Sep 14, 2012 06:50 PM

Cold Shower for Chalco's Mongolia Mining Plan


(Beijing) – A Chinese metals-mining concern's plan to tap mineral-rich Mongolia took a pause in early September as the Aluminum Corporation of China Ltd. (Chalco) withdrew its bid for coal supplier SouthGobi Resources Ltd.

Chalco's buyout ambitions surfaced in April when it signed an agreement with SouthGobi's majority shareholder, Turquoise Hill Resources Ltd., a Canadian company controlled by global mining giant Rio Tinto, for up to 60 percent but no less than 58 percent of SouthGobi shares at C$ 8.48 apiece.

The potential US$ 1 billion transaction was expected to close by July 15. But Chalco delayed and then terminated the deal, blaming regulatory hurdles in Mongolia.

The deal for SouthGobi was supposed to fit an overseas expansion strategy at Chalco which, as China's biggest aluminum producer, has been working to vertically integrate its coal, ore and aluminum businesses.

In a press release, Turquoise Hill said its and Chalco's executives had concluded that the transaction was unlikely to obtain government regulatory approval within an acceptable timeframe.

The cancellation didn't surprise the market, as investors had been selling off SouthGobi stock since April. Between that month and September, the share price had slumped 71 percent on the Toronto stock market.

Analysts consistently predicted a tough go for the plan, given complicated politics in Mongolia and weak economic conditions globally.

Indeed, Chalco and Turquoise Hill officials said pressure from opponents of the deal inside the Mongolian government had been building for months before they finally threw in the towel.

On April 16, the Mongolian energy minister suspended mining licenses for SouthGobi Sands LLC, a SouthGobi subsidiary. Meanwhile, the regulator suspended the operating license for SouthGobi's Ovoot Tolgoi mine.

The ministry's decision reflected its clear opposition to the Chalco takeover, said Alexander Molyneux, who served as SouthGobi's chief executive until the deal collapsed in September. He lashed out at Mongolian regulators for what he called "hostility."

Industry analysts said the Mongolian government revised foreign investment laws, apparently with the goal of upsetting the deal and catering to public opposition to foreign mineral buyouts.

Parliament approved a new foreign investment law in mid-May that labeled mining resources, banking, financial services, media companies and telecoms nationally strategic sectors for which any company stake transfer would require special government review.

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