China targets Mongolia in SouthGobi move

China’s largest aluminium producer intends to acquire SouthGobi Resources, a Mongolia-focused coal company listed in Toronto, for up to C$925m, in the biggest investment yet by a Chinese mining company in Mongolia as China seeks to tap the vast resources of its next-door neighbour.

Chalco, a Hong Kong-listed subsidiary of the Chinese state-owned metals and mining group Chinalco, said it intends to offer C$8.48 per share to acquire a stake of up to 60 per cent in SouthGobi, which trades in Hong Kong as well as Toronto and has assets in Mongolia.High quality global journalism requires investment.

The deal follows years of frustration for Chinese miners trying to access the huge deposits of copper and coal sitting across the border in Mongolia. Although Mongolia has opened up to foreign investors over the past decade, Chinese companies have often found themselves sidelined because of historic friction and mistrust between the two neighbours.

Chalco has been eyeing assets in Mongolia for years as it seeks to expand beyond its core aluminium and bauxite business into base metals and energy. The Chinese company was previously in discussions with Ivanhoe Mines, which controls SouthGobi, over a possible stake in the Oyu Tolgoi copper and gold mine, but these never came to fruition, according to bankers.

Andrew Driscoll, an analyst at CLSA, said the SouthGobi deal was a natural extension of Chalco’s coking coal trading business on the Mongolian border. “This marks the most substantial step yet for Chalco in pursuing its diversification strategy,” Mr Driscoll said.

Shenhua, China’s biggest coal miner, was last year awarded a 40 per cent stake in part of Mongolia’s Tavan Tolgoi coking coal deposit, but the Mongolian government later said it was reconsidering the deal after complaints from Japanese and Korean companies.

Ivanhoe, the Toronto-listed mining company headed by Robert Friedland, has agreed to sell Chalco its 57.6 per cent stake in SouthGobi. China’s sovereign wealth fund also holds a 13.7 per cent stake in SouthGobi and has a right of first refusal for Ivanhoe’s shares, but the fund is expected to give its approval to Chalco’s bid.

David Bartel, vice-president for external affairs at SouthGobi, said its business would remain unchanged in the short term as Chalco planned to keep staff in place. However, in the long term the deal could allow SouthGobi effectively to become the listed coal arm of Chalco, and as such the company could be used as a vehicle for other Chalco coal deals, Mr Bartel added.

Chalco’s investment will need approval from Canadian and Chinese authorities, as well as from China’s sovereign wealth fund.

The offer price represents a premium of 28 per cent to the Friday Toronto close but is below SouthGobi’s historic highs. SouthGobi’s share price has fallen by more than half from its peak of C$16.56 in February 2011 amid global investor gloom over resources assets.

Chalco’s shares closed down 1.9 per cent in Hong Kong after the announcement, which was made before the start of trading. SouthGobi’s Hong Kong share price shot up 18 per cent from the Friday close.

Chalco will make a formal offer to SouthGobi before July 5, the company said, and the acquisition will be funded either by issuing external debt, drawing on internal funds or some combination of the two.

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