* Mongolian government has made Chalco bid impossible - CEO
* Chalco has until Sept 4 to decide on offer
* SouthGobi shares down nearly 4 percent in Hong Kong
* Mining licence suspension hurt Q2 profits
By Charlie Zhu
HONG KONG, Aug 14 Mongolia-focused coal miner
SouthGobi Resources Ltd said on Tuesday that
it expects China's state-controlled Chalco to drop its
$926 million takeover bid in the face of opposition from the
The proposed deal has the backing of SouthGobi's majority
shareholder, Turquoise Hill Resources Ltd, formerly
known as Ivanhoe Mines Ltd, but it faced opposition almost
immediately within Mongolia, which is becoming wary about the
growing Chinese presence in its mining sector.
"I personally believe Chalco is not continuing to work on
the deal," SouthGobi Chief Executive Alex Molyneux told Reuters.
"The evidence I have before me seems highly unlikely that
the bid is going to go forward," Molyneux said by telephone,
citing Mongolia's recent efforts to block the deal. "It's 100
percent clear that Mongolia has made the deal impossible."
Aluminum Corp of China Ltd, or Chalco, this
month said it had decided to extend its offer for up to 60
percent of the common shares of Toronto and Hong Kong-listed
SouthGobi Resources for the second time as it needs more time to
"engage with the Mongolian government and review the terms and
conditions of the transaction".
The company in April had announced the C$8.48-per-share bid
for a controlling interest in SouthGobi, which owns large coal
projects in Mongolia close to China, which has a huge appetite
for energy and minerals to feed its giant economy.
Chalco has until Sept. 4 to formalize its bid.
Mongolia, a former Soviet satellite landlocked between China
and Russia, passed a controversial law in May aimed at capping
foreign ownership in "strategic" industries like mining.
FRIENDLIER INVESTMENT CLIMATE?
The law stipulates that foreign investors are allowed to own
a maximum of 49 percent of companies involved in the mining,
finance, media and telecommunications sectors before being
subject to scrutiny by a government panel. The rule only applies
to deals valued at above $75 million, or ones involving
state-owned companies like Chalco.
But recent changes in Mongolia politics have raised hopes
for a friendlier investment climate. Norov Altanhuyag of the
Democratic Party was confirmed as prime minister last week. The
Democratic Party, broadly in favour of the free market, is
expected to comprise 75 percent of the new
SouthGobi's shares, which last traded at C$3.7 in Toronto,
have wilted. Its Hong Kong-listed shares were down nearly 4
SouthGobi had had no formal contact from Chalco for more
than a month, another sign that the deal will not happen,
Chalco board secretary Liu Qiang, asked by Reuters whether
Chalco was still pursuing a takeover, said she had no comment.
SouthGobi said late on Monday its second-quarter profit
plunged on lower output after Mongolia suspended its mining
licence following Chalco's bid.
Operations at its flagship Ovoot Tolgoi mine in the south of
the country had been "fully curtailed" since June 30 and were
not expected to resume in the third quarter, SouthGobi said.
The company's second quarter net income attributable to
equity holders fell to $237,000 from $67.3 million a year
"They (Mongolian government) have done everything in their
power to roadblock the deal by the Chinese state company,"
Molyneux said, adding that profits were also hurt by weakening
demand for coking coal in China.
Chalco is the largest aluminium producer in China. It has
been investing in coal, iron ore and electricity projects as the
profit margin for its core aluminium business shrinks.
It said on Monday that it would buy a 35.3 percent stake in
China's Ningxia Electric Power Group Co for 2.02 billion yuan