law, principally for purposes of drawing in private investment.  Mining sector growth transformed the nation in rapid fashion and at the start of 2011 Mongolia was measured as the world's fastest expanding economy, manifesting impressive production gains in copper, coal, uranium, gold, silver and a number of other minerals.  The government agency that has been most responsible for managing the mining sector's exceptional development is the Mineral Resource Authority of Mongolia (MRAM).

Mineral extraction corporations are well-aware of Mongolia's precious metals potential (chiefly gold and silver) and the government through its long-term Gold 2 program has initiated strategies geared to pursuing sustainable gold / silver sector mining.  This ambitious undertaking is supported by several government agencies which includes the Ministry of Finance, the Central Bank of Mongolia, the Ministry of Mining and Heavy Industry, and the Ministry of Environment and Tourism. 

The company that currently appears to have the largest precious mining presence in Mongolia is Stepp Gold, being the first organization to venture into that domain.  As of mid-2020 Stepp Gold had recorded gold production figures exceeding 15,300 ounces.  Silver output came in at approximately 5,500 ounces (Investing News Network - Mongolia:  A Fast-growing Economy with Unique Mining Opportunities - 15th March 2021).  These totals are but a small indicator of the country's extraordinary precious metals potential.

All signs point to Mongolia having a highly promising future in metals extraction, but there are a number of serious issues that may compromise its near-to-medium-term prospects.  One major concern is lack of economic diversification, making it similar to most other natural resource rich lesser developed countries.  Outside of mining, the only other industry of note that contributes appreciably to GDP and generates a reasonable level of foreign exchange is cashmere wool manufacturing - Mongolia is currently close to being the world's biggest producer of cashmere.  Secondly, budgetary difficulties have intensified with the revised 2020 deficit figure projected to reach 3 percent of GDP.  The rise stems essentially from a decline in exports, impacting growth and tax revenues.  Critically, the Covid-19 pandemic markedly hurt exports and foreign direct investment (FDI), with the former decreasing by USD 2.1 billion and the latter dropping USD 300 million.  Finally, Mongolia's external debt burden is problematic, registering at USD 30.7 billion for year-end 2019, which equates to about 221 percent of GDP (IMF Country Report No. 20/205 - Mongolia - Request for Purchase Under the Rapid Finance Instrument - Press Release; Staff Report; and Statement of the Executive Director for Mongolia - June 2020).  However, in fairness, these figures merit some qualification; nearly one half of the nation's external debt total is comprised of FDI and a quarter pertains to general government long-term liabilities.

Mongolia has some other notable base vulnerabilities, in large part because of its limited economic capacity and inadequate foreign exchange levels.  This makes the country susceptible to any extended degrading in external economic and financial environments, potentially affecting proposed new bond issuances - this past June Fitch assigned a B rating to near-future Mongolian bond issues - purposed for the repurchasing of a considerable portion of external repayment obligations that are scheduled to mature during the next few years.  Additionally, the banking system lacks adequate capital supports and the deficiency may eventually lead to difficulties in effectively navigating the effects of Covid-19.

Although developing country analysts generally categorize Mongolia's external debt as higher risk, it is considered sustainable under current and planned administrative frameworks.  Ongoing efforts to preserve debt sustainability are concentrated on the re-prioritization of capital expenditures.  Stronger evaluation and selection criteria will serve as the predominate template for the central government's capital expenditure objectives going forward.  The primary macroeconomic motivations are: acceleration of economic growth and expansion of export streams while avoiding new imbalances and boosting foreign direct investment inflows significantly.

Mongolia has several USD high-yielding medium and long-term bond / note issues (final maturities range from 2022 to 2026), all trading at modest volumes and frequencies.  Basic information on such is a follows:

- MONGOLIAN MORTGAGE COMPANY -

medium-term notes, final maturity in 2022, coupon: 9.750%.

- MONGOLEIDL -

medium-term notes, final maturity in 2022, coupon 5.125%.

- MONGOLEIDL -

medium-term notes. final maturity in 2023, coupon 5.6250%.

- MONGOLEIDL -

long-term notes, final maturity in 2026, coupon 5.125%.

As alluded to earlier in this presentation, the expectation is that a portion of the above bonds / notes maturing in 2022 and 2023 will be repurchased through a new USD bond issue currently in negotiation.  A cash tender offer is planned (Fitch Ratings - Fitch Assigns Mongolia's Proposed USD Bond a 'B' Rating - 21st June 2021).

Additionally, a small number of old impaired supplier credits (loans) - some may be in dispute due to exporter performance matters - are owed by quasi-sovereign entities.  Ostensibly, Chinese and Japanese trading companies hold the bulk of this debt.  Speculated totals fall in the range of USD 20 to 50 million.  These loans have occasionally been offered for sale (not over the last twelve quarters, given accumulated distressed debt market trading intelligence) in specialized secondary markets that deal regularly in various forms of exotic sovereign debt.

WesBruin Capital

14th July 2021

 

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28th April 2021 - Approximate reading time, 7 minutes.

MONTENEGRO:

The Curious Case of the "Highway to Nowhere"

A small mountainous Balkan country with a population of just over 600,000 owes China approximately USD 1 billion for a highly controversial and technically complex highway project that has brought with it looming financial peril.

Montenegro sometime during the past two weeks reportedly asked the European Union for assistance in repaying its huge Chinese obligation - the first highway loan payment comes due in July.  China presently holds about one quarter of Montenegro's debt total with much of it resulting from throughway financing.  Fears of Montenegro possibly defaulting on the road construction loan (owed to China's Import-Export Bank) and / or other external debt triggered a market sell-off of its two eurobond issues, with the 2029 maturity in particular dropping dramatically (from the low 90s to near 80 in just a matter of days).  The country's bonds have since recovered somewhat but market sentiment remains clearly negative, particularly since the EU has stated that it does not get involved in repaying loans to third parties, although some notable figures in Brussels have expressed concerns about "the socioeconomic and financial effects some of China's investments can have [on Montenegro]", along with economic imbalance risks and "debt dependency."

China sees Montenegro as pragmatically attractive because it gives Beijing a European presence in the Adriatic and closer political ties, and heightened influence in the country may prove beneficial if Podgorica gains European Union membership.

Montenegrin officials deny that a "formal request" for assistance was ever communicated to the E.U. and they claim that the country has the capacity to service all its debts "without unusual difficulty."  A rather bold statement given that, according to recent Standard and Poor's projections, Montenegro's debt-to-GDP metric will exceed 82 percent by end 2021.  Balance of payments pressures also remain seriously high with the current account deficit standing at 26 percent of of GDP, at the present time (SeeNews: S&P downgrades Montenegro to B, outlook stable.  10th March 2021).  Moreover, the tourism-reliant Montenegrin economy has been especially hard hit by Covid-19.  All things considered, the former Yugoslav state is hardly in a position to assume any further borrowings to complete the last three stages of its problematic highway venture (in actuality, the first stage has yet to be finished.  "Official first-stage completion" was recently rescheduled for end 2021).  The IMF in a recent Montenegro economic assessment estimated that at least an additional USD 1.2 billion will be needed to complete all four highway stages (International Monetary Fund, Montenegro: Request for Purchase Under the Rapid Financing Agreement - Press Release Staff Report, and Statement by the Executive Director for Montenegro.  June, 2020).

The country had been fast-tracked for European Union membership in 2022.  However, during 2018, growing unease regarding the pace of social and fiscal reforms plus the government's ineffectiveness in tackling widespread corruption pushed Montenegro's approximate accession date to 2025, at the earliest.

Montenegro's massive highway undertaking was substantially troublesome from origination and it has suffered extended delays with no fixed timetable for completion.  "The Highway to Nowhere", as the venture is commonly referred to nowadays, was conceptually billed by the government as a critical part of Montenegro's modernization program, emphasizing that the roadway offered a rapid, more direct connection to neighboring Serbia, facilitating commerce, diplomacy and socio-cultural exchanges.  The inceptive project blueprint was designed to link Montenegro's Adriatic port of Bar to landlocked Serbia.  However, studies conducted as far back as 2006 (and again in 2012) reached the conclusion that the roadway was not economically feasible, and it was only after European sources refused to provide financing that the powers in Podgorica approached China - the highway construction loan was executed in 2014.  "There is a big question of how they complete it", voiced an anonymous E.U. official sometime around the loan's official signing.  "[Montenegro's] fiscal space has shrunk enormously.  They have strangled themselves [with the highway financing]." (Reuters: Chinese highway to nowhere haunts Montenegro.  16th July 2018).

In 2014, shortly before Chinese funding was secured, an E.U. anti-corruption monitor, MANS, repeatedly requested that the central government provide legislators with data buttressing the project's early period income generation forecasts.  But Podgorica was not forthcoming and numerous details regarding accounting procedures, technical aspects of the project and a variety of loan agreement elements remain off limits.

The "Highway to Nowhere" is at the center of a vigorous debate concerning Chinese influence in the European Union as well as some eastern neighbors with ambitions of joining the E.U. - Albania, North Macedonia and Serbia.  There is growing disquiet that, potentially, China's footprint could expand throughout the Balkans via its aggressive infrastructure and energy lending programs, giving rise to unwanted regional financial dependence on Beijing.

So, how can Montenegro navigate its way out of this "nowhere highway" financial quandary?  Its options are rather unclear as of now but two possibilities - although far from certain or ideal - come to mind:

1) Podgorica could appeal to the E.U. as a NATO member and the Balkan region's dominant investor for assistance through its multi-billion euro Economic and Investment Plan for the Western Balkans.

The E.U. investment plan might also encourage funding from other investors - both public and private - including the European Investment Bank - at favorable rates.  The problem is that this particular tactic is unlikely to quickly bring about a satisfactory solution.  Unfortunately, the reality is that Montenegro's need is most immediate since, as mentioned, the initial payment on the highway loan comes due in July.

2) Another approach would be for Montenegro to leverage its historical relationship with Russia and negotiate a financing structure designed to cover the highway loan payments that fall in the short-term, allowing it additional time to arrange a more long-term solution through the E.U. or possibly other avenues.  However, any deal with Moscow would, in all probability, not sit well with Brussels primarily for geopolitical reasons.

Examining things strictly from an investment perspective. going forward, volatility in Montenegro's eurobonds is to be expected, especially as we move closer to the first highway loan payment date.  In the coming weeks, we are likely to encounter a slew of both positive and negative news concerning Podgrocia's maneuvers to achieve a satisfactory resolution to the Chinese loan quagmire.  Surely, its bond prices will be moved by developments.

Possible Market Plays:*

Surveying the current Montenegro bond trading landscape for possible opportunities (with volatility in mind), one quick profit gambit could be to buy into Montenegro debt (bonds) when there are major price dips and cash out at the first sign of upward movement - a pure, very short-term capital gains play.  Rinse and repeat at the next chance.

A second strategy entails taking a more medium-to-long-term view: Buy on a pronounced price drop and take a calculated risk that the Balkans are too politically and economically important to the E.U. for it to not pursue timely action against a potential Montenegrin default.  A greater temporal risk to be sure but, at the right purchase price, yields in the short-term could be highly attractive and, if default is avoided, one will be in a position to accomplish some solid capital gains down the road.

WesBruin Capital

28th April 2021

*DISCLAIMER:

Must not be construed in any way as a recommendation to buy, sell or trade any Montenegrin bonds or other assets.  Comments are opinions, not advice, and provided strictly for research purposes.

 

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