Energy & Resources

Smart steppe?

Chalco’s acquisition of SouthGobi in Mongolia is not going smoothly

Mongolia’s new hoard

On June 18, reporters, bankers and consultants crowded into the Beijing Jade Palace Hotel to hear Liu Xin, a self-proclaimed former employee of SouthGobi Resources – a mining company with coal projects in Mongolia.

Liu claimed to have been a senior engineer in the company, and over the previous few days had tried to discredit SouthGobi by emailing bankers and brokers with the warning that the company’s main coal mine, Ovoot Tolgoi, is “a hoax”, reports CBN.

Liu’s charges, if proved true, would be devastating for SouthGobi. His claim is that during exploration work in 2008, he discovered that the coalfield in one of the opencast mines was less than 15 metres thick, compared to an expected depth of between 20 and 50 metres.

That suggested that Ovoot Tolgoi had much less coal than anticipated. But Liu said that SouthGobi concealed the results as it sought out a Chinese buyer.

So it is no wonder that a crowd had assembled to hear more – especially as SouthGobi is now the takeover target of Aluminum Corporation of China. The state-owned company, also known as Chalco, announced in April that it expected to pay no more than $1 billion for a controlling stake in the company. The plan was to issue a formal offer on July 5.

In fact, Liu failed to appear at his own event. SouthGobi’s senior management told CBN that they deny his allegations completely, and that no one under Liu’s name had ever worked for the company.

While Liu looks like a hoaxer himsef, the publicity he has generated is just the latest in a series of events that could make the SouthGobi acquisition less attractive to Chalco.

Soon after the bid was announced, the Mongolian Mineral Resources Authority suspended a number of SouthGobi’s exploration permits.

And on April 26, Chalco received news, along with other major investors in Mongolia, that the local government was planning a new law on foreign investment. The legislation was passed in mid-May, and it requires parliamentary approval for foreign investments over $76 million in bids for more than 49% of businesses in strategic sectors.

Chinese companies have already made significant investments in their resource-rich neighbour. Last year, the Mongolian government sold a large chunk of the huge Tavan Tolgoi coal mine to an international coalition led by Shenhua Group, China’s largest coal company. But Chalco’s difficulties in acquiring SouthGobi, which is listed on the Toronto Stock Exchange, suggest a change of mood.

China’s long-term goals in Mongolia are clear. “China has always been captive to a few players. Now the country no longer wants to passively receive the offtake from projects,” James Cameron of HSBC told the FT. “They want to develop new sources of raw materials and they want equity in projects.”

But Mongolia’s interests are different: it wants to develop industries to process minerals and other resources before they are exported. The concern is that Chinese owners will ship the resources across the border for processing.

The mineral boom is also a major issue in national elections in Mongolia, where voting was conducted on Thursday. Expectations are high: spokesmen for the MPP – the successor to the Communist Party that ran Mongolia for more than 60 years – have suggested that mining wealth could see gross domestic product per capita reach $60,000 by 2030, from $3,000 last year.

But before the election, the news got even worse for SouthGobi. On Tuesday the company announced that it would suspend production at the Ovoot Tolgoi mine, due to uncertainty about the future, reports the Wall Street Journal. The company’s shares promptly crashed, losing 8.4% on Tuesday and another 19.1% on Wednesday to close at HK$29.85. That now makes Chalco’s offer price of HK$65.97 look an expensive one, raising the chance that the terms will have to be renegotiated regardless of whether the Mongolian government approves of the bid or not.


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