SOUTHGOBI PLUNGES ON THREAT TO LICENCE

Mongolia has threatened to suspend the mining licence of a key Gobi Desert coal mine that is the subject of a Chinese takeover attempt, a move that could potentially derail China’s biggest investment to date in its resource-rich neighbour.

The move by Mongolia comes amid a global burst of resource nationalism this month, with Argentina nationalising 51 per cent of the oil group YPF and Indonesia threatening to impose punitive export taxes on commodities from thermal coal to copper.

Mongolia’s mining authorities have threatened to suspend some of the licences of SouthGobi Resources, a mining company listed in Toronto and Hong Kong, because Chinese metals company Chalco intends to purchase a majority stake in the company, SouthGobi said late on Monday night.

SouthGobi’s auditor Deloitte resigned shortly after the Mongolian announcement, contributing to a 10 per cent drop in SouthGobi’s Hong Kong share price on Tuesday. The shares closed down at HK$49.90.

Deloitte left of its own initiative but did not “express reservations”, according to SouthGobi.

Although Mongolia’s vast mineral resources lie next to its border with China, the world’s biggest consumer of many commodities, historical mistrust has limited the involvement of Chinese mining companies in Mongolia’s resources sector.

Earlier this month Chalco said it planned to make a C$925m offer for a majority stake in SouthGobi. SouthGobi’s biggest shareholder Ivanhoe Mines, which owns a 57.6 per cent stake in SouthGobi, also agreed to sell its shares to Chalco. SouthGobi’s main asset is the Ovoot Tolgoi coking coal mine, which is in the Gobi Desert less than 50km from the Chinese border.

Because the share sale was to take place in Toronto where SouthGobi is listed, it was not technically subject to review by Mongolian authorities.

However, Mongolian mining authorities have announced a “request to suspend exploration and mining activity on certain licences” because of the Chalco investment, according to SouthGobi. SouthGobi added that it “has not received any official notification” of a licence suspension. Mongolia’s mining minister declined to comment.

How to best develop Mongolia’s mineral wealth is one of the topics being debated in the run-up to its nationwide parliamentary elections in June. Mongolia’s opposition parties have often targeted mining deals in their campaigns and in the past they have accused the government of being too generous to foreign miners.

Sardor Koshnazarov, head of research at Eurasia Capital, said: “This was not good timing for both Mongolia and SouthGobi because the election is coming.

“Chalco’s deal would allow them to gain an additional 15 per cent of Mongolia’s coal output and almost 19 per cent of Mongolia’s coal exports. That’s why Mongolia considers this deal very important and very sensitive for its national security.”

Last autumn the Mongolian government asked Rio Tinto and Ivanhoe to reopen the investment agreement governing Oyu Tolgoi, the biggest undeveloped copper mine in the world, in response to mounting political pressure. However, the government later backed down and the investment agreement governing the mine has stayed in place.

SouthGobi said it did not know whether the company would receive a formal request to suspend operations. “The mine is operating as usual,” David Bartel, vice-president, said. “We have received no notification not to operate so we are continuing mining just like we did yesterday and the day before.”

By Leslie Hook in Beijing