Mired in Uncertainties, SouthGobi Deal Further Dimmed by "Fraud" Accusation
June 20 (NAI) Already troubled by the resource-conservative Mongolian policies, SouthGobi Resources' (HK:1878, TSX:SGQ) intended sale to Chalco has just got a muddy twist. Liu Xin, a self-claimed mining engineer and former employee of SouthGobi, publicly accused SouthGobi of frauding reserve data. The "fraud bomb" was dropped right on time: with several positive signals in place, Chalco is set to make the formal purchase offer on July 5th.
The situation started to develop last Thursday, when Mr. Liu mailed a group of investment banks, brokers, and consulting companies accusing SouthGobi's flagship Ovoot Tolgoi coal project as being a "fraud". According to Chinese media, the letter cited large amount of data and diagrams to substantiate the claim. On the same day, Mr. Liu also opened a dedicated blog to increase the publicity of his allegation, on which he swore to the truthfulness of his claims and willingness to assume legal responsibility.
According to Mr. Liu, he participated in exploration drillings with SouthGobi in 2008, and found far less coal content than the company currently claims: "we made 41 drilling holes totaling over 23,000 meters. The result is surprising that some drills went directly into rocks". Mr. Liu claimed that while SouthGobi reported Ovoot Tolgoi to contain 300 million tons of coal with measured and indicated resources combined, the real number might be around 70 million tons at most. The discrepancy, according to Mr. Liu, was also noticed by Norwest, a Vancouver engineering company, yet SouthGobi's "crisis management" hid the fact through bribery. Mr. Liu claimed to have left SouthGobi this March for "not fitting in the culture".
While relatively unheard of (as yet) in North America, Liu Xin's letter stirred great media attention in China, much owning to Chalco's popularity as a blue chip in the country. China's First Financialinterviewed the management of SouthGobi, who claimed that Liu's allegation is an act of fraud. While rejecting all of Mr. Liu's claims,SouthGobi further denied Liu ever worked for the company. First Financial also noted that Mr. Liu has failed to show up for a media conference set to take place in Beijing on June 18th. The financial institutions that received Liu's letter are also unable to reach him in person. Chalco is yet to comment on the issue.
Despite far from substantiation, the public letter is likely to cause pressure on Chalco in the Chinese market. Being an overseas acquisition "debut" for Chalco, the SouthGobi deal has been a major point of excitement for investors. Previously, Mongolian government casted a heavy shadow over the case by suspending the deal to limit foreign ownership in natural resources. The situation only improved recently with the authorities relaxing its position and showed willingness to reconsider the suspension. Against this background, Mr. Liu's letter is certainly a matter of concern for both Chalco and SouthGobi.
The situation started to develop last Thursday, when Mr. Liu mailed a group of investment banks, brokers, and consulting companies accusing SouthGobi's flagship Ovoot Tolgoi coal project as being a "fraud". According to Chinese media, the letter cited large amount of data and diagrams to substantiate the claim. On the same day, Mr. Liu also opened a dedicated blog to increase the publicity of his allegation, on which he swore to the truthfulness of his claims and willingness to assume legal responsibility.
According to Mr. Liu, he participated in exploration drillings with SouthGobi in 2008, and found far less coal content than the company currently claims: "we made 41 drilling holes totaling over 23,000 meters. The result is surprising that some drills went directly into rocks". Mr. Liu claimed that while SouthGobi reported Ovoot Tolgoi to contain 300 million tons of coal with measured and indicated resources combined, the real number might be around 70 million tons at most. The discrepancy, according to Mr. Liu, was also noticed by Norwest, a Vancouver engineering company, yet SouthGobi's "crisis management" hid the fact through bribery. Mr. Liu claimed to have left SouthGobi this March for "not fitting in the culture".
While relatively unheard of (as yet) in North America, Liu Xin's letter stirred great media attention in China, much owning to Chalco's popularity as a blue chip in the country. China's First Financialinterviewed the management of SouthGobi, who claimed that Liu's allegation is an act of fraud. While rejecting all of Mr. Liu's claims,SouthGobi further denied Liu ever worked for the company. First Financial also noted that Mr. Liu has failed to show up for a media conference set to take place in Beijing on June 18th. The financial institutions that received Liu's letter are also unable to reach him in person. Chalco is yet to comment on the issue.
Despite far from substantiation, the public letter is likely to cause pressure on Chalco in the Chinese market. Being an overseas acquisition "debut" for Chalco, the SouthGobi deal has been a major point of excitement for investors. Previously, Mongolian government casted a heavy shadow over the case by suspending the deal to limit foreign ownership in natural resources. The situation only improved recently with the authorities relaxing its position and showed willingness to reconsider the suspension. Against this background, Mr. Liu's letter is certainly a matter of concern for both Chalco and SouthGobi.
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