Chalco to buy Ivanhoe's SouthGobi stake in $926 million deal

HONG KONG/SYDNEY Mon Apr 2, 2012 3:24am EDT

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HONG KONG/SYDNEY (Reuters) - Chinese aluminum giant Chalco stepped up its diversification on Monday, agreeing to pay $926 million for a controlling stake in Mongolian coal miner SouthGobi Resources in a deal with mining billionaire Robert Friedland's Ivanhoe Resources.

The deal marks the first foray into coal by state-run Aluminium Corp of China Ltd, known as Chalco, (601600.SS) (2600.HK), which is facing a bleak outlook in aluminium, and will give it access to a large coal producer in neighboring Mongolia.

Ivanhoe (IVN.TO) said a sell-down would free up capital that could be invested in the $6 billion Oyu Tolgoi mine in Mongolia, one of the world's largest copper and gold projects.

Analysts said the deal had the potential to boost Chalco's earnings, but cautioned that the Chinese aluminium producer was moving into a new industry in a different country.

"This is a very surprising acquisition, and should be positive to Chalco's share prices as earnings growth in the company's aluminium business is limited and diversifying into coal is a good move," Robin Tsui, an analyst at BOCI Research said.

Helen Lau, senior analyst at UOB Kay Hian Research, said in a note that it was questionable if Chalco could manage coal mining on its own in a foreign country amid political and regulatory uncertainty.

Under the deal, Chalco plans to buy up to a 60 percent stake in SouthGobi (SGQ.TO) (1878.HK) for C$8.48 per share, a 28 percent premium to its Friday close. The Hong Kong price of the offer was HK$65.97.

Ivanhoe, which owns 57.6 percent of SouthGobi, said it could get C$889 million for selling its entire stake or C$533 million for selling 60 percent of its stake, depending on how much stock is tendered by other shareholders.

SouthGobi shares jumped as much as 20 percent in Hong Kong and were trading at HK$59.70 at 0700 GMT. Chalco fell 2.4 percent.

Chinese miners have been scouring the globe for raw materials to feed rapid industrial growth at home. The offer also comes as China plans to slow annual growth in coal output to about 2 percent from around 10 percent over the next four years to conserve resources and protect the environment

Chalco is offering to buy all of SouthGobi's coal for up to 24 months and assist with power supply. The deposit is located just 45 km (28 miles) from the Chinese border, where a dedicated coal hauling rail line is already in operation.

Canadian and Hong Kong-listed SouthGobi owns four coal projects in Mongolia, three development projects and a mineral exploration license.

It produced 4.02 million metric tonnes (4.43 million tons) of coal in 2011, up 58 percent from 2010 and has a target of 12 million metric tonnes a year.

Chalco, China's biggest aluminium maker, has been battling lower metal prices and higher costs and has warned of losses in the first quarter of 2012 after reporting a bigger-than-expected loss in the fourth quarter of last year.

The company signed an agreement in 2010 with Rio Tinto (RIO.AX) to develop an iron ore project in Guinea. It said it would fund the SouthGobi buy with internal funds and bank loans.

"Chalco is debt heavy but it is a central government-owned company and should have no problem in terms of funding, and have no danger of default," said BOCI Research's Robin Tsui.

CAPITAL FOR OYU TOLGOI

Ivanhoe, which is 51 percent owned by Rio Tinto, said the deal would free up capital to deploy in Oyu Tolgoi, which it is co-developing with Rio.

Analysts said the SouthGobi stake sale could also remove a large asset that would be unwanted by Rio Tinto as it pursues greater ownership of Oyu Tolgoi, possibly via an acquisition of Ivanhoe.

Chalco's parent Chinalco is the largest shareholder in Rio Tinto, one of the world's most diversified mining houses, with a 12.9 percent stake

Ivanhoe's other assets include stakes in Ivanhoe Australia IVA.AX and Altynalmas Gold, a private company developing the Kyzyl gold project in Kazakhstan.

Ivanhoe Australia, owned 59 percent by Ivanhoe Mines, has mandated UBS (UBSN.VX) to evaluate proposals from potential strategic partners for it Cloncurry project portfolio.

Chalco has appointed BNP Paribas as its adviser.

($1 = 0.9995 Canadian dollars)

($1 = 6.2980 Chinese yuan)

(Reporting by Alison Leung and Denny Thomas in HONG KONG, Narayanan Somasundaram and James Regan in SYDNEY, Euan Rocha in TORONTO; Editing by Richard Pullin)

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