SouthGobi shares dive on fears Mongolia may derail Chalco bid

Tue Apr 17, 2012 5:01am EDT
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By Denny Thomas and Bhaswati Mukhopadhyay

(Reuters) - Coal miner SouthGobi Resources (1878.HK: Quote) saw its shares plunge after the Mongolian government suspended its exploration licenses, sparking fears the move may scupper a takeover bid by China's Chalco 601600.SS.

Earlier this month, state-run Aluminium Corp of China Ltd, known as Chalco 2600.HK, agreed to pay $926 million for a 57.6 percent stake in SouthGobi held by mining billionaire Robert Friedland's Ivanhoe Resources (IVN.TO: Quote). China sovereign wealth fund CIC CIC.UL owns 13.8 percent of SouthGobi, which is also traded in Toronto but is focused on Mongolia.

The SouthGobi offer by Chalco, which would allow China's top aluminum maker to diversify away from aluminum, appears to have caught Mongolian officials by surprise.

Late on Monday, SouthGobi announced in a statement that the Mongolian government suspended the company's exploration and mining licenses. The suspension included its flagship Ovoot Tolgoi coal mine.

"The Mongolian government's intervention appears like a political move rather than commercial decision," said Helen Lau, an analyst with UOB Kay Hian, adding that in a worst-case scenario, the move signals that the deal could collapse.

"This will increase the political risk for Chinese state companies looking to acquire Mongolian assets," Lau said.

SouthGobi owns four coal projects in Mongolia, three development projects, mineral exploration licenses and has full ownership of the projects. The Ovoot Tolgoi coal mine in Mongolia is just about 40 kilometers from China, the world's largest coal consumer.

While Mongolia has opened its doors to foreign investors over the past decade, Chinese companies have found it hard to access Mongolia's vast copper and coal mines. Analysts say there has been a historic mistrust between the two countries.   Continued...