Perhaps not the safest jurisdiction in the world for new coal miners?
SouthGobi to Halt Mining at Flagship Coal Mine
WSJ - June 26, 2012
By JOANNE CHIU
HONG KONG—SouthGobi Resources Ltd. 1878.HK -18.97% said Tuesday that it will stop mining at its flagship Mongolian coal mine by the end of the week because of weak demand and customer uncertainty about its future, in the latest setback for the Canadian-owned miner that Aluminium Corp. of China Ltd. ACH +2.38% is trying to buy for more than $920 million.
Hong Kong-listed SouthGobi said it has already "curtailed" much of its coal mining at its Ovoot Tolgoi mine about 25 miles from the China border, because of weak demand and a "lack of clarity" on whether its license to mine would be suspended by the Mongolian government after Chalco announced an offer to buy a controlling stake in it in April. The news of the planned suspension of its operations dragged SouthGobi shares down 8.4% Tuesday, 44% below Chalco's offer price of $65.97 Hong Kong dollars (US$8.50), and 19% below its level from the start of the year.
Soon after state-owned Chalco announced an offer to buy up to 60% of SouthGobi from Canada's Ivanhoe Mines Ltd., IVN -1.17% the Mongolian government said in April that it was looking to suspend SouthGobi's mining license. The government then passed a law that limited future foreign ownership in strategic industries such as mining to 49%, unless the acquirer got parliamentary approval. Investors owned by governments, such as state-backed Chinese companies like Chalco, also will need special permission to buy into the sectors. SouthGobi is already 14% owned by Chinese sovereign wealth fund China Investment Corp.
SouthGobi Chief Executive Alexander Molyneux said that SouthGobi's license to mine at Ovoot Tolgoi remained valid, but the company has no concrete timetable for resuming mining at the mine. He refused to be drawn, however, on whether Chalco's acquisition of SouthGobi would get the green light.
"But it's wrong to assume that [the deal] cannot be approved under the new law. It can. It just requires extra approval from parliament" he said.
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SouthGobi's Mongolia Woes Worsen
Mongolia's foreign ownership legislation comes as the country gears up for elections, this Thursday, and reflects anxiety among ordinary Mongolians that foreigners would enjoy the spoils of the country's hoard of coal, copper, gold and other natural resources. In the landlocked country, which broke from Soviet influence just over two decades ago and formed a democracy, China also makes some Mongolians nervous for its size and influence.
Chalco shareholders will vote on the offer on Friday.
SouthGobi's failure to secure Chalco as a key shareholder would have a negative impact on its prospects, analysts said Tuesday, as the Mongolia-focused miner needs financial support if it is to ramp up production at its Ovoot Tolgoi mine, something Chalco can provide. For its part, Chalco has been moving to diversify beyond hard-hit aluminum into other areas, like coking coal, which can be used to make steel, so the failure of its bid for SouthGobi will hurt its moves to broaden its offerings. Aluminum prices has fallen sharply since the second half of 2011 because of weakening demand amid the global economic downturn.
"Chalco's core aluminum business has been weighed down by weakening demand as well as higher costs—it needs acquisitions to create a new revenue stream as well as cut costs as it vertically integrates," said Robin Tsui, an analyst at BOC International
SouthGobi said that its Mongolian unit could not get the country's environment ministry to revise an environmental impact assessment for a dry-coal-handling facility. Without that approval, SouthGobi won't be able to run the plant that washes coal and prepares it for transport to market. It also said Tuesday it has put on hold plans for capital expenditure and further exploration.
