Chalco Targeted as Mongolia Seeks to Limit State Deals (Update 2)
Mongolia, the commodity-rich nation that posted the world’s fastest economic growth in 2011, is on course to pass a law by June that will bar foreign state-owned companies from controlling its key assets.
The draft law, submitted to parliament two years ago, was accelerated after a public outcry following state-run Aluminum Corp. of China Ltd.’s move last month to take control of SouthGobi Resources Ltd. (SGQ), Vice Finance Minister Ganhuyag Chuluun Hutagt said in an interview. The law isn’t likely to apply to any existing operations, he said. Rio Tinto Group is developing the $6 billion Oyu Tolgoi copper mine in the nation.
Tightening the legislation would mean Mongolia joins Indonesiaand Argentina in seeking to control ownership of resource assets to secure their economic future. The draft law, due to be passed before parliamentary elections next month, will be applied to the bid by Chalco, as Aluminum Corp. is known, and is aimed at ensuring no one country or product dominates the economy, according to Ganhuyag.
“Investors don’t like it when the rules of the game are changed after the game has started, and changed often at that,” Dale Choi, chief investment strategist at Frontier Securities in Ulan Bator, said by phone. “It would be in the interests of Mongolian people to make a decision based on commercial factors, rather than geopolitical factors.”
Chalco rose 0.6 percent to HK$3.24 in Hong Kong, valuing the company at HK$93.3 billion ($12 billion). SouthGobi gained 2.4 percent to C$5.89 in Toronto.
Controlling Assets
Mongolia, a nation of 2.8 million people that broke off from Communist rule and dependence on the then-Soviet Union in 1990, wants foreign investment in key assets to be made by entities that represent several nations, Ganhuyag said. The country currently exports most of its coal and copper to China.
“We don’t want to be faced with one sovereign,” he said by phone from Ulan Bator. “Our struggle to get political freedom was a long one and we cherish that. We will not let foreign government-owned entities control strategic assets in Mongolia.”
The land-locked country is squeezed between China and Russia, two of the world’s 10 largest economies and the No. 1 and No. 3 countries by land mass. China accounts for over 80 percent of its neighbor’s import and export trade, according to the World Bank. Exports to China rose to 92 percent of the total in the first quarter, Mongolia’s statistics office said last week.
Resource nationalism, or state demands for higher taxes, royalties or stakes, was cited as a growing concern by Rio Tinto (RIO) and Freeport-McMoRan (FCX) Copper & Gold Inc. in their most recent earnings. The issue was the number-one concern among mining executives in 2011, replacing capital allocation, Ernst & Young LLP said in its annual risk survey published in August.
Government Review
Chalco said April 2 that it agreed to buy Toronto-listed Ivanhoe Mines Ltd. (IVN)’s 58 percent stake in SouthGobi in a deal worth as much as C$925 million ($910 million). Mongolia’s Mineral Resources Authority said it would ask SouthGobi to suspend exploration activity and mining on certain licenses while it reviews the deal. Some customers have cut orders because of the request, SouthGobi said May 14.
Chalco won’t proceed with the deal unless it gets approval from Mongolia, it said on April 25.Yuan Li, a spokesman for Aluminum Corp. of China, Chalco’s parent, declined to comment, saying he can’t provide more information.
“There’s a big issue of discrimination and foreign investors should be just foreign investors,” Frontier’s Choi said. “You can’t create separate rules for Chinese state-owned companies or Canadian companies. Chalco’s accord is market- based, it represents the way the market wants to go.”
Coal Deposit
Plans to develop Mongolia’s Tavan Tolgoi coal deposit, one of the world’s largest, have also stalled ahead of the June elections. Progress on talks with companies including Peabody Energy Corp. (BTU), OAO Russian Railways, and China’s Shenhua Group to develop the West Tsankhi part of Tavan Tolgoi have “stopped,” Prime Minister Sukhbaatar Batbold said in March.
Mongolia first announced in July, and then said it would review, an accord to give Shenhua Group a 40 percent stake in West Tsankhi, with Peabody taking 24 percent and a Russian- Mongolian group the rest. The government didn’t clarify who the Russian-Mongolian group included.
Uncertainty about the fate of the foreign tender has meant that the $3 billion initial public offering of state-run Erdenes Tavan Tolgoi, which is developing the East Tsankhi part of the 6-billion-metric-ton field, was delayed in March as some politicians call for Mongolia to develop West Tsankhi itself.
Chalco’s Move
Chalco’s move on SouthGobi was announced in the same month that it revealed plans to become the top shareholder in Winsway Coking Coal Holdings Ltd. (1733), a Hong Kong-based trader that ranks among the top exporters of the commodity from Mongolia. London- based Rio Tinto, the world’s third-largest mining company, counts Chalco’s parent as its largest shareholder.
Illtud Harri, a Rio spokesman, declined to comment.
The new law will make sure that any purchase of stakes in so-called strategic assets by a state-owned entity are registered and receive government approval, Ganhuyag said. The list of strategic assets and industries will be made later and will likely include uranium and rare earths among other minerals, he said.
State-owned entities won’t necessarily be barred from owning any assets in Mongolia, Ganhuyag said. “We’ll review all applications on a case by case basis.”
Private companies investing in the country’s key assets will also be scrutinized on their source of income, local hiring intentions and investment timespan to avoid so-called hot money inflows, Ganhuyag said. Mongolia will also seek to make sure investors don’t use jurisdictions that allow tax minimization, he said.
Export Partners
The country needs new investment laws to support more of its products being exported to countries other than China, Ganhuyag said. A project that would include several foreign entities, such as West Tsankhi where companies from five countries may form a consortium, is the model Mongolia wants, he said.
“We want China to be our good neighbor and economic partner,” Ganhuyag said. Mongolia’s “Third Neighbor” policy, a move to broaden ties with nations outside China and Russia, aims to have no country or product account for more than a third of total sales, he said.
Coal sales amounted to $2.2 billion in 2011 and made up almost half of Mongolia’s exports, the World Bank said in a February report. Mineral resources accounted for 89 percent of Mongolia’s total exports in April, according to the latest data from the country’s Customs General Administration. Exports to northeast Asian countries were $389 million of a total $409 million, the data show.
Strategic Industries
To protect its strategic industries, which in the current version of the draft law include mining, media, communications, weaponry and air traffic, Mongolia may retain a majority stake in key assets or a so-called golden share that would allow the government to veto decisions, Ganhuyag said.
Purchasing more than 49 percent of a key asset will need parliamentary approval, according toa draft of the law.
Chalco’s intention to purchase SouthGobi will be reviewed once the new strategic investment law is passed, Ganhuyag said. The fact that the company is state-owned and that Mongolia is China’s biggest coking coal supplier will be a factor in the decision, he said.
“We don’t think it’s a good idea to give up control over the whole supply chain,” Ganhuyag said. “We trust the Chinese government will understand our needs and our concerns.”
Chalco was allowed last year to buy all of the coal from the East Tsankhi area of Tavan Tolgoi, Mongolia’s biggest coal field, after it agreed to resell 30 percent of the total volume to Mitsui & Co. (8031), Itochu Corp. (8001) and Korea Resources Corp.
The difference between SouthGobi and East Tsankhi is that Mongolia controls the mine, how much it produces and how it exports, Ganhuyag said.
“We would like to retain that freedom,” he said.
To contact the reporter on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net
To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net
The draft law, submitted to parliament two years ago, was accelerated after a public outcry following state-run Aluminum Corp. of China Ltd.’s move last month to take control of SouthGobi Resources Ltd. (SGQ), Vice Finance Minister Ganhuyag Chuluun Hutagt said in an interview. The law isn’t likely to apply to any existing operations, he said. Rio Tinto Group is developing the $6 billion Oyu Tolgoi copper mine in the nation.
Tightening the legislation would mean Mongolia joins Indonesiaand Argentina in seeking to control ownership of resource assets to secure their economic future. The draft law, due to be passed before parliamentary elections next month, will be applied to the bid by Chalco, as Aluminum Corp. is known, and is aimed at ensuring no one country or product dominates the economy, according to Ganhuyag.
“Investors don’t like it when the rules of the game are changed after the game has started, and changed often at that,” Dale Choi, chief investment strategist at Frontier Securities in Ulan Bator, said by phone. “It would be in the interests of Mongolian people to make a decision based on commercial factors, rather than geopolitical factors.”
Chalco rose 0.6 percent to HK$3.24 in Hong Kong, valuing the company at HK$93.3 billion ($12 billion). SouthGobi gained 2.4 percent to C$5.89 in Toronto.
Controlling Assets
Mongolia, a nation of 2.8 million people that broke off from Communist rule and dependence on the then-Soviet Union in 1990, wants foreign investment in key assets to be made by entities that represent several nations, Ganhuyag said. The country currently exports most of its coal and copper to China.
“We don’t want to be faced with one sovereign,” he said by phone from Ulan Bator. “Our struggle to get political freedom was a long one and we cherish that. We will not let foreign government-owned entities control strategic assets in Mongolia.”
The land-locked country is squeezed between China and Russia, two of the world’s 10 largest economies and the No. 1 and No. 3 countries by land mass. China accounts for over 80 percent of its neighbor’s import and export trade, according to the World Bank. Exports to China rose to 92 percent of the total in the first quarter, Mongolia’s statistics office said last week.
Resource nationalism, or state demands for higher taxes, royalties or stakes, was cited as a growing concern by Rio Tinto (RIO) and Freeport-McMoRan (FCX) Copper & Gold Inc. in their most recent earnings. The issue was the number-one concern among mining executives in 2011, replacing capital allocation, Ernst & Young LLP said in its annual risk survey published in August.
Government Review
Chalco said April 2 that it agreed to buy Toronto-listed Ivanhoe Mines Ltd. (IVN)’s 58 percent stake in SouthGobi in a deal worth as much as C$925 million ($910 million). Mongolia’s Mineral Resources Authority said it would ask SouthGobi to suspend exploration activity and mining on certain licenses while it reviews the deal. Some customers have cut orders because of the request, SouthGobi said May 14.
Chalco won’t proceed with the deal unless it gets approval from Mongolia, it said on April 25.Yuan Li, a spokesman for Aluminum Corp. of China, Chalco’s parent, declined to comment, saying he can’t provide more information.
“There’s a big issue of discrimination and foreign investors should be just foreign investors,” Frontier’s Choi said. “You can’t create separate rules for Chinese state-owned companies or Canadian companies. Chalco’s accord is market- based, it represents the way the market wants to go.”
Coal Deposit
Plans to develop Mongolia’s Tavan Tolgoi coal deposit, one of the world’s largest, have also stalled ahead of the June elections. Progress on talks with companies including Peabody Energy Corp. (BTU), OAO Russian Railways, and China’s Shenhua Group to develop the West Tsankhi part of Tavan Tolgoi have “stopped,” Prime Minister Sukhbaatar Batbold said in March.
Mongolia first announced in July, and then said it would review, an accord to give Shenhua Group a 40 percent stake in West Tsankhi, with Peabody taking 24 percent and a Russian- Mongolian group the rest. The government didn’t clarify who the Russian-Mongolian group included.
Uncertainty about the fate of the foreign tender has meant that the $3 billion initial public offering of state-run Erdenes Tavan Tolgoi, which is developing the East Tsankhi part of the 6-billion-metric-ton field, was delayed in March as some politicians call for Mongolia to develop West Tsankhi itself.
Chalco’s Move
Chalco’s move on SouthGobi was announced in the same month that it revealed plans to become the top shareholder in Winsway Coking Coal Holdings Ltd. (1733), a Hong Kong-based trader that ranks among the top exporters of the commodity from Mongolia. London- based Rio Tinto, the world’s third-largest mining company, counts Chalco’s parent as its largest shareholder.
Illtud Harri, a Rio spokesman, declined to comment.
The new law will make sure that any purchase of stakes in so-called strategic assets by a state-owned entity are registered and receive government approval, Ganhuyag said. The list of strategic assets and industries will be made later and will likely include uranium and rare earths among other minerals, he said.
State-owned entities won’t necessarily be barred from owning any assets in Mongolia, Ganhuyag said. “We’ll review all applications on a case by case basis.”
Private companies investing in the country’s key assets will also be scrutinized on their source of income, local hiring intentions and investment timespan to avoid so-called hot money inflows, Ganhuyag said. Mongolia will also seek to make sure investors don’t use jurisdictions that allow tax minimization, he said.
Export Partners
The country needs new investment laws to support more of its products being exported to countries other than China, Ganhuyag said. A project that would include several foreign entities, such as West Tsankhi where companies from five countries may form a consortium, is the model Mongolia wants, he said.
“We want China to be our good neighbor and economic partner,” Ganhuyag said. Mongolia’s “Third Neighbor” policy, a move to broaden ties with nations outside China and Russia, aims to have no country or product account for more than a third of total sales, he said.
Coal sales amounted to $2.2 billion in 2011 and made up almost half of Mongolia’s exports, the World Bank said in a February report. Mineral resources accounted for 89 percent of Mongolia’s total exports in April, according to the latest data from the country’s Customs General Administration. Exports to northeast Asian countries were $389 million of a total $409 million, the data show.
Strategic Industries
To protect its strategic industries, which in the current version of the draft law include mining, media, communications, weaponry and air traffic, Mongolia may retain a majority stake in key assets or a so-called golden share that would allow the government to veto decisions, Ganhuyag said.
Purchasing more than 49 percent of a key asset will need parliamentary approval, according toa draft of the law.
Chalco’s intention to purchase SouthGobi will be reviewed once the new strategic investment law is passed, Ganhuyag said. The fact that the company is state-owned and that Mongolia is China’s biggest coking coal supplier will be a factor in the decision, he said.
“We don’t think it’s a good idea to give up control over the whole supply chain,” Ganhuyag said. “We trust the Chinese government will understand our needs and our concerns.”
Chalco was allowed last year to buy all of the coal from the East Tsankhi area of Tavan Tolgoi, Mongolia’s biggest coal field, after it agreed to resell 30 percent of the total volume to Mitsui & Co. (8031), Itochu Corp. (8001) and Korea Resources Corp.
The difference between SouthGobi and East Tsankhi is that Mongolia controls the mine, how much it produces and how it exports, Ganhuyag said.
“We would like to retain that freedom,” he said.
To contact the reporter on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net
To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net
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