Chalco abandons Mongolia coal mine deal

China has abandoned its attempt to buy a large coal mine in neighbouring Mongolia, bowing to political opposition to a deal that inspired the mineral-rich country to pass a tough new law on foreign investment.

The attempt by Chalco, China’s biggest aluminium producer, to secure a controlling stake in SouthGobi resources for up to C$925m (US$938m) would have been the biggest-ever Chinese investment in Mongolia, which harbours concerns about the influence of Chinese state-owned companies over its resources-dependent economy. In an effort to stop the SouthGobi deal, Mongolia’s parliament rushed to pass a new law on foreign investment just a few weeks after it was announced.

Hong Kong-listed SouthGobi, whose major asset is a coal mine in the Gobi desert, has seen its fortunes wane over the past five months as the deal unravelled. The company’s mines have been idle since the end of June due to uncertainties over mining licenses and a flagging global coal market, while the price of its shares has plummeted 60 per cent since Chalco’s April offer.

Under the terms of the deal, Chalco was to buy a stake of up to 60 per cent in SouthGobi from miner Turquoise Hill, which was formerly known as Ivanhoe Mines.

Turquoise Hill announced Monday that it had ended its lock-up agreement with Chalco because the chances of getting regulatory approvals for the deal were “minimal”. Under the terms of Mongolia’s new foreign investment law, Chalco’s acquisition would have required parliamentary approval, which analysts and miners say was unlikely.

Chalco’s failure to close the deal with SouthGobi, one of the earliest Mongolian mining groups to list in Hong Kong, highlights the political risks involved in investing in Mongolia.

According to statements from Alexander Molyneux, chief executive of SouthGobi, the group encountered “hostility” from Mongolian regulators following Chalco’s offer. The mining ministry publicly threatened to suspend SouthGobi’s mining licenses and its offices were raided as part of an anti-corruption investigation, according to statements from SouthGobi.

Questions over regulatory approvals and changing global commodities markets also scuppered SouthGobi’s sale of a Mongolian mining license to Australian miner Modun for about $30m.

Andrew Driscoll, mining analyst at CLSA in Hong Kong, said the failure of the deal suggests that the Mongolian government does not yet have a workable framework for large foreign investments under the new law: “The new bill remains untested, which is a deterrent for both mining companies and investors, until some precedence has been set.”

SouthGobi shares fell more than five per cent in Hong Kong on Monday, in an otherwise flat market. The Toronto stock exchange, where SouthGobi is also listed, was closed Monday for Labor Day.

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