April 17, 2012 / 5:28 AM / 5 years ago

SouthGobi shares dive on fears Mongolia may derail Chalco bid

(Reuters) - Coal miner SouthGobi Resources (1878.HK) 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). 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.

Yet, Chalco has had previous business dealings with Mongolia, having secured an off-take agreement with the Mongolian government-owned Erdenes Tavan Tolgoi project.

SouthGobi said it has asked key stakeholders to commence discussions with the Mongolian government. The company said it has no reason to believe its licenses are not in good standing.

Proven and probable surface coal reserves at Ovoot Tolgoi are estimated to be 175.7 million metric tonnes as of December 11, 2011, according to the company’s website. More than two-thirds of the reserves are in the proven category.

STOCK FALLOUT

J.P. Morgan, which described the move as an “extraordinary development” said in a research report on Tuesday that Chalco was unlikely to walk away so easily and will look to ensure the deal progresses ahead.

Chalco has long desired to diversify away from aluminum, which faces a bleak outlook and the SouthGobi deal marked the first significant move in that direction.

Chalco was not immediately available to comment.

SouthGobi’s Hong Kong shares fell as much as 13.3 percent on Tuesday to a one-month low, before cutting their losses to end 10 percent down, their biggest one-day fall in nearly seven months. Its Canada shares fell 12.4 percent on Monday on the Toronto Stock Exchange.

Chalco shares in Hong Kong fell 1.6 percent. Shares of Ivanhoe, which has a market value of C$9.50 billion, fell 5.6 percent to a more than two-year closing low of C$12.03 on Monday on the Toronto bourse.

SouthGobi said if it receives an official ruling from the Mongolian government it may need to suspend operations until an injunction is granted.

SouthGobi, which sells metallurgical and thermal coal mainly to customers in China, has requested Ivanhoe and Chalco to discuss the proposed deal with the Mongolian government. It has also informed Rio Tinto (RIO.L) (RIO.AX), which has a 51 percent stake in Ivanhoe.

Separately, SouthGobi said on Tuesday that Deloitte & Touche LLP resigned as the company’s auditor and has been replaced by PricewaterhouseCoopers.

Editing by Michael Flaherty and Muralikumar Anantharaman

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