China targets Mongolia in SouthGobi move
Beijing (Financial Times) -- China's largest aluminium producer intends to acquire SouthGobi Resources, a Mongolia-focused coal company listed in Toronto, for up to C$925m -- the biggest investment yet by a Chinese mining company in Mongolia as China seeks to tap the vast resources of its 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 and Toronto.
The deal follows years of frustration for Chinese miners trying to gain access to Mongolia's deposits of copper and coal. Although Mongolia has opened up to foreign investors over the past decade, Chinese -companies have often found themselves sidelined because of historic mistrust between the two countries.
The deal could pave the way for more Chinese investment in the Gobi desert, which sits in southern Mongolia right on the common border. The transaction will not require Mongolian approval because the share transfer will take place in Canada, but a representative of SouthGobi said the Mongolian government had been informally notified and was supportive.
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.
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. Previous discussions with Ivanhoe over a stake in the Oyu Tolgoi copper and gold mine did not come to fruition, bankers say.
South Gobi's main producing asset is a coking coal mine less than 50 km from the Chinese border, and the sale is unlikely to stir the same kind of nationalist debate that has accompanied the development of Mongolia's big state-owned mines, such as Tavan Tolgoi, which plans to list in London later this year.
Alexander Molyneux, president and chief executive of SouthGobi, said the company would benefit from being controlled by a big state-owned miner such as Chalco, which has coal distribution networks inside China and will buy coal from SouthGobi as part of the deal. "SouthGobi will be a more valuable company by having a big brother like Chalco," he said, adding that the company could be a platform for Chalco's overseas coal deals in the future.
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," he said.
Shenhua, China's biggest coal miner, appeared to win a leading role in developing part of the Tavan Tolgoi coking coal deposit, but the Mongolian government is now reconsidering the deal after complaints from Japanese and Korean companies.
The offer price represents a premium of 28 per cent to Friday's close in Toronto 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 resource 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.
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 and Toronto.
The deal follows years of frustration for Chinese miners trying to gain access to Mongolia's deposits of copper and coal. Although Mongolia has opened up to foreign investors over the past decade, Chinese -companies have often found themselves sidelined because of historic mistrust between the two countries.
The deal could pave the way for more Chinese investment in the Gobi desert, which sits in southern Mongolia right on the common border. The transaction will not require Mongolian approval because the share transfer will take place in Canada, but a representative of SouthGobi said the Mongolian government had been informally notified and was supportive.
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.
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. Previous discussions with Ivanhoe over a stake in the Oyu Tolgoi copper and gold mine did not come to fruition, bankers say.
South Gobi's main producing asset is a coking coal mine less than 50 km from the Chinese border, and the sale is unlikely to stir the same kind of nationalist debate that has accompanied the development of Mongolia's big state-owned mines, such as Tavan Tolgoi, which plans to list in London later this year.
Alexander Molyneux, president and chief executive of SouthGobi, said the company would benefit from being controlled by a big state-owned miner such as Chalco, which has coal distribution networks inside China and will buy coal from SouthGobi as part of the deal. "SouthGobi will be a more valuable company by having a big brother like Chalco," he said, adding that the company could be a platform for Chalco's overseas coal deals in the future.
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," he said.
Shenhua, China's biggest coal miner, appeared to win a leading role in developing part of the Tavan Tolgoi coking coal deposit, but the Mongolian government is now reconsidering the deal after complaints from Japanese and Korean companies.
The offer price represents a premium of 28 per cent to Friday's close in Toronto 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 resource 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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